Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Sega Sammy Holdings, Upstart Holdings Inc, Zhejiang Expressway Co H, Blue Bird and more

In today’s briefing:

  • Sega Sammy Holdings, Inc.: Time for a Look at Management’s Pivot Setting Stage for Profit Rebound
  • Upstart Holdings – Up 1,252% from the IPO Price & A Key Comp for Kakao Pay
  • Zhejiang Expressway (576 HK): Drivers in Place for Robust Outlook
  • Blue Bird (BIRD): New Distribution Channel and Limited Downside.

Sega Sammy Holdings, Inc.: Time for a Look at Management’s Pivot Setting Stage for Profit Rebound

By Howard J Klein

  • The company has reacted to multiple market challenges with refocused priorities and freshened management perspective led by a new CEO and reorganized priorities in each of its business sectors going forward to FY 2022.
  • It’s core Pachinko and Pachislot businesses can now address long term market decline with more highly focused, new equipment.
  • It’s South Korea casino resort business could see early post pandemic upside by early next year. Yokohama bows out of Japan IR bidding. Sega and consortium partner Genting have other possible options in Japan or elsewhere in Asia.


All amounts shown in jpy unless otherwise specified or noted. Also note we use the Sega Sammy Holdings Inc. corporate flag frame of reference not the successor entities to be consistent with  historical perspective on the company and the stock. This includes  corporate separation of units and names in the pachislot, pachinko and amusement segments.

 Investment premise: While it’s relatively recent trading history does not precisely fit the mold of one of those stocks that match the descriptive of a fallen angel, Sega-Sammy Holdings. Inc.(6460T) has seen its shares decline from a 5 year high of 1,898jpy in June of 2018 to its price at writing of 1,576jpy—hardly a steep enough long term drop to classify the stock as a fallen angel. Its average daily trading range runs ~ 1m shares which is double that of competitor Konami (9766T), for example.

 Konami’s market cap sits at 960bjpy vs. Sega-Sammy at 378.2bjpy. Yet Konami at 7,210jpy of course has something of a similar business profile as Sega, it is not apples to apples in the traditional sense. What does command our attention is that given the global explosion of video game growth ignited by the plethora of new games and themes social as well as casino, the stock of Sega has possibly lagged the general digital entertainment sector.

 Between huge valuations being set by the market for tech start ups with massive operating losses as well as established sector leaders, one would assume that companies like Sega, with longstanding roots in a diverse gaming/entertainment sub-sector would command a stronger price profile than that of its current trading range. So clearly the market is sending a message that it believes that a forward Sega earnings profile and overall prospects has yet to show ip.

 Our premise here is entirely based on what we believe could be the beginnings of a strong turnaround in Sega prospects engineered as it were, by a strategic reform program instituted by management under the company’s youthful new leader  since last April, Mr. Haruki Satomi. The new management approach springs from the premise that the solution of problems, begins with the recognition of problems And Sega has faced many, and will continue to face, some with the difference that it has now tightly focused on solutions, the policies for which are already in place.

 Sega recently lost the services of a key creative leader in its development department. Mr. Toshihiro Nagoshi, who has left the company to join China’s NetEase. His services were being competed for with Tencent. He expects to form a team of game developers which will have the key mission to bring fresh thinking into the new title flow. This was seen as a loss for Sega, yet over time, it has managed to keep launching new titles with not quite the pace of peers. Still now, under its new management focus, the company sees hot new product flow as a major task for management going forward.

Sega’s family of characters remains a key strength of its core business segments.

 We think that the recognition and resolve to deal with macro as well as internal challenges warrants a look at the stock now. The first crocus if you will, that a possible significant turnaround may be underway, has been the company’s consolidated operating results for the three months ended June 2021.( The company’s fiscal year ends March 31,2022).

 We take a capsule glance of the three -month results (June 30th) y/y vs. 2020 (Millions of yen)

 Net sales                       59,477            48,381     22.9%

Operating Income         3,.844          (3851)     

Ordinary income            3,484           (4099)

Profit to owners

Of parent                         2,940          (4099)

 Comprehensive income 3 months ended 6/21: 4,312m jpy 3 months ended 6/20: (2,551)

 Net income per share 6/30-/21: 12.51  6/30/20: (14.04)

Projected cash dividend for full fiscal year March 3,1 2022: 20.00. No dividend anticipated before that date, nor has management revised the above forecast.

Shares outstanding 6/21: 266,229,476

                                   6/20:  266.229,476

 This single quarter’s results show a significant beginning of what could be a strong turnaround in process. As such we believe the stock warrants following from this point forward as the possibility of internal policy and strategic adjustments and improvements in the macro outlook in general is presented to investors over the next several earnings releases. These circumstances could set forth the conditions for a bullish outlook for the stock going forward.

 The challenges and remedies   

Management has set sharply defined priorities.

The macro challenges Sega has faced linked to the pandemic crisis have likewise battered the entire gaming/entertainment segment since March of 2020. Especially hit hard have been those sub-sectors dependent on mass public in person participation. Sega’s business largest units fall into that category in Pachislot and Pachinko machines, amusement machines—all requiring in person customers. Its entertainment machines constitute its largest single segment with machines next.  Projecting for the full fiscal 2022 year management has addressed challenges thusly by segment:

 Digitial entertainment content: The stay at home lifestyle changes forced by the pandemic have resulted in a stronger sales profile as expected. In this area, Sega expects to introduce new titles such as Phantasy Star Online 2 new Genesis plus existing titles remastered or enhanced.

 Amusement field machine sales and animation toy field produced a 5.1% increase y/y. New titles produced net sales of 47,400mjpy a 5.1% increase y/y for the period.

 Pachislot and Pachinko: This second largest segment has long been beset by challenges endemic to all peers in the sub-sector. The overall decline in the market size since 1995 is indicative of the situation: It has slipped from 280T jpy to 18Tjpy in 2019.

Unit sales have declined from 22,800 in 2002 to ~2,800 in 2009.

Moving ahead with a more defined plan of action.

Average hours of play per participant is another indicator of the long term decline:

2005: 5.7hrs 2019: 4.3hrs

 As play has waned so has the number of halls declined.  As of Total gaming machines in all halls 3.7m comprised of 2.2m pachinko and 1,4m pachislot. Thirty seven halls closed permanently, with another 148 temporarily closed.  By January 2021, the industry saw a decline of 584 halls to 8,302. The trend has been fewer halls but larger ones.

  Operators have been generally disinclined to invest in new machines against these trends. And since the mandates of the Security Association o f 2014 for dramatic changes in the characteristics of the games to discourage addictive gambling, all makers have been pushed to replace existing games with those that meet the new standards. The process has been slower, the deadline for compliance grows nearer.

 Based on its research and ongoing attention to both mitigating the decline as well as sparking interest among players within the new standards, Sega expects to introduce games with new characteristics to meet compliance requirements. This led to sales of 15,000 units with a y/y net increase in sales of 1,494m jpy vs, an ordinary loss of (8,532m) y/y period.

 Toys: Sega expects to narrow its focus to greater stress on  educational toys as well as those that spring from pop culture themes they create or those drawn from general audiences.

Projections based on historic trends against best guess pandemic easing seem doable.

 Resort Segment: Sega’s Phoenix Segalia Resort in Souh Korea, was hit, as was every brick and mortar casino property globally, with a dramatic decline in visitation,for Sega over 74% down from the baseline year of 2019. Because at the present time, globally, all in person reliant businesses continue to battle the Delta variant of the Covid pandemic, it is difficult to forecast within reasonable ranges, at precisely what kind of time frame we are envisioning before a normalized travel pattern resumes in South Korea.

 At writing, the government estimated it has already completed 4.9m doses at a rapidly increasing rate. But equally crucial to the return of normalized revenue streams for the Sega properties there, is the progress of inoculations in mainland China, which represents so key a feeder of gaming visitation. Beijing says it has reached the dispensation of2.082b doses to date and expects to reach 80% to 90% of the population by the end of this year. Medical experts as usual seem to be divided as to when the Delta flare up will begin to diminish. It is best to take the position according to our on the ground sources, that next spring is a reasonable assumption for South Korea.

 Add to this, Beijing’s avowed policy of discouraging cross border gambling by Chinese citizens, particularly VIPs. It furthermore has announced its intention to blackball tourism to any nation that has indulged in over-aggressive recruitment of Chinese VIP players. However, we think the trend until baseline 2019 of tourists from China to South Korea was highly positive.

 In baseline year 2019, 5.5m tourists visited South Korea, of the visitors ~34% originated from mainland  China. The biggest dip in an otherwise continuing upward trend was in 2017, when China blackballed Seoul over the US.SK  THAAD  missile dispute. While a normalized forecast of what South Korea may expect from China tourism post-pandemic is equally difficult o project, our sources in gaming related businesses in Seoul believe there is a resiliency built into the business base of Sega properties that should rebound tourism from China and also importantly, from Japan.

 Sega has a long announced intention to bid on one of three integrated resort licenses for Japan to be announced by mid 2022. It has partnered with a consortium co-led by Genting Berhad committing to US$1b for an IR project in Yokohama. But late last month, the local election  was won by an anti-gaming candidate. He has indicated that the city has withdrawn from he IR race and does not want the casino resort.

  The move could mean the end of Sega’s ambitions to participate in the Japan IR market. In fact, management has noted on many occasions that part of its objectives in entering the South Korean market was to train a team of experienced, highly skilled executives who would bring live gaming know-how to its proposed gaming development in Japan from day one. Now that would appear to be a non-starter.

 However, Sega still has the option of seeking another Japan city, or adding to its investment in casinos in South Korea or elsewhere.

 We spoke to a key industry executive in Busan who shared this insight. (This is a translation provided by a journalist associate).

 “It would be wrong to count Sega out of the casino business in Japan or anywhere. It would seem now that their options in the Japan IR bidding have disappeared, but there is still time for them to try to find another venue. We do see vibrant growth for the South Korea casino sector whenever conditions return to something near normal after the pandemic”.


“ Sega has the asset base, the experience and financial capacity to expand here (in South Korea) or anywhere else.  Most important is that management sees that it must act forcefully to continue to diversify its focus on both online and brick and mortar real money gaming”.

 Forward view 

52 week trading range: 1,224-1,910

Market cap at writing: 370.497b

FWD div and yield: 40.00(2.56%)

Our PT:  We base our call on the fundamental issue we saw in our long -term familiarity with the company and its products due to our time inside the gaming industry. It has been clear to us that Sega at some point lost its way. It had too many people in too many positions linked to its past and not sufficiently visionary to chart a course for its future. As a result it became, (and still is to a degree) overly dependent on business segments that needed a more dynamic approach to growth in the rapidly changing world of digital and  amusement play.

 I believe that need has now been addressed by the board and senior management. I see signs of renewed energy in all its segments that I believe could result in the next quarters returns that could continue to indicate progress. Plus the company does have a family of well -established games that form the baseline of its business while it works to expand its titles, address cost savings and find new opportunities.

 I think if the next two quarters continue to show progress along the lines indicated, that Sega could break through above its current 52 week high, aided by the beginnings of the endgame of the pandemic. I think positive sentiment will begin to show by this fall and bring the stock to a 2,144 valuation by 2022’s end or before.

Upstart Holdings – Up 1,252% from the IPO Price & A Key Comp for Kakao Pay

By Douglas Kim

Upstart Holdings Inc (UPST US) has been one of the best performing SaaS stocks in the United States in the past year. Upstart Holdings completed its IPO in December 2020 at an IPO price of $20 per share. Since then, its share price has skyrocketed by 1,252% to reach $270.46 per share. Upstart’s market cap has also jumped to $21 billion. Upstart Holdings is also one of the comps to Kakao Pay that the bankers used to price the Kakao Pay IPO. 

All in all, Upstart Holdings has experienced extraordinary growth in sales and profits in the past couple of years, driven by its superior AI driven technologies in the personal and auto loans sector. Upstart Holdings is clearly one of the most important companies to pay attention in the global AI-driven lending industry. 

As Kakao Pay is trying to complete its IPO next month, it has chosen to include Upstart Holdings as one of the comps. However, we have concerns that investors are likely to put significant discount on the relative valuations of Kakao Pay as compared to Upstart due to the following factors such as increased regulatory scrutiny on the fintech services provided by Kakao Pay and higher marketing and operating costs that are likely to be required to change the way its current financial services are provided.

Zhejiang Expressway (576 HK): Drivers in Place for Robust Outlook

By Osbert Tang, CFA

After reporting an 8.65x surge in profit in 1H21, we think there are three drivers that should bring better outlook for Zhejiang Expressway Co H (576 HK) (ZJEC) over the next twelve months. These positive factors include further rebound in traffic and toll revenue, additional contribution from new projects and good upside from profit of Zheshang Securities Co Ltd (601878 CH)

YTD, share price of ZJEC increased by 10%, but we still see good upside potential given that it trades on only 0.9x P/B for FY21 and its ROE for 1H21 already reached 10.1% (before annualised). On earnings valuation, its 5.7x and 5.0x PER for FY21 and FY22, respectively, also appeared very attractive, in our view. 

Blue Bird (BIRD): New Distribution Channel and Limited Downside.

By Henry Soediarko

Indonesia’s recovery from the COVID-19 induced pandemic is within a few months away as the inoculation rate in Jakarta has reached 57%, although the rest of the nation’s inoculation rate is still at 15%.  

While Blue Bird (BIRD IJ) previously suffered from the Airport Express that took the former’s market share in that route, the recent collaboration with PT KAI (National Train of Indonesia) allows Bluebird taxis to be included when customers are booking train tickets, creating a new distribution channel for Bluebird besides its existing partnership with Gojek. 

The downside of owning Bluebird’s share right now is quite limited as the mobility lockdown is only months from over thus owning Bluebird right now can be likened to have a long position on a call option. Its share price should trade at least at book value or even higher at 1.2x PBR, implying a potential return of between 76% to 126%. 

Related tickers: Sega Sammy Holdings (6460.T), Zhejiang Expressway Co H (0576.HK), Blue Bird (BIRD.JK)

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