Brief Multi-Strategy: ZOZO: The Kingmaker Abandons His King and more

In this briefing:

  1. ZOZO: The Kingmaker Abandons His King
  2. India Consumer Discretionary: Growth Slowing on NBFC Liquidity Tightness, Demand Softness
  3. Recruit Holdings Reports Strong 3Q Results; Remains Expensive
  4. A Surprising Finding of Stock Outperformance & Quarterly Earnings Conference Call Recording in Korea
  5. Healthcare in Egypt with a Focus on Cleopatra Hospitals Group

1. ZOZO: The Kingmaker Abandons His King

United Arrows’ (7606 JP) decision to cancel its e-commerce services contract with ZOZO Inc (3092 JP) was not a surprise at all but could not have come at a worse time. While a move to direct operation of its online store was expected, United Arrows did not have to choose a moment when Zozo’s stock was collapsing. That it did shows how much cooler relations are between the two firms, a critical development given United Arrows was the principal reason for Zozo’s emergence as the leading fashion mall in the early 2000s.

United Arrows will still be selling through Zozotown and its president last week praised Zozotown’s capacity to bring new and younger customers to its brand. The bigger problem is that United Arrows relies less and less on sales from Zozotown each year and more from its own online store – direct e-commerce sales have increased from 20% of all e-commerce sales in FY2016 to 27% in 9M2018.

At Baycrews, another leading merchant on Zozotown, 50% of e-commerce sales are from its own online store, up 12 percentage points in two years.

A further problem is that other merchants are leaving. We reported before that Onward’s departure, while significant, is less of a threat than it might first appear given that Onward already garners 70-75% of sales from its own store so it did not cost much to leave Zozo. 

However, another big retailer, Right On, also quit Zozo last month despite the fact that more than 50% of its online sales come from Zozo and it has intermittently been one of the top 20 merchants on Zozo. Right On has struggled in recent years, so leaving Zozo cannot have been an easy decision, suggesting just how seriously upset it was.

Other merchants are likely to view these departures with some concern. Six months ago, the idea of quitting Zozo was not even a remote thought in Japan’s fashion industry but it is now a lively subject of discussion. While most merchants will stay,  the recent high profile departures will make a threat to leave look much more real, giving merchants more leverage to negotiate, particularly on Zozo’s take rates.

2. India Consumer Discretionary: Growth Slowing on NBFC Liquidity Tightness, Demand Softness

  • While many NBFCs pulled back on disbursements in 3QFY19, the sharpest declines were in SME/MSME, LAP and Loan Against Shares (LAS) segments
  • The pullback in SME/MSME financing has reduced working capital financing in some supply chains. This has impacted stocking in some discretionary items.
  • A number of players alluded to weakness in discretionary consumption post Diwali owing to the NBFC liquidity squeeze
  • With supply chains selectively impacted by liquidity tightness and weakness in demand, consumer discretionary players could not pass on input cost increases during the quarter

3. 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 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, 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





Consolidated Revenue (JPYbn)




YoY Growth %




Consolidated EBITDA (JPYbn)




EBITDA Margin %




Source: Company Disclosures/LSR Estimates

4. A Surprising Finding of Stock Outperformance & Quarterly Earnings Conference Call Recording in Korea


In this report, we provide a finding which may surprise some of the readers. We have checked homepages of the top 100 companies in KOSPI by market cap to see which companies have recordings of their quarterly earnings conference calls (including the Q&A session) available. We have found that out of these 100 companies, only 14 companies have their quarterly earnings conference calls (including the Q&A session) available in English. 

We then tallied their share price performances since a) end of 2016 to present, b) end of 2017 to present, and c) YTD. We have found that their average share price performance crushed the market from end of 2016 to present (these 14 stocks were up on average 39% versus KOSPI which was up only 8.6% during this period).

The main reason why stock prices go up is because of the companies’ improving cash flow and earnings with improved investor capital inflow. Having an excellent investor relations (with quarterly earnings announcements conference call recording) IS NOT the leading cause of why stock prices go up. 

We believe the following are the two main reasons why these 14 companies choose to have their quarterly conference call recordings available:

  • Strong investors’ demands
  • Benchmarking the global best practices of investor relations vs. saving face

5. Healthcare in Egypt with a Focus on Cleopatra Hospitals Group

Improved Macro/Stock Market Outlook: As I outlined in Egypt Travel Report: Stock Market Discount Widens Despite Numerous Recovery Signals and The Global Significance of Egypt’s Improving Macro Picture and Sovereign Discount Egypt’s economy has improved substantially in the past 2-3 years and the stock market trades at a discount to its historical norm (the market is actually cheap compared to 2016 when the devaluation took place).  I believe the poor performance of emerging markets in general during 2018 has created a solid entry point for equities in Egypt.  I had the opportunity to spend around 30 days in Egypt late last year and was impressed with what I saw on the ground, particularly the rebound in tourism.

Initial insight on GB AutoDouglas Kim kicked off this company insight series with an insight called Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story ,which highlighted how this auto company is an appropriate way to play Egypt’s macro turnaround.  GB Auto is the largest automotive manufacturing company in Egypt and distributes Hyundai motor vehicles.  The company has seen improved financial performance in recent years and Egypt is also approaching a sweet spot for automotive sales (namely when a country’s GDP per capita is between US$5,000 and US$12,000). 

Why I think Cleopatra Hospitals Group stands out: Cleopatra Hospital (CLHO EY) is the largest publicly listed private hospital operator in Egypt and has aggressive expansion plans for the coming years, which includes new hospitals and polyclinics.  Investing in the healthcare industry itself is a very defensive play, as rising incomes will result in increased private healthcare moving forward.  Egypt’s improved macro picture coupled with favorable demographic trends will allow healthcare to continue outpacing GDP growth.

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