While Numbers Are Disappointing, Solid Growth of Fintech Business Enhances Rakuten's Network Effect

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Equity Bottom-Up

Our impression of <a href="https://www.smartkarma.com/entities/31" target="_blank" data-smartkarma-citation="entities:31:1">Rakuten Inc (4755 JP)</a>'s full-year earnings results is somewhat mixed. On the positive side, we acknowledge some metrics suggesting the strength of its ecosystem. Rakuten has been focusing on building up a solid user base by offering a unique business model combining e-commerce and e-finance businesses, and promoting cross-use of its services through Rakuten Super Point program. We are encouraged with the growing transaction value of each business and increasing cross-use ratio, which is the source of Rakuten’s economic moat. Meanwhile, we consider that the results and briefing meeting did not resolve our concerns of the tough competition on the domestic e-commerce market and future heavy investment of mobile network operator business. Overall, although we acknowledge a network effect on its ecosystem, we are concerned that Rakuten’s ROIC will be exposed to downward pressure in the meantime, and thus, we will retain our narrow moat and negative moat trend ratings. We retain our fair value estimate of JPY 1,200 and assess that Rakuten’s shares are currently slightly undervalued, but concerns mentioned above should be addressed for investors to recover confidence.Gross merchandise sales on Rakuten’s domestic EC business increased 13.2% in 2017, which was above 11.2% of 2016, and the shopping transaction value of the Rakuten Card increased 21.5% in 2017, which was above 20.7% in 2016, which suggests that Rakuten succeeded in re-accelerating business momentum. Moreover, cross-use ratio, the proportion of people using earned Rakuten points on multiple services, increased to 67.3% by the end of 2017, increasing from the previous year’s 62.7%, which is also an impressive number.On the other hand, we are somewhat disappointed about the declining margin of domestic EC business. In the December quarter, operating margin of domestic EC business was 18%, which was the lowest on a quarterly basis. We assume that the margin contraction is owing to the acquisition cost of Soukai Drug and increasing incentives, which may contribute enhancing Rakuten’s ecosystem in the long run. However, we are concerned about the downward pricing pressure in the domestic EC market because of the tough competition.Analyst: Kazunori Ito

Our impression of Rakuten Inc (4755 JP)'s full-year earnings results is somewhat mixed. On the positive side, we acknowledge some metrics suggesting the strength of its ecosystem. Rakuten has been focusing on building up a solid user base by offering a unique business model combining e-commerce and e-finance businesses, and promoting cross-use of its services through Rakuten Super Point program. We are encouraged with the growing transaction value of each business and increasing cross-use ratio, which is the source of Rakuten’s economic moat. Meanwhile, we consider that the results and briefing meeting did not resolve our concerns of the tough competition on the domestic e-commerce market and future heavy investment of mobile network operator business. Overall, although we acknowledge a network effect on its ecosystem, we are concerned that Rakuten’s ROIC will be exposed to downward pressure in the meantime, and thus, we will retain our narrow moat and negative moat trend ratings. We retain our fair value estimate of JPY 1,200 and assess that Rakuten’s shares are currently slightly undervalued, but concerns mentioned above should be addressed for investors to recover confidence.Gross merchandise sales on Rakuten’s domestic EC business increased 13.2% in 2017, which was above 11.2% of 2016, and the shopping transaction value of the Rakuten Card increased 21.5% in 2017, which was above 20.7% in 2016, which suggests that Rakuten succeeded in re-accelerating business momentum. Moreover, cross-use ratio, the proportion of people using earned Rakuten points on multiple services, increased to 67.3% by the end of 2017, increasing from the previous year’s 62.7%, which is also an impressive number.On the other hand, we are somewhat disappointed about the declining margin of domestic EC business. In the December quarter, operating margin of domestic EC business was 18%, which was the lowest on a quarterly basis. We assume that the margin contraction is owing to the acquisition cost of Soukai Drug and increasing incentives, which may contribute enhancing Rakuten’s ecosystem in the long run. However, we are concerned about the downward pricing pressure in the domestic EC market because of the tough competition.Analyst: Kazunori Ito

エコシステムの強化とEC競争の激化で楽天の業績は好不調