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.

Equity Bottom-Up

<p>In this note, we take a deep dive into <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten Inc (4755 JP)</a>’s domestic e-commerce business.</p><p>We see a clear difference between how both Rakuten and <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a> are pursuing their traditional “goods” e-commerce businesses. Z seems to be still going after user growth, through acquisitions (such as ASKUL and ZOZO) and introduction of newer platforms (such as PayPay Mall and PayPay Flea Market). Rakuten, on the other hand, seems to be focused on monetising its existing users better. </p><p>One way Rakuten plans to do this is through “in-housing” its merchant deliveries. In 2018, Rakuten introduced the Rakuten Super Logistics service, an end to end supply chain solution for e-commerce users. The service is expected to boost Rakuten’s margins by reducing its reliance on third-party logistics providers and by adding “an extra buck” to revenue through fees charged from both the merchant (through both pickup and warehousing services) and the customer (shipping/delivery costs). However, upfront investments in the logistics network seem to be eating into the e-commerce business bottom line, and by the looks of it, this seems unlikely to recover anytime soon.</p>

In this note, we take a deep dive into Rakuten Inc (4755 JP)’s domestic e-commerce business.We see a clear difference between how both Rakuten and Z Holdings (4689 JP) are pursuing their traditional “goods” e-commerce businesses. Z seems to be still going after user growth, through acquisitions (such as ASKUL and ZOZO) and introduction of newer platforms (such as PayPay Mall and PayPay Flea Market). Rakuten, on the other hand, seems to be focused on monetising its existing users better. One way Rakuten plans to do this is through “in-housing” its merchant deliveries. In 2018, Rakuten introduced the Rakuten Super Logistics service, an end to end supply chain solution for e-commerce users. The service is expected to boost Rakuten’s margins by reducing its reliance on third-party logistics providers and by adding “an extra buck” to revenue through fees charged from both the merchant (through both pickup and warehousing services) and the customer (shipping/delivery costs). However, upfront investments in the logistics network seem to be eating into the e-commerce business bottom line, and by the looks of it, this seems unlikely to recover anytime soon.

Rakuten: Upfront Investments in Logistics and UI/UX Are Eating into E-Commerce Margins

'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. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/121/977/original/2020-03-09_14-29-36.png?1583731808" class="editor-image img-responsive" data-smartkarma-image-id="121977"></figure><div class="content-caption">Source • Stoxx.com</div><p style="text-align: left;"><strong>ALTMAN'S Z-SCORE</strong> - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy which built on the work of William Beaver and R.A. Fisher. Altman's original article (attached below) was published in the September 1968 issue of the Journal of Finance when he was an assistant professor of finance at NYU Stern.  The 'classic' Z-Score sampled publically-traded manufacturing companies. Later versions were formulated for private companies, non-manufacturing companies and emerging markets.  The model is between 80% and 90% accurate in predicting bankruptcy one year ahead of the event, while the rate of false positives has been between 15% and 20%.</p><p style="text-align: left;"><strong>APPLICATION TO JAPAN</strong> - We have been using Altman Z-Scores in Japan since the mid-1980s. We have found the Scores to be reasonably predictive, as has been confirmed by several academic papers, including  <a href="https://www.semanticscholar.org/paper/A-Model-of-Bankruptcy-Prediction%3A-Calibration-of/5565168f75b578ba28115ef314acbdd387f82483" target="_blank" rel="noopener">Gurau (2013)</a>. The persistence of a large number of 'zombie' companies supported by banks or keiretsu 'relatives' has, however, reduced the overall 'hit' rate for larger listed companies. The following charts show a timeline of the Altman Z-Score and Market Capitalisation for several memorable Japanese corporate bankruptcies. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/005/original/2020-03-09_15-53-11.png?1583736804" class="editor-image img-responsive" data-smartkarma-image-id="122005"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/006/original/2020-03-09_15-54-52.png?1583736903" class="editor-image img-responsive" data-smartkarma-image-id="122006"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/007/original/2020-03-09_15-56-58.png?1583737032" class="editor-image img-responsive" data-smartkarma-image-id="122007"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/009/original/2020-03-09_15-59-08.png?1583737161" class="editor-image img-responsive" data-smartkarma-image-id="122009"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/011/original/2020-03-09_16-03-28.png?1583737425" class="editor-image img-responsive" data-smartkarma-image-id="122011"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-highlight"><p>This Insight is the second part of a three-part series attempting to highlight those Japanese companies that at the highest risk from the 2020 <em>Covid-19 recession</em>. The first focused on the<strong><a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-1-audit-score" target="_blank" data-smartkarma-citation="insights:37265" rel="noopener">Audit Score</a></strong>, while a forthcoming Insight will look at <strong>Cumulative Cash Flows.</strong></p></div>

Source • Stoxx.comALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy which built on the work of William Beaver and R.A. Fisher. Altman's original article (attached below) was published in the September 1968 issue of the Journal of Finance when he was an assistant professor of finance at NYU Stern.  The 'classic' Z-Score sampled publically-traded manufacturing companies. Later versions were formulated for private companies, non-manufacturing companies and emerging markets.  The model is between 80% and 90% accurate in predicting bankruptcy one year ahead of the event, while the rate of false positives has been between 15% and 20%.APPLICATION TO JAPAN - We have been using Altman Z-Scores in Japan since the mid-1980s. We have found the Scores to be reasonably predictive, as has been confirmed by several academic papers, including  Gurau (2013). The persistence of a large number of 'zombie' companies supported by banks or keiretsu 'relatives' has, however, reduced the overall 'hit' rate for larger listed companies. The following charts show a timeline of the Altman Z-Score and Market Capitalisation for several memorable Japanese corporate bankruptcies. Source • Japan AnalyticsThis Insight is the second part of a three-part series attempting to highlight those Japanese companies that at the highest risk from the 2020 Covid-19 recession. The first focused on theAudit Score, while a forthcoming Insight will look at Cumulative Cash Flows.

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

Telco/Internet specialist

Kirk Boodry

Redex Research

Thematic (Sector/Industry)

<p><a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> said today that it would launch commercial 5G services on 27 March with two handsets.  Nominally, 5G will cost an additional ¥1,000/month although the fee is being waived for the first two years and we expect that the operators will never collect 5G surcharges. Since 2011, Japanese mobile operators have traded higher speeds or larger bundles for revenue stability and there is no reason to think that changes as 5G proliferates.  For the incumbents, adding 5G to their already high-quality networks should help them compete with Rakuten, which despite an anticipated June 2020 5G launch, is really years away from matching incumbent quality. </p>

Softbank Corp (9434 JP) said today that it would launch commercial 5G services on 27 March with two handsets.  Nominally, 5G will cost an additional ¥1,000/month although the fee is being waived for the first two years and we expect that the operators will never collect 5G surcharges. Since 2011, Japanese mobile operators have traded higher speeds or larger bundles for revenue stability and there is no reason to think that changes as 5G proliferates.  For the incumbents, adding 5G to their already high-quality networks should help them compete with Rakuten, which despite an anticipated June 2020 5G launch, is really years away from matching incumbent quality. 

Softbank Corp: Commercial 5G in Japan Arrives Later This Month

<p>It was worth the wait. Rakuten Mobile announced new pricing plans that are by far the simplest and cheapest (for data users) in Japan: unlimited voice and data for ¥2,980/month... and the first year is free. The catch is that it is only available on network whilst roaming usage, which will be a very wide area to start, is limited to 2GB/month. That makes the plan less useful for the most intensive (and highest ARPU) users but should generate high subscriber numbers as users take advantage of low-upfront costs to check it out without leaving their existing carrier. The end result is a race between Rakuten (network expansion) and the incumbents (moderating price declines) to provide a platform that offers lots of data cheaply.  In the near-term, today's announcement is good news for roaming provider KDDI but less so for DoCoMo and Softbank. Meanwhile, Rakuten may benefit from headlines on subscriber additions going forward but giving away a year of mobile revenue and guidance of break-even for the consolidated business may spook some investors. An unlikely loser in today's announcement could be Apple as a trend away from very expensive high-end devices in Japan gathers steam.</p>

It was worth the wait. Rakuten Mobile announced new pricing plans that are by far the simplest and cheapest (for data users) in Japan: unlimited voice and data for ¥2,980/month... and the first year is free. The catch is that it is only available on network whilst roaming usage, which will be a very wide area to start, is limited to 2GB/month. That makes the plan less useful for the most intensive (and highest ARPU) users but should generate high subscriber numbers as users take advantage of low-upfront costs to check it out without leaving their existing carrier. The end result is a race between Rakuten (network expansion) and the incumbents (moderating price declines) to provide a platform that offers lots of data cheaply.  In the near-term, today's announcement is good news for roaming provider KDDI but less so for DoCoMo and Softbank. Meanwhile, Rakuten may benefit from headlines on subscriber additions going forward but giving away a year of mobile revenue and guidance of break-even for the consolidated business may spook some investors. An unlikely loser in today's announcement could be Apple as a trend away from very expensive high-end devices in Japan gathers steam.

Rakuten: Mobile Pricing Disruptive with a Catch

<p>Rakuten will unveil pricing plans for its facilities-based mobile service on 3 March, with reservations to start on 4 March and the actual service launch sometime in early April.  The current MVNO service offers a starting point on how to evaluate Rakuten's approach whilst incumbent promotional strategies also offer some ideas on what to expect. As we have discussed before, the company's relatively small coverage footprint will constrain discounting as it needs to balance market share expansion with operating losses.  We think Rakuten pricing will focus on simplicity and offer effective discounts of 20-30% over the incumbents today which should be manageable for the incumbents. </p>

Rakuten will unveil pricing plans for its facilities-based mobile service on 3 March, with reservations to start on 4 March and the actual service launch sometime in early April.  The current MVNO service offers a starting point on how to evaluate Rakuten's approach whilst incumbent promotional strategies also offer some ideas on what to expect. As we have discussed before, the company's relatively small coverage footprint will constrain discounting as it needs to balance market share expansion with operating losses.  We think Rakuten pricing will focus on simplicity and offer effective discounts of 20-30% over the incumbents today which should be manageable for the incumbents. 

Japan Mobile: What We Expect when Rakuten Unveils Pricing Next Week

Japan

Rakuten Group, Inc. provides Internet services. The Company offers Internet finance services which including "Rakuten Card" and "Rakuten Bank". Rakuten Group also provides digital content services including electronic book services.

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Rakuten (4755 JP)

Rakuten: Upfront Investments in Logistics and UI/UX Are Eating into E-Commerce Margins

In this note, we take a deep dive into Rakuten Inc (4755 JP)’s domestic e-commerce business.We see a clear difference between how both Rakuten and...

Supun Walpola

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

ALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy...

Campbell Gunn

Softbank Corp: Commercial 5G in Japan Arrives Later This Month

Softbank Corp (9434 JP) said today that it would launch commercial 5G services on 27 March with two handsets. Nominally, 5G will cost an...

Kirk Boodry

Rakuten: Mobile Pricing Disruptive with a Catch

It was worth the wait. Rakuten Mobile announced new pricing plans that are by far the simplest and cheapest (for data users) in Japan: unlimited...

Kirk Boodry

Japan Mobile: What We Expect when Rakuten Unveils Pricing Next Week

Rakuten will unveil pricing plans for its facilities-based mobile service on 3 March, with reservations to start on 4 March and the actual service...

Kirk Boodry

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