Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a> last week announced its Q3 results. The stock popped 15+% quickly that day and stayed up all day long, closing at +17.7%. The next day was up small. Over the two days volume was 74.1 million shares. 
I expect the shares were up for two reasons.
<ol>
<li>People figured out Son-san could sell as well as buy. And the sale of <a href="https://www.smartkarma.com/entities/5891" target="_blank" data-smartkarma-citation="entities:5891:1">NVIDIA Corp (NVDA US)</a> shares was done very well. </li>
<li>Softbank announced a buyback of ¥600 billion - its largest buyback ever. </li>
</ol>
The first was surprisingly well-executed. The ownership and transfers of assets from Softbank to the Softbank Vision Fund are sometimes tough to follow, and this should give non-Softbank SVF investors some pause, but Softbank's ability to get leverage on assets is good, and the collar transaction was - in the eyes of this former derivatives strategist - very well done.
The US$15bn+ gain in market cap over the next two days was probably 10 times the net income impact of the savings on the NVIDIA trade, which means investors are paying 10x earnings for the same thing to incrementally happen every year vs what they thought was going to happen before Thursday. Financial trading businesses have generally traded over time in the high single digit PERs because of the variability of results, so the jump was a little more than it should have been for that, especially if you think some years the "right" jump because of better-than-market execution will have less impact than $2.9bn.
So the rest was either due to other business going well, or the share buyback. At ¥600 billion and at Friday's closing price, it is about 7 days worth of volume using the 3-month volume average prior to the earnings release and 8.6 days of volume using a one-year average. That means they could buy 10% of ADV every day for 70-86 trading days and complete the buyback, or it means they could buy 3.4% of the volume every trading day. 
That doesn't seem like a lot. But it is.

Softbank Group (9984 JP) last week announced its Q3 results. The stock popped 15+% quickly that day and stayed up all day long, closing at +17.7%. The next day was up small. Over the two days volume was 74.1 million shares. 
I expect the shares were up for two reasons.

People figured out Son-san could sell as well as buy. And the sale of NVIDIA Corp (NVDA US) shares was done very well. 
Softbank announced a buyback of ¥600 billion - its largest buyback ever. 

The first was surprisingly well-executed. The ownership and transfers of assets from Softbank to the Softbank Vision Fund are sometimes tough to follow, and this should give non-Softbank SVF investors some pause, but Softbank's ability to get leverage on assets is good, and the collar transaction was - in the eyes of this former derivatives strategist - very well done.
The US$15bn+ gain in market cap over the next two days was probably 10 times the net income impact of the savings on the NVIDIA trade, which means investors are paying 10x earnings for the same thing to incrementally happen every year vs what they thought was going to happen before Thursday. Financial trading businesses have generally traded over time in the high single digit PERs because of the variability of results, so the jump was a little more than it should have been for that, especially if you think some years the "right" jump because of better-than-market execution will have less impact than $2.9bn.
So the rest was either due to other business going well, or the share buyback. At ¥600 billion and at Friday's closing price, it is about 7 days worth of volume using the 3-month volume average prior to the earnings release and 8.6 days of volume using a one-year average. That means they could buy 10% of ADV every day for 70-86 trading days and complete the buyback, or it means they could buy 3.4% of the volume every trading day. 
That doesn't seem like a lot. But it is.

Softbank Buyback More Than It Appears To Be

'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/000/077/686/original/2019-02-02_09-34-42.png?1549067763" class="editor-image img-responsive" data-smartkarma-image-id="77686"></figure><div class="content-caption">Source: Japan Analytics</div><div style="text-align: left;" class="content-caption">
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.</div>DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/701/original/2019-02-02_14-11-25.png?1549084295" class="editor-image img-responsive" data-smartkarma-image-id="77701"></figure>Source: Japan Analytics
</div>PAST THE PEAK - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point. We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'.  Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/746/original/2019-02-03_07-23-31.png?1549146223" class="editor-image img-responsive" data-smartkarma-image-id="77746"></figure><div class="content-caption">Source: Japan Analytics</div>THE FIRST CUT - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/722/original/2019-02-02_18-25-46.png?1549099572" class="editor-image img-responsive" data-smartkarma-image-id="77722"></figure><div class="content-caption">Source: Japan Analytics</div>INTERREGNUM - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'. In due course, we expect the preponderance of negative momentum to tip the scales.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/724/original/2019-02-02_18-41-12.png?1549100508" class="editor-image img-responsive" data-smartkarma-image-id="77724"></figure><div class="content-caption">Source: Japan Analytics</div>TORAKU @110 - The Toraku advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018. This signal is 'amber' and could be 'red' by the end of next week. <div class="content-highlight">
OUTLOOK &amp; RECOMMENDATIONS
<ul>
<li>We continue to recommend an underweight position in Japan in global portfolios.</li>
<li>The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit.  </li>
<li>Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.</li>
<li>In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.</li>
</ul>
</div>In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on <a href="https://www.smartkarma.com/entities/3700" target="_blank" data-smartkarma-citation="entities:3700:1">Anritsu (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/12001" target="_blank" data-smartkarma-citation="entities:12001:1">Alps Alpine (6770 JP)</a>, <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a>, <a href="https://www.smartkarma.com/entities/454" target="_blank" data-smartkarma-citation="entities:454:1">Lixil (5938 JP)</a> (yes, again), <a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a> , and <a href="https://www.smartkarma.com/entities/8197" target="_blank" data-smartkarma-citation="entities:8197:1">Cyberagent (4751 JP)</a>.

Source: Japan Analytics
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.
Source: Japan Analytics
PAST THE PEAK - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point. We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'.  Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. Source: Japan AnalyticsTHE FIRST CUT - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  Source: Japan AnalyticsINTERREGNUM - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'. In due course, we expect the preponderance of negative momentum to tip the scales.Source: Japan AnalyticsTORAKU @110 - The Toraku advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018. This signal is 'amber' and could be 'red' by the end of next week. 
OUTLOOK &amp; RECOMMENDATIONS

We continue to recommend an underweight position in Japan in global portfolios.
The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit.  
Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.
In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.

In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Anritsu (6754 JP), Alps Alpine (6770 JP), SanBio (4592 JP), Lixil (5938 JP) (yes, again), Fanuc (6954 JP), Mizuho Financial Group (8411 JP) , and Cyberagent (4751 JP).

Japan Fortnightly Update: Drip, Drip, Drip...

Differentiated global TMT & Internet Research

New Street Research Insights

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Research is provided by our team of experienced analysts. Our work is idea driven, based on independence of thought, sector expertise, and firmly focused on fundamentals and valuation of telecoms and internet names globally. New Street is headquartered in London with offices in New York, Singapore and Australia. 

New Street Research is an independent, partner-owned, research firm specialising in equity and debt research. Our equity research embraces the following sectors:

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We also provide debt research on:
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Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/639" target="_blank" data-smartkarma-citation="entities:639:1">KDDI's (9433 JP)</a> 3Q results were a small miss (2% vs our forecasts), at both the revenue and profit lines, but not enough to change our positive stance. A key part of our view is derived from our negative view on <a href="https://www.smartkarma.com/entities/666" target="_blank" data-smartkarma-citation="entities:666:1">Apple (AAPL US)</a> from August 2018 where we see an "air-pocket" of demand loss coming through. This is particularly important to Japan where the iPhone accounts for around 75% of smartphones. Apple has downgraded guidance and we believe is in a secular downtrend as refresh cycles elongate and that has been accentuated by the pull forward of demadn for the iPhone X. This is playing out in Japan, with KDDI reporting handset revenues down 13% YoY, and the key cause of the revenue miss. KDDI increased discounting to offset falling sales in 3Q adding a ¥9.9bn increase in handset costs in the quarter. Without that, EBIT would have beaten expectations. KPIs were generally strong, and service revenue trends improved to -0.1% YoY from -0.8%. Given the nature of the miss, and the fact the company is reiterating guidance we do not expect material changes to forecasts. Our price target is ¥4,100, and our recommendation remains Buy.

KDDI's (9433 JP) 3Q results were a small miss (2% vs our forecasts), at both the revenue and profit lines, but not enough to change our positive stance. A key part of our view is derived from our negative view on Apple (AAPL US) from August 2018 where we see an "air-pocket" of demand loss coming through. This is particularly important to Japan where the iPhone accounts for around 75% of smartphones. Apple has downgraded guidance and we believe is in a secular downtrend as refresh cycles elongate and that has been accentuated by the pull forward of demadn for the iPhone X. This is playing out in Japan, with KDDI reporting handset revenues down 13% YoY, and the key cause of the revenue miss. KDDI increased discounting to offset falling sales in 3Q adding a ¥9.9bn increase in handset costs in the quarter. Without that, EBIT would have beaten expectations. KPIs were generally strong, and service revenue trends improved to -0.1% YoY from -0.8%. Given the nature of the miss, and the fact the company is reiterating guidance we do not expect material changes to forecasts. Our price target is ¥4,100, and our recommendation remains Buy.

KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies

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. 

The following is an in-depth review of <a href="https://www.smartkarma.com/entities/18379" target="_blank" data-smartkarma-citation="entities:18379:1">ZOZO (3092 JP)</a> covering its core operations and its potential to achieve its stated targets over the next few years.
<div class="content-highlight">
This Insight has been produced jointly by <a href="https://www.smartkarma.com/profiles/2415" target="_blank" data-smartkarma-citation="accounts:2415">Michael Causton</a> at JapanConsuming and <a href="https://www.smartkarma.com/profiles/713" target="_blank" data-smartkarma-citation="accounts:713">Mio Kato, CFA</a> at <a href="https://www.smartkarma.com/companies/909" target="_blank" data-smartkarma-citation="companies:909">LightStream Research</a>.
</div>
The Insight is structured as follows:
<ul>
<li>A. Conclusions Up Front</li>
<li>B. Report Highlights</li>
<li>
C. Fashion E-Commerce Market
</li>
<li>D. Zozo History and Current Business Overview</li>
<li>E. Review of Brand, Management &amp; Operational Divisions</li>
<li>F. Scenarios and Valuations</li>
</ul>
There is also a summary of this report as a slide deck (PDF) in the attachments.
<hr>
<div class="content-highlight">
<h2>A. Conclusions Up Front</h2>
Zozo’s valuation is based on:
<ul>
<li>The core Zozotown mall business</li>
<li>The potential of its new private brand</li>
<li>The quality and reliability of its management</li>
<li>Zozo’s two key assets: its brand and its database of 7 million fashion consumers.</li>
</ul>
This report examines each of these with the following conclusions:
1. The Existing Zozotown business faces slowing growth profile
We expect Zozotown to continue to grow transaction values (TVs) and revenues but expect growth rates to differ sharply from Zozo’s projections:
<ul>
<li>The mall business will continue to add volume in line with expansion of the online fashion market overall but not much higher and margins may suffer from pressure on take rates and declining average prices:
<ul>
<li>Demographic breakdowns suggest that Zozo will have to work much harder to add new customers, especially women in their 20s. To continue growing membership rapidly, penetration of older demographics could be necessary and Zozo has not demonstrated this ability so far.</li>
<li>Commission rates could come under pressure as merchant discontent increases due to reduced visibility and the brand dilutive proliferation of lower-priced clothing. The recent departure of Onward could be a sign that brands are increasingly capable of going it alone online.</li>
<li>Revenue per user significantly outpaces global competitors such as Asos, Zalando and even Boohoo. After increased purchase frequency drove a temporary small increase, the same purchase frequency is falling back towards trend, as is average revenue per user.</li>
</ul>
</li>
</ul>
2. Private brand targets look extremely aggressive
The private brand will not reach anywhere near the targets set by Zozo given the difficulty in building a business of such scale in a short time:
<ul>
<li>¥200bn in revenue within three years would represent a pace of growth 3-5x as fast as some of Japan’s biggest names in fashion and the numerous execution errors point to a rushed launch.</li>
<li>Marginal profit ratios aren’t that high for apparel firms and retailers with most names achieving 6-10% marginal operating profit. While Zozo is likely to hit the top of this range, it will dilute the Zozotown mall's high operating margins.</li>
<li>The target of 30% of private brand sales coming from overseas in 2020 is a fantasy. Zozo has almost no presence overseas currently and no amount of moon-trip press will deliver sufficient market coverage to drive sales to this target.</li>
</ul>
3. Other Business has some potential
<ul>
<li>Zozo has potential to grow advertising revenues and further leverage its Wear app to do this.</li>
<li>Adding advertising to Zozotown and Wear requires little capex or additional operational overhead so should be quite profitable – but could annoy some users.</li>
</ul>
4. Evidence of poor/rushed planning is piling up
While the Zozo business is solid, recent management behaviour and policy implementation suggest management is struggling:
<ul>
<li>CEO Maekawa’s public profile is increasingly difficult to reconcile with someone intent on driving their existing business to unprecedented highs.</li>
<li>Questions regarding the amount of time he spends at work and the moon trip announced with Elon Musk don’t sustain a reputation of solid dedication to the business.</li>
<li>After consistently producing conservative guidance throughout much of its history, Zozo’s recent medium-term plans appear to be based on bluest-of-sky forecasts.</li>
<li>At the same time, failed execution on the first Zozosuit, haphazard strategic changes and hopes presented as solid targets for entirely new businesses where the company has not accumulated expertise, suggest a lack of rigour and discipline.</li>
<li>This all points to management trying to execute to a target that has been determined, not for the purpose of building long term enterprise value, but rather to generate significant positive and temporary buzz… or a higher short-term share price. Either way, signs are that all is not well with the company short-to-medium term. </li>
</ul>
5. Long-term potential still very much there
While the short-to-medium term outlook looks unstable, Zozo has significant momentum longer-term:
<ul>
<li>A valuable database of some 7 million fashion consumers with their purchase histories, likes and dislikes, profiles on Wear, sizing, and relationships with other Wear users. In our view this database is Zozo’s primary asset and not one to be underestimated – it is far and away the biggest and most comprehensive database on fashion preferences among Japan’s most fashion-avid consumers. No competitor has anything like it.</li>
<li>The Zozo brand remains very valuable despite the recent blemishes caused by the botched launch of the private brand.</li>
<li>These two assets are an excellent foundation for building a major new apparel brand.</li>
<li>While no fashion/apparel retailer has reached ¥200 billion in three years, and it is highly unlikely Zozo can, it is equally true that no fashion retailer has started out with a database of all the preferences of 7 million fashion-loving consumers and one of the most famous brands in the sector.</li>
<li>If management can stabilise and follow long-term planning and a more considered execution of strategy, the potential for the emergence of a Zozo brand to rival Uniqlo and others is real.</li>
</ul>
However, development of such a business is a five to ten-year project.
</div>

The following is an in-depth review of ZOZO (3092 JP) covering its core operations and its potential to achieve its stated targets over the next few years.

This Insight has been produced jointly by Michael Causton at JapanConsuming and Mio Kato, CFA at LightStream Research.

The Insight is structured as follows:

A. Conclusions Up Front
B. Report Highlights

C. Fashion E-Commerce Market

D. Zozo History and Current Business Overview
E. Review of Brand, Management &amp; Operational Divisions
F. Scenarios and Valuations

There is also a summary of this report as a slide deck (PDF) in the attachments.


A. Conclusions Up Front
Zozo’s valuation is based on:

The core Zozotown mall business
The potential of its new private brand
The quality and reliability of its management
Zozo’s two key assets: its brand and its database of 7 million fashion consumers.

This report examines each of these with the following conclusions:
1. The Existing Zozotown business faces slowing growth profile
We expect Zozotown to continue to grow transaction values (TVs) and revenues but expect growth rates to differ sharply from Zozo’s projections:

The mall business will continue to add volume in line with expansion of the online fashion market overall but not much higher and margins may suffer from pressure on take rates and declining average prices:

Demographic breakdowns suggest that Zozo will have to work much harder to add new customers, especially women in their 20s. To continue growing membership rapidly, penetration of older demographics could be necessary and Zozo has not demonstrated this ability so far.
Commission rates could come under pressure as merchant discontent increases due to reduced visibility and the brand dilutive proliferation of lower-priced clothing. The recent departure of Onward could be a sign that brands are increasingly capable of going it alone online.
Revenue per user significantly outpaces global competitors such as Asos, Zalando and even Boohoo. After increased purchase frequency drove a temporary small increase, the same purchase frequency is falling back towards trend, as is average revenue per user.



2. Private brand targets look extremely aggressive
The private brand will not reach anywhere near the targets set by Zozo given the difficulty in building a business of such scale in a short time:

¥200bn in revenue within three years would represent a pace of growth 3-5x as fast as some of Japan’s biggest names in fashion and the numerous execution errors point to a rushed launch.
Marginal profit ratios aren’t that high for apparel firms and retailers with most names achieving 6-10% marginal operating profit. While Zozo is likely to hit the top of this range, it will dilute the Zozotown mall's high operating margins.
The target of 30% of private brand sales coming from overseas in 2020 is a fantasy. Zozo has almost no presence overseas currently and no amount of moon-trip press will deliver sufficient market coverage to drive sales to this target.

3. Other Business has some potential

Zozo has potential to grow advertising revenues and further leverage its Wear app to do this.
Adding advertising to Zozotown and Wear requires little capex or additional operational overhead so should be quite profitable – but could annoy some users.

4. Evidence of poor/rushed planning is piling up
While the Zozo business is solid, recent management behaviour and policy implementation suggest management is struggling:

CEO Maekawa’s public profile is increasingly difficult to reconcile with someone intent on driving their existing business to unprecedented highs.
Questions regarding the amount of time he spends at work and the moon trip announced with Elon Musk don’t sustain a reputation of solid dedication to the business.
After consistently producing conservative guidance throughout much of its history, Zozo’s recent medium-term plans appear to be based on bluest-of-sky forecasts.
At the same time, failed execution on the first Zozosuit, haphazard strategic changes and hopes presented as solid targets for entirely new businesses where the company has not accumulated expertise, suggest a lack of rigour and discipline.
This all points to management trying to execute to a target that has been determined, not for the purpose of building long term enterprise value, but rather to generate significant positive and temporary buzz… or a higher short-term share price. Either way, signs are that all is not well with the company short-to-medium term. 

5. Long-term potential still very much there
While the short-to-medium term outlook looks unstable, Zozo has significant momentum longer-term:

A valuable database of some 7 million fashion consumers with their purchase histories, likes and dislikes, profiles on Wear, sizing, and relationships with other Wear users. In our view this database is Zozo’s primary asset and not one to be underestimated – it is far and away the biggest and most comprehensive database on fashion preferences among Japan’s most fashion-avid consumers. No competitor has anything like it.
The Zozo brand remains very valuable despite the recent blemishes caused by the botched launch of the private brand.
These two assets are an excellent foundation for building a major new apparel brand.
While no fashion/apparel retailer has reached ¥200 billion in three years, and it is highly unlikely Zozo can, it is equally true that no fashion retailer has started out with a database of all the preferences of 7 million fashion-loving consumers and one of the most famous brands in the sector.
If management can stabilise and follow long-term planning and a more considered execution of strategy, the potential for the emergence of a Zozo brand to rival Uniqlo and others is real.

However, development of such a business is a five to ten-year project.


Zozo: A Shooting Star Shooting Itself in the Foot

Specialist in Japanese equities, Kheiron Group

Nathan Ramler, CFA

Specialist in Japanese equities

Kheiron Group

Tokyo-based with experience in global equity markets and M&A. Striving to add value and insight. 

Specialists in Japan

NTT (Nippon Telegraph & Telephone) / Equity Bottom-Up

With its nationwide fiber optic network infrastructure, NTT continues to dominate the fixed line broadband market in Japan with 68% market share. In this Insight we explore the fixed line broadband market in Japan today and how it is evolving, especially with the increasing dominance of "collaboration" offerings that bundle fiber with mobile services.Mobile services are getting a lot of attention today, especially in the run up to 5G launches over the coming 12 months, but without fiber backhaul, 5G would be a nonstarter. In this Insight we investigate what 5G will bring and what is needed to support it as well as the telcos' latest plans. NTT is not just an incumbent telecom operator, it’s also a key player for future technologies and provides the physical infrastructure and architecture for many of the industries new services.With all the talk about 5G it is sometimes easy to forget that fixed line networks are still necessary. With NTT's strong fiber-based network and its collaborations with NTT Docomo and many other partners in mobile and data, we believe NTT is well positioned to be a key and winning player in the evolving telecom and technology space.

With its nationwide fiber optic network infrastructure, NTT continues to dominate the fixed line broadband market in Japan with 68% market share. In this Insight we explore the fixed line broadband market in Japan today and how it is evolving, especially with the increasing dominance of "collaboration" offerings that bundle fiber with mobile services.Mobile services are getting a lot of attention today, especially in the run up to 5G launches over the coming 12 months, but without fiber backhaul, 5G would be a nonstarter. In this Insight we investigate what 5G will bring and what is needed to support it as well as the telcos' latest plans. NTT is not just an incumbent telecom operator, it’s also a key player for future technologies and provides the physical infrastructure and architecture for many of the industries new services.With all the talk about 5G it is sometimes easy to forget that fixed line networks are still necessary. With NTT's strong fiber-based network and its collaborations with NTT Docomo and many other partners in mobile and data, we believe NTT is well positioned to be a key and winning player in the evolving telecom and technology space. 

NTT (9432 JP) Remains the Broadband King in Japan, Both for Fixed Line and Mobile

Japan

Softbank Corporation provides mobile phone telecommunication and networking services. The Company offers mobile communication opening, short messaging function opening, video function opening, and other services. Softbank also provides mobile phones.

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