Brief Consumer: Isetan-Mitsukoshi Unveils Digital Strategy and more

In this briefing:

1. Isetan-Mitsukoshi Unveils Digital Strategy
2. Tesla  – Now We Know The Y, But Not the How
3. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
4. Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending
5. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong

1. Isetan-Mitsukoshi Unveils Digital Strategy

Three years ago, Isetan-Mitsukoshi attempted to reverse a strategy of shifting to small format retailing.

At the same time, the department store operator made a final ditch effort to avoid closing department stores and sacked its CEO who had had the temerity to suggest closure was the only way to revive the business.

Last year new management finally realised the old CEO had been right and that culling stores was the only way to improve profit growth.

Now the company is diversifying again but, instead of just small stores, it is planning a big investment into e-commerce with a projected ¥145 billion in sales from personal styling alone.

2. Tesla  – Now We Know The Y, But Not the How

Tesla Motors (TSLA US) unveiled Model Y on, perhaps not coincidentally, March 14th which also is Pi Day. Pi is the fundamental ratio which demonstrates that all circles are related–as Model Y is overwhelmingly related with the seminal Model 3 which contributes 75-80% of the newcomer’s platform and technology.

Which means Model Y may be originating with Model 3’s many inherent problems, as I discussed in Tesla’s Plan B 2.0; Y Not, just as Tesla also is juggling the ramp-up of the newly launched $35,000-base model of Model 3 along with sales expansion into Europe and China as well as building a new plant on a shoestring in Shanghai. All this just as the company also has lurched into a radical new online-only sales model with apparently little if any considered preparation (see Tesla’s New Plan: Buy Before You Try).

No wonder Tesla’s Vice President of Engineering Michael Schwekutsch just quit, an ominous signal.

Another is that Model Y won’t be available until late 2020–at best–which is much later than expected. It’s still not clear when or where Model Y will be in full production or, even more critical, when Tesla will make even a penny of profit on it. Model 3 only recently became marginally profitable, excluding the likely money-losing $35k version, and sales of more profitable but aging Models S and X are in accelerating decline.

And, as I observed last week, Tesla’s track record of long delays in delivering new models coupled with Model 3’s alarming quality and reliability may seriously diminish the hoped-for early bird reservation cash which the company sorely needs to ease its liquidity crunch. At the same time, the pending arrival of Model Y over the next year or so is likely to further dampen already waning demand for Model 3.

In any case, it’s too late for Tesla to preserve profitability in the calamitous first quarter, if not for the full year.

Continue reading for Bond Angle analysis.

3. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

4. Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending

Koolearn (1797 HK) is looking to raise up to US$S234m in its upcoming IPO.  We have previously covered the company in:

• Koolearn (新东方在线) Pre-IPO – Profitable Online Edu Company but Poor Sentiment Weighs
• New Regulatory Tightening on Online Education Reads Badly on Koolearn IPO

In this insight, we will look at the updates on financials and operating metrics, compare it to other listed online education companies, and run the deal through our framework.

The increase in spending on marketing has not yielded the intended results as the growth rates of student enrollment and gross billings slowing down. Furthermore, aggressive spending behavior is similar to that of STG and LAIX and both companies did not perform well post listing.

5. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong

We recently met with Yahoo Japan (4689 JP)  for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants.  We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.