Brief Consumer: ZOZO: The Kingmaker Abandons His King and more

In this briefing:

1. ZOZO: The Kingmaker Abandons His King
2. OUE C-REIT – Beware of the CPPU Timebomb

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. OUE C-REIT – Beware of the CPPU Timebomb

Whilst OUE C-REIT’s DPU yield and Price-to-NAV appears to be attractive vis-à-vis its peers, investors should take note of the implications of the S$375 mil Convertible Perpetual Preferred Units (“CPPU”) and its impact on OUE C-REIT’s DPU going forward.

Assuming that all S$375 mil CPPUs are converted, a total of 524.2 mil new OUE C-REIT will be issued to OUE Ltd, and the total unit base of OUE C-REIT will expand by 18% to 3,385.8 mil units.

For minority investors of OUE C-REIT, they face the risk of having their DPU yield diluted from a projected 7.1% (before conversion) to 6.2% after conversion.

 A Rights Issue to fund CPPU Redemption will be more dilutive than the conversion scenario. Assuming a Rights Issue at 20% discount, DPU yield of OUE C-REIT will drop from a projected 7.1% (before conversion) to 5.8% after Rights Issue.

Minority investors are likely to be at the losing end of this CPPU issue and suffer from yield dilution. Investors should avoid OUE C-REIT for now as the uncertainty over the CPPU conversion remains.

For investors who are still keen to take a position in OUE C-REIT, a fair post-conversion diluted DPU yield would be 6.6%, translating to a recommended entry price of S$0.465 per unit.