In this briefing:
- Will Rakuten Get A Near-Term Lyft?
- A Comparison of Recent Visitors Trend to Korea and Japan
- Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued
- Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
- This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans
1. Will Rakuten Get A Near-Term Lyft?
Rakuten Inc (4755 JP) is much in the news for many reasons – one of which being a plunge into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, having officially applied for the license in February 2018 and seeing it approved in April. – the license for which it applied a year ago, with approval received in April 2018. The goal has been to use its initial foray into the MVNO business where it has more than 1.5 million users, and increase its footprint to attract some of its 100+mm Rakuten IDs, 7mm Rakuten Bank accountholders, 3mm Rakuten Securities accountholders, so that it can increase the LTV (LifeTimeValue) of its existing customer base.
The goal is to introduce service this year (also a requirement of the terms of its license), growing steadily to have 15mm subs in 10 years. The estimated hardware spend is said to be ¥600-700bn on base stations and equipment, initially concentrating on areas in and around mass transit stations in urban areas such as Tokyo and Osaka, and then expand outward. The company has signed deals with numerous partners in electricity distribution such as Tokyo Electric Power Co (9501 JP), Chubu Electric Power Co (9502 JP), and Kansai Electric Power Co (9503 JP) to install transmission equipment on these companies’ power poles and other infrastructure.
The shares have suffered mightily since the plan came to light in mid-December 2015, underperforming the TOPIX Info & Communications Sector Index by more than 20% in the fourteen months through yesterday. The sharp drop on the left hand side of the chart was a two-day sell-a-thon by investors convinced the company was about to waste billions of dollars. The Info & Communications Sector Index also dropped sharply on that day on fears that a fourth entrant with a declared goal of dropping monthly charges by 40% would increase churn at the existing Big Three (NTT Docomo Inc (9437 JP), Softbank Corp (9434 JP), and KDDI Corp (9433 JP)) and possibly cause a price war. The shares dropped from about ¥1140 to ¥1020/share, and then slid another 30-odd percent in the next six months to ¥700/share.
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The shares have rebounded, fell back in autumn general market weakness, rebounded a tie-up on payments with KDDI announced Nov1 and decent Q3 numbes announced less than 2 weeks later, got crushed in the sharp global selloff in November and December, then had a v-shaped rebound at the start of 2019.
At the end of January Rakuten Mobile Network received blanket licenses to transmit on 1.7Ghz in the major regions covering Tokyo, Kyoto, Osaka, Nagoya and Yokohama from the local Bureaus of Communication, and expects to receive others soon. Last week, Rakuten reported full-year earnings through end-December with revenues up 16.6%yoy to just over ¥1.1 trillion, OP (IFRS) at ¥170.4bn, and Net Income at ¥142bn and on the same day announced Nokia had been granted the contract to deploy a turnkey solution as had been previously tested and speculated.
There are numerous telecom and retailing experts publishing on Smartkarma who have more expertise on Rakuten’s telecom plans and their plans to compete harder against Amazon Japan and Yahoo Japan and others in the e-tailing space.
Selected Insights on Smartkarma on Rakuten Inc (4755 JP) In the Last 12+ Months | |||
Date | Sector | Insight Provider | Insight Title |
21 Dec 2017 | Telecom | New Street Research | Rakuten’s Entry to Telco Market Unlikely to Be Disruptive. Telco Visits Suggest Positive Outlook. |
17 Jan 2018 | Telecom | New Street Research | Rakuten’s Balance Sheet and Incremental Costs Limit Funding Flexibility as It Plans Mobile Entry |
11 Sep 2018 | Telecom | Nathan Ramler | SoftBank (9984 JP) Mobile Sub-Brands Provide a Case Study for Rakuten (4755 JP) Mobile |
21 Sep 2018 | Telecom | Nathan Ramler | Rakuten (4755 JP) Mobile: Can It Succeed? A Study, Plus Insights from SoftBank’s (9984 JP) EMobile |
18 Oct 2018 | Retailing | Michael Causton | Rakuten Launches Own Delivery Service |
16 Nov 2018 | Retailing | Michael Causton | Online Food Boom: Rakuten Walmart Alliance Goes Live |
16 Feb 2019 | Retailing | Michael Causton | Rakuten to Covertly Cut Merchant Commission Rates? |
20 Feb 2019 | Telecom | Kirk Boodry | Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten |
I am not going to pretend to their level of knowledge on telecom or retailing (I found Kirk Boodry’s piece on the upcoming 5G allocations in March to be particularly informative) but I will note that Rakuten has a) the ability to borrow against the hardware and licenses, b) can roll out hardware quarter-by-quarter, and c) the KDDI/Rakuten deal is important. In it, KDDI will give Rakuten access to its nationwide roaming network, and Rakuten will provide KDDI with expertise on mobile payments – especially relevant as KDDI is now building out au Financial as briefly discussed here.
But There is More NewsFlow To Come, And THAT is Interesting
In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mm in a then just-become-unicorn ride-sharing company called Lyft Inc (0812823D US), which at the end of the Series E round in May 2015 would leave it with ~11.9% of the company at a ~US$2.4-2.5bn post-money valuation. Recent articles suggest that Rakuten remains the top investor (though a WSJ article 2 weeks ago noted there would be golden shares. Hiroshi Mikitani remains a board member of Lyft.
That becomes important as by all accounts I can find (much more detail below), Rakuten continued investing in the four subsequent funding rounds through last summer, leaving the company as the largest single shareholder in Lyft as it prepares for its IPO later this spring. Lyft confidentially filed its IPO paperwork (a “draft S-1”) with the SEC in early December 2018, leaping ahead of Uber in the race to IPO first so the much larger Uber valuation doesn’t block Lyft’s chances for raising funds.
Reuters carried an article Thursday night Asia time saying Lyft planned to start its roadshow the week of March 18th, with an expected valuation of US$20-25 billion, and the first-mover advantage would allow Lyft to set the metrics it wants to use upon which to be judged and priced (if it waited, it would have to be compared to Uber). That could mean more emphasis on the company’s strong suite of self-driving partnerships (drive.ai, Ford, GM, Jaguar, Nutonomy, Waymo, others). A March 18th roadshow would require a full S-1 filing two weeks prior to that.
A successful IPO story based on picking up market share (reportedly doubled to 28% by end-2018 vs end-2016) might make Rakuten’s other investments look good too (Rakuten led Series B, C, D, and E funding for Spanish-language ride-hailing app cabify from 2014-2018 (and reportedly pushed cabify to merge with Lyft last year) and has invested in multiple rounds in SE Asian version GoJek.
The runup to this IPO and the clarity a filing could provide on ownership could provide a near-term fillip to Rakuten’s share price.
2. A Comparison of Recent Visitors Trend to Korea and Japan
- In this report, we compare the recent dynamic foreign tourists trend to Korea and Japan. In January 2019, the number of foreign visitors to Japan rose 7.5% YoY to 2.69 million. A total of 0.78 million from South Korea visited Japan in January (DOWN 3% YoY) followed by 0.75 million people from China (up 19.3% YoY).
- According to Korea Ministry of Economy & Finance (MoEF), the number of people from China to Korea increased 35.1% YoY in January 2019.
- As evidenced by the better than expected Chinese visitors to Korea and worse than expected South Korean visitors to Japan in January, there is an increasing indication that this trend could continue in 2019. Many of the Korean related cosmetics stocks have positively reacted to the recent data. One of the interesting trades to be long on a basket of Korean cosmetics related stocks and be short on a basket of Japanese cosmetics related names.
3. Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued
- Tokyo Electron (8035 JP) is a semiconductor equipment manufacturer based in Japan. The company has been operating in the semiconductor space for several decades and generates nearly 90.0% of its revenue from the sale of semiconductor equipment.
- The company revenues are highly correlated with worldwide semiconductor revenues. The current softness in the semiconductor market has already caused a decline in company earnings for 3QFY03/19 and we expect the company earnings to deteriorate further as the market has just begun witnessing the demand decline.
- Even though IoT, cloud, big data, 5G and AI are expected to drive semiconductor revenues and make up for the declining demand from smartphones, tablets and PCs, we do not expect this to drive a significant change in semiconductor demand for another few years as the technologies are still not fully developed.
- Based on our valuation, the company share price is still overvalued despite the stock losing more than 20% to-date since the market started decelerating in mid-2018. As the current semiconductor cycle nears its worst, we feel the company share price will dip further with the earnings outlook deteriorating.
4. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019. Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities. Rather surprisingly, foreign investors own just over 21% of outstanding shares. Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019. Caveat emptor! (May the buyer beware)!
5. This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans
LINE Corp (3938 JP) is one of the top Japanese names in our “Watchlist” of listed companies in Japan and South Korea that are adopting blockchain technologies or have exposure to cryptocurrencies.
Since being added to the “Watchlist” in May last year (2018), LINE has launched a cryptocurrency, a cryptocurrency exchange, and a blockchain venture fund. In this note, we revisit LINE’s blockchain and cryptocurrency plans.
In our opinion, potential synergies between LINE’s cryptocurrency business and its other business ventures are quite enticing. LINE could very well lure “millions” of its existing messaging and LINE Pay users to be a part of its blockchain eco-system.
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