2020 has been a record setting year in the stock market for most things e-commerce. Even as lockdowns across the world temporarily depressed demand for certain categories such as autos and fashion, the world’s digital transformation has undoubtedly accelerated and rising market valuations have reflected the expectation for this trend to persist going forward.
Despite its focus on online marketplaces in Japan and Southeast Asia, Beenos (3328.T) has been left out of the party thus far, with its shares down roughly 10% year to date and unable to break out of a downtrend that has lasted five years, significantly underperforming the S&P 500 and the Nikkei 225:
The chart alone would scare away most growth-oriented investors from the start, as it signals that there could be unfixable fundamental problems with the underlying business or corporate governance. A quick skim through the financials, presentations, and analyst research (all in English) is all it takes to understand why the stock may be undervalued; this tiny $150m company has way too many moving parts for any investor to completely get their heads around, with a dozen subsidiaries operating in Japan ranging from start-ups to mature businesses and a VC portfolio with 20+ early-stage investments across 10 different countries:
Companies like this can deservedly trade at a permanent “conglomerate discount” to NAV, and by now most value investors have learned to avoid falling into that trap. I estimate a liquidation value of at least 3x the current share price with very attractive underlying growth, but with no natural buyers of the stock and inconsistent overall financial results, the stock is stuck in Japanese small-cap purgatory.
However, I think the odds are pretty decent that investors begin to give this company more credit for the true value of their main assets over the next several years, as three things happen. One, the Company’s highly profitable growth engine Buyee is emerging as the main driver of overall operating results after years of obfuscation as a subsidiary within a subsidiary and is likely worth more than the market cap on a standalone basis. Two, the largest component of the Company’s VC portfolio Tokopedia has announced plans to go public within the next several years and is also likely worth more than the market cap on a standalone basis. Three, management is taking appropriate steps to create shareholder value by cutting costs in struggling business units, prioritizing support for the best-performing current investments, and repurchasing shares at valuations they presently “are not happy with.”
Buyee – Connecting Japanese e-commerce to the world
Launched in December 2012, Buyee is the largest proxy shopping service in Japan, which enables users in over 190 countries to make purchases on over 160 Japanese e-commerce sites, which generally lack the customer support and payment infrastructure to handle foreign customers and transactions. Buyee translates information on the Japanese sites, offers multilingual customer support, facilitates bid and order placements, handles payments and currency conversion, arranges international shipping, and provides insurance and optional packaging services. The Company does not hold any inventory but receives product information from e-commerce sites which it translates and places on the Buyee site. The Company earns service fees when shoppers purchase goods listed on Buyee; it then receives the purchased goods at its warehouse in Japan and records revenue when the goods are shipped to the overseas customer.
High barriers to entry thanks to Buyee’s dominant scale, a first-mover advantage in entering alliances with Japanese e-commerce sites, and the multiple value-added services provided for a typical transaction make for very attractive unit economics; Buyee’s take rate is over 20% of GMV (Gross Market Value), and operating margins for the business exceed 25%. Since FY2015, Buyee GMV has grown at an annual rate of around 23%, accelerating to 34% in the last two quarters due to a new partnership with C2C juggernaut Mercari (4385.T) and the introduction of a new distribution service for Taiwan, which accounts for 20% of sales. While COVID-19 has caused some delays in shipping that delayed some revenue recognition last quarter, the situation has not impacted growth in transactions and the shipping delays have now been largely rectified.
I expect Buyee to continue to grow at a high rate for the foreseeable future, in part due to a recently announced strategic alliance with Shopee, the leading shopping platform in Southeast Asia operated by Sea Limited (SE). Under the agreement, Japanese sites will be able to use Buyee to link to the Shopee system and commence sales on the platform without any additional effort, as Buyee will provide translation and modification of listings to comply with the rules set by Shopee as well as customer support and international shipping. Buyee should continue to find new opportunities for growth in the cross-border e-commerce market going forward, which is still seeing rapid growth and is expected to reach a total size of $1T this year in Japan, USA, and China.
Due to strong continuous growth in GMV, Buyee has grown from generating 32% of GMV in Beenos’ Cross-Border segment in 2015 to 68% today. Other services in the segment include tenso.com, a freight forwarding business that has been deemphasized in favor of Buyee, and Sekaimon, an inbound proxy shopping service that enables Japanese buyers to bid on and procure products on global Ebay sites. While declining sales from tenso.com and low growth for Sekaimon led to a temporary stagnation in GMV, overall growth has jumped to double digits once again this year as Buyee leads the way:
The FY2020 GMV estimates above are based on the low end of the Company’s guidance range, with three quarters of actual results already on the books. I have arrived at these FY21 to FY23 estimates by assuming 20% annual growth in Buyee GMV, which is in line with overall Cross-Border market growth estimates and below recent actual results.
Buyee’s relatively high take rate and superior unit economics to tenso.com drove more consistent net revenue growth of about 13% annualized over the past five years, while segment EBIT margins have doubled from 13% to 26%. Incremental EBIT margins have averaged more than 40% over this period, meaning that for every dollar of net revenue added, more than 40 cents is dropping to the bottom line. The segment reported record profitability for the first nine months as Buyee continues to scale. My FY21 to FY23 estimates below assume a 21% take rate vs. 9% take rate at tenso.com and incremental EBIT margins in line with the past average:
So what is this business worth on a standalone basis? The closest comparable company is Raccoon Holdings (3031.T), which operates SUPER DELIVERY, the leading Japanese cross-border B2B e-commerce platform. Raccoon’s overall financial results are very similar to Beenos’ cross-border segment, with net revenue growing 16.7% last year at a 20.3% operating margin. Although SUPER DELIVERY is about half the size of Buyee, Raccoon’s market capitalization is 60% higher than Beenos. The stock trades at more than 50x trailing P/E and 34x EV/EBIT, reflecting the high quality of Raccoon’s business, the likelihood for double-digit growth to continue for the foreseeable future, and certainly a premium for consistency and clarity. If Beenos were to trade on a similar multiple based on its cross-border segment alone, the market capitalization would be more than JPY50 billion, more than 3x the current stock price!
The reason it’s not there today, as I highlighted earlier, is massive confusion over the rest of Beenos’ operations. Buyee results get totally buried on slides like this:
And this:
And this:
If you don’t know what you just looked at, it’s okay, you’re not alone. Analysts are struggling to figure out what’s important too. At the Q1 FY20 financial results briefing Q&A Session, only one out of the eleven questions was about Buyee. It’s true there are some issues with competition and COVID-19 in the Company’s other operating segments that may temporarily detract from overall operating results, but management is taking the appropriate steps to control costs and adjust their strategy as needed. Ultimately, if management cannot see a way forward in one of their businesses, they have shown a willingness to protect shareholder value through winding down operations or entertaining a sale of a subsidiary. In 2017, Beenos transferred netprice to Aucfan (3674.T) in order to reduce operating losses. Netprice was the Company’s first business, so the transfer was a great sign that management is not too sentimental about what they own.
While we can make a strong investment case for Beenos just based on Buyee alone, the company’s VC investments could be an even bigger driver of future returns. In future posts, I will discuss the Company’s investment in Indonesian e-commerce pioneer Tokopedia, as well as other promising investments in the VC portfolio. I’ll also explore the lasting impact of Beenos’ founder turned venture investor Teru Sato, who laid the foundation for the Company’s success in India and Southeast Asia before parting ways to run an independent venture fund in 2014.
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