Description

Da na na, Da na na. Yes, Ateam has a silly name which originates from the Founder and President’s love of the 1980s movie and TV show. But the company has a very serious collection of market-leading, high-quality internet price comparison and information properties in Japan which are collectively growing >25% p.a. The valuation has been penalized (13x TTM P/E and 7.5x EV/EBIT) due to a mobile gaming business which has been contracting but this division is increasingly becoming a less important driver of earnings. As earnings inflect positively over the next 12 months and investors begin to realize that the non-gaming internet businesses account for the majority of earnings, Ateam has multibagger potential through earnings growth and rerating.

Background

Ateam was founded in 1997 by President Takao Hayashi. The company initially focused on outsourced development for mobile phone sites. In 2003, the company started moving away from outsourcing to focus on developing its own products, initially entering mobile game development for feature phones. In 2006 the company launched its first price comparison site for moving services and later expanded into other industry verticals. In 2013 the company launched an e-commerce site for bicycles. The company IPOed in February 2012 and President Hayashi owns 28.4% of shares outstanding.

The company has three divisions:
Entertainment (Mobile Games): 54% of sales and 53% of EBIT (Trailing 12 months)
Lifestyle Support (Price Comparison & Info Websites): 40% of sales and 51% of EBIT (Trailing 12 months)
e-Commerce (Bicycle e-commerce): 6% of sales and -4% of EBIT (Trailing 12 months)

Entertainment (Mobile Games)

The division is focused on in-house developed smartphone games, most of which are RPG style games. Sales are predominantly in Japan but the US and other geographies accounts for about one quarter of sales. Ateam has released more than 100 games over time but sales currently are concentrated in 4-5 key games. Division sales peaked in mid-2017 and have been declining for the past year as key titles are aging and the market has become saturated and increasingly competitive. In the past year, divisional sales declined 23% and operating profit declined 32%.

This decline in the Entertainment division has dragged down consolidated profits by 40% y/y in the past six months and also caused the stock to de-rate significantly. Ateam successfully launched a new Japan mobile game, Revue Starlight Re -LIVE-, in October 2018. The game is off to a strong start and we estimate it will account for more than one-third of divisional sales in the January 2019 quarter based on AppAnnie data. This should help offset the decline of older titles and get the division back to y/y sales growth, at least in the short-term.

While we expect the Entertainment division to continue to be a profitable cash cow for some time, it is likely to become a smaller and much less important part of the business, barring the launch of a new blockbuster game, which is difficult to predict. We expect that by fiscal year July-2020, less than 25% of consolidated profits will come from mobile games. The Lifestyle Support division will increasingly be the main earnings driver for the company.

Lifestyle Support

The most important division of Ateam is the Lifestyle Support division. This is comprised of a collection of Japanese price comparison and information websites. Most of these businesses are lead-generating sites which derive revenue from fees and commissions for referring customers to or booking services for partner businesses. The key industry verticals within the division are moving (26% of division sales), auto (19%), bridal (20%), and finance (33%). The company is planning to split the finance-related business into a separate division called Ateam Finergy in May 2019.

The division has grown at a revenue CAGR of 28% over the past 5 years, including 31% y/y in the most recent quarter. Growth has been driven by a combination of increasing users, higher ARPU, and new website launches. The majority of divisional costs are paid search listings on Google and Yahoo Japan. Divisional margins have been in the 14-18% range, and with minimal capital investment requirements, most of profits are converted into cash flow.

Below is a brief description of the most important Lifestyle Support websites:

Hikkoshi Samurai – The #1 moving-related price comparison website with an estimated 70% market share. Management estimates that 27% of people who move in Japan use Hikkoshi Samurai and this translates into 50-60% market share of people who shop for moving services online. The site provides users with quotes from up to 10 moving companies and allows them to book directly with the moving company or through the website. Ateam collects a fee for each lead generated or a commission when a customer reserves a service directly through the website. The website also sells peripheral products and services related to moving, such as air conditioners. WebCrew, owned by Newton Financial Consulting (7169 JP), is the #2 competitor.

Navikuru – The #1 used car appraisal comparison website. Users who want to sell a used car enter the details of their car into the site and then get a price estimate from up to 10 used car dealers. Ateam collects a fee for each lead generated. Navikuru also has a partnership with JADRI, an association of Japan used car dealers. JADRI pays Navikuru for the data collected on every used car entered into the site. The company also sells peripheral services such as auto insurance. The #2 competitor, Carview Corp, is owned by Yahoo Japan.

Hanayume – The #2 bridal-related online business which helps users book wedding halls and related services. The business also operates 12 physical “Wedding Desk” locations to generate leads. Revenue is generated from wedding halls and other wedding service providers based on lead generation or sales commissions. The largest competitor, Zexy, is owned by Recruit (6098 JP).

NaviNavi Cashing – NaviNavi is a collection of financial service price comparison sites under the NaviNavi brand. NaviNavi is #1 in auto loan price comparison which accounts for the majority of NaviNaiv revenue currently. Other NaviNavi sites allow users to comparison shop for credit cards, home loans, and FX trading services. Revenue is generated on a pay per lead basis.

The company is currently launching eight new businesses within the Lifestyle Support division. The upfront expenses for these businesses will likely result in slower profit growth than revenue growth for the division this year, but should help to maintain strong growth over the medium-term. Ateam has a strong track-record in starting successful new businesses so we think there is a good probability that at least some of these new ventures achieve success and materially contribute to growth over time. Two of the new businesses management has high expectations for are price comparison for used car sales through the OEM dealer network and Life-ending services, such as tombstones, cemeteries, and funerals.

E-Commerce

The company operates Cyma, a bicycle e-commerce site, which was launched in December 2013. Cyma stocks and sells bicycles which can be customized online and then delivered to the consumer’s home. The business operates warehouses and holds inventory. Cyma generates small operating losses and management has recently announced a restructuring initiative to improve profitability. We don’t expect Cyma to make a material contribution to group results.

Opportunity and Valuation

The stock is down more than 40% from the 2017 high because the decline in the Entertainment division has dragged down consolidated earnings and the stock has de-rated to an all-time low valuation of only 13x P/E. Most mobile gaming stocks in Japan trade at low P/E multiples of 7-15x due to the saturated market and overreliance on a limited number of game titles. We believe the market continues to value Ateam like a mobile gaming stock, despite the fact that the Lifestyle Support division now contributes more than half of profits. Within 1-2 years, we expect this will increase to >75%. Fast growing internet companies with high margins and leading market positions in Japan often trade at >30x P/E so we see substantial re-rating potential when investors begin to notice Ateam’s improved earnings composition.

Based on our fiscal year July-2019 forecasts, we estimate the stock is trading at 14x P/E, 7.9x EV/EBIT, 7% FCF/EV, and a 1.7% dividend yield.

The stock is very underfollowed with coverage from only one local broker, Tokai Tokyo. There are however informative English reports available from Shared Research, an IR firm offering free reports paid for by corporate clients. https://sharedresearch.jp/en/3662. If earnings inflect positively in the next year and the market cap increases, additional sell side coverage could help rerate the stock further.

Risks

We currently expect Ateam’s fiscal year July 2019 performance to be similar to the company guidance for sales of JPY 40b, OP of 4.0b, and EPS of 132. This will however be dependent on the performance of the key mobile games. If Revue Starlight Re -LIVE- performance stalls or older titles decline faster than expected, the company could miss guidance.

We believe the October 2018 quarter will mark the low point of quaterly earnings and sequential improvement is likely. However we expect profits to continue declining on a year-over-year basis for another quarter or two. The stock might not react positively until profit growth inflects positively.

Catalyst

Positive earnings inflection in the next few quarters

Improved earnings mix toward Lifestyle Support division

Increased sell side coverage