Description

Beenos is a complex Japanese small-cap that appears to be trading at a deep discount to the sum of its various e-commerce operating businesses and investments. I believe the current share price is cheap solely based on its biggest core operating business (Buyee), with significant upside from its VC portfolio and ongoing improvements in its additional operating businesses. The largest component of its VC portfolio, a Series A investment in a leading Indonesian e-commerce player (Tokopedia), could also be worth almost the current market cap. Plans for a merger with Gojek to create a dominant super-app in Indonesia, followed by a U.S. listing could serve as a catalyst for closing the valuation gap.

Global Commerce Segment (Buyee, tenso.com, Sekaimon)

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 attractive unit economics; Buyee’s take rate is over 20% of GMV, 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 market leader Mercari and the introduction of a new distribution service for Taiwan, which accounts for 20% of sales.

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.

Cross Border E-Commerce Market Size in Japan, USA, and China. Source: Shared Research

Due to strong continuous growth in GMV, Buyee has grown from generating 32% of GMV in Beenos’ Global Commerce 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:

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 28%. Incremental EBIT margins have averaged about 40% over this period. The segment reported record profitability in FY2020 as Buyee continues to scale.

My estimates for the Global Commerce segment for the next three years make the following key assumptions: Sustained acceleration of Buyee GMV growth to 30% annually due to new partnerships and focused investments in faster growing markets such as Taiwan, continued decline of tenso.com (-10%) and modulation of Sekaimon growth (7%), stable take rates for the three subsegments (tenso: 9%, Buyee: 21%, Sekaimon: 26%), and incremental margins in line with the last five years:

Management’s Global Commerce guidance for 2021 is slightly higher on revenue (7.6B) and slightly lower on EBIT (2.15B); however, Q1 operating income came in ahead of their expectations:

With about JPY8B net cash on the balance sheet and a market cap of about 29B, the stock is trading at less than 10x 2021E EV/EBIT with expected earnings growth of 25-30% over the next few years, which works out to about 4x 2023E EV/EBIT.

What is this business worth on a standalone basis? The closest comparable company I have found in Japan is Raccoon Holdings (3031), which operates SUPER DELIVERY, the leading Japanese cross-border B2B e-commerce platform. Raccoon’s overall financial results are similar to Beenos’ Global Commerce segment, with recent acceleration in net revenue from single digits to mid-20s and expansion of operating margin to about 30%. Although SUPER DELIVERY is about half the size of Buyee, Raccoon’s market capitalization is 60% higher than Beenos. Raccoon now trades at 70x trailing P/E and 43x 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 Global Commerce segment alone, the market capitalization would be about JPY70 billion, more than 2x the current stock price.

I believe the main reason it is not there today is investor confusion over the rest of Beenos’ operations, which has led to a significant conglomerate discount. Buyee standalone results get surrounded by a lot of noise on slides like this:

And this:

And this:

Analysts were also struggling to figure out what was important but are starting to focus again on the main value drivers for the company. At the Q1 FY20 financial results briefing Q&A Session, only one out of the eleven questions was about Buyee. It is true there were some issues with competition and COVID-19 in the Company’s other operating segments that have temporarily detracted 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) 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. Concerns seem to have subsided now that the problem businesses are back in the black, and the Q1 FY21 Q&A focused mostly on Buyee and their VC portfolio.

Value Cycle Segment (Defactostandard, JOYLAB)

Defactostandard operates “Brandear,”an online C2B2C service that purchases and resells branded items. The business was listed in 2016, but sales peaked in 2018 as the model was severely challenged by the rise of Mercari’s pure C2C model. Beenos made a tender offer for the minority stake in January 2020, which management believes gives them the flexibility to make important strategic changes in the business. Steps taken to improve Brandear’s value proposition and operating results include focusing on higher-value (designer) goods, opening physical appraisal locations in Japan, leveraging synergies with Buyee to expand sales abroad, and reducing advertising expense by switching from mass marketing campaigns to targeted advertising. JOYLAB is a similar operation to Brandear but for alcoholic beverages.

Q1 results for the Value Cycle segment were encouraging, on track with management’s targets:

Entertainment Segment (monosense)

Monosense’s business model is to enter license agreements, develop products based on these agreements, and sell them through e-commerce sites and physical stores. The business handles product planning and development, sales via e-commerce sites, promotional activities, and license management. The business primarily focuses on agreements with popular anime characters (such as Pokemon) and popular music artists, for whom it also manages their official e-commerce sites. Going forward, the Company is focusing more on the live entertainment industry and intends to build out a platform, including event merchandise, fan sites, and broadcasting. One example of innovation in this is segment is their development of Narabee, an app that enables users to pick up merchandise at live events without lining up.

The business struggled to break even in FY2020 as Covid led to cancellation of a numerous live events. Q1FY21, however, went exceptionally well as a number of live events moved online, driving e-commerce sales:

Incubation Segment

As of December 2020, the company’s VC portfolio contained 20+ investments primarily in India, Southeast Asia and Japan.

The basic strategy from 2012 to 2016, as shown below, was simply to find growing online marketplaces early in developing markets.

Although the Company’s founder and largest shareholder Teru Sato is no longer involved in the operations or decision making at Beenos in any way, he still contributes indirectly to the Incubation segment by sitting on the board of its largest investment and providing some deal flow from his own VC fund.

Tokopedia

When Teru was still with Beenos, he found Tokopedia at an early stage and participated in one of the early rounds through Beenos in 2012, before Softbank and Alibaba came in. From what I understand from others with knowledge of the situation, Teru is good friends with Tokopedia’s founder and still sits on the board. The Indonesian unicorn is now reportedly finalizing a merger with fellow unicorn Gojek in preparation for a listing, with a targeted valuation of $35 to $40 billion.

https://www.bloomberg.com/news/articles/2021-02-10/gojek-is-said-to-near-tokopedia-merger-ahead-of-public-listing

Tokopedia shareholders are expected to receive a 40% stake in the combined entity. The expected post-merger valuation would be worth about double Tokopedia’s last funding round ($7.5B), which would be the valuation used by Beenos.

While Beenos does not disclose valuation per position or exact ownership stakes, we know from the following article that the Company owned about 1.9% in late 2018:

https://kr-asia.com/snapshot-of-tokopedias-company-structure-and-major-shareholders

Assuming the 2018 $1.1B raise at $7B came after this snapshot, Series G would have diluted Beenos’ stake by about 15%. In October 2020, Google and Temasek participated in a round valuing the company at $7.5B. The amount was rumored to be about $350m. This would have diluted Beenos’ stake by an additional 5%. I peg Beenos’ stake at about 1.6%, worth between $220m and $250m at the expected post-merger valuation (roughly JPY22B-25B).

What is this potentially worth? In an interview last year, the founder laid out the back of the napkin valuation work to get to $100B for Tokopedia by 2030:

https://nextbn.ggvc.com/podcast/s2-ep-6-william-and-patrick-of-tokopedia-indonesias-gdp/

“Today, Indonesia is a one trillion dollar economy and we contribute 1% to 1.5% of Indonesia economy. In the next 10 years, Indonesia will become a $5 billion economy and if by that time Tokopedia contributes 5% of Indonesian economy… Meaning that there will be a $250 billion run rate transition happens in Tokopedia. If you use a multiplier of maybe 0.4 or 0.3 it would be already a very sensible business only focusing on the Indonesian market.”

However, the combination with Gojek raises some questions worth asking. What will pro-forma growth and unit economics look like? How do Gojek’s global ambitions fit with Tokopedia’s deeply local focus? Was this a necessary defensive move in response to the rise of Sea’s Shopee? What does Shopee’s presence mean for Tokopedia in the long run?

Luckily, we don’t need to know the exact answers at this point.

Other VC bets

The fair market valuation of the Incubation portfolio was JPY19.4 billion as of September 2020, a 5x return on the JPY3.9 billion invested. As it seems Tokopedia is carried at about JPY12 billion and could soon be worth twice that, the rest of the individual positions are relatively inconsequential to the Company’s valuation at present. However, a closer inspection of the individual names should help investors build confidence in the Company’s investment strategy, as they are typically leading online marketplace businesses seeing high growth. For investors interested in digging deeper, I would flag Sendo, Droom, and Zilingo for further study. I believe these investments are a relatively large proportion of the remaining portfolio.

Management has stated that their strategy for the VC portfolio going forward is to focus on the successful investments they have already made. Proceeds from exits will be used either to increase their stakes in winners or potentially to repurchase their own shares. In the past three years, the Company has spent about JPY800 million on repurchases, held as treasury shares. Management has not communicated any particular strategy regarding exiting the Tokopedia stake. Asked if they would consider a special dividend, they replied:

“We feel that it is important to distribute dividends on a consistent and stable basis. We currently have no plans of a special dividend. We are prioritizing share buybacks in regard to profit reduction. We currently believe that our share price is still low and has plenty of potential to increase in value, but we do not have any definitive plans for buybacks at the moment and will continue to monitor the situation.”

One more thing to note: Teru Sato has steadily reduced his Beenos holding over the years and is still selling. This is likely due to capital commitments he has related to his own VC fund. He does not advise Beenos in any formal way or make investment decisions, but management still maintains a good relationship with Teru, and sometimes he will pass on ideas or make introductions on the VC side.

Intersegment Adjustments

The Company recorded JPY680 million of intersegment adjustments over the past twelve months. This has grown over the years, but the run rate has also come down by about JPY200 million over the last two quarters. From FY15 to FY18, the amount was more than covered by operating profits from Value Cycle and Entertainment. Ideally, these businesses can continue their recent momentum to cover most of the amount once again. If they can't sustain an operational rebound, however, I would consider combining the negative adjustments with the Global Commerce operating results before valuing that business. 

In a worst-case scenario, subtracting JPY700m from FY21 EBIT will put us at JPY1.6B, and the current market cap actually implies a 2022E EV/EBIT around 10x. 

For more detail on the Company, it has analyst coverage in English:

https://sharedresearch.jp/system/report_updates/pdfs/000/030/570/original/3328_EN_20200225.pdf?1582697577

All corporate presentations, press releases and Q&A sessions are available in English as well, and the Company is responsive to investors that request a meeting.

Catalyst

Tokopedia merger and listing

Buyee growth