Market

Rakuten Group: Japanese E-Commerce Leader (OTCMKTS:RKUNY)

Rakuten headquarters located in Silicon Valley

Sundry Photography/iStock Editorial by way of Getty Images

Rakuten Group Inc. (OTCPK:RKUNY) is a number one Japanese telecommunications, retail e-commerce market and cell cost programs firm. In this protection, we analyzed the competitiveness of Rakuten’s e-commerce enterprise relative to its major competitor, which is Amazon (AMZN), based mostly on their market share, buyer satisfaction as measured by on-line opinions, product breadth based mostly on the variety of product listings on their web sites and payment construction to find out whether or not Rakuten derives a bonus.

Moreover, as the corporate implements its cross-selling technique capitalizing on the Rakuten ecosystem of providers, we in contrast its common income per consumer progress with opponents and forecasted its income progress based mostly on ARPU and consumer progress.

Lastly, we analyzed the profitability of Rakuten’s cell section with its intensive enlargement of 4G base stations and projected its section profitability.

Amazon Expected to Maintain Competitive Lead

Rakuten is the second-largest on-line market in Japan based mostly on on-line web site visits, solely trailing behind Amazon. Though, Rakuten had been rising quicker than Amazon between 2019 and 2021 (11.2% vs. 6.3%). However, it faces competitors from different marketplaces reminiscent of Mercari (OTCPK:MCARY), ZOZOTOWN (OTCPK:SATLF) and Qoo10 Japan. As seen within the desk under, solely Qoo10 Japan had the next progress charge (27.4%) than Rakuten, nevertheless it additionally had significantly decrease month-to-month visits than Rakuten.

Online Marketplaces Monthly Visits in Japan (‘mln’)

2019

2021

Growth %

Amazon

523

555.8

6.3%

Rakuten

489.5

544.3

11.2%

Mercari

70.3

75.2

7.0%

ZOZOTOWN

47

43

-8.5%

Qoo10 Japan

11.3

14.4

27.4%

Source: Disfold, Webtailer, Khaveen Investments

Besides that, we in contrast its buyer opinions with the opposite two main retail e-commerce marketplaces in Japan that are Amazon and Mercari to match their buyer satisfaction. Rakuten had higher opinions than the others. Based on the opinions, the satisfaction with Rakuten’s cashback system and the inclusion of sellers’ each day provides on the platform for purchasers’ comfort was highlighted.

Company

Customer Ratings (Out of 5 Stars)

Amazon

3.2

Rakuten

4.2

Mercari

3.7

Source: Trustpilot, Khaveen Investments

According to Rakuten, it had taken initiatives to make sure the merchandise’ high quality listed on {the marketplace} by imposing further necessities for the retailers. We consider this might decrease the danger of pretend and counterfeit merchandise on Rakuten’s market and improve customers’ buying expertise. However, we consider Amazon Japan has extra versatile service provider onboarding necessities.

Additionally, we then in contrast the variety of product listings based mostly on chosen merchandise listed on Rakuten and Amazon Japan web sites to find out which has a bonus in product selection. By taking the variety of merchandise acknowledged on Rakuten’s web site and calculating the variety of merchandise per web page multiplied by the overall web page numbers of merchandise for Amazon, we decided that Amazon has a considerably increased variety of product listings which might be an obstacle for Rakuten.

Product Listings Comparison

Rakuten

Amazon

Rice cookers

1,537

16,000

Men’s watches

543,960

960,000

Women’s watches

408,745

480,000

Monitors

22,624

240,000

Keyboards

26,164

480,000

Mouse

46,753

240,000

Source: Rakuten, Amazon, Khaveen Investments

Furthermore, in distinction to the decrease account charges and elimination of transaction, upkeep, and registration charges for the retailers by Amazon Japan, we consider Rakuten might be at an obstacle because it prices extra charges to its sellers as seen within the desk under. However, Amazon consists of increased referral charges than Rakuten.

Item

Amazon Pro Seller Japan

Rakuten Ichiba Seller

Referral Fees

8% – 15%

2% – 7%

Account Fees/month

$39.99

$205 – $980

Transaction Fee

0.00%

2.50% – 3.50%

Maintenance payment/month

0.00%

1.10%

Registration Fees – One-off

$0.00

$570

Source: Easy2Digital

Overall, we consider is well-positioned to learn from the expansion of e-commerce with its main place solely behind Amazon and excessive buyer satisfaction. Though, we anticipate Amazon to pose a powerful aggressive risk with its superior product breadth and enticing charges for sellers. To mission its progress, we anticipate Rakuten’s member progress to proceed rising with a 5-year common progress assumption (7.47%) via 2026.

Rakuten Members

Projection

2018

2019

2020

2021

2022F

2023F

2024F

2025F

2026F

Members (‘mln’)

103

111

120

125.4

134.8

144.8

155.7

167.3

179.8

Growth %

7.77%

8.58%

7.54%

4.67%

7.47%

7.47%

7.47%

7.47%

7.47%

Source: Rakuten, Khaveen Investments

Increasing ARPU from Cross-selling Strategy

Rakuten members have been growing at a 7-year common progress of 8.64% from 2014 to 2021. However, the expansion has been decelerating from 11.04% in 2016 to 4.67% in 2021. On the intense facet, its ARPU has proven accelerating progress from -0.77% in 2015 to 44.5% in 2021.

Compared to its major opponents in Japan together with Amazon and Mercari, Rakuten had the next 5-year common ARPU progress of 6.13% in comparison with Amazon’s -10.5% however decrease than Mercari’s 15.58%. While Amazon had increased subscriber progress, its ARPU had decreased in comparison with Rakuten which elevated. While Rakuten’s ARPU progress is decrease than Mercari’s, its member base was a lot bigger than Mercari’s. We consider its ARPU progress might be mirrored in its benefit of buyer loyalty by its cross-selling technique throughout the ecosystem. Rakuten Ichiba has a wide range of product choices together with trend, dwelling merchandise, expertise merchandise and automobiles.

ARPU Comparison

2016

2017

2018

2019

2020

2021F

Rakuten Members (‘mln’)

88

95

103

111

120

125.4

Growth %

11.04%

8.80%

7.77%

8.58%

7.54%

4.67%

Rakuten Internet Services Revenue ($ mln)

4,801

6,040

7,186

7,292

7,946

9,135

Growth %

30.94%

25.80%

18.97%

1.48%

8.97%

14.96%

Rakuten ARPU ($)

54.87

63.44

70.04

65.46

66.33

72.85

Growth %

17.92%

15.62%

10.39%

-6.53%

1.33%

9.83%

Amazon Prime Subscribers (‘mln’)

66

100

120

150

200

269

Growth %

51.52%

20.00%

25.00%

33.33%

34.67%

Amazon Japan Revenue ($ mln)

10,800

11,910

13,830

16,000

20,460

23,070

Growth %

10.28%

16.12%

15.69%

27.88%

12.8%

Amazon ARPU

235

180

138

133

136

86

Growth %

-23.14%

-23.36%

-3.59%

2.30%

-10.50%

Mercari Users (‘mln’)

5.2

8.4

10.7

13.6

17.5

19.5

Growth %

61.54%

27.38%

27.10%

28.68%

11.43%

Mercari Revenue ($ mln)

119.3

202.85

328.72

475.02

701.04

955.3

Growth %

70.03%

62.05%

44.51%

47.58%

35.23%

Mercari ARPU

22.94

24.15

30.72

34.93

40.06

48.99

Growth %

5.26%

27.22%

13.69%

14.69%

15.58%

Source: Statista (Amazon), Statista (Mercari), Amazon, Mercari, Khaveen Investments

Based on Rakuten’s media webpage, the corporate first launched its ecosystem efforts in July 2017. This coincides with Rakuten’s ARPU progress beginning to flip constructive within the following 12 months after 3 years of adverse progress. Rakuten has talked about that the corporate has been leveraging on cross-selling technique by “promoting cross-use between services and increasing customer retention, as well as minimizing risks through the diversification of businesses and maximizing the added value of synergy generated between businesses.”

As of This fall 2021, 74.7% of Rakuten customers have been utilizing greater than 1 service in its portfolio from 64.9% in 2017.

Moving ahead, we projected its members and ARPU progress based mostly on its 5-year common progress charge. We consider this may be achieved via the multi-purpose use of its loyalty program throughout its ecosystem of e-commerce, cell funds, and banking that might improve the quantity they spend throughout totally different platforms and thus probably enhance Rakuten’s ARPU progress.

Internet Services Revenue Projection

2020

2021

2022F

2023F

2024F

2025F

2026F

Members (‘mln’) (‘a’)

120

125

135

145

156

167

180

Growth %

7.54%

4.67%

7.47%

7.47%

7.47%

7.47%

7.47%

ARPU ($) (‘b’)

66.33

72.85

77.31

82.05

87.08

92.41

98.08

Growth %

1.33%

9.83%

6.13%

6.13%

6.13%

6.13%

6.13%

Internet Services Revenue ($ mln) (‘c’)

7,946

9,135

10,420

11,884

13,555

15,461

17,634

Growth %

8.97%

14.96%

14.06%

14.06%

14.06%

14.06%

14.06%

*c = a x b

Source: Rakuten, Khaveen Investments

Mobile Segment Expected to Still Be Unprofitable in The Future

Since 2018, Rakuten has ventured into its cell section, offering telecommunication providers in Japan. However, with the intensive prices of launching the providers, Rakuten’s cell section has been unprofitable till 2021. In order to deploy its cell infrastructure, Rakuten acquired Altiostar, a US cell expertise firm, at over $1 bln which may help Rakuten by offering software program to streamline the cell community processes and automate operations.

Previously in 2021, Rakuten’s CEO Hiroshi Mikitani has talked about that the cell section is anticipated to show losses into revenue by 2023 by rising its subscriber base. However, the corporate has been dealing with a scarcity of nationwide service for its 4G community and initiated to extend within the 4G base stations in Japan for higher protection. Compared to its opponents, KDDI has 10,000 5G base stations and NTT DoCoMo (OTCPK:DCMYY) with 7,100 5G base stations. Rakuten had just one,000 5G base stations as of Q2 2021 and the unfinished 4G base stations may hinder the 5G protection of Rakuten to Japan’s customers sooner or later.

While Rakuten launched a one-year free marketing campaign in 2020 adopted by 3 months free marketing campaign in 2021 to extend its subscriber base, we’re cautiously optimistic about its progress going ahead following the top of the promotion interval. We anticipate Rakuten’s cell section customers to decelerate via 2023 with intense competitors from native opponents.

Rakuten Mobile Segment Users

2020

2021

2022F

2023F

Mobile customers (‘mln’)

3.45

5.5

6.7

7.5

Growth %

59.42%

21.54%

12.54%

Source: Rakuten, Khaveen Investments

Rakuten offered a 1-year free-of-charge cell service subscription till March 2021 when the 3-month free subscription was applied subsequently. At the identical time, its working margin continued to say no in 2021. We anticipate the corporate to stay unprofitable within the foreseeable future because it continues to develop its subscriber base in addition to expands its community throughout the nation.

Rakuten Mobile Segment

2019

2020

2021

2022F

Mobile Revenue

1,102.40

2,200.80

2,102.40

2,628.00

Mobile Operating Profit

-552.6

-2,199.20

-3,628.13

-3,102.53

Mobile Operating Margin %

-50.1%

-99.9%

-148.1%

-148.1%

Source: Rakuten, Khaveen Investments

Based on the unprofitability of the cell section as a result of intensive prices of constructing 4G and 5G base stations, in addition to the decrease subscriber progress, we don’t anticipate the cell section to generate income by 2023. However, in accordance with its Mobile section President from its newest earnings briefing, the corporate expects to interrupt even in 2023.

Rakuten Mobile is translating 4G and 5G networks and increasing enticing providers to all buyer teams. By persevering with to develop our subscriber base, we goal to attain breakeven in fiscal 12 months 2023.” – Yoshihisa Yamada, President, Rakuten Mobile

Risk: Rising Debt

According to underwriter Daiwa Securities Group Inc (OTCPK:DSECF), Rakuten is “scheduled to cost about 200 billion yen ($1.75 billion) of multi-tenor bonds”. As of 2021, its cash to debt ratio stood at 0.29x. We factored in $1.75 bln multi-tenor bonds in 2022 in our forecast and see its cash balances deteriorating weighed down by losses from its Mobile segment. Overall, we expect its cash to debt ratio to fall to 0.21x by 2024.

rakuten cash to debt

Rakuten, Khaveen Investments

The $1.75 bln multi-tenor bonds consist of just a small portion of Rakuten’s total debt of $136 bln in 2021. While the amount is not very significant, we believe Rakuten’s cash to debt ratio remains low at 0.28x; the company could face a risk of not having sufficient liquidity to pay back its debt obligations.

Valuation

Due to the various segments of Rakuten in different industries, we used a sum of the parts valuation. For the Internet Services segment, we used a P/S Valuation as we forecasted it to grow robustly through 2024.

Internet Services Revenue Projection ($ mln)

2020

2021

2022F

2023F

2024F

Internet Services Revenue

7,946

9,135

10,420

11,884

13,555

Growth %

8.97%

14.96%

14.06%

14.06%

14.06%

Source: Rakuten, Khaveen Investments

For the Fintech segment, we calculated its segment equity value by firstly determining its portion of banking assets and liabilities based on its 2020 financial report. Then, we adjusted the Banking Assets in 2020 to USD mln using the annual average rate of 1 USD = 106.754 JPY.

Banking Assets (JPY / USD mln)

JPY (‘mln’)

Weightage

Adjusted JPY (‘mln’)

Adjusted USD (‘mln’)

Financial assets for securities business

2,673,229

100%

2,673,229

25,041

Loans for credit card business

2,003,013

100%

2,003,013

18,763

Investment securities for banking business

266,227

100%

266,227

2,494

Loans for banking business

1,436,513

100%

1,436,513

13,456

Investment securities for insurance business

283,969

100%

283,969

2,660

Total Banking Assets

6,662,951

6,662,951

62,414

Remaining Assets

1,912,185

35.49%

678,674

6,357

Total assets excluding Cash, AR and Net PPE

8,575,136

7,341,625

68,772

Source: Rakuten, Khaveen Investments

Banking Liabilities (JPY / USD mln)

JPY (‘mln’)

Weightage

Adjusted JPY (‘mln’)

Adjusted USD (‘mln’)

Deposits of banking Business

4,716,162

100%

4,716,162

44,178

Financial liabilities for securities business

2,587,227

100%

2,587,227

24,235

Total Banking Liabilities

7,303,389

7,303,389

68,413

Remaining Liabilities

4,153,895

35.49%

1,474,329

13,811

Total liabilities excluding AP, NCL

11,457,284

8,777,718

82,224

Source: Rakuten, Khaveen Investments

Next, we assumed the increase in cash by deducting Banking Assets by Banking Liabilities.

Cash Growth in Banking

2019

2020

Growth (JPY mln)

Growth (USD mln)

Banking Liabilities

5,021,393

7,303,389

2,281,996

21,376

Banking Assets

5,414,129

6,662,951

1,248,822

11,698

Increase / (Decrease) in Cash

1,033,174

9,678

Source: Rakuten, Khaveen Investments

By assuming the assets and liabilities besides banking were distributed according to Rakuten’s revenue segment breakdown, which Fintech was 35.49% of the total revenue in 2020 excluding internal transactions, we have calculated the Fintech segment’s equity value to be $4,464 mln.

Rakuten Fintech Equity Value (2020)

JPY mln

Weightage

Adjusted 2020 (USD mln)

Cash & Equivalents

1,988,132

35.49%

6,609.86

Increase in Cash

1,033,174

100.00%

9,678.08

Accounts Receivable

243,886

35.49%

810.84

Net Property, Plant & Equipment

684,110

35.49%

2,274.47

Other Assets

7,341,637

100%

68,771.54

Fintech Asset

88,144.92

Accounts Payable

337,427

35.49%

1,121.85

Non-Current Liabilities

100,713

35.49%

334.84

Other liabilities

8,777,718

100%

82,223.79

Fintech Liability

83,680.48

Fintech Equity

4,464.45

Source: Rakuten, Khaveen Investments

After we calculated the Fintech equity value for 2020, we projected the equity value for 2021 based on its growth rate (0.95%). For 2022, we projected it based on its 5-year average revenue growth.

Rakuten Fintech Equity Value Projections ($ mln)

2020

2021F

2022F

Fintech Equity

4,464.45

4,507.02

5,304.34

Growth %

0.95%

17.69%

Source: Rakuten, Khaveen Investments

For the Mobile segment, we used P/B valuation instead due to its unprofitability. To calculate the Mobile segment’s assets, we used the average 4G LTE and 5G base station cost with the number of base stations planned. Assuming the debt to asset ratio remains at 0.91x based on its 2021 ratio, we calculated the equity value of the mobile segment in 2022.

Rakuten Mobile Segment Asset ($ mln)

Average 4G LTE base stations cost (‘a’)

0.1375

Number of 4G base stations planned (Quantity) (‘b’)

44,000

Average 5G base stations cost (‘c’)

0.057

Number of 5G base stations planned (Quantity) (‘d’)

1,000

Mobile Segment Asset (‘e’)

6,107

Debt / Asset Ratio

0.91x

Liability

5,559

Equity

548

*e = (a x b) + (c x d)

Source: IEEE, GizChina, Khaveen Investments

Due to the different valuation methods for Internet Services, Fintech and Mobile segment, we have taken the industry average P/S, and P/B and arrived at three averages of 1.31x, 1.61x and 1.83x respectively.

industry average p/s

Seeking Alpha, Khaveen Investments

industry average p/b

Seeking Alpha, Khaveen Investments

industry average p/b

Seeking Alpha, Khaveen Investments

By multiplying our projected revenue and equity value for its segments with the industry averages, we arrived at the total valuation of $24817.10 mln.

Internet Services

Revenue

Industry P/S

Valuation

9,616.48

1.31x

13,650

Fintech

Equity Value

Industry P/B

Valuation

5,122.80

1.61x

8,522

Mobile

Equity Value

Industry P/B

Valuation

305.35

1.83x

1,003

Source: Rakuten, Khaveen Investments

With the total valuation accounting for a 20% conglomerate discount divided by the shares outstanding of the company, we obtained an upside of 50%.

Rakuten Valuation

Total Valuation ($ mln)

23,175

Conglomerate Discount

20%

Adjusted Valuation ($ mln)

18,540

Shares Outstanding (‘mln’)

1,583

Target Price

$11.71

Current Price

$7.79

Upside

50.30%

Source: Rakuten, Khaveen Investments

Verdict

We consider Rakuten is poised to learn from the rise of the e-commerce market in Japan with a number one place solely behind Amazon and excessive buyer satisfaction. However, we additionally anticipate robust competitors from Amazon, the market chief, with extra visits, in addition to having the next variety of product listings and a variable payment construction. We anticipate Rakuten’s member progress to proceed rising with a 5-year common of seven.47% progress assumption via 2026. Additionally, we consider via its cross-selling technique, its ARPU progress outlook at a forecast progress charge of 6.13% is supported as prospects buy extra from its platform and complement different income segments. However, we anticipate the cell section to stay unprofitable and the longer term competitors for the 5G community in Japan may intensify as Rakuten expands aggressively within the nation. With the sum of the elements valuation, we charge the corporate as a Strong Buy with a value goal of $11.71.

Source hyperlink

Leave a Reply

Your email address will not be published.