Day 5: AZoom (3496)

Category: Real estate tech, Mkt cap: ¥12.5bn ($115mn), NTM EV/Sales: 2.43x, Gross margin: 41%, 3yr Sales CAGR 37.5%, Founded: 2009

This is installment #5 of my 200-day challenge to do a write-up on 200 Japanese small caps, at the end of which I plan on publishing a book (tentative title: Japan Small Caps Handbook). I’m writing these unedited versions in a stream of consciousness style, and they will be refined before being finalized later on.

If you don’t have time, I encourage you to jump to the end of the post for the Key Takeaways. The goal of this newsletter is to fill the information gap on Japanese small caps with little or no analyst coverage.

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Life-streaming

Today was the last day of my daughter’s first grade of elementary school. The Japanese school year starts in April, but she didn’t have school until May, because of coronavirus. And I wasn’t able to attend her entrance ceremony, because only one parent was allowed to join. To celebrate her last day of school, we drove to Lalaport and had parfait. And, after that, she asked for gacha toys.

Gacha is an interesting business. All you need is a dispenser of plastic balls containing a cheap toy inside, and you can magically charge 300 or 400 yen each, even though what’s inside is clearly worth only 100 yen or so. The profit margin on the “thrill” of twisting that revolving lever, and the anticipation of not knowing what might be inside the ball, is considerable.

Experience is what must drive profits, I thought to myself. The story attached to a product evokes a thrill or excitement that differentiates the product. In Japanese, this is referred to as emoi (エモい)—a word that was in part popularized with the hit movie, Demon Slayer, and the emoi narrative around the character Rengoku.

In a similar vein, my 200-day challenge is not a product sold by a brokerage. Nor do I hold the stocks I cover here (though I may buy some after the write-up), so it’s not solicitation by a current shareholder. I’m serializing a journey of how an ordinary translator can break into the high barriers of finance.


AZoom (3496): Parking-Lot Matching Platform Operator Capitalizing on Subleases, Moving into Other Verticals


Business Overview

AZoom operates Japan’s largest online parking space matching website, with around 50,000 listings. The majority of sales (98%) comes from its parking lot business, which comprises the following: Monthly Parking Lot Introduction Service (matches vacant parking lots with renters and earns commission upon rental agreement) and Monthly Parking Lot Subleasing Service (leases parking lots from owners and subleases them to renters by using its matching website).

AZoom’s vision is to put idle real estate to productive use by harnessing the data accumulated on its online platform. By utilizing the data, AZoom realizes a higher occupancy ratio of vacant lots as well as superior price discovery.


History

Founded in October 2009 by CEO Yoji Sugata. After getting a degree in engineering, Sugata worked in sales and architectural design, and then joined Nippon Parking Development, where he recognized how slow the industry was in adopting IT and saw an opportunity in monetizing idle parking spaces.

Soon after establishment, AZoom launched CarParking, a matching platform for vacant parking spaces. In 2012, it rolled out a subleasing service for parking spaces adjacent to condominiums, which proved to be a huge hit.

Subsequently, in a streak of expansion throughout Japan, AZoom opened branches in Yokohama (Mar 2015), Fukuoka (Aug 2016), Osaka (Aug 2017), Nagoya (Oct 2018), and Sapporo (Mar 2019). In September 2018, it was listed on the Mothers Market of the Tokyo Stock Exchange.


Products & Services

AZoom’s core offering is CarParking, an online aggregation platform, through which it offers a referral and and subleasing service (98% of total sales).

In the early days, AZoom deployed sales personnel to visit parking lot owners and operators to ask them to register their vacant spaces on their website. But these hard-tackle days are over, since it now has a better grasp of which areas are in particularly high demand. By capturing spaces in these prime locations, the company has recently seen the number of inquiries grow exponentially.

Other offerings include the following (collectively account for 2% of total sales).

Smart Kaigishitsu: Reservation management system of rental spaces by using smart locks.

Adwall: Connects owners of outdoor signages with advertisers.

Bikeru: Connects owners of bicycle parking spaces with users.

CoinPa Search: Connects owners of hourly parking spaces with users.

In Q1 FY9/20, AZoom started a Visualization Business, which uses 3D computer graphic processing (3DCG) and VR technology to visualize space layouts. The segment consists of two subsidiaries: CGworks (established March 2019) and AZoom Vietnam (established September 2019).


Business model

AZoom’s business model revolves around the parking space aggregation website, CarParking, through which it offers a referral service (earns one-time commissions) and a subleasing service (earns recurring revenues).

CarParking functions as a matching platform, eliminating the need for the middle men (real estate brokers), and allowing users to find vacant spaces more efficiently and without having to visit parking spaces on foot.

The one-time commission business (Introduction Service) accounted for 10.9% of total sales in FY9/20, and the recurring revenue business (Subleasing Service) accounted for 85.9% of total sales in FY9/20.

The one-time commission typically equals one month’s rent. Recurring revenues are the difference between the leased price and subleased price. AZoom proposes a guaranteed rent to parking space owners based on market price information in similar regions, and subleases those spaces for profit.

AZoom’s edge is its ability to realize a higher occupancy ratio by using its online platform. Owners lease to AZoom for guaranteed rent and to eliminate hassles, while AZoom finds renters more efficiently than owners would on their own.

Cost of sales chiefly consist of rent guarantees to parking space owners (98%). Thus, an uptick in sublease sales translates directly to a higher cost of sales ratio. SG&A expenses include personnel costs, software depreciation, and advertising.

Clients are mainly owners of commercial buildings, property managers, and REITs. Condominium owners account for around 90% of transactions. AZoom’s strength is in parking spaces adjoined to condominiums, distinguishing it from rival Nippon Parking Development (2353), which mainly serves office buildings.


Market and competitors

According to MLIT’s survey in FY2018, there was roughly 5.34 million parking spaces in Japan less than 500sqm in size, of which parking spaces adjacent to buildings accounted for roughly 62%, making the target market for AZoom about 3.3 million parking spaces nationwide. AZoom has about 50,000 listings, so it still has considerable room for expanding its coverage.

As of end-2020, the number of registered vehicles in Japan totaled approx. 78mn. Especially in Tokyo, where there isn’t street parking as you would find in the US, parking spaces are usually in high demand. A number of other parking lot search sites exist, but there are only a few competitors in subleasing. The subleasing business has a high barrier to entry because of the sizable amount of effort required to build clients, despite profits per transaction being rather small.

Market players offering car parking search websites include the following:

  1. LIFULL HOME’s: 15,125 listings

  2. CHU-NET: 22,421 listings

  3. at home: 30,977 listings

  4. Chumap: 29,170 listings

  5. AZoom: 42,318 listings

Note: Number of parking spaces listed as of March 25, 2021.

AZoom has the largest number of listed parking spaces. [I have personally searched for parking spaces before. I used Google Search, and without recognizing it back then, I landed on AZoom’s CarParking website.]

In subleasing, the only noteworthy rival is Nippon Parking Development (2353). But NPD focuses primarily on office building parking lots instead of condominium parking lots. Presumably, the extra hassle of dealing with owners’ associations of condominiums would make AZoom’s target market less attractive for players looking for monetization over a short horizon.

A quick glance at sector players doing business related to parking lots show that AZoom is growing at a much faster rate than any other peer.


Growth strategy

AZoom views its recurring revenues from the subleasing business as the core earnings driver, on top of which it looks to generate referral fees from its matching platform and develop new businesses. The company looks to broaden its coverage of parking spaces while looking for synergies with its online conference room reservation system and 3D CG businesses.

The figure below shows that AZoom exists within three concentric circles comprising real estate operators, owners, and users. The theme to follow will be how AZoom translates the presence it has built as a parking lot specialist into other domains by harnessing its online room reservation and 3D CG businesses.

In its MTBP (Japanese deck), AZoom sets out the following FY09/22 targets:

  • Sales: ¥6,300mn (3yr CAGR: 32.18%)

  • OP: ¥900mn (3yr CAGR: 112.34%)

  • OPM: 14%

  • ROE: 31%


Latest earnings (Q1 FY21) and guidance

Q1 FY9/21

  • Sales: ¥1.1bn (+31.6% y/y)

  • OP: ¥101mn (vs. ¥1mn LY)

  • NI: ¥64mn (vs. net loss of ¥2mn LY)

Full-year guidance

  • Sales: ¥4.8bn (+25.8% y/y)

  • OP: ¥450mn (+100.5% y/y)

  • NI: ¥288mn (+106.5% y/y)

AZoom posted above-trend results in Q1, which tends to be a slow period, and profit increased robustly thanks to increased occupancy rates of leased spaces.

Further details can be found in this sponsored report here (by Shared Research).


Key takeaways

  • AZoom operates a car parking space matching platform called CarParking with the largest number of listed parking lots in the industry. It utilizes this platform to generate revenues from (1) referrals and (2) subleases.

  • Recently, it has moved into other verticals, including an online reservation system using smart locks for idle conference rooms and 3D CG to visualize real estate information (e.g. creating images of finished properties)

  • Presumably, AZoom is capable of creating a flywheel around the network it has already created with building owners through its core parking lot business. But, at present, non-parking business sales only account for 2% of total sales. Thus, further upside to the stock likely hinges on progress made in monetizing its online reservation (smart lock) and 3DCG businesses.

  • Notably, AZoom guides for OP growth at a CAGR of 112% from FY09/20 to FY09/22. Profits were muted in the early days, because of personnel expenses required to build ties with owners. But inquiries on the website are now growing exponentially, thanks to network effects. As such, AZoom appears to have entered the profit-reaping stage of its core parking business. By reinvesting those profits to foster new verticals, AZoom could potentially expand its addressable market beyond the current parking lot market.

Score: 4/5 [Reason: Solid position in parking lot subleasing business, which has entered profit-reaping stage. Data from aggregation website, CarParking, is an advantage. However, progress is yet to be seen in reinvesting those profits to non-parking lot operations, which only account for 2% of total sales at present].


Reference


Valuations


Major shareholders

CEO Yoji Sugata and his asset management company, KK Panorama, own roughly 60% of the company, followed by Asset Management One (5.26%), Schweitzer Investment (4.36%), and Morgan Stanley & Co. (2.80%).


Relevant links


Archives

Day 0: The Creator Economy: “200 day challenge”

Day 1: GA Technologies (3491): Category: Real estate tech, Mkt cap: ¥73.8bn, NTM EV/sales: 0.72x, Gross margin: 15.3%, 5yr sales CAGR 72.7%, Founded: 2013

Day 2: SRE Holdings (2980): Category: Real estate tech, Mkt cap: ¥67.3bn, NTM EV/sales: 9.25x, Gross margin: 53.8%, 3yr sales CAGR 59.9%, Founded: 2014

Day 3: Nihon Jyoho Create (4054): Category: Real estate tech, Mkt cap: ¥27.7bn, NTM EV/Sales: 9.85x, Gross margin: 73.4%, 3yr Sales CAGR 9.3%, Founded: 1994

Day 4: Property Data Bank (4389): Category: Real estate tech, Mkt cap: ¥11.2bn, NTM EV/Sales: 4.32x, Gross margin: 49%, 5yr Sales CAGR 18.5%, Founded: 2000