Day 7: TKP Corporation (3479)
Category: Space as a Service. Mkt cap: ¥103.1bn, NTM EV/Sales: 3.05x, Gross margin: 38.1%, FY17-19 Sales CAGR 35.2%, Founded: 2005
This is installment #7 of my 200-day challenge to do write-ups on 200 Japanese small caps, at the end of which I plan to publish 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 obscure Japanese small caps that have little or no analyst coverage.
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Software -> Markets -> Communities…
“Communities are eating the world”—Some of you would probably noticed I took those words from Software is Eating the World by Marc Andreessen, or alternatively, Markets are Eating the World by Taylor Pearson.
Every week, I look forward to reading Brad Slingerlend’s newsletter. This week, he quotes Microsoft CEO Satya Nadella as follows: “Creation, creation, creation—the next 10 years is going to be as much about creation as it is about consumption and about the community around it, so it’s not creating alone.”
“If the last 10 years has been about consumption—we’re shopping more, we’re browsing more, we’re binge watching more—there is creation behind every one of of those. But I see that phenomenon being much more democratized.”
In the famous essay, 1,000 True Fans, Kevin Kelly argues that all you need are 1,000 fans to make a living as a creator. Take this newsletter, for example. All I need would be 1,000 subscribers paying $5 per month to make this a full-time job.
Note that the 1000-fans concept derives from the idea of a long tail coined by Chris Anderson in 2004. Essentially, a peer-to-peer network like the web allows even obscure items to become mega hits. As Kelly puts it: “eBay, Amazon, Netflix, etc. noticed that the total sales of *all* the lowest selling obscure items would equal or in some cases exceed the sales of the few best selling items.”
“1,000 true fans is an alternative path to success other than stardom,” Kelly says. He also points out, “The long tail does not raise the sales of creators much. But it adds massive competition and downward pressure on prices.” Trying to get 1,000 fans is saner than seeking stardom. It’s a new way for artists to make a living.
People who read my post, The Creator Economy, know that I don’t believe in this 1000-fan mantra. Even 1000 fans is only for stars, as acutely underscored by Li Jin in The Creator Economy Needs a Middle Class. The solution I reached was not to monetize my newsletter, but to publish a book and start my own business.
Substack has three shortfalls, imo. (1) It’s designed like a platform for journalists. But it should be a platform for founders. (2) It monetizes subscriptions. But it should focus on monetizing communities. (3) It has revenue-sharing agreements with Substack Pros. In this scheme, Substack pays writers advances until they get established. In exchange, they would take a share of their revenues later on.
Rather than burning cash on would-be journalists, Substack should invest in business founders. Going forward, many businesses will likely have its origins in a newsletter. Founders will continue to engage with supporters through the platform. New products will dawn on founders while interacting with fans.
My dream is to run my own boutique consulting firm. I’m not a journalist. So I don’t need subscription income. All I need are connections. I want to meet the right people, who will point me in the right direction. Put differently, I’m using Substack to help me form and participate in…communities.
TKP (3479): Japanese version of WeWork. Smaller in sales, but sticky user base. Valued at 15% of WeWork.
WeWork, valued at $47bn in January 2019, was reportedly SPACed by a black-check firm BowX Acquisition Corp valuing it at $9bn, including debt.
According to Bloomberg, WeWork reported first-quarter revenues of $1.1bn (+45% y/y) and free cash outflows of $482mn in the last quarter. Members totaled 693,000 (+49% y/y), half of which are companies with 500 or more employees.
TKP is the “Japanese version of WeWork” worth $1.4bn in enterprise value. Last year, it had roughly $500mn in revenues (+53% y/y) with EBIT of approx. $44mn. A total of 35,000 companies (2,000 are publicly listed) used its facilities last FY.
TKP has a dominant market share (51%) for meeting room rentals. From FY17 to FY19, it has expanded sales at a CAGR of 35.2% and OP at a CAGR of 32.9%. During the post-GFC recession, CEO Kawano saw an opportunity to put idle real estate to productive use by building a nationwide network of rental meeting rooms.
In May 2019, TKP acquired Regus Japan (the largest serviced office player in Japan) and Regus Taiwan, allowing it to offer a full set of flexible workspace solutions (e.g. rental meeting room, serviced offices, co-working spaces).
Sales weighting by business breaks down as follows (FY19 results)
Flexible workspace business (75.8% of total sales)
Meeting room rentals (48.3%): Meeting rooms and hotel banquet halls available for short-term rent. TKP rents idle space from owners for cheap and generates rent income by boosting utilization rates.
Rental equipment (9.5%): Optional service for rental meeting rooms and banquet halls. Rents out items such as projectors, PCs, screens, and teleconferencing systems.
Food and beverage (18.9%): Lunchbox deliveries and catering services to meeting rooms. Also helps customers plan parties and gatherings.
Accommodation and training (12.8%): Started in 2011 after TKP saw an opportunity in underutilized accommodation facilities (e.g. hot spring ryokans, business hotels, resort hotels, etc.).
Regus Japan (23.6% of total sales): Monthly office rentals (different from leased offices, because of lower initial costs but higher unit price per sqm).
Regus Taiwan (0.6% of total sales): Offers serviced offices and co-working spaces under the Regus and SPACES brands. Operates 11 Regus and 2 SPACES facilities.
As shown in the slide above, TKP’s business model is as follows:
Secure large blocks of underutilized real estate at a discount
TKP/Regus “revitalizes” or remodels the space and rents it out in small lots
Offer ancillary services to users (e.g. food and beverage, accommodation).
In FY19, TKP had 35,000 corporate users (2,000 publicly listed), of which 85% were repeat users. TKP’s spaces are distinguished by location (near train stations) and low price (hourly rate of ¥100-500 per seat).
Essentially, it’s a recurring revenue model based on monthly rent income. But TKP creates a flywheel around those repeat users by offering ancillary services like food & beverages and accommodation.
Regus Japan’s business model is as follows.
Open new facility
Breakeven point = 45% occupancy rate (generally reached in 8-12 months)
Ordinary operation = 65% occupancy rate (18 months)
The company explains that, once office spaces reach 65% occupancy, they usually operate stably for 10 years or longer.
Q3 EBITDA was ¥1.5bn (4.2x of ¥362mn in Q2), as operations (e.g. hotel, food & beverage) gradually recovered from the slump due to the pandemic.
Cumulative Q3 EBITDA was -¥921mn (vs. ¥5.7bn LY), mainly due to losses at its hotel and food & beverage businesses. Mainstay meeting room rentals business remained profitable.
Along with Q3 results, TKP announced full-year guidance as follows: Sales of ¥42.2bn-43.8bn (-19.4% to -22.3% y/y), EBITDA of ¥2.3bn-3.5bn (-64.9% to -77.0% y/y), and a net loss of ¥2.9bn-¥3.7bn (-269% to -313% y/y).
TKP’s share price hasn’t fully recovered from the pandemic. But there appears to be no problem with cash flows. Further reopening of the Japanese economy should be positive for its hotel, banquet, and food & beverage operations.
Occupancy rates should also pick up as TKP captures demand for hybrid work styles. A growing number of Japanese companies are setting up satellite offices and leasing co-working spaces. TKP should be a beneficiary of these trends.
CEO Takateru Kawano previously worked in the forex and trading division at Itochu and participated in founding the present-day Kabu.com Securities Co., Ltd. He then served as executive director at present-day Rakuten Bank Ltd. before founding TKP in 2005.
TKP started out as a rental conference room business. It began by leasing rental rooms in Roppongi by the hour (¥100/hr per person or ¥5,000/hr per room). Kawano is cited as being the first one to have introduced this system in Japan. The business took off fairly quickly and turned a profit from the first year.
But Kawano faced a roadblock due to the 2008 GFC. The business was dealt a blow with ¥500mn in cancellations. Preparations for publicly listing its shares in 2009 were soon cancelled. But TKP negotiated rent reductions (approx. 30%) and managed to break even during these times. As a result, there were no layoffs.
Comparison with WeWork
This page on WeWork Statistics by TechJury explains as follows:
WeWork has 609,000 members globally.
WeWork covers 33 countries.
Generates $1.8bn in revenues annually, but doesn’t make a profit.
Coworking locations more than doubled in 4 years.
Revenues quadrupled in 3 years.
TKP differs from WeWork in the following ways:
Combines rental offices with rental conference rooms. Also offers hybrid space sharing for banquets and commercial events. Diverse offerings enable high occupancy rates. Stable profits (FY19 EBITDA of ¥10,132mn).
Total of 35,000 client companies (85% repeat ratio in FY19).
Generates $500mn in revenues annually, and makes a profit.
As of end-Nov 2020, TKP had 2,085 rooms in 260 locations. 154,660 seats with 477,548 sqm. Regus Japan had 25,020 seats in 164 locations with 132,810 sqm. Regus Taiwan had 2,319 seats in 13 locations with 20,368 sqm.
In total, TKP operates in 437 locations with 181,999 seats and 630,726 sqm.
Essentially, WeWork is a global player expanding rapidly, but is cash destructive. TKP is a local player (Japan and Taiwan) that is posting positive operating cash flows. TKP’s revenue is smaller and growing slower than WeWork. But its customer base is sticky: mostly corporate clients with a high repeat ratio (85%).
Should TKP be successful in gaining a solid foothold in Asia and then expanding globally, it could potentially reach the size of WeWork down the road. Unlike WeWork, TKP is generating profits that could help fuel its expansion.
TKP outlines four growth strategies in its FY19-21 medium-term plan.
Merge resources with Regus Japan.
Tap demand for workstyle shifts in Japan.
Develop and acquire relevant businesses.
Expand in Asia and then globally.
In August 2019, TKP acquired Regus Taiwan, the country’s largest flexible workspace company. Over the next 6 years, TKP aims to expand to 50 locations in Taiwan, including joint rollouts of rental meeting spaces. Over the next 3 years, it targets ¥2.3bn in sales and approx. ¥600mn in EBITDA. Management is also seeking partnerships to build out its network beyond Taiwan.
In Q3 FY20, TKP announced a new business model called “Work X,” which is a coined concept for “work style reforms” and “digital transformation (DX)”. Under this concept, TKP will start rolling out satellite offices in March 2021.
The key difference is that these offices have six-to-one-year contracts and rental furniture/fixtures, making them more customizable than other leased spaces. TKP aims to convert approx. 56k sqm of existing rental meeting rooms to satellite office spaces in Tokyo.
The move came on the back of increased demand for longer-term rental spaces, subsequent to the COVID-19 pandemic. TKP expects the conversion of rental meeting rooms to satellite offices will increase occupancy rates.
At first sight, “Work X” appears to be just a tweak that would modestly increase occupancy rates. The bread and butter will come from value-added services. How can TKP create a flywheel around “satellite offices,” which are likely to spread in the scenario of hybrid workstyles adopted in post-COVID Japan?
TKP operates rental conference rooms and work spaces. It has a dominant market share (51%) in the Japanese meeting room rental market.
In 2019, it acquired Regus Japan and Regus Taiwan from IWG. By doing so, it now offers a full set of work space solutions, including coworking spaces.
TKP is thus comparable to WeWork, which was recently valued at $9 billion, albeit smaller in revenue, slower in growth, and only a local player (Japan + Taiwan). However, before it was dealt a blow by the pandemic, revenues grew 53% y/y with EBIT of approx. $44mn. Thus, TKP is a non-cash burning Japanese version of WeWork that’s still operating locally.
Financial results in the current FY has been negatively affected by the pandemic. The share price has also been sluggish. But a further reopening of the economy should lift earnings in operations such as hotels, banquets, and food & beverage. Adoption of hybrid work more broadly by companies will likely serve as a tailwind in the post-COVID operating environment.
Score: 3/5 [Reason: TKP has a solid foothold in Japan. Future growth hinges on whether it can successfully expand in Taiwan, and then to the rest of Asia. Economic reopening and hybrid-work tailwind likely to be near-term drivers. Further information available here: sponsored report by Shared Research.]
CEO Kawano and his asset management company owns nearly 60% of total shares. TKP has seven directors, including one outside director and three independent outside directors. In 2019, it added IWG’s CEO Mark Dixon as an outside director. The other independent outside directors include former president of Sharp, Haruo Tsuji, and former VP of Itochu, Kohei Watanabe.
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