Day 9: Firstlogic (6037)
Category: Real Estate Tech. Mkt cap: ¥9.0bn ($82mn), LTM EV/Sales: 3.5x, Gross margin: 99.6%, FY17-FY19 Sales CAGR: -3.3%, Founded: 2005
This is installment #9 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 for the Key Takeaways. The goal of this newsletter is to fill the information gap on Japanese small caps that have little or no analyst coverage.
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Life-Streaming: Offense and Defense
I’ve faltered. Some of you might have noticed that I’ve fallen behind schedule. I’m not producing write-ups fast enough. At this rate, my book-publishing dream will be distant. How can I speed this up while keeping up the quality?
I need a template—a simple, but effective one. And here’s what I came up with. For each company, I’ll give a business overview. Then, I’ll give my take on the company’s business model, moat, and strategy.
At the each post, I’ll provide key takeaways, which are essentially scorecards. I give a score of 1 through 5 for each category. Note that these are just my first takes and my opinions are subject to change. Also, my scores are not advice.
I focus on business model, moat, and strategy, because I see them as follows.
Business model = DNA. The “core” of the business.
Moat = Defense. The reduction of risk.
Strategy = Offense. The enhancement of growth.
A hackneyed business model forces you to play a lot of defense. But if your business model is innovative, then you can spend more time playing offense. Simultaneously, great defense can often be an effective offense over the LT.
For example, I run my own translation business. My business model is [No. of words translated x Rate per word = Fee]. My moat is [Specialization in finance]. My strategy is to [Expand into consulting services].
Therefore, I try to increase the # of words translated [i.e. more orders/clients] and raise the rate per word [i.e. price hike]. I’m also trying to produce more words/hr. [i.e. boost productivity]. That’s my core.
But there are tons of translators. You can find translators anywhere. And at rates much cheaper than mine. That’s why I play defense: I focus on finance. It’s hard to find translators with a solid understanding of finance. That’s my defense.
I’m also trying to expand into new verticals. I’m using my translation skills to produce these short write-ups about Japanese small caps in hopes of getting consulting gigs down the road. That’s my offense.
My defense is the cash cow that gives me the time and money to spend on my offense. Similarly, businesses often have a profitable existing business that funds a cash-burning but promising growth business.
This will be the structure of my write-ups going forward. Now that I have a structure, I should be able to get through the remaining 192 days with more consistency. Not all days will be great. But I choose to enjoy the journey.
Firstlogic (6037): Operator of Japan’s largest real estate investment portal “Rakumachi” trading at LTM EV/EBIT of 6.9x w/ cash & equivalents amounting to 33% of mkt cap.
Japan Times reported in an article titled, “Japan land prices fall for first time in six years due to pandemic,” that average land prices across Japan fell for the first time in six years. [Commercial land prices -0.8%, residential land prices -0.4%].
Meanwhile, Reuters reported in an article about household savings here (in Japanese) that the total for “cash and deposits” rose 4.8% y/y to ¥1,056trn, a record high, during the Oct-Dec period. Corporate B/S also added cash and deposits (+16.6% y/y) amounting to ¥311trn as of end-Dec, a record high.
Simultaneously, in the March Policy Review, the BOJ announced that it would widen its interest rate target, allowing the 10yr yield to fluctuate to about 0.25%, per Nikkei. In other words, we have three macro backdrops in play:
Land prices down for the first time in six years.
Household and corporate cash at a record high.
BOJ allowing interest rates to rise slightly higher.
This may be a good setup for investors to look for passive income in Japan’s real estate market. Land prices are down. But cash needs to be deployed. An uptick in interest rates may create opportunities to buy properties at discount prices.
Firstlogic would benefit from such a scenario. It operates Japan’s largest real estate investment portal, called Rakumachi. Unlike Recruit’s SUUMO or LIFULL’s HOME’s, which focus primarily on residential real estate, this is a website that focuses solely on investment real estate.
What stands out about Firstlogic is its sluggish sales growth (FY17-FY19 Sales CAGR: -3.3%) versus GA Technologies (FY17-FY19 Sales CAGR: 87.6%) and LIFULL (FY17-FY19 Sales CAGR: 30.5%). But its margins are high and its cash and deposits (¥3,244mn) as of end-Jan 2021 amount to 36% of market cap (¥9,033mn).
1/ Business Model: Recurring revenues growing, but others sluggish
Firstlogic was founded in August 2005 by CEO Naohiro Sakaguchi, who previously worked as a software engineer. He noticed there wasn’t an IT service catering to the real estate investment market for individuals back then. Sakaguchi pioneered this market by developing Rakumachi.
Rakumachi is a matching platform between individual investors and real estate brokers. Investors register on the portal (in the translation below, it says “users” but the original Japanese says “会員数” which means members. I checked the website, and members have to register their own information). I make this distinction because registered users are typically stickier than just visitors.
Membership is free. And registered users can get free appraisals for real estate they are planning to sell. Having this sticky user base is the holy grail of the business model. That’s because real estate agents pay Firstlogic to list properties onto the website, make proposals to users, and post ads on the website.
This information may be outdated (source: report written in 2016), but Firstlogic charges ¥1,000 per month per listed property, and a ¥50,000 membership fee to new real estate brokers. They also allow these brokers to send proposal emails for ¥100,000 for every 50 members. On top of that, they sell banner ad frames for prices ranging from ¥80,000 to ¥800,000 per month.
If you look at the chart below from the latest earnings deck, property listing revenues have been growing steadily, including during the pandemic. Proposal fees appear to have flatlined, while “others” (incl. advertising, seminars) seem to have turned sluggish ever since the beginning of 2018. From this, I assume that property listings are generally “recurring” while others are “one-offs.”
2/ Moat: Reduce marketing cost for real estate brokers
The company says that its strength is that it “lowers marketing costs” for real estate brokers. Presumably, that’s why these brokers continue to pay for membership and property listings.
I googled searched “不動産投資 (real estate investment)” and the following were the top three hits: LIFULL HOME’s, Tokyu Livable, and Rakumachi. LIFULL has 29,664 listed properties, Tokyu 3,363, and Rakumachi 67,048 (ranked first in number of listed properties, per Japan Marketing Research in Oct 2020 survey).
I also looked through several other websites. But the only ones I think can be considered real competitors are Kenbiya (acquired by LIFULL; 40,313 listed properties) and GA Technologies’ RENOSY (9,612 listed properties; specialized in second-hand apartments. No. 1 in sales, Good Design Award 2020).
But I thought Rakumachi has a more engaged community of investors. It has several features that I think differentiates the service.
Newspaper, including blogs by owners [updated every day, comments and like buttons used frequently].
3/ Strategy: Digital transformation, 5,000 members, YouTube channel
For FY20, management sets out the following targets:
Promote digital transformation
Target 5,000 real estate broker members
Improve brand profile through YouTube channel
The following slide shows that H1 FY7/21 (Aug 2020 to Jan 2021) revenue slid 2.5% y/y. In other words, those are sales results compared to Aug 2019 to Jan 2020, right before the pandemic. The next six months’ results will be against easier year-earlier hurdles due to the pandemic.
Management targets 5,000 members, which is 739 more than the current number (see Fig above; row that says “RE agencies using Property Listing Service.”) The drop from LY could be due to COVID-19 causing some agencies to pull out. The growth in PVs and registered users, and the high user engagement compared to competitor sites, will likely keep the website attractive to real estate brokers.
Management left guidance undisclosed but announced the following initiatives.
Payment of ¥5 per share in dividend. First dividend in five years (FY15).
Share buyback of up to ¥200mn (from 15 Dec 2020 to 30 Jun 2021).
Rollout of new services: Q&A service [released: 8 Feb]. Relocation of office in Dec 2021 [lower rent, new YouTube studio]. Video calling on Rakumachi app [released: Jun 2020]. Further enhancement of app [online messaging, online applications, online movie content].
Announcement of guidance for a year-on-year increase in sales and profits could serve as a catalyst to the currently sluggish share price. But if user engagement does not appear to be translating to sales growth, the stock could continue to stay out of favor, despite management’s decision for dividends and buybacks.
Overview: Operates Rakumachi, the largest portal in Japan for real estate investments.
Business Model [Score: 3/5]: Recurring revenue from real estate brokers who subscribe to the platform to list their properties. One-off revenue from email distribution, advertising, and seminars.
Moat [Score: 4/5]: High user engagement through features currently not offered by competitors RENOSY (GA Technologies) and Kenbiya (LIFULL) [e.g., owner blogs in newspaper, interviews to turn blog content into videos, Q&A service] and a growing number of YouTube subscribers (207k).
Strategy [Score: 2/5]: Management appears to be trying to address the bloated cash balance (36.3% of mkt cap) through buybacks and dividends, as well as investments in digital transformation. However, I asked about the company to a senior analyst at a renowned Japanese activist investing firm, and he said: “I’m not sure if the founder is all that investor friendly. They don’t do analyst meetings and their AGM is a very brief affair.”
Valuation [Score: 3/5]: At first sight, the stock looks cheap trading at an EV/EBIT of 6.9x, which is lower than its 5yr mean of 11.0x, and almost 1/5 of its all-time high of 32.0x. Solid earnings guidance could serve as a near-term catalyst. However, if you look at the chart below, it shows that Firstlogic has a productive workforce but an unusually high cash balance. Unless management starts investing this cash to rekindle growth, I do not expect a re-rating of this stock anytime soon.
CEO Sakaguchi owned 63.5% of shares as of 30 Jan 2021. VIS Advisors is an independent advisor based in NY, USA. Yoshihisa Yamashita is an individual investor.
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