Day 4: Property Data Bank (4389)
Category: Real estate tech, Mkt cap: ¥11.2bn ($102mn), NTM EV/Sales: 4.32x, Gross margin: 49%, 5yr Sales CAGR 18.5%, Founded: 2000
This is installment #4 of my 200-day challenge to write about 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 Key Takeaways. The aim of this newsletter is to fill the information gap on Japanese small caps with little or no analyst coverage.
Click on the button below to join 189 others to receive these posts in your email.
What does my day look like? I wake up at 7:00 a.m., skim through the news, and get ready for translation work from 8:00 a.m. But if I don’t have translation work, I go on twitter, read through newsletters, and dig through some in-depth reports. My kids come back from school at 2:00 p.m. and 3:00 p.m., and I do some chores until they go to bed at 8:00 p.m. I then start writing my newsletters.
How long does it take to write these posts? I usually start at 8:00 p.m. and finish before midnight. But, today, I had translation work all day. So I’m starting at 10:00 p.m. Inevitably, there are going to be days where posts are shitty because of the lack of time. Some companies I have been following for a long time, so are easy to extrapolate. For the majority, however, it’s a foray into the woods.
Where am I based and why? I’m based in Tokyo. I moved to Japan after marrying my wife who is Japanese. I’m Japanese-American, born and raised in the US. I went to a liberal arts college and majored in philosophy. I know the ins and outs of Socrates, Kant, and the post-modernists. I wrote my college thesis on St. Augustine. I attempted a masters in translation, which I couldn’t complete. I’m just an ordinary, middle-class dude with a wife, daughter, and son. If you’re interested in meeting up, feel free to hit me up and we can share notes.
Property Data Bank (4389): Real Estate SaaS Player with Dominant Market Share Among J-REITs
Property Data Bank (PDB) is a cloud software business specializing in the real estate industry, helping asset owners efficiently manage and analyze their property portfolios. It has been growing at 5yr CAGR (FY16-20coe) of 18.5% for sales and 34.5% for OP, with a growth margin ranging around 47% to 56%. The balance sheet appears safe, with cash and equivalents amounting to slightly more than 10% of market cap and a shareholders’ equity ratio of 78.8%. FY16 to FY20 ROE has trended from 10.1%, 14.3%, 14.7%, 11.9%, to 17.9%. Shares trading at NTM EV/sales of 4.32x (EV/EBIT of 23.52x) don’t look particularly expensive.
PDB is an affiliate of Shimizu Corporation, one of Japan’s five major general contractors, with a 23.84% holding ratio, followed by another real estate company Ken Corporation as the second major shareholder with a 12.42% holding ratio. Toshimasa Itaya, President of Data Bank, owns 9.04%, followed by Co-founder Hideki Takahashi 7.59%, and individual investor Eiji Terada 4.36%.
PDB was started as a project within Shimizu Corporation (1803), one of Japan’s five major general contractors. This was back in 2001, right when the securitization of real estate was getting off to a start, with J-REITs sprouting up one after another. Western countries already had prolific databases used by property managers, whereas in Japan there had been no analogous solutions.
Shimizu openly recruited employees to be founding members of the team, with the condition that these members would take a partial stake in the startup. In December 2000, Shimizu released @Property, its core service to this day.
Initially, it faced two bottlenecks: (1) deficient broadband networks, which was eventually solved through Yahoo! BB’s release in 2001; and (2) the long runway until profitability when targeted newly built properties only. In response to the second bottleneck, the company started targeted second-hand properties, particularly targeting REITs, and that’s how @Property blossomed in early days.
But the startup took a devastating hit to its operations as the real estate bubble burst in 2008 and clients evaporated. That was when PDB started looking beyond REITs and targeted corporate properties, the major one being a contract acquired from a life insurance company in 2009.
Healthy earnings expansion continued thereafter, with its business model being recognized with numerous well-known awards in back-to-back years between late 2009 and 2011. In June 2016, its cloud service was adopted by Chinkan (National Association of Rental Real Estate Management Companies), forging PDB’s nationwide presence as a software provider in the real estate industry.
In June 2018, the company listed on the Mothers Market of the Tokyo Stock Exchange.
PDB’s main product is @Property, a SaaS solution that streamlines real-estate related operations and asset management, including the following: land/building management, property management, lease contract management, construction management, real estate accounting, billing & payments, outsourcing management, and management analysis.
@Property had 60,456 properties registered in its database (from J-REITS, developers, etc.) as of Q3 FY3/20, growing at a long-term CAGR of 19.13%.
@Property is a SaaS that generates recurring revenue. However, monthly fees are based on pay-per-usage and the number of registered properties, making it difficult to track the exact number of IDs.
PDB also offers solution services, consisting of (1) initial consulting (2) optional sales, and (3) customized solutions. Consulting services include data registration support and smooth implementation of software. Optional sales are incidental to standard offerings of @Property. Customized solutions include contract-based development and data integration of customer infrastructure with @Property.
PDB has two business segments: cloud services (@Property) and solution services. KPIs are a little vague. But in the slide below, PDB provides the “monthly cloud services fees,” which probably means MRR (x 12 = ARR), whereas “monthly average by customers” x 12 likely refers to ARPA. If my assumption is correct, then ARR/ARPA would render about 289 accounts (clients). In short, there’s likely 289 accounts paying ¥4.6mn/yr on average for an ARR of around ¥1,332mn.
For the solution service segment, the company only discloses total sales and number of solutions. PDB appears to be rapidly expanding its solutions lineup. Sales growth also looks healthy.
Market and competitors
According to Holistic Research, PDB had a market share of 37.3% among REITs and major real estate funds as of end-March 2020. It enjoys a dominant market share of 52.3% for J-REITs. On the other hand, it has made little progress in penetrating corporate funds and property managers. Out of an estimated 1,889 corporate funds and property managers with a capital north of ¥1.0bn, it only had 61 clients (or 3.2% market share) as of end-March 2020. Even for smaller target companies (882 nationwide), it only has 35 clients (4.0% share).
PDB announced a three-year MTBP (FY20-23) in April 2020. Management aims for sales growth of 15%, 12%, and 11% from FY20 to FY22. Gross margins would increase slightly from 47% to 49%, while the SG&A expense ratio will trend down, leading to a higher OPM and bottom line. Management’s stance appears somewhat too cautious, in my opinion, for a growth-stage software company.
Recent announcements of near-term growth strategies include the following.
In May 2020, PDB rolled out a service called @Knowledge, which centralizes real estate documentation. By cross-selling @Knowledge to existing @Property users, management aims to increase ARPA. YouTube introduction video in Japanese:
In July 2020, PDB announced a partnership with Nomura Research Institute (4307). NRI offers support solutions for asset management and looks to expand its services into real estate investments. Specifically, NRI wants to integrate @Property into its consulting services through knowledge sharing in hopes of tapping the digital shift demand among J-REITS and real estate funds. (Press release in Japanese).
Latest earnings (Q3 FY3/21)
Results were robust in sales and profits, with sales expanding 19% and OP delivering a robust gain of 92.5%. Increased sales were driven by cloud sales (+16.3%) and solution sales (+22.9%), as progress was made in winning large contracts. OP was boosted in part by curtailed system costs and controlled SG&A outlays in view of the COVID-19 circumstances.
Property Databank is a long-standing SaaS player that branched off of Shimizu Corporation (23.84% shareholder), a major general contractor in Japan. It stands out among real estate tech peers given its dominant market share among J-REITs, despite still being only $100mn in market cap.
The company has two business segments: cloud services and solution services. Essentially, the business model revolves around the SaaS service called @Property, which drives all the recurring revenue, and additional customized services on top of that would be classified as solution services.
I estimate its ARR to be around ¥1.3bn as of Q3 FY20, which is about 12% of market cap. The interesting storyline is the release of @Knowledge, a software lineup for centralized document management that will likely contribute to cross-selling (higher ARPA).
Management aims to grow sales at a CAGR of 12.8% in the three-year MTBP. Cash stockpile at 11.1% of market cap feels slightly high for a growth-stage company. Feels a little confounding to me why management plans to curtail the SG&A ratio from 30% to 28%. Given the likelihood of the business model being labor intensive (i.e. need sales personnel to do the grunt work of helping property managers bring operations onto the cloud), I think PDB needs to be much more aggressive with hiring and related investments.
Score: 4/5 [Reason: Reasonable valuation. SaaS provider with dominant market share among J-REITs. However, management policy feels a little too conservative. Catalyst likely to be cross-selling with @Knolwedge and greater penetration of broader market consisting of corporates and property managers.]
[Update 03/25: I have been notified by a reader, who has talked with someone in the industry about @Property, that the platform isn’t very sophisticated and is difficult to customize. Therefore, it actually doesn’t deserve to be called a SaaS.]
I’ve covered four real estate tech companies so far: SRE (2980), GA Technologies (3491), Nihon Jyoho Create (4054), and Property Data Bank (4389). I jotted down a recap of financials below. Property Data Bank is the smallest in size out of the four, and valuations look relatively reasonable. Growth rate feels lukewarm, but is likely due to defensive investments.
My key takeaway after these four write-ups is that Nihon Jyoho Create probably has the highest ARR (given the high gross margin, meaning most of sales is from software)—but because of their utter lack of KPI disclosure, the stock looks unattractive. Hopefully, NJC would improve its disclosures and invest more aggressively to offer SaaS for property managers (in addition to brokers). That way, the stock would be investible and may turn out to be a long-term winner.