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Investment account
There is no indication that Rakuten’s mobile phone business is making significant progress in value creation. Recent fundraising efforts show a continued commitment to building the telecom industry, but risks remain for higher capital requirements that could lead to dilutive funding. Must market expectations remain low and we rate the shares neutral.
Quick Primer
The Rakuten Group (OTCPK:RKUNY) is a Japanese conglomerate with more than 70 diverse business lines, from its traditional online retail business to personal loans, online shopping, life insurance, professional sports clubs, reader- e, and telecommunications/technology companies. Rakuten has a 12.6% market share in domestic e-commerce, still losing shares to Amazon (AMZN) Japan at 25.7% (source: Euromonitor). The company is the challenger in telecoms, ranking fourth behind NTT (OTCPK:NTTYY), KDDI (OTCPK:KDDIY), and SoftBank Group Corp. (OTCPK:SFTBY).
Key accounts and assumptions
Key accounts and assumptions (Company, Refinitive)
Our Goals
In anticipation of a significant cash burn in FY12/2022 and FY12/2023, the company will have to raise high-cost debt financing and finance its assets. In April 2023, the company IPOed Rakuten Bank (5838), its online banking business, and raised JPY71 billion / USD0.5 billion through the sale of a 35% stake, and raised a minimum of JPY8 billion / USD58 million through the initial offering.
Raising capital is a priority for the organization, and the next planned project is the IPO of financial services arm Rakuten Securities Holdings. However, with debt to equity at 600% in FY12/2023, management has said that there will be no further increase in debt.
We would like to re-examine our sector from November 2022 and assess the future developments in the mobile phone industry, as well as the funding needs for the near term. medium.
Turns It’s hard to see
No matter how much capital is being invested in the telecommunications industry, it is still not clear to us whether this business will be profitable or generate income. In its fourth year as a mobile network operator (MNO), Rakuten Mobile has made progress but not enough to show that this business strategy will pay off well in the long term, with two years to go to establish a business. a product structure (page 38 of Q4 FY12/2022 materials).
Rakuten’s playbook to success comes from the following three factors. First, to increase users and encourage them to stay and spend in the Rakuten ecosystem. Second, an increase in scale leads to a decrease in cost, thereby increasing the probability of good operating profit. Third, to sell the mobile-as-a-computer model (called Symphony) used in Japan as a service to mobile players around the world. We will assess progress in these areas.
Although it is the main challenger in the mobile phone world, the growth of subscribers has increased. After reaching a peak of just 5.68 million subscribers in Q1 FY12/2022, it was 5.06 million in Q4 FY12/2022 (-6% YoY). This is a concern given the continued marketing spending and ‘price leadership’ strategy that Rakuten should be able to profit from. The main problem is that the best promotions are stopped when they are first available to new users and result in a lot of damage.
The cost is reduced when the company’s population network coverage is 99%, because the rolling costs from using other carrier networks are reduced. With JPY15 billion/USD0.1 billion monthly cost savings, this will be significantly increased and planned for FY12/2023. However, even on an annual basis, this alone is not enough to break even for this industry, especially since the growth of users has stopped.
On a positive note, Symphony’s sales are on the rise and will reach USD476 million in FY12/2022. It is estimated that 14 current customers are closing in on offering solutions, with a total of 64 checking accounts. The company is targeting 40% YoY sales growth in FY12/2024 and a pipeline worth over $4 billion, indicating that the technology is promising and may become the standard industry. However, there is no information about its effectiveness, and it shows the overall problem with the teleportation program.
Overall, we don’t expect any positive surprises from the mobile division that will change the fundamental outlook for the company.
Financial needs must be present
Although the IPO of Rakuten Securities Holdings will raise JPY200 billion/USD1.5 billion, this will depend on market conditions and investor interest – the Rakuten Bank IPO was discounted. Management has also said it will be ‘flexible’ on strategic business partnerships and capital raising, keeping the door open for equity issuance. While these deals to date have included subsidiaries, the parent company has been briefed on the possibility, saying existing shareholders may be at risk.
If the mobile division cannot operate without financial support, there is still a high risk that we think the financial crisis will continue, and fewer and fewer options will emerge. .
Value
With no positive earnings and cash burn expected in FY12/2023, the shares are trading on an EV/EBITDA consensus of 11.5x, with a low yield of 0.7%. Because of the risks inherent in mobile telephony, we believe that current costs are not low enough to provide an entry point.
Problems
The risk may arise from unexpected growth in mobile user subscribers, resulting from effective marketing campaigns, and/or the failure of incumbents (such as KDDI network failures in year 2022).
Rakuten Symphony is likely to be adopted by a major carrier, become an industry standard and enhance the technology as a core IP, strengthening the vision for the business.
The negative impact comes from the successful takeover of the Rakuten Securities Holdings IPO, raising questions about future fundraising efforts. The company also had to sell the group’s subsidiaries to smaller holdings, due to a sharp decline in the group’s earnings.
Flatlining subscribers in the telecommunications industry will cover the profits from traditional core businesses, mostly home and startups that show signs of a mature income path.
Conclusion
We do not see growth from management’s efforts to build a mobile phone business, as traditional businesses are sold to fund this expansion. The organization’s money distribution is a form of gambling. However, no negative or positive shocks are expected and we believe that the shares will remain at neutral level.
Editor’s Note: This article refers to one or more stocks that do not trade on the US stock exchange. Be aware of the problems associated with these trees.
