08 July 2015 Asia Pacific/Japan Equity Research Consumer Internet (Internet (Japan)) / MARKET WEIGHT
Rakuten (4755 / 4755 JP) Rating OUTPERFORM* Price (07 Jul 15, ¥) 2,022 INITIATION
Target price (¥) 2,400¹ Chg to TP (%) 18.7 Market cap. (¥ bn) 2,878.52 (US$ 23.45) King of Japanese e-commerce Enterprise value (¥ bn) 2,868.91 Number of shares (mn) 1,423.95 ■ Action: We initiate coverage of Rakuten with a ¥2,400 target price (potential Free float (%) 55.0 return 18.7%) and an OUTPERFORM rating. Rakuten is our top pick in the 52-week price range 2,358 - 1,138
*Stock ratings are relative to the coverage universe in each Internet sector. We look for business domain expansion to drive continued analyst's or each team's respective sector. double-digit growth. For details, see our report Internet/Telecom sector: ¹Target price is for 12 months. Battling ecosystems: Search for winners among telecom/Internet stocks, Research Analysts also published today. Hitoshi Hayakawa 81 3 4550 9952 ■ Investment case: Rakuten operates Japan’s largest e-commerce site, [email protected] Rakuten Ichiba, and is the country’s undisputed e-commerce leader. It boasts over 70mn customer login IDs, a key measure of competitiveness in our view, which is by far the highest count among the five ecosystems (Rakuten, Softbank Group, Recruit Holdings, NTT DoCoMo, KDDI). In addition to e-commerce, it is also strong in travel booking, with Rakuten Travel ranking as one of Japan’s two dominant players in this area along with Recruit’s Jalan. Through targeted acquisitions, Rakuten has also aggressively entered the finance arena to quickly become an Internet finance conglomerate, offering services in the areas of consumer credit (Rakuten Card), banking, securities (including forex), and life insurance. ■ Catalysts/risks: (1) Expansion or reduction of overseas M&A transactions, (2) acceleration or slowing in equity financing and profit growth (3) expanded earnings or losses at overseas subsidiaries, (4) growth or contraction in e- commerce transaction value, (5) increased competition from Yahoo!Shopping, Amazon and others, (6) developments in the Japanese stock market, and (7) improvement or deterioration in economic conditions. ■ Valuation: We derive our ¥2,400 TP for Rakuten by applying the stock’s past-three-year-average P/E of 37.4x to our FY12/16 EPS estimate of ¥65. Our FY12/16E EBITDA is ¥168.3bn. EV/EBITDA on our ¥2,400 TP is 20x.
Share price performance Financial and valuation metrics
Year 12/14A 12/15E 12/16E 12/17E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 598.6 680.0 778.9 884.7 4000 160 Operating profit (¥ bn) 106.4 122.9 140.5 160.1 3000 140 Pre-tax profit (¥ bn) 104.2 121.9 139.5 159.0 2000 120 Net income (¥ bn) 70.6 76.1 92.8 105.8 1000 100 EPS (¥) 53.5 56.7 64.9 74.0 0 80 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 56.3 72.0 85.5 The price relative chart measures performance against the EPS growth (%) 64.0 6.0 14.5 14.0 TOPIX which closed at 1637.23 on 07/07/15 P/E (x) 31.5 35.7 31.2 27.3 On 07/07/15 the spot exchange rate was ¥122.74/US$1 Dividend yield (%) 0.27 0.22 0.22 0.22 EV/EBITDA(x) 17.5 17.8 15.3 12.8 Performance over 1M 3M 12M P/B (x) 6.3 4.6 4.2 3.6 Absolute (%) 6.6 -12.0 45.3 ROE(%) 22.0 15.8 14.2 14.2 Relative (%) 8.4 -15.1 17.4 Net debt/equity (%) 45.4 net cash net cash net cash
Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
08 July 2015
Rakuten (initiating coverage) Consolidated
Figure 1: Rakuten (4755): Consolidated earnings forecast summary Sales Operating profit Pre-tax profit Net profit EPS DPS P/E ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x) Consolidated Dec-14 Actual 598,565 15.4 106,397 17.9 104,245 17.6 70,614 64.6 53.5 64.0 4.5 31.5 Dec-15 CS E (new) 680,049 13.6 122,945 15.6 121,903 16.9 76,132 7.8 56.7 6.0 4.5 35.7 CoE ------IBES E 695,029 16.1 130,625 22.8 127,701 22.5 75,537 7.0 56.3 5.3 4.9 35.9 Dec-16 CS E (new) 778,923 14.5 140,531 14.3 139,451 14.4 92,778 21.9 64.9 14.5 4.5 31.2 IBES E 786,998 13.2 163,136 24.9 159,570 25.0 97,220 28.7 72.0 27.9 5.3 28.1 Dec-17 CS E (new) 884,711 13.6 160,071 13.9 158,991 14.0 105,779 14.0 74.0 14.0 4.5 27.3 IBES E 865,569 10.0 190,382 16.7 185,099 16.0 115,402 18.7 85.5 18.8 5.8 23.6 Source: Company data, I/B/E/S, Credit Suisse estimates Rakuten's revenue and profit fall under three segments: (1) Internet services, (2) Internet Double-digit growth set to finance, and (3) Other. FY12/14 consolidated sales were ¥598.6bn (¥641.7bn before continue consolidation adjustment), with Internet services accounting for 57%, Internet finance for 37%, and Other for 7% of the total (pre-consolidation adjustment). Note that Rakuten uses IFRS. FY12/14 consolidated OP was ¥106.4bn (¥106.5bn before consolidation adjustment), with Internet services and Internet finance making nearly equal contributions of ¥58.8bn and ¥48.4bn, respectively, but with the Other category making a loss of ¥0.6bn (pre- consolidation adjustment on an IFRS basis).
Figure 2: Rakuten (4755): Consolidated revenue (FY12/14)
(¥bn) Others Segment 42
Internet Finance Segment 237 Internet Services Segment 363
Source: Company data, Credit Suisse
Rakuten (4755 / 4755 JP) 2 08 July 2015
Figure 3: Rakuten (4755): Operating income (IFRS, FY12/14) (¥bn) 120
100
80 Internet Services Segment 59 60
40 Internet Finance 20 Segment 48 Others Segment -1 0 FY12/14 -20
Source: Company data, Credit Suisse We expect double-digit growth in sales and OP at the consolidated level to continue over Overseas M&A deals a the next three years. That said, the company’s appetite for investment in overseas Internet variable companies remains strong, so there is every possibility that further expansion of the roster of consolidated subsidiaries will significantly influence future earnings. For FY12/15, we expect to see continued double-digit growth in both sales and profits. We look for expanded sales in both the Internet services and Internet finance segments to drive 13.6% YoY growth in consolidated revenue to ¥680bn and 15.6% YoY growth in OP to ¥122.9bn (IFRS basis).
Figure 4: Rakuten (4755): Revenue (¥bn) 885 900 779 30% 680 25% 700 599 519 20% 400 500 15%
300 10% 5% 100 0% -100 -5% FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Internet Services Segment Internet Finance Segment Others Segment Adjustments Revenue, % YoY Source: Company data, Credit Suisse estimates
Rakuten (4755 / 4755 JP) 3 08 July 2015
Figure 5: Rakuten (4755): Operating income
(¥bn)
200 160 20% 141 123 150 106 15% 90 100 50 10% 50 5% 0
-50 0% FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E Internet Services Segment Internet Finance Segment Others Segment Adjustments OP margin
Source: Company data, Credit Suisse estimates
Internet services The Internet services segment comprises e-commerce site Rakuten Ichiba, travel booking site Rakuten Travel, and other Internet businesses. FY12/14 sales were ¥362.8bn for the segment as a whole, with Rakuten Ichiba contributing ¥151.2bn (41.7%), Rakuten Travel ¥37.2bn (10.3%), and other Internet ¥174.2bn (4.8%). Segment OP in the Internet services segment was ¥58.8bn on an IFRS basis, but ¥68.4bn Offsetting overseas losses on the non-GAAP basis used for segment disclosures. This reflects operating profits of with domestic gains ¥79.8bn for Rakuten Ichiba and ¥15.2bn for Rakuten Travel and an operating loss of ¥26.6bn for other Internet. The basic pattern is to use profits generated in the domestic market to offset overseas losses, regarded as upfront costs to develop future businesses.
Figure 6: Rakuten (4755): Internet service segment revenue (FY12/14, Non-GAAP)
(¥bn)
Other Internet Services Rakuten Ichiba 174 151
Rakuten Travel 37
Source: Company data, Credit Suisse estimates
Rakuten (4755 / 4755 JP) 4 08 July 2015
Figure 7: Rakuten (4755): Internet service segment OP (non-GAAP)
(¥bn) 100
80
60 Rakuten Ichiba 80 40
20 Rakuten Travel 15 0 Other Internet -20 Services -27 FY12/14
Source: Company data, Credit Suisse estimates Primary drivers of earnings in the core Rakuten Ichiba business are domestic e-commerce Rakuten Ichiba earning gross merchandise volume (GMV) and growth in Rakuten login members (active users drivers with a login account) who use the domestic e-commerce site. Although there was some fluctuation around the spike in demand seen ahead of the consumption tax hike, domestic GMV has grown at a CAGR of 14.2% over the past two years. Login IDs, meanwhile, have continued to grow at a pace of about 2mn per quarter and now top 72.34mn.
Figure 8: Domestic e-commerce transaction value
(¥bn) 3,000 25% 2,595 2,379 2,500 2,180 20% 2,013 2,000 1,766 15% 1,448 1,500 10% 1,000
500 5%
0 0% FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Domestic EC transaction value % YoY
Source: Company data, Credit Suisse estimates
Rakuten (4755 / 4755 JP) 5 08 July 2015
Figure 9: Rakuten (4755): Login members (mn) 100 94 16% 86 90 78 14% 80 70 12% 70 63 60 55 10% 50 8% 40 6% 30 4% 20 10 2% 0 0% FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E Rakuten log-in members % YoY
Source: Company data, Credit Suisse estimates Next, we look at average revenue per user (ARPU). While demand surges ahead of the ARPU analysis consumption tax hike and during the year-end sales season temporarily pushed up monthly revenues a few hundred yen, Rakuten’s domestic e-commerce ARPU generally runs in the neighborhood of ¥2,000–2,500. We calculate e-commerce ARPU by dividing domestic EC GMV by number of login accounts, which gives average monthly e- commerce spending per login. Changing the denominator in this formula to Rakuten Ichiba sales, average monthly Rakuten Ichiba spend per login (Rakuten Ichiba ARPU) is in the ¥170–190 range. Rakuten Ichiba charges its merchants rent based on how much they sell. Taking Rakuten Ichiba ARPU as a proportion of domestic e-commerce ARPU (Rakuten Ichiba ARPU ÷ domestic e-commerce ARPU) puts Rakuten Ichiba’s rental rate at about 7%. As this shows, drivers for growing Rakuten Ichiba earnings boil down to three variables: (1) raising login member count, (2) raising per-login spend, and (3) raising merchant rental rates.
Figure 10: Rakuten (4755): Domestic e-commerce ARPU
(¥) 2,500 2,481
2,450 2,438 2,409 2,400 2,377 2,365
2,350 2,321
2,300
2,250
2,200 FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Source: Company data, Credit Suisse estimates
Rakuten (4755 / 4755 JP) 6 08 July 2015
Figure 11: Rakuten (4755): Rakuten Ichiba ARPU
(¥) 195 190 190 187
185 181 180 174 175 171 171 170
165
160 FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Source: Company data, Credit Suisse estimates
Figure 12: Rakuten (4755): Rental rate charged by Rakuten Ichiba in domestic e- commerce market (ARPU) 8.0% 7.8% 7.8% 7.8%
7.6% 7.5%
7.4% 7.2% 7.2% 7.2% 7.2%
7.0% FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Source: Company data, Credit Suisse estimates We expect sales and profits in the Internet services segment to continue to grow, driven by expanded billings at Rakuten Ichiba and Rakuten Travel. However, the extent to which this translates to overall earnings growth will likely depend largely on the performance of the Other Internet services segment, centering on the company’s overseas e-commerce businesses.
Rakuten (4755 / 4755 JP) 7 08 July 2015
Figure 13: Rakuten (4755): Internet service revenue
(¥bn) 544 500 472 450 409 400 363 350 315 300 270 250 200 150 100 50 0 FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Rakuten Ichiba Rakuten Travel Other Internet Services
Source: Company data, Credit Suisse estimates
Figure 14: Rakuten (4755): Internet service operating profit
(¥bn) 96 120 87 79 100 59 68 80 25 60 40 20 0 -20 -40 -60 FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Rakuten Ichiba Rakuten Travel Other Internet Services
Source: Company data, Credit Suisse estimates Internet finance The Internet finance segment comprises Rakuten Card, Rakuten Bank, Rakuten Securities, Rakuten Life Insurance, and other businesses. FY12/14 segment sales were ¥236.5bn, with Rakuten Card contributing ¥98.1bn (41.5%), Rakuten Bank ¥50.4bn (21.3%), Rakuten Securities ¥43.5bn (18.4%), Rakuten Life Insurance ¥32bn (13.5%), and other businesses ¥12.3bn (5.2%). Segment OP was ¥48.4bn, with Rakuten Card contributing ¥18.3bn, Rakuten Bank ¥9.5bn, Rakuten Securities ¥19.3bn, Rakuten Life Insurance ¥0.7bn, and other businesses ¥0.4bn.
Rakuten (4755 / 4755 JP) 8 08 July 2015
Figure 15: Rakuten (4755): Internet finance revenue (Non-GAAP, FY12/14)
(¥bn) Others 12 Rakuten Life Insurance 32
Rakuten Rakuten Card Securities 44 98
Rakuten Bank 50
Source: Company data, Credit Suisse
Figure 16: Rakuten (4755): Internet finance operating profit (Non-GAAP, FY12/14)
(¥bn) 50 Rakuten Life Others 0 45 Insurance 1 40 Rakuten Securities 35 19 30 25 Rakuten Bank 10 20 15 10 Rakuten Card 18 5 0 FY12/14
Source: Company data, Credit Suisse The Internet finance segment revolves around the Rakuten Card, which is closely Rakuten Card growth associated with Rakuten Ichiba. There is considerable scope for the company to expand dramatic this business through its own efforts. About 70% of all transactions on Rakuten Ichiba are settled by credit card, but Rakuten Card is only used for about half these payments. This presents a significant opportunity for growth. Efforts logically would focus on motivating Rakuten Ichiba shoppers who do not have a Rakuten Card to get one and encouraging current Rakuten Card holders who do not use it as their primary card to begin doing so. The tools for increasing the convenience and therefore attractiveness of Rakuten Card are already in place in the form of Rakuten Super Point Card, R-Point Card, and the Edy e- money card. It is now time for the company to step up and begin pulling these levers in the context of a strong marketing campaign with the twin aims of further growing membership and stimulating increased use of the card. The Rakuten Card’s main earnings drivers are card count and usage. In short, this means number of cards issued and actively used, along with shopping transaction volume and revolving credit balances. For competitive reasons, the company does not disclose hard numbers in this area. Figure 17 shows changes in shopping transaction volume. Total billings jumped nearly ¥1tn last year, rising from ¥2.5tn in FY12/13 to ¥3.45tn in FY12/14. Of this amount, high- margin revolving credit purchases rose from ¥772.7bn to ¥999.2bn.
Rakuten (4755 / 4755 JP) 9 08 July 2015
Figure 17: Rakuten (4755): Card shopping transaction value
(¥bn) 960 1,000 866 900 811 823 771 800 648 700 606 600 521 536 453 500 395 433 400 300 200 100 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY12/12 FY12/13 FY12/14
Source: Company data, Credit Suisse
Figure 18: Rakuten (4755): Rakuten Card revolving repayment balance
(¥bn) 300 272 257 242 229 250 215 199 200 186 161 173 140 150 150 129
100
50
0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY12/12 FY12/13 FY12/14
Source: Company data, Credit Suisse estimates
Figure 19: Rakuten (4755): Interest rates on shopping and revolving payment (%)
16 14.3 14.2 14.3 14.2 14.3 14.4 14.3 14.4 14.5 14.5 14.5 14.5 14 12 10 8 6 4 2.7 2.7 2.8 2.8 2.8 3.0 2.9 2.8 2.8 3.0 3.0 3.0 2 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY12/13 FY12/14 FY12/15E Interest rate on shopping revolving payment Interest rate on shopping transaction
Source: Company data, Credit Suisse estimates On the operations side, credit management could become an issue as the company goes on the offensive to boost its cardholder and usage numbers. The main credit card loan loss-related indicator for the Rakuten Card is when receivables are expanding at the same time that balances more than four months outstanding among borrowers deemed low risk are falling in YoY terms. On this basis, there is no real indication at present of escalating risk in Rakuten’s card business. Bad debt expense is currently ¥5.2bn, and while this is
Rakuten (4755 / 4755 JP) 10 08 July 2015 slightly up from 4Q’s ¥4.9bn, when adjusted against credit card and credit guarantee provisions, net impact is limited to ¥210mn.
Figure 20: Rakuten (4755): Credit Card bad debt related data (¥mn) FY12/14 FY12/15E 1Q 2Q 1H 3Q 4Q 2H FY 1Q Rakuten Card 598,144 589,694 589,694 617,425 698,240 698,240 698,240 694,694 Normal 585,679 577,801 577,801 605,786 686,601 686,601 686,601 682,878 Doubtful (4 months-and-over-delinquent) 12,465 11,894 11,894 11,638 11,640 11,640 11,640 11,816 Secured 3,767 3,658 3,658 3,565 2,484 2,484 2,484 2,421 Rakuten Bank Super Loans 250,559 260,865 260,865 274,581 286,202 286,202 286,202 303,781 Normal (Credit guarantees) 237,612 246,716 246,716 259,153 269,881 269,881 269,881 286,109 Doubtful (Foreclosed credit guarantees) 12,947 14,149 14,149 15,427 16,321 16,321 16,321 17,672 Total balance of loan receivables 852,471 854,217 854,217 895,570 986,926 986,926 986,926 1,000,896 Expenses related to doubtful accounts 3,739 4,019 4,019 4,533 4,956 4,956 4,956 5,203 Ratio of expenses related to doubtful accounts 1.82% 1.88% 1.88% 2.07% 2.11% 2.11% 2.11% 2.09% Source: Company data, Credit Suisse Among other businesses, Rakuten Bank and Rakuten Securities are also seeing solid earnings growth amid a favorable operating environment. In the bank business, number of accounts and deposit balances are both showing steady growth, while in the securities business, the number of accounts and assets under management are both expanding quite rapidly.
Figure 21: Rakuten (4755): Rakuten Bank accounts & deposits (¥bn) ('000) 1,400 5,000
1,200 4,800 1,000 4,600 800 4,400 600 4,200 400 200 4,000 0 3,800 FY12/12 FY12/13 FY12/14
Rakuten Bank deposit balance (LHS) Rakuten Bank account RHS)
Source: Company data, Credit Suisse
Figure 22: Rakuten (4755): Rakuten Securities accounts & deposits
(¥bn) ('000) 4,000 2,000 3,500 1,600 3,000 2,500 1,200 2,000 1,500 800 1,000 400 500 0 0 FY3/12 FY3/13 FY3/14 FY3/15
Rakuten Securities deposit balance LHS) Rakuten Securities account (RHS)
Source: Company data, Credit Suisse We expect revenue and profits in the Internet finance segment to remain on an uptrend, driven by growth in card billings, bank customers, and deposit assets. Like at all major
Rakuten (4755 / 4755 JP) 11 08 July 2015 finance companies, earnings in Rakuten’s Internet finance businesses have considerable exposure to the macro environment and the stock market. This is particularly so with Rakuten Securities, which while performing strongly now amid the favorable operating environment (FY12/14 OP ¥19.3bn, accounting for 16.4% of non-GAAP consolidated OP) will likely see increased earnings volatility in response to market developments, and this could well impact consolidated earnings.
Figure 23: Rakuten (4755): Internet finance revenue (¥bn) 400 344 350 311 300 277 237 250 201 200 150 127 100 50 0 FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Rakuten Card Rakuten Bank Rakuten Securities Rakuten Life Insurance Others
Source: Company data, Credit Suisse estimates
Figure 24: Rakuten (4755): Internet finance operating profit (¥bn)
90 79 80 71 70 64 60 48 50 44 40 30 20 20 10 0 -10 FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E
Rakuten Card Rakuten Bank Rakuten Securities Rakuten Life Insurance Others
Source: Company data, Credit Suisse estimates
Rakuten (4755 / 4755 JP) 12 08 July 2015
Figure 25: Rakuten (4755): Consolidated profit & loss statement (¥mn) FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E Revenue 400,444 518,568 598,565 680,049 778,923 884,711 Internet Services Segment 270,255 315,228 362,751 409,302 471,632 544,410 Internet Finance Segment 126,563 201,494 236,520 276,511 311,291 344,301 Others Segment 33,270 35,746 42,445 39,643 40,000 40,000 Adjustments -29,644 -33,900 -43,151 -45,406 -44,000 -44,000 Operating expenses 319,435 420,374 491,279 558,767 638,392 724,639 Advertising and promotion expenditures 49,611 75,408 83,884 84,923 97,365 110,589 Employee benefits expenses 70,098 93,206 108,898 129,565 147,995 168,095 Depreciation and amortization 21,227 26,086 30,140 35,207 38,946 44,236 Communication and maintenance expenses 15,355 18,254 19,055 20,291 23,368 26,541 Consignment and subcontract expenses 22,666 27,959 31,343 34,176 38,946 44,236 Allowance for doubtful accounts charged to expenses 10,023 12,928 16,964 20,958 23,368 26,541 Cost of sales of merchandise 50,297 84,625 101,367 105,422 116,838 132,707 Interest expense for finance business 5,512 4,864 5,590 6,077 6,848 7,575 Commission expense for finance business 5,002 5,300 6,399 7,445 8,405 9,296 Insurance claims and other payments, and 1,857 11,215 15,963 17,057 19,473 22,118 provision of policy reserves and others for insurance business Others 67,787 60,529 71,676 97,648 116,838 132,707 Other income 3,365 1,831 6,724 9,663 10,000 10,000 Other expenses 5,581 9,781 7,613 2,001 2,000 2,000 Additional line items -28,738 - - 0 0 0 Non-GAAP Operating Income - 103,344 118,092 0 0 0 Internet Services Segment - 59,495 68,437 0 0 0 Internet Finance Segment - 43,648 49,496 0 0 0 Others Segment - 3,790 190 0 0 0 Adjustments - -3,589 -31 0 0 0 Non-GAAP Adjustments - -13,100 -11,695 0 0 0 Amortization of Intangible Assets (PPA) - -4,363 -6,327 0 0 0 Stock Based Compensation - -1,604 -2,315 0 0 0 One-off items* - -7,132 -3,053 0 0 0 Operating income (IFRS) 50,055 90,244 106,397 122,945 140,531 160,071 Internet Services Segment 25,305 47,455 58,806 79,161 86,832 96,312 Internet Finance Segment 20,284 44,174 48,399 63,550 71,109 79,176 Others Segment 2,825 3,762 -639 -2,462 0 0 Adjustments 1,641 -5,147 -169 -17,305 -17,409 -15,416 Financial income 193 197 230 113 120 120 Financial expenses 2,565 1,962 2,986 3,553 3,600 3,600 Share of income of associates and joint ventures 1,423 131 604 2,398 2,400 2,400 Income before income tax 49,106 88,610 104,245 121,903 139,451 158,991 Income tax expense 27,970 45,129 33,142 45,239 46,019 52,467 Net income 21,136 43,481 71,103 76,663 93,432 106,524 Net income attributable to owners of the parent company 20,489 42,900 70,614 76,132 92,778 105,779 Net income attributable to non-controlling interests 647 581 489 532 654 746
EPS (¥) 15.59 32.60 53.47 56.69 64.90 73.99 Diluted EPS (¥) 15.56 32.41 53.15 56.16 64.25 73.25
DPS (¥) 3.00 4.00 4.50 4.50 4.50 4.50
Shares outstanding (mn shares, including treasury stocks) 1,321 1,324 1,329 1,430 1,430 1,430 Treasury stocks (mn shares) 6 6 6 6 6 6 Average shares outstanding (mn shares) 1,314 1,316 1,321 1,379 1,430 1,430
(¥bn) FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E Capex - 34.51 38.22 51.41 52.00 52.00 Property, plant and equipment - 11.29 10.01 19.51 20.00 20.00 Intangible assets - 23.22 28.21 31.90 32.00 32.00 Source: Company data, Credit Suisse estimates
Rakuten (4755 / 4755 JP) 13 08 July 2015
Figure 26: Rakuten (4755): Segment data
Rakuten (4755 / 4755 JP) 14 08 July 2015
Figure 27: Rakuten (4755): Consolidated balance sheet (¥mn) FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E Assets 2,287,634 3,209,808 3,680,695 4,227,367 4,514,894 4,815,422 Cash and cash equivalents 270,114 384,008 428,635 599,531 735,237 873,213 Accounts receivable - trade 65,493 73,443 88,871 90,000 90,000 90,000 Financial assets for securities business 615,703 1,218,987 1,110,888 1,200,000 1,200,000 1,200,000 Loans for credit card business 402,418 544,314 692,886 794,958 896,780 1,009,332 Investment securities for banking business 296,326 197,897 222,297 240,000 240,000 240,000 Loans for banking business 189,669 239,818 321,877 371,877 421,877 471,877 Investment securities for insurance business 13,623 10,233 12,205 13,000 13,000 13,000 Derivative assets 10,674 12,588 13,927 14,000 14,000 14,000 Investment securities 23,411 34,025 50,506 100,000 100,000 100,000 Other financial assets 123,132 159,058 144,283 150,000 150,000 150,000 Investments in associates and joint ventures 6,601 8,189 8,932 9,000 9,000 9,000 Property, plant and equipment 24,143 30,408 34,811 35,000 35,000 35,000 Intangible assets 188,014 235,881 490,679 550,000 550,000 550,000 Deferred tax assets 40,546 31,594 35,006 35,000 35,000 35,000 Other assets 17,767 29,365 24,892 25,000 25,000 25,000
Liabilities 2,045,722 2,903,354 3,252,609 3,546,427 3,746,427 3,946,427 Accounts payable - trade 79,965 115,357 137,042 150,000 150,000 150,000 Deposits for banking business 809,531 959,960 1,137,195 1,398,500 1,598,500 1,798,500 Financial liabilities for securities business 558,055 1,077,971 995,141 1,000,000 1,000,000 1,000,000 Derivative liabilities 4,685 8,023 11,769 10,000 10,000 10,000 Bonds and borrowings 305,186 389,683 589,927 589,927 589,927 589,927 Other financial liabilities 210,048 226,771 242,616 250,000 250,000 250,000 Income taxes payable 2,873 30,191 27,129 30,000 30,000 30,000 Provisions 29,614 41,020 43,969 45,000 45,000 45,000 Policy reserves and others for insurance business 18,496 18,852 19,847 20,000 20,000 20,000 Deferred tax liabilities 6,416 9,123 12,437 13,000 13,000 13,000 Other liabilities 20,853 26,403 35,537 40,000 40,000 40,000
Equity 241,912 306,454 428,086 680,940 768,467 868,995 Equity attributable to owners of the parent company 235,942 300,063 421,562 674,416 761,943 862,471 Common stock 108,255 109,530 111,602 202,589 202,589 202,589 Capital surplus 116,599 116,555 118,528 209,515 209,515 209,515 Retained earnings 20,873 61,226 124,796 195,677 283,204 383,732 Treasury stock -3,626 -3,649 -3,649 -3,649 -3,649 -3,649 Other components of equity -6,159 16,401 70,285 70,285 70,285 70,285 Non-controlling interests 5,970 6,391 6,524 6,524 6,524 6,524 Total liabilities and equity 2,287,634 3,209,808 3,680,695 4,227,367 4,514,894 4,815,422 Source: Company data, Credit Suisse estimates
Rakuten (4755 / 4755 JP) 15 08 July 2015
Figure 28: Rakuten (4755): Consolidated cash flow statement (¥mn) FY12/12 FY12/13 FY12/14 FY12/15E FY12/16E FY12/17E Cash flows from operating activities 104,687 1,485 111,860 168,678 200,558 208,210 Income before income tax 49,106 88,610 104,245 121,903 139,451 158,991 Depreciation and amortization 21,227 26,086 30,140 35,207 38,946 44,236 Other loss 30,010 5,509 1,643 0 0 0 Increase in operating receivables -9,379 -3,035 -1,901 -1,129 0 0 Increase in loans for credit card business -96,287 -141,895 -148,572 -102,072 -101,821 -112,552 Increase in deposits for banking business 66,941 150,429 177,383 261,305 200,000 200,000 Decrease (increase) in call loans for banking business 42,000 -32,000 15,000 0 0 0 Increase in loans for banking business -35,113 -50,149 -82,060 -50,000 -50,000 -50,000 Increase in operating payables 14,284 29,464 17,917 12,958 0 0 Decrease (increase) in financial asseets for securities business -200,103 -603,284 132,864 -89,112 0 0 Increase (decrease) in financial liabilities for securities business 193,565 519,916 -106,851 4,859 0 0 Others 35,353 23,142 20,476 20,000 20,001 20,002 Income tax paid -6,917 -11,308 -48,424 -45,239 -46,019 -52,467
Cash flows from investing activities 67,440 30,584 -261,085 -160,225 -52,000 -52,000 Increase in restricted deposits - -3,169 -20,138 0 0 0 Increase in time deposits -6,349 -8,089 -11,187 0 0 0 Decrease in time deposits 12,431 5,155 8,162 0 0 0 Purchase of property, plant and eqipment -5,162 -10,018 -9,959 -19,510 -20,000 -20,000 Purchase of intangible assets -18,949 -22,412 -26,783 -31,900 -32,000 -32,000 Acquisition of subsidiaries -35,076 -30,198 -174,469 -59,321 0 0 Purchase of investment securities for banking business -253,991 -150,512 -365,787 0 0 0 Proceeds from sales and redemption of investment securities for banking business 385,115 251,178 342,090 0 0 0 Purchase of investment securities for insurance business -750 -6,228 -8,522 0 0 0 Proceeds from sales and redemption of investment securities for insurance business 1,034 9,591 6,596 0 0 0 Purchase of investment securities -15,637 -4,728 -8,845 -49,494 0 0 Proceeds from sales and redemption of investment securities 3,324 5,654 12,907 0 0 0 Other payments -3,450 -7,249 -13,396 0 0 0 Other proceeds 4,900 1,609 8,246 0 0 0
Cash flows from financing activities -56,820 75,252 189,512 162,443 -12,852 -18,234 Net increase in short-term borrowings 6,607 62,305 8,126 0 0 0 Increase (decrease) in commercial papers 14,000 23,000 -10,300 0 0 0 Proceeds from long-term debt 30,100 63,210 251,860 0 0 0 Repayment of long-term debt -90,168 -66,966 -82,817 0 0 0 Proceeds from issuance of bonds - 1,483 29,828 0 0 0 Cash devidends paid -3,286 -3,962 -5,251 -5,251 -5,251 -5,251 Others -14,073 -3,818 -1,934 167,694 -7,601 -12,983
Effect of change in exchange rates on cash and cash equivalents 2,006 6,573 4,340 0 0 0 Net increase in cash and cash equivalents 117,313 113,894 44,627 170,896 135,706 137,976 Cash and cash equivalents at the beginning of the year 152,801 270,114 384,008 428,635 599,531 735,238 Cash and cash equivalents at the end of the year 270,114 384,008 428,635 599,531 735,238 873,214 Source: Company data, Credit Suisse estimates
Rakuten (4755 / 4755 JP) 16 08 July 2015 CFROI scenario based on HOLT analysis The Credit Suisse HOLT discounted cash flow model (based on long-term mean reversion assumptions) suggests Rakuten has -4.2% potential upside (analyst TP ¥2,400, potential return 18.7%). CFROI® (cash flow return on investment) and EBITDA margins assumptions are in charts below.
Figure 29: Rakuten (4755): HOLT analysis
Source: Credit Suisse HOLT Lens
Rakuten (4755 / 4755 JP) 17 08 July 2015
Companies Mentioned (Price as of 07-Jul-2015) Amazon com Inc. (AMZN.OQ, $436.04) KDDI (9433.T, ¥2,982) NTT DoCoMo (9437.T, ¥2,390) Rakuten, Inc. (4755.T, ¥2,022, OUTPERFORM, TP ¥2,400) Recruit Holdings Co., Ltd (6098.T, ¥3,820) SoftBank Group Corp. (9984.T, ¥7,146)
Disclosure Appendix Important Global Disclosures I, Hitoshi Hayakawa, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Rakuten, Inc. (4755.T)
4755.T Closing Price Target Price Date (¥) (¥) Rating 30-Oct-12 722 950 O 28-Feb-13 801 1,000 12-Apr-13 1,044 1,200 18-Jun-13 1,225 1,400 14-Apr-14 1,250 1,400 N 03-Apr-15 2,143 NR * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM NEUTRAL N O T RAT ED
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Rakuten (4755 / 4755 JP) 18 08 July 2015
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Price Target: (12 months) for Rakuten, Inc. (4755.T)
Method: Our ¥2,400 TP for Rakuten is derived by applying the stock’s past-three-year-average P/E of 37.4x to our FY12/16 EPS estimate of ¥65. FY12/16E EBITDA is ¥168.3bn. EV/EBITDA on our ¥2,400 TP is 20x.
Risk: Upside risks to our ¥2,400 target price for Rakuten include: (1) Expansion or reduction of overseas M&A transactions, (2) acceleration or slowing in equity financing and profit growth (3) expanded earnings or losses at overseas subsidiaries, (4) growth or contraction in e- commerce transaction value, (5) increased competition from Yahoo!Shopping, Amazon and others, (6) developments in the Japanese stock market, and (7) improvement or deterioration in economic conditions.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (9984.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (9984.T) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (9984.T) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (9984.T) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (4755.T, AMZN.OQ, 6098.T, 9433.T, 9984.T) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (AMZN.OQ). Credit Suisse has a material conflict of interest with the subject company (9984.T) . .
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Rakuten (4755 / 4755 JP) 19 08 July 2015
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Rakuten (4755 / 4755 JP) 20 08 July 2015
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4755_070815_Rakuten_E.doc Rakuten (4755 / 4755 JP) 21