Beenos (3328) - 2023 Q3 Update
Beenos reported their 3rd quarter earnings on August 8th, and there were a few key details that I was pleased to see. First, the company’s most important subsidiary, Buyee, grew by 22.8% year-over-year. Second, the company seems to be getting more aggressive with the repurchase of their own stock. Beenos has been selling off some of their investments, and using the proceeds to fund the repurchases. Even though I came away happy with these developments, apparently the market didn’t like what it saw.
The stock price of Beenos declined almost 17% on the day of the earnings announcement, and is now down almost 23% in total since then. Beenos is one of my largest positions, as it makes up 14.5% of the portfolio even after this large decline in stock price. At the end of June, Beenos made up over 17% of the portfolio. Clearly I am a fan of this business.
It is difficult - if not impossible - to fully understand why the market reacts the way it does. That won’t stop me from speculating about the reasons why Beenos declined though.
Beenos is a company that has its sights set on growth, yet its revenue declined by almost 9% in the quarter for its ecommerce segment. The company has an investment in an Indonesian company called GoTo, and the stock price of GoTo declined by almost 11% on the day of the Beenos earnings announcement. Maybe the decline in value of this asset was on the minds of investors. Beenos’ subsidiary Buyee has had excellent performance, but its other subsidiaries have had lackluster results. Importantly, the organizational structure is a little confusing for investors to follow given the number of subsidiaries and business segments. The company also set aggressive goals for fiscal 2023, and it looks like they are falling behind a little bit on some of those goals:
Before going further, I should probably give a little background on what Buyee - Beenos’ most important subsidiary - does as a business. Buyee is an ecommerce business that helps foreign consumers outside of Japan buy products from Japanese businesses and ecommerce sites. The business was started in December 2012, and has prospered over the short time period. Buyee has partnered with 4,000 businesses and ecommerce companies, up from just 500 at the end of fiscal 2014. Buyee has its own website where consumers shop, and the products of those 4,000 other businesses show up on Buyee’s site. Buyee helps with product translation, shipping, exchange rate settlement, and customer service as cross border selling can be difficult for those without expertise in the subject. Buyee doesn’t charge partner businesses, they only charge the end customer. This is a win-win arrangement, as it adds a sales channel for third party companies without any additional investment or risk, while customers can more easily buy from their favorite Japanese stores. The take rate for Buyee has ranged from 17% to 19% over the last few years.
Despite the negative aspects of the quarterly results, I can’t help but feel excited when taking a step back and looking at the business. This is a company that has a valuation of ¥19 billion. The ‘Global Commerce’ segment of Beenos, which is mostly the ecommerce subsidiary Buyee, earned ¥3.8 billion of operating income pretax over the trailing twelve months (TTM). Buyee grew its gross merchandise value (GMV) by 22.8% year-over-year. The GMV figure represents the amount of transactions that took place on its platform. Over the past decade, this growth has been above 30% compounded annually.
Beenos operates many different wholly owned subsidiaries and has plenty of investments, but the current valuation looks pretty reasonable just for Buyee alone. The valuation of the entire company is only 5x the pretax operating income of Buyee, which would mean an initial yield of 20% for an owner of this business. Assuming a corporate tax rate around 35% in Japan, this would still be about a 13% initial yield after tax. This is a high yield for a business that has experienced robust growth over the past decade.
Beenos has some value outside of Buyee though. The firm disclosed that the market value of its ‘operational investment securities’ was ¥24.5 billion. These are made up of venture capital investments. Some of these investment securities are publicly traded, as a few of the businesses went through the IPO process in recent years. The more successful venture capital investments tend to be the ones that go public. The investments that are not publicly traded have much more debatable and unclear market values, so investors should use some caution when seeing the ¥24.5 billion worth of investment securities for Beenos. Even if you mark down the value of the portfolio quite a bit, this investment portfolio is clearly significant compared to the ¥19 billion valuation that Beenos has overall.
Management appears to be making some interesting moves with this portfolio. Although at a relatively slow pace, the company has been in the process of selling off some investments, and using the proceeds to repurchase its own stock. Recently, Beenos announced a ¥500 million stock buyback plan that would take place from August 14th until the end of September. This would represent a repurchase of 2.4% of the company’s stock. During May and June of this year, the company bought back 1.3% of its stock. Below is a slide showing the share repurchases over the past few years:
There is an important asterisk to note with this repurchase plan. It isn’t exactly how I would choose to run things if I was in charge. To start, I would ramp up the rate of repurchases to a much more aggressive level. Most of all, I would want to see less dilution offsetting the share repurchases. In the slide above, management writes that some of the repurchased shares are held to be issued as stock options, or to be used for future mergers and acquisitions. It’s not exactly what I like to see, but I don’t worry about this too much. Plenty of companies out there have authorizations to issue more stock. I view these authorizations as a backup plan, as the company can respond quicker to an external shock if the board already approved an authorization to issue shares. Additionally, plenty of ecommerce companies issue stock options, and the level of dilution from this activity at Beenos is reasonably small. Basically, my point is that the actual share count at Beenos hasn’t decreased by the exact amount of share repurchases made over the past few years. In the recently announced stock buyback plan though, Beenos wrote that they plan to dispose of all the repurchased shares, which is a good sign.
Here is another way to look at the share repurchase situation. From 2016 until 2021, the amount of shares outstanding grew at a compound annual rate of 1% due to dilution from stock options. I would just factor that in as a cost of employee compensation when analyzing the stock. Beenos started being more aggressive with the repurchases in 2022 though, buying back 4.1% of the company’s shares. Beenos will have repurchased another 3.7% in 2023 as long as their most recently announced buyback plan is executed. Due to the recent increase in stock buybacks, the share count has been decreasing lately instead of the slight dilution we saw in the past. This isn’t a major deal yet, as the amount of shares repurchased haven’t been extreme, but it could give a hint into management’s view on the current valuation as well as its view of shareholders. If the current valuation remains steady at these levels, then hopefully we will see continued buybacks in the future.
Now I want to circle back to the negatives that I mentioned earlier. First off, Beenos is a company that has its sights set on growth, yet its revenue declined by almost 9% in the quarter for its ecommerce segment. Revenue is down overall at Beenos year-to-date. Although its subsidiary Buyee is growing rapidly, Beenos has many other businesses whose results haven’t been too exciting. This gets into how the organizational structure is a little confusing for investors to follow given the number of subsidiaries and business segments. The important thing here is that the unimpressive subsidiaries tie up little capital for operations, and don’t burn much cash at all. The decline in revenue for the quarter at Beenos was due to the ‘Value Cycle’ and ‘Entertainment’ segments. The entertainment segment changed the method in which it reports revenue, which was the main driver of its decline. The value cycle segment is the largest for Beenos in terms of revenue, but it only produced TTM operating earnings of ¥266 million pretax. Buyee’s business segment has less revenue, but generated pretax operating profits of ¥3.8 billion. Buyee’s business segment is smaller, yet it produced more than 14x as many profits. If Buyee can continue its profitable growth, then eventually the financials could look cleaner at Beenos as this subsidiary becomes a larger and larger piece of the pie.
Another negative has been the fact that the stock price of an Indonesian company called GoTo, one of Beenos’ investments, has declined quite a bit. Venture capital investments can be volatile and speculative. Investors should keep in mind that the valuation of Beenos looks attractive from the persective of Buyee alone, even if its investments were worthless. Its investment in GoTo was still worth ¥2.5 billion at the end of June. The stock declined further since then, but its value is still above ¥2 billion. I expect Beenos to sell this stake down in the near future, and it already might have sold a portion of this already. At a value of ¥2 billion, the GoTo investment is worth more than 10% of Beenos’ overall valuation. With management selling investments to buyback its stock, this volatile and speculative portfolio could really help the company drive value for shareholders.
Last but not least, management set aggressive goals for fiscal 2023, and it looks like they are falling behind a little bit on some of those goals. With that being said, I expect Beenos to hit those goals soon even if it isn’t by fiscal year end. Those goals include GMV of ¥100 billion, revenue of ¥33.1 billion, and after tax net income of ¥2.58 billion. If the company can hit these goals eventually, then these three metrics look very attractive compared to the ¥19 billion valuation we have to pay to own the business. It is difficult to compare Buyee and Beenos with other companies, but there are plenty of unprofitable ecommerce companies that trade for premiums to their sales, while Beenos is profitable and yet selling at a discount.
One reason I was originally excited about Beenos was the fact that they looked like a potential spawner in the very early innings. By spawner, I mean a company that constantly is creating new businesses, products, or services from scratch. Beenos has an entrepreneurial culture. Its best business, Buyee, was at least the 3rd iteration of a cross border ecommerce type business. I am a fan of entrepreneurial companies that can spawn off new businesses, as trial and error will work better over the long term than centralized planning. Experimenting is more important than planning.
Since the results of subsidiaries other than Buyee have been lackluster, there is a chance that I was wrong to get so excited about the entrepreneurial abilities of Beenos. However, the entrepreneurial culture of Beenos still allows for asymmetric opportunities. It is true that poor results from other subsidiaries would detract from the profitability of Buyee, but the cash burn of new business start-ups has been very low, and there isn’t any subsidiary with major losses. As long as the capital invested is low, and there isn’t any subsidiary losing tons of money, then the downside is limited. On the upside, maybe someday another successful subsidiary like Buyee will emerge.
I have mentioned multiple times that there are low capital requirements in all of these subsidiaries. Just take a look at Beenos overall. The firm has equity capital of ¥14 billion, while it has cash and investments of ¥20 billion. The market value of these investments is higher, but the reported book value of the cash and investments is ¥20 billion. One of the reasons that this ecommerce company is capital-light is due to the fact that it can operate with negative working capital - assuming the cash and investments aren’t needed for operations. The firm has ¥2.5 billion of receivables and ¥2.6 billion of inventory, while PP&E is insignificant. The accounts payable figure is around ¥6.5 billion, and customer deposits amount to ¥1.8 billion. This negative working capital situation is especially beneficial for shareholders of a growing business.
At the end of the day, this is an entrepreneurial, high growth Japanese tech company with a low valuation that is buying back its stock. There are some interesting companies like this in Japan, which might not exactly fit the current stereotype of the Japanese markets. One of the concerns the market has related to Japan is its declining population. Buyee is a business that helps Japanese firms sell products abroad. I have no view on what the Japanese population will be in the future, as anything could happen. Things could change. If the fears around the extent of the population decline come true though, then a firm like Buyee could become very helpful in assisting Japanese firms find new customers elsewhere.
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