Beenos Inc. (3328)
Welcome to Calico Capital, today I will be breaking down Beenos, a high quality Japanese small cap trading at a bargain basement price. Feel free to subscribe, I would really appreciate it, and as always thank you for reading.
Beenos is a VC/e-commerce hybrid with an asymmetric risk return profile and imminent catalysts. Downside is protected through the combined valuation of its VC portfolio and net cash exceeding the company’s market cap. Upside is considerable thanks to the company’s crown jewel, Buyee, the long runway for growth ahead of its VC investments and the embryonic businesses the company has developed. In Beenos, Mr. Market is offering you the opportunity to invest in a keenly priced, potential multi-bagger with the ability to compound long into the future. In my base case, Beenos has 200% near term upside potential and limited to no downside potential at present. The IPOs of its investments GoTo and Droom in early 2022 provide an opportunity to exit previously illiquid positions and ensure the company will not languish with its low valuation for long. The company has five segments: global commerce, value cycle, entertainment, inbound and incubation. I will be focusing on the global commerce and incubation divisions and excluding the others as they are not integral to the thesis.
Within the global commerce division there are 3 separate operating businesses: Buyee, Sekaimon and Tenso. Buyee is the company’s flagship service and it generates the overwhelming majority of the operating profits. Buyee is a cross border e-commerce service that permits people from foreign countries to buy products from Japanese e-commerce sites, and it has partnered with 2,500 companies. It was established in 2012 by CEO Shota Naoi. Naoi’s track record is impressive in that he also was part of the team that founded Tenso, a package forwarding business. The other service, Sekaimon, simplifies the process for Japanese people to buy products on eBay. Sekaimon has grown revenue steadily at an 8% CAGR since 2012 while Tenso’s revenue has declined since then, so Buyee is the primary focus here.
Buyee has grown magnificently, increasing gross merchandise value (GMV) tenfold from 2015 to 2021.
It’s important to note that all of this growth has been organic as opposed to acquisitive, and Buyee requires very little capital outlay to achieve this growth. Buyee has strong competitive advantages in the form of branding effects and economies of scale. Management have stated that Buyee was confirmed to be the the largest Japanese cross-border company by GMV according to research conducted by Tokyo Shoko Research. So as the most popular platform for foreign people to buy from Japanese sites, its users really have no reason to switch to a competitor. Their competitors can’t match Buyee on price due to Buyee’s scale, so not many existing customers are going to switch from a cheaper service they know how to use to one they aren’t familiar with. Therefore the churn rate will be very low. And as Buyee scales I anticipate considerable margin expansion as the marginal cost of replication is so low. We can expect strong growth over the coming decade, as the global cross-border B2C e-commerce market is expected to grow by 28% annually from 2020 to 2027 (https://www.zionmarketresearch.com/inquiry/cross-border-b2c-e-commerce-market). The secular trend behind the company is so strong that even if Buyee doesn’t increase its market share, simply riding the wave will drive GMV and revenue growth.
Another thing that I have been impressed by is how management have focused their attention on improving the fundamentals. As Bezos has said, rather than speculating on what is going to change over the next 10 years, you should consider what isn’t going to change over the next 10 years. In the case of Buyee and Amazon: prices and speed of delivery. Buyee has excelled in this regard, offering competitive pricing and whittling down delivery time globally, especially in Russia for example, reducing it from 2-3 months to 10 days. Indeed, by prioritising what’s important and what’s knowable, Buyee is increasing the value proposition to its customers each year.
As for valuing Buyee, after applying the 20% take rate to run rate GMV of $364mn, it has run rate revenue of $73mn. The company doesn’t provide a breakdown of EBIT margins for the global commerce segment, but we know EBIT margins for the entire segment are 35% so using that figure Buyee alone is doing run rate EBIT of $26mn. There are adjustments of approximately $6mn which reduces it to $20mn. Beenos has $40mn of net cash so with an EV of $290mn we arrive at an EV/EBIT of 14.5. This multiple really doesn’t make sense, especially taking into account the conservative growth forecast of 28%. Buyee should easily achieve this, given the global commerce segment has grown EBIT 100% and 80% year-on-year for Q3 2020 and 2021 respectively.
In terms of comparisons, there aren’t many given how specialised the service is, but there is an Israeli cross border e-commerce company called Global E-Online which IPOd in May. It has a similar growth profile to Buyee and it is valued at a P/S of 45. Applying that P/S multiple gives you a valuation of $3.3bn for Buyee alone, which would make it a 10-bagger. Now I’m not arguing Buyee should have the same multiple as a frothy pocket of the US market, but it gives you an idea of how much it could be valued once it’s noticed. In my opinion, GMV is the best metric to value Buyee, as management have said themselves that it is their primary KPI. More broadly, many international e-commerce companies trade at multiples of their GMV, such as Etsy (2.6x), MercadoLibre (3.6x) and our very own GoTo (1.8x). This gives us an indication of the range Buyee could be trading in. You could make the argument that Buyee deserves a premium to them as they are more mature businesses with slower growth by comparison, and Etsy for example has a much lower take rate at 5%. However, using this 1.8x-3.6x range for Buyee’s $364mn run rate GMV gives us a valuation range of $655mn-$1.3bn. I like to err on the side of caution, so I will use the lower end of the range in my base case. Finally, the contribution of the other operating businesses to Beenos’ valuation is relatively small, but they do add a few million in EBIT, albeit with far less growth expected.
Beenos also has a highly valuable VC portfolio it has accumulated through outstanding capital allocation. In 2012, founder and then CEO Teruhide Sato decided the group should pivot and began to use the company as a vehicle for venture investments. The company has managed to invest in an amazing number of companies that became unicorns. Sato left in 2014 to found a VC fund called BEENEXT however the stellar track record did not falter in his absence and the company continued to make excellent investments. Since its first investment in 2012, the company has managed to grow 4.7bn yen of invested capital into 20.9bn yen, all while charging no performance fees.
However, in reality its value is far higher, as the market value of an investee is calculated on the valuation of when it last raised money, and many of them have not raised money for years while having increased in value significantly. Management’s strategy has changed in recent years and they now make fewer VC investments, while selling off their existing holdings. This is in order to aggressively buy back a few percent of its own outstanding shares each year, underlining management’s belief that the company is undervalued. They also focus on forming symbiotic partnerships between its investees and its new businesses to strengthen both of them.
Management has said the investments they are “most optimistic about” (aka most valuable) are GoTo, Droom, Healthians and Sendo. They are quite vague and not very forthcoming on sharing information about their stakes in these companies, and public information about many of the investees is sparse which makes it difficult to determine their value.
GoTo is an online marketplace and ride hailing platform, and by far their most successful investment. As per the most recent investor presentation, we know their stake in GoTo is roughly 0.5%, and it is planning on going public in early 2022 at a valuation of $40bn (https://www.reuters.com/technology/indonesias-goto-set-wrap-up-2-bln-funding-round-eyes-ipo-2022-sources-2021-08-19/), which values Beenos’ stake at around $200mn, or 60% of the company’s market cap. There is big appetite for this category of company at the moment, with another Indonesian e-commerce company, Bukalapak, having its IPO oversubscribed four times and surging 25% on its opening day (https://www.reuters.com/business/retail-consumer/bukalapak-indonesias-biggest-ipo-up-25-blockbuster-debut-2021-08-06/).
Droom is an Indian used car marketplace, which was recently valued at $1.2bn (https://economictimes.indiatimes.com/tech/funding/autombile-marketplace-droom-raises-200-million-to-list-on-nasdaq-in-2022/articleshow/84816290.cms) and is also IPOing in early 2022. Beenos owned 5-10% of it as of June, but there was dilution of one sixth since then, so their stake is now worth $50mn-$100mn. Taking the mean amount, we can value Beenos’ stake at around $75mn.
Zilingo is a tech company in the fashion industry in Thailand and was valued just shy of $1bn (https://techcrunch.com/2019/02/11/zilingo-raises-226m/). Beenos owns 0.5%-5% of it so their stake is worth $5mn-$50mn. Once again taking the mean gives us a rough valuation of $27.5mn for Beenos’ holding.
There are other holdings such as Healthians and Sendo that Beenos has valuable stakes in, but due to a lack of public information I cannot assess their values. The founder of Sendo, for example, said in an interview that Sendo hit an annualised GMV of $1bn, so it’s likely a unicorn. But I will not come up with an arbitrary figure for exactly what the stake is worth as it would be speculation. However, from the 3 stakes I have evaluated alone, we can add them up to $302.5mn. The group has around 70 investments, and between all of the others the aggregate value of the VC portfolio would comfortably surpass the company’s market cap. A NAV discount on a fast-growing VC portfolio alone with no carry isn’t too shabby.
The company also dedicates significant resources towards the development of new businesses, which in my opinion is one of the most exciting aspects of the company. Company culture is always difficult to determine, but Beenos’ culture is unquestionably very entrepreneurial and enterprising. Many of the executives are entrepreneurs who joined the group to develop new businesses, and the company has maintained that entrepreneurial spirit and a willingness to try new things. Elon Musk claims innovation is the only moat that exists. I’m not sure I’d go as far as to say that, however innovation is the surest form of insurance against disruption. Management created BeeCruise in 2017, the arm of the company responsible for the development of new lines of business. While the group has stepped up its development of new businesses in recent years, it has done so in the past as well. And you have to admire the consistency with which they can spawn new, successful divisions out of relatively small amounts of capital, as you can see in their history (https://beenos.com/en/corporate-information/timeline/). Only a few of the operating businesses today were acquired, the majority of them were started by Beenos themselves. Of course, there can be a high failure rate when pursuing this strategy and some of the startups will be more successful than others, but the ability to create new businesses can prove incredibly lucrative if executed correctly, as the team have done in the past. They have already hit one home run in starting Buyee and I wouldn’t put it past them to hit another.
Their modus operandi for starting these businesses is to establish them in the incubation segment and to keep them there until they are older, when they are transferred into one of the other segments. The group plans on continuing to create more new businesses in the medium term. The company has ~$7mn of op-ex for the incubation segment. A small amount of this is attributable to running the VC fund, but the majority is used for the creation of new businesses and the losses these businesses incur once they begin operating. The company can afford to do this as it can use the earnings generated by the other profitable segments to subsidise this division. The other global commerce businesses and the value cycle and entertainment divisions should cover the majority of these expenses. This strategy is also very tax efficient, as it uses pre-tax earnings, unlike share buybacks and dividends. The plan here is clearly short-term pain, long-term gain. Investing in these new businesses does reduce earnings in the near term, but if all goes according to plan it will benefit the company in the long run. While there is no guarantee it will translate into success, the company’s track record gives me enough confidence to trust their decision to allocate capital in this manner. However, I am not attributing any value to the new businesses in my base case as there is too much uncertainty regarding their future.
The businesses the group has established in recent times include Groobee, a service that enables people to create an e-commerce website with no initial costs. Narabee, a SaaS mobile order service that allows users to pre-order, purchase and specify pick up time for merchandise at events such as concerts, to avoid waiting in line. And Linkus, a cross border HR platform that connects businesses that want to hire foreigners with foreigners who want to work in Japan. There are many others, and it will only take one success to create enormous value.
Reasons why this opportunity exists:
Firstly, the company is a small/microcap, so it is not on too many people’s radar, coupled with the fact that it is quite obscure. Furthermore, Beenos doesn’t screen very well, as the financials don’t highlight the value inherent in the company. Buyee’s strong prospects and growth are obscured by the lower quality legacy businesses. However, as Buyee takes up a greater proportion of GMV/revenue this will become less of a factor, and should increase awareness of the stock. The balance sheet also doesn’t highlight the value of the VC investments, as they are carried on the books at the cost of invested capital rather than market value. If these investments are liquidated more people will realise how far the market value of these investments exceeds book value and begin pricing it in. And the sale of operational investments in certain years gives the business the appearance of having erratic revenue and earnings, even though that is not true of its operating business. Another reason is perhaps the pessimistic prevailing attitude that has surrounded Japan for a long time. And that is not without reason as companies in Japan have been plagued by terrible management, with little regard for shareholder return and overcapitalised balance sheets. Reforms have been ushered in under Abenomics, but sentiment remains dubious. In the midst of all this gloom however, Beenos is the exception to the rule and has been excellently managed, with strong capital allocation. A regular dividend is paid and the company deploys excess cash through the form of share buybacks. It’s likely many investors assume Beenos is one of many Japanese companies whose value will not be realised due to endemic mismanagement.
To conclude, using a sum-of-the-parts analysis, and after weighing up the value of both Buyee and the VC portfolio, along with the excellent management, it is evident the Beenos is a compelling investment opportunity. The share price is detached from reality, as its value and growth prospects are being overlooked. It is usually the case that a small number of causes is responsible for the majority of outcomes and I believe this is a useful framework to use when evaluating a business. In calculating the valuation for each of the cases, I like to examine the three most important variables the success of the business is contingent on. In the case of Beenos those are:
1. Buyee’s valuation
2. the value of the VC portfolio
3. the success of the new businesses
In the downside case, I take these 3 variables and extrapolate the worst-case scenario for each of them. In the upside case, I map out the best-case scenario for each of them. And for the base case, I say what I genuinely expect their prospects will be. I try to stay conservative for all of them and avoid relying on too many assumptions in order to be as accurate as possible.
In my base case, the lower end of Buyee’s calculated valuation range, $655mn, is added to the current market value of the VC holdings. We don’t know what that figure is, but we do know it is >$302.5mn. I am not factoring any future growth of the investments in this case. I am also not projecting any of the new businesses to be successful in the base case. Throw in $40mn of net cash, and adding up the individual parts would take the value of the company to just under $1bn, 200% above current levels.
In the downside case, there isn’t very much risk as the company is free cash flow positive and the value of its VC investments plus net cash support the current market cap. However, if the company sells its holdings and the value of the VC investments drops below the company’s market cap there would be downside risk, so this should be monitored. In addition to this, there is the issue that management doesn’t have an ownership stake in the new businesses which means they won’t be as incentivised to make them successful without having a vested interest in the outcome, as per the principal-agent problem. There is also concentration risk in the VC portfolio as its value is highly dependent on the success of GoTo.
In the upside case, I will apply the upper figure of the valuation range to Buyee, which is $1.3bn. Given the uncertainty regarding the exact value of the VC investments, I will keep it at $302.5mn. As for the new businesses, it requires some guesswork. Nonetheless I surmise that there could be one business half as successful as Buyee, which gives an equivalent value of $650mn. And finally, the $40mn net cash. Totting these up leads to a valuation of $2.3bn, which offers approximately 600% upside from the current market cap.
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Disclaimer: Author is long. This is not investment advice. Please DYOR.