Slow First Quarter and Consolidation of Loss-Making PayPay; Z Holdings’ FVE Lowered to JPY 600

We trimmed Z Holdings’ fair value estimate to JPY 600 from JPY 620 as we revised our operating income forecasts for two major reasons. First, we have cut the revenue forecasts of existing businesses based on the worsening economic outlook. The media segment’s 2022 and 2023 revenue forecasts are lowered by 4% each, mainly due to the weaker sales growth forecast for display advertising, which is sensitive to economic fluctuations. Similarly, our commerce segment’s 2022 and 2023 revenue forecasts are cut by 5% and 4%, respectively, due to the lower gross transaction value assumptions. Second, we have incorporated the impact of PayPay consolidation in October, which is a loss-making business in the near term. Although these factors drag Z Holdings' short-term profitability—and raise concerns about whether the company is able to meet its EBITDA commitment of JPY 331.5 billion to JPY 340 billion for fiscal 2022 and JPY 390 billion for fiscal 2023—it is encouraging that management emphasized achieving the target through the revenue growth of the ad business and cost control efforts. We believe Z Holdings' shares are undervalued, as the consolidation of PayPay, which handles approximately two-thirds of all QR code payments in Japan, would contribute to enhancing Z Holdings' entire ecosystem.