Economic Headwinds and Consolidation of PayPay Pressure Near-Term Margins; Lowering FVE to JPY 440

Z Holdings reported underwhelming second-quarter results, with both revenue growth and operating margin falling below our expectations, as the impact of macroeconomic headwinds on advertising demand in the second quarter was more severe than anticipated. Based on the disappointing results, we lower our near-term revenue and margin projections for the media and commerce segments, and we lower our second-stage earnings before interest growth rate assumptions to 5% from 8.8% previously, as we expect synergies from integrating Yahoo, Line, and PayPay to be realized more slowly than we had previously assumed. While our Z Holdings’ fair value estimate is revised to JPY 440 from JPY 600 previously, we think the stock is still attractive because we retain our long-term view on the competitiveness of the Yahoo and Line advertising businesses, and expect PayPay’s profitability to improve over time.