Company Reports

We raise our fair value estimate for narrow-moat LY Corp to JPY 520 from JPY 480 previously, based on a more positive operating margin and top-line outlook. Since the merger with Line in 2021, postmerger integration remained painfully slow until in recent quarters. Besides revamping its management structure, LY Corp also sliced its redundant businesses. These efforts paid off, as the December quarter recorded a JPY 16.5-billion, or 17.4%, year-on-year improvement in adjusted EBITDA. We believe that LY Corp is now finally at the cusp of moving on to the next business stage—accelerating top-line growth through realizing synergies with Yahoo, Line, and PayPay. With a leaner organizational structure that fundamentally lowers operational costs, we raise our operating margin forecast to 11.3% from 10.2% for the fiscal year ending March 2024, as well as our 2027 operating margin assumption to 14.4%, from 12.6% previously. We also uplift our revenue growth rate for the next five years to 6.7% from 6.2%, as we expect the company to invest more in promoting the cross-use of services. We believe shares are currently undervalued.

LY Corp is Japan’s largest internet conglomerate, with the Yahoo Japan portal site, Line messenger, PayPay mobile payment, and Zozo fashion e-commerce site under its umbrella, each with the largest number of active users in Japan. LY Corp’s business portfolio was built through the aggressive mergers and acquisitions strategy implemented by former co-CEO Kentaro Kawabe. Yahoo Japan, which has a relatively older user base; Line, which has a younger user base; and Zozo, which has many young female users, have little overlap in user base, and thus we expect significant synergies in the future.

LY Corp is Japan’s largest internet conglomerate, with the Yahoo Japan portal site, Line messenger, PayPay mobile payment, and Zozo fashion e-commerce site under its umbrella, each with the largest number of active users in Japan. LY Corp’s business portfolio was built through the aggressive mergers and acquisitions strategy implemented by former co-CEO Kentaro Kawabe. Yahoo Japan, which has a relatively older user base; Line, which has a younger user base; and Zozo, which has many young female users, have little overlap in user base, and thus we expect significant synergies in the future.

We raise LY Corp’s fair value estimate to JPY 480 from JPY 440 after fine-tuning our midterm margin projection as LY Corp showed commitment to improve return on equity, specifically, aiming to recover EPS to JPY 18.70, the level before integration. LY Corp achieved record-high September-quarter adjusted EBITDA, and we were surprised by the huge improvement in the strategy segment. This gave us more confidence that LY Corp will be able to continuously improve margins through disciplined cost control. We also anticipate Line-Yahoo ID integration, which began in October, to accelerate growth in advertisement and e-commerce in the long run. The market reacted positively following the announcement, so we believe the stock is now fairly valued.

LY Corp is Japan’s largest internet conglomerate, with the Yahoo Japan portal site, Line messenger, PayPay mobile payment, and Zozo fashion e-commerce site under its umbrella, each with the largest number of active users in Japan. LY Corp’s business portfolio was built through the aggressive mergers and acquisitions strategy implemented by former co-CEO Kentaro Kawabe. Yahoo Japan, which has a relatively older user base; Line, which has a younger user base; and Zozo, which has many young female users, have little overlap in user base, and thus we expect significant synergies in the future.

Z Holdings’ cost-cutting efforts over the past few months have paid off, as it reported the highest quarterly adjusted EBITDA of JPY 99 billion in history, 15.6% up from last year’s June quarter. During the earnings presentation, management continues to emphasize its commitment to profitability, which supports our view that while its full-year revenue guidance of JPY 1.9 trillion seems a bit ambitious given the reduction in promotional spending this year, Z Holdings is likely to generate enough cost-savings for the rest of the year to achieve its full-year adjusted EBITDA guidance of JPY 356 billion–JPY 366 billion. Therefore, we broadly maintain our fiscal-year 2023 and midterm revenue and profit projections, keeping our fair value estimate at JPY 440. We believe the shares are fairly valued currently.

Yahoo Japan, which is the portal site organized by Z Holdings, is the first and largest internet portal in Japan. We think it has benefited from Japan’s ageing population, in that many Japanese people tend to hold on to older technology and habits, including Yahoo Japan’s portal service. Yahoo Japan has a strong brand name, and SoftBank, its parent, has helped to promote its internet services together with SoftBank’s telecom services in Japan. Yahoo Japan’s Premium Membership has been promoted through SoftBank Mobile and Y Mobile retail stores, and in March 2016, the membership fee increased from JPY 380 to JPY 462 per month. The high-margin search and display advertising business has brought Z Holdings continuous net cash inflow, and the company has a solid balance sheet with JPY 438.5 billion in net cash.

Z Holdings' March-quarter results and guidance for the fiscal year ending March 2024 were somewhat disappointing, as they suggest that the negative impact of the economic slowdown will continue throughout this fiscal year, which is longer than we had anticipated. The company expects revenue growth in the advertisement business to be limited this year, dragged down by the sluggish growth in display ads, which are more susceptible to economic fluctuations. In addition, the company expects negative growth in Yahoo Shopping’s gross merchandise value this fiscal year due to a reduction in incentives as it prioritizes allocating marketing expenses to more profitable services such as Zozo and travel e-commerce. As such, while growth in its core businesses is likely to be limited, the company is focusing on (1) reducing fixed costs by JPY 30 billion this fiscal year through cost-cutting initiatives such as closing unprofitable businesses and (2) realizing synergies by accelerating the integration of Line and Yahoo. Despite lowering our 2023 forecasts, we maintain our fair value estimate of JPY 440 for Z Holdings, as our midterm outlook remains largely unchanged with these initiatives.

Yahoo Japan, which is the portal site organized by Z Holdings, is the first and largest internet portal in Japan. We think it has benefited from Japan’s ageing population, in that many Japanese people tend to hold on to older technology and habits, including Yahoo Japan’s portal service. Yahoo Japan has a strong brand name, and SoftBank, its parent, has helped to promote its internet services together with SoftBank’s telecom services in Japan. Yahoo Japan’s Premium Membership has been promoted through SoftBank Mobile and Y Mobile retail stores, and in March 2016, the membership fee increased from JPY 380 to JPY 462 per month. The high-margin search and display advertising business has brought Z Holdings continuous net cash inflow, and the company has a solid balance sheet with JPY 438.5 billion in net cash.

On Feb. 2, Z Holdings announced the merger of its main subsidiaries, Yahoo Japan and Line. Due to the economic slowdown, advertising revenue, which has been the main driver of earnings, has slowed down, posting negative year-over-year growth in the December quarter. In anticipation of continued headwinds, Z Holdings is shifting its focus to improving cost-efficiency, rather than pursuing revenue growth. In this challenging environment, we believe that the integration of these two companies makes sense, as it will enable the effective use of internal resources by aligning the overlapping businesses, and will also accelerate the decision-making process. While Yahoo Portal website, Line, and PayPay have strong ecosystems with leading market shares in their respective areas, synergies such as ID collaboration and customer transfer have not been realized over the past two years. We expect the integration to accelerate the development of new services through collaboration among these businesses. Overall, we believe the integration will be well received by the market.

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.

Yahoo Japan, which is the portal site organized by Z Holdings, is the first and largest internet portal in Japan. We think it has benefited from Japan’s ageing population, in that many Japanese people tend to hold on to older technology and habits, including Yahoo Japan’s portal service. Yahoo Japan has a strong brand name, and SoftBank, its parent, has helped to promote its internet services together with SoftBank’s telecom services in Japan. Yahoo Japan’s Premium Membership has been promoted through SoftBank Mobile and Y Mobile retail stores, and in March 2016, the membership fee increased from JPY 380 to JPY 462 per month. The high-margin search and display advertising business has brought Z Holdings continuous net cash inflow, and the company has a solid balance sheet with JPY 438.5 billion in net cash.

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.

Yahoo Japan, which is the portal site organized by Z Holdings, is the first and largest internet portal in Japan. We think it has benefited from Japan’s ageing population, in that many Japanese people tend to hold on to older technology and habits, including Yahoo Japan’s portal service. Yahoo Japan has a strong brand name, and SoftBank, its parent, has helped to promote its internet services together with SoftBank’s telecom services in Japan. Yahoo Japan’s Premium Membership has been promoted through SoftBank Mobile and Y Mobile retail stores, and in March 2016, the membership fee increased from JPY 380 to JPY 462 per month. The high-margin search and display advertising business has brought Z Holdings continuous net cash inflow, and the company has a solid balance sheet with JPY 438.5 billion in net cash.

Z Holdings reported fiscal year 2021 results that broadly met expectations and announced conservative guidance for fiscal year 2022. While we lowered Z Holdings’ fair value estimate to JPY 620 from JPY 720—after toning down our previously high revenue projections for the media and commerce segment—we still believe the stock is undervalued because investors were swayed by the conservative 2022 guidance by both Z Holdings and Zozo. Despite the weaker-than-expected revenue growth guidance, we expect Line and the Zozo business to still be strong growth drivers for Z Holdings in the coming few years, as there is still room for online advertising and e-commerce markets in Japan to grow. As a result of the Line integration, we think there are no other competitors threatening Z Holdings’ massive user base in the internet advertising business, and thus we changed the moat trend rating for Z Holdings to stable from negative.

Yahoo Japan, which is the portal site organized by Z Holdings, is the first and largest internet portal in Japan. We think it has benefited from Japan’s ageing population, in that many Japanese people tend to hold on to older technology and habits, including Yahoo Japan’s portal service. Yahoo Japan has a strong brand name, and SoftBank, its parent, has helped to promote its internet services together with SoftBank’s telecom services in Japan. Yahoo Japan’s Premium Membership has been promoted through SoftBank Mobile and Y Mobile retail stores, and in March 2016, the membership fee increased from JPY 380 to JPY 462 per month. The high-margin search and display advertising business has brought Z Holdings continuous net cash inflow, and the company has a solid balance sheet with JPY 438.5 billion in net cash.

Yahoo Japan, which is the portal site organized by Z Holdings, is the first and largest Internet portal in Japan. We think it has benefited from Japan’s ageing population, in that many Japanese people tend to hold on to older technology and habits, including Yahoo Japan’s portal service. Yahoo Japan has a strong brand name, and SoftBank, its parent, has helped to promote its Internet services together with SoftBank’s telecom services in Japan. Yahoo Japan’s Premium Membership has been promoted through SoftBank Mobile and Y Mobile retail stores, and in March 2016, the membership fee increased from JPY 380 to JPY 462 per month. The high-margin search and display advertising business has brought Z Holdings continuous net cash inflow, and the company has a solid balance sheet with JPY 438.5 billion in net cash.

We revised our earnings forecast and raised Z Holdings’ fair value estimate to JPY 720, from JPY 700 previously, after considering the better-than-expected third-quarter performance, underpinned by the positive impact of the integration with the LINE business. Z holdings reported record high quarterly revenue of JPY 409.1 billion (year on year 29.2%), and operating income of JPY 61.0 billion (year on year 38.8%). Growth in advertising revenue, in particular Line advertising, was the biggest driver in the third quarter. We believe synergies with Line will continue to be realized in the coming five years and revised upward our revenue forecast, mainly for the media segment. Z Holdings’ shares have dropped approximately 30% from its recent peak in November 2021 as the growth expectation had been too high. We now believe Z Holdings’ shares are undervalued.

Yahoo Japan, which is the portal site organized by Z Holdings, is the first and largest Internet portal in Japan. We think it has benefited from Japan’s ageing population, in that many Japanese people tend to hold on to older technology and habits, including Yahoo Japan’s portal service. Yahoo Japan has a strong brand name, and SoftBank, its parent, has helped to promote its Internet services together with SoftBank’s telecom services in Japan. Yahoo Japan’s Premium Membership has been promoted through SoftBank Mobile and Y Mobile retail stores, and in March 2016, the membership fee increased from JPY 380 to JPY 462 per month. The high-margin search and display advertising business has brought Z Holdings continuous net cash inflow, and the company has a solid balance sheet with JPY 438.5 billion in net cash.

We refreshed our earnings forecasts and raise Z Holdings’ fair value estimate to JPY 700, as we expect the synergies with the acquired Line business will be greater than we had previously expected. Z Holdings currently owns several platforms with tens of millions of domestic active users, such as Yahoo Japan (55 million monthly active IDs), Line (89 million monthly active users), and PayPay (42 million registered users), and we believe the collaboration between them will contribute to achieving higher revenue growth than before. In addition, we also expect synergies in cost reduction in the short run (the company forecasts JPY 10 billion for this fiscal year). Overall, we raised our average annual revenue growth assumption for the next five years to 12.9% from 11.5% and our operating margin forecast for fiscal 2025 (financial year ending March 2026) to 15.2% from 13.0%. As a result, our operating income forecasts for fiscal 2021 and 2025 are lifted to JPY 195 billion from JPY 170 billion, and JPY 335 billion from JPY 270 billion, respectively. Although we highly appreciate the upbeat growth momentum, we view that the market’s expectation is somewhat too high and thus Z Holdings’ shares are currently slightly overvalued.