EUR 850.00 For Business Accounts Only

Morningstar | Rakuten’s Earnings Results May Relieve the Market in the Short Run, but Concerns on MNO Remain

Rakuten’s September quarter operating income was JPY 43.9 billion, which was 15% below the previous year’s number. However, excluding the one-time factors, it was materially flat from the previous year. Weaker operating margin of domestic EC was complemented by the robust growth of the fintech segment, which is in line with our long-term view. Owing to the tough competition, operating margin of domestic EC had dropped for seven consecutive quarters until the June quarter, but it rebounded to 15.3% on from 14.6% on the previous quarter, which should somewhat relieve the market. From its recent peak, Rakuten’s share has approximately halved by June 2018, as the company intends to invest in highly competitive areas such as mobile payments and mobile network operator, or MNO, while its mainstay domestic EC business has been struggling by the margin contraction. However, we think that the September quarter numbers showed the strength of Rakuten’s ecosystem, which is the source of our narrow moat rating, encouraging the market in the short run. We retain our fair value estimate of JPY 1,080 as reported numbers are within our expectation and view Rakuten’s share price as currently fairly valued as a result of the correction over the past two weeks.

We also consider that the alliance with KDDI, which enables Rakuten to provide roaming service in rural areas, may mitigate the concern that Rakuten’s investment on MNO business is too small to compete with existing players. According to Rakuten’s plan submitted to the ministry of internal affairs and communications, Rakuten intends to invest JPY 600 billion in total for the next 10 years, while existing operators spend more than JPY 300 billion every year, and plans to prepare 27,397 base stations by March 2026, while existing operators possess more than 120,000 stations for each. Therefore, we believe that Rakuten’s plan for MNO business looks optimistic, and additional costs should be necessary.

We thus acknowledge that the alliance with KDDI contributes savings to the initial investment cost, but we are still skeptical whether Rakuten’s MNO business will succeed. While Rakuten needs to provide an attractive pricing plan to obtain users from existing operators, Rakuten’s marginal profit will be smaller because of providing the roaming service, and as a result, it may be more difficult to offer cheaper a plan to customers. In addition, NTT Docomo recently announced its intention to cut pricing by 20%-40% in 2019, and KDDI and SoftBank may follow. Overall, Rakuten’s pricing plan may look less attractive for users to decide switching from other operators.