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Morningstar | Preceding Cost Is Likely to Drag Down the Margin in the Short Run; Cut Yahoo Japan’s FVE to JPY 360. See Updated Analyst Note from 05 Feb 2019

We revise Yahoo Japan’s fair value estimate to JPY 360 from JPY 400, as we consider that its operating margin will be lower than we had anticipated because of the increasing costs. Yahoo Japan intends to provide a comprehensive marketing solution to merchandisers in the longer term by integrating its advertisement, e-commerce, and mobile payment businesses, but the related cost seems to be much larger than our original forecast, and as a result, Yahoo Japan’s operating margin will remain flat throughout our five-year forecast period. Meanwhile, Yahoo Japan’s operating income has been declining for three consecutive years because of the increasing costs and worsening product mix, and thus, we consider that management’s commitment to maintain at least JPY 140 billion of operating income for the next five years encouraged the market. In fact, Yahoo Japan’s share price jumped 9% on the following day of earnings briefing, and we currently view its shares as fairly valued.

Yahoo Japan’s December quarter revenue increased 5% from the previous year, but on the other hand, its operating margin dropped to 15% from 23% because of the increasing costs, such as personnel costs, business commissions, marketing fees, and depreciation expenses. However, we are not too concerned about the margin contraction for the time being, as business KPIs, such as e-commerce transaction value, number of active browsing users, and number of Yahoo Premium Memberships are all steadily growing. We acknowledge that Yahoo Japan is heavily investing to expand its userbase and to establish a one-stop solution from advertisement to shopping activities, which the company intends to monetize later by providing an integrated marketing solution mentioned above.

While providing a mobile payment service is critical to the one-stop solution, it is currently exposed to intense competition in the domestic market. However, as a result of the JPY 10 billion giveaway campaign in last December, Yahoo Japan’s mobile payment service, PayPay, has become one of the most popular mobile payment services in the industry, in our view (Line Pay and Rakuten Pay are major competitors). Currently, there are more than 20 mobile payment services in Japan, but we believe that PayPay is likely to be one of the top providers, as it is owned by Yahoo Japan and Softbank, and thus PayPay can leverage the resources of the entire Softbank Group, including Softbank Mobile, Alibaba, Paytm, and Yahoo Japan.