Japan Idea Radar #2
Takeout targets, Midcaps, Defense and hidden AI plays
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It’s been a minute since I did one of these. While Made in Japan will mostly focus on deeper insights into specific companies, To accelerate idea generation for investors, I’ll continue to occasionally provide watchlist names that could be of interest. Generally, I have a growing list of names which business models I like, but are on the watchlist due to either a) Valuation b) simply have not had the time to do deeper research. There are simply too many interesting opportunities. To be precise, I own small tracking positions for some of these (disclosed at the end)- and I may end up doing a more extensive write-up on them some time.
Had a blast writing this. In this list, you’ll be able to find a variety of what I think are uncorrelated opportunities, Many of them are of decent size including some mid-cap ideas (finally), an AI play, a Defense play, and a potential takeover target. That’s right… I don’t only look at software. lol.
Reading time: 22 minutes - basically every idea became something of a one pager.
Alright here we go…
M-UP (Ticker: 3661)
Finding religion as a business model
Mcap: ¥68b ($470mn USD)
P/E: 26.5x
EV/EBITDA: 12.5x
ROIC: 35.9%
3-Year EBIT CAGR: 34.4%
Ok to be clear, this business has nothing to do with actual religion, but something that’s close to one.
One thing about Japanese Fandom, whether musicians, actors, athletes or anything - we have some of the most dedicated fans in the world. So much so that I once heard a music executive say that this type of fan endorsement is almost like a ‘Religion’. This reminded me of the story of when Buffett was asked if he could buy any business in the world, and he said: “The Vatican”.
The business model is fantastic as it’s a combination of ticket commissions, but also subscription sales. It’s main value proposition sums up to improving fan engagement for artists thereby helping Artists establish themselves as ‘businesses’. M-ups main Content segment operates Fan Sites on behalf of major artists in Japan, providing exlusive access to content, product and events for dedicated fans. These are ‘micro’ subscriptions of ~¥500 i.e. a recurring revenue model which provides the company with a steady revenue stream. They lead the market with more than 3 million fans subscribed through their services today. For artists it serves as a touchpoint with fans and a valuable monetisation opportunity. Many are die hard fans and it’s unlikely that they will unsubscribe if the economy gets tougher i.e. it's pretty recession proof. In fact, they have recently raised subscription prices without much trouble. Apparently annual churn is 0.5%, and M-up does not have to spend anything on marketing as subscribers find out about the service directly through the artists.
This type of solution matters because previously large record labels would have their infrastructure to market artists. However the issue has been that the structure highly favored the labels. With the advent of the internet and social media, M-up’s solution aims to help artists reap more of the benefits for themselves. Marketing as a value prop from record labels have diminished.
As an extention to fansites, they also have an e-commerce arm which sells merchandise from these artists.
In theory at least there is significant more room to keep growing, major artists can bring in more than 100k fans to subscribe - which can be highly accretive to the m-ups revenue. The more scale the business gets, the more extensive M-ups value proposition to artists become and consequently, this should attract more artists to consider m-up as a valuable monetisation channel. Furthermore, as I mentioned earlier, M-up has been able to succesfully raise prices for subscription fees without much of a hassle and should enjoy further margin expansion. For dedicated fans a ¥100 bump in subscription may not be much. Whilst margins are decently high, (Group OP margin is 15% and Gross margin 30%) there is further potential to expand margin from operating leverage and a positive mix shift to high margin services.
The second potential tailwind is going to be in relation to overseas fans. Whilst Japanese artist has not gotten much exposure globally in comparison to major Korean Artists, there is an increasing following for Japanese artists too. In doing so this could provide some foreign monetistion opportunties too! M-Up has been setting a up a Chinese fan club site, which in relation to the market size could be large!
Furthermore, they have an electronic e-ticketing business called Tixplus. I guess you can think of it more like a Live Nation LYV 0.00%↑ type business. E-ticketing is interesting because (as with anything in Japan) we’re pretty behind on digitalisation. For one you may be surprised to hear that the ticketing market in Japan is dominated by the convenience store chains which represented 90%+ of ticketing volume. It’s a valuable way to bring customers to their stores making it difficult to digitalise the industry. However with artists directly becoming clients of M-Up it becomes easier to manage ticketing on their behalf. Only ~15% of ticketing for musical concerts issued is done digitally. To be clear, M-up still has to work with convenience stores as an option to issue physical tickets too. This is actually not even the best part of their business as they only earn a small portion as commission (they only earn ¥100 per issuance).
What’s exciting is that M-up has been scaling it’s secondary ticketing marketplace. This is growing quickly and the commission it earns versus primary ticketing is much higher. Apparently multiples higher and m-up takes from both the buyer and seller so this is their main focus. There is also an inherent network effect as you need both buyers and sellers to come to your platform. M-Up has the advantage of also having direct access to artists. This market is also relatively new. As the incumbent, it’s establishing itself as a trusted brand for trading legit tickets. It was only in 2019 that the government deicded that we needed a legal secondary market. (I know… JAPAN). So there’s a huge runway for growth. Having acquired a large competitor in 2019 they are now the dominant player. M-up believes secondary market could be around 10mn tickets (4mn for concerts 6mn for sports) if assume 10% of tickets issued end up in the secondary market. Yet so far only 330k tickets have been traded through M-up, in other words, there can be many, many more tickets sold here.
Anyhow this busness is growing fast (~30%) and with operating margins at 30%. (remember, group Op margin is just 15%) so the increasing mix of this business should also be margin accretive to the overall biz. Also remember that this business is still arguably sub-scale so the ticketing biz itself has potential margin expansion from 30%!
Overall the stock has gone up quite abit due to strong ticket sales and new artist signings which brought in new fan subscribers - so valuation wise this may not look as cheap today. But if you’re willing to bet that they can sustain their 20%+ EBIT growth for some years it may look cheaper in the outer years.
So big picture, as M-up expands its service portfolio for Artists this becomes an invaluable one-stop solution for them to be able to monetise their career in a more fair way. Right now the valuation is what’s stopped me from pulling the trigger but given the growth profile if you believe earnings can compound, given the massive market, I am sure there’ll be an opportune moment.