Seibu Holdings (9024.T) Inventory Evaluation

1. Government Abstract

Seibu Holdings is a Japanese resort, railway, leisure actions, and actual property conglomerate. It operates 167km of railway and 83 resorts, most of that are in Japan. It additionally owns a complete of 474 km2 of land, most of which is underutilized and undervalued.

The group suffered throughout the COVID pandemic, reaching an all-time low in January 2021. It additionally needed to promote a few of its resorts in early 2022 to stave off a liquidity disaster. Consequently, the group is buying and selling at a low valuation, assuming little to no progress.

This valuation ignores the truth that Japan is now reopening and coming again to regular. Even the inbound vacationer numbers of January 2023, up x83 year-to-year, are nonetheless a lot beneath the 2019 ranges. So Seibu’s outcomes must be coming again to a extra regular stage, according to its historic performances.

As well as, the Japanese tourism sector is boosted by the short-term development of the weak yen and the long-term development of Japanese tradition’s rising recognition with youthful (and even not-so-young anymore) generations.

Seibu’s stability sheet is satisfactory, even when the group would possibly have to roll over some short-term debt to remain liquid sufficient in 2023.

In the long term, Seibu’s giant land holdings are in all probability the place a lot of the group’s complete worth is locked. Even very conservative estimates point out these lands could possibly be value as a lot as your entire present market cap and possibly a number of instances extra.

Seibu shall be most becoming for traders with a really long-term focus, prepared to commerce off liquidity for larger long-term returns.

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2. Prolonged Abstract: Why Seibu Holdings?

The Nice Reopening of Japan

Japan is reopening after 2 years of harsh covid insurance policies, and the yen is weakening quickly. It’s its tourism sector that’s the more than likely to profit from these modifications. In the long run, tourism is prone to be a progress business for Japan, carried by its rising cultural attain and affect.

Seibu Holdings

Seibu is energetic in resorts, leisure, railroad, and actual property. It affords diversified publicity to the tourism and leisure business in Japan, together with sports activities venues, resorts, golf, snowboarding, and others.

Seibu’s Technique

The Seibu resort phase shouldn’t be the middle of revenue for the group however the entry level within the gross sales funnel for its leisure, retail, and transport companies. Clients are then incentivized to come back again via premium membership and some extent system. Additionally it is sitting on a whole bunch of sq. kilometers of worthwhile land, which it’s promoting or growing very slowly to maximise its income.

Financials

Seibu has a comparatively weak stability sheet, even when not alarming. It’d have to roll over some short-term debt, whereas the group is getting again within the inexperienced all through 2023. Its valuation is low in comparison with its friends, much more so when considering undervalued property like its undeveloped actual property property.

Conclusion

Seibu is greatest fitted for traders who’re prepared to attend for the group’s property to appreciate their worth absolutely, and for the tourism exercise to choose again as much as 2019 ranges. Within the meantime, it would additionally present a modest dividend yield.

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3. The Nice Reopening of Japan

A Lengthy-Awaited Return to Regular

Lots of consideration has been given to Chinese language lockdowns, which had been particularly harsh, even by Asian requirements. However different international locations within the area had strict Covid-19 insurance policies as nicely, together with the world’s third largest economic system, Japan.

Japan relaxed its COVID restrictions a lot later than the US or Europe. It reopened for tourism solely final October, with restrictions and the scar of the pandemic slowing the reboot of the tourism business. As new titles lined it in October: “Japan reopens to vacationers with shuttered memento retailers, resort workers scarcity“.

Masks-wearing remains to be very current, and you could present vaccination and a unfavourable check to enter the nation. However that is lastly altering, with a brand new relaxed border protocol deliberate for Might 8, 2023, that ought to cancel most entry restrictions. Total, issues are shifting in a extra liberal route, even when it would seemingly slowly take all of 2023 to get again to a extra regular scenario.

This can be a slightly huge deal. Within the final 10 years, Japan has develop into a tourism powerhouse, greater than quadrupling its complete of worldwide vacationers.

The final numbers for January are very encouraging, with 1,5 million abroad guests, or an 8,327.9％ year-to-year improve. This may nonetheless fall in need of 2019, with greater than 30 million for the 12 months, however that is the primary information level indicating that the business is out of the disaster part.

Foreign money’s Brutal Strikes Boosting Tourism

Japan’s economic system has tremendously suffered from COVID, however there has additionally been a major influence from the battle in Ukraine. Japan is extremely depending on power imports; particularly gasoline and oil, because it shut down its nuclear powerplant post-Fukushima. So the brewing power disaster and exploding LNG costs severely affected the nation’s commerce stability.

The conjunction of the financial disaster, rising power import prices, and a robust greenback have all contributed to the weakening of the Japanese Yen. The height was when the nation was nonetheless locked away from the surface world, however the yen remains to be but to get better.

A declining foreign money has advanced results, however total, it favorises the tourism sector and most exporters. It’s because a lot of the prices are in native foreign money (actual property, meals suppliers, staff), whereas the vacationers understand the worth within the now extra worthwhile international foreign money.

In order that journey to Japan that somebody needed to wait and postpone for 3 years? It simply bought 30% cheaper relating to meals, resorts, parks, sights, spectacle, transport, companies, and so on.

Japan as a Cultural Superpower

I additionally assume the attractiveness of Japan is at an all-time excessive and nonetheless rising. The nation has slowly developed right into a tender energy big, efficiently exporting its cultural merchandise and picture overseas.

That is one thing which may not translate into conventional tender energy, like diplomatic affect or an elevated position in worldwide establishments. Nevertheless it undoubtedly has a huge effect on Japan’s picture and the nation’s attractiveness to vacationers.

In keeping with the Duolingo Language Report 2021, Japanese has develop into the fifth most chosen language on this planet, surpassing Italian, and is the fastest-growing language in the USA and the UK.

With Japanese it’s completely different. The curiosity within the language shouldn’t be a lot pushed by Japan’s financial attraction as by its cultural capital.

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Contemplating how exhausting to be taught the Japanese language is, it’s extremely vital to see it rating above one other world-class vacationer vacation spot, Italy.

Comfortable energy and cultural affect is one thing a bit exhausting to quantify, however I feel a couple of landmarks have been achieved in the previous couple of years.

For instance:

• Since 2018, mangas are outselling superhero comics within the USA.
• The Tremendous Mario Bros. Film scored an astonished 96% optimistic with the general public, making it the most well-liked online game adaption ever (and a low 56% from skilled critics…).
• Different IP from Japan have develop into much more mainstream, with Netflix on the forefront to show them into bigger franchises:
• Japanese tradition is widespread manner past manga and videogames, even when “otakus” (manga and anime diehard followers) are by far the loudest group:
  • Japanese meals, from sushi, teriyaki, and miso soup to ramen, is beloved worldwide.
  • Japan has an unequaled status for being a particularly secure, cultured, and clear nation. And the picture of Japanese soccer followers cleansing the stadium after the World Cup matches can solely assist.
  • The federal government is actively selling Japan overseas utilizing these strong bases, notably via the “Cool Japan” program.
  • Japanese wealthy historical past and tradition are widespread, from geothermal sizzling baths, tea ceremonies, and Zen philosophy to the samurai esthetic.

This affect will solely develop with time, as new generations raised on Nintendo consoles, studying manga, and hanging out with buddies consuming sushi shall be extra prone to put Japan on their tourism guidelines.

This attractivity shouldn’t be restricted to Westerners. In 2019, Japan was probably the most visited vacation spot by Chinese language vacationers. With the remainder of Asia getting richer, Japan can capitalize on attracting extra vacationers, introduced by a status for high-quality infrastructure, companies, meals, and so on.

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4. Seibu Holdings

A Lengthy Historical past

When potential beneficiaries of returning tourism to Japan, I had a couple of standards:

• Massive asset base, decreasing the chance of a particular area or exercise turning out to be much less widespread than anticipated.
• Diversified, with a purpose to money in on a number of spending from the identical vacationers with a number of classes of the group property and to supply synergy between completely different actions, like having widespread HR, software program, centralized buying division for meals, furnishings, and so on…
• Low cost, as I wished the rebound of tourism to not be priced in but.

As there aren’t that many giant tourism teams with a slim deal with Japan, the selection was slightly easy. And as you will notice within the subsequent chapter, the corporate’s present worth doesn’t worth within the chance of a rebound in revenues and earnings.

The corporate would endure throughout the Japanese financial crash, culminating in a company scandal in 2004 and its delisting from the Tokyo Inventory Change.

The group would restructure, largely centered on hospitality and transport, and restore its status, and was re-listed in 2014.

A Multifaceted Hospitality Enterprise

The holding is managed with 6 completely different enterprise traces:

Transport: Practice traces and buses. There are 5.5 million residents within the neighborhood of Seibu traces and 1.4 million passengers day by day on its 176 km of railways. It ought to generate 158 billion yen in 2022 ($1.2B), on the best way again to 2019 ranges (¥160B).

Keep & Journey: 50 resorts in Japan, together with connected sizzling springs, spas, golf programs, and ski slopes. It additionally contains one other 33 resorts abroad, in Hawaii, China, Taiwan, the UK, and Australia. This quantities to a complete of 24,366 resort rooms. The long-term goal of Seibu Holdings is to extend this quantity to 250 over time. The phase was anticipated to return to a modest working revenue in 2022.

Store & Eat: This phase teams collectively resort eating places, retailers in practice stations, a touring restaurant practice, and the Karuizawa Mall of 240 retailers.

Amusement: This phase contains a number of amenities:

• A extremely aggressive baseball workforce (the Saitama Seibu Lions), the Belluna Dome stadium (31,552 seats), Yokohama Area (10,560 seats), and a live performance corridor. And a pair of giant ice rings and ice exhibits.
• 5 aquariums, 2 amusement parks + aquarium, and three swimming pools, together with the biggest within the Tokyo Metropolitan space.
• An amphibious bus, a tourism boat on Lake Biwa, and a couple of ropeways/gondola lifts.

The amusement class’s affords may also be mixed with resort stays or be a part of marriage ceremony ceremonies or different occasions.

Sports activities: 28 golf programs, 10 ski resorts, in addition to tennis courts, bowling alleys, and health golf equipment.

“Comfy life“: A really various phase, largely centered on actual property: particular person houses, trip houses, and a couple of high-end apartment & city improvement. But in addition places of work, insurance coverage, pet care, daycare, a faculty, housekeeping companies, and even cemeteries!

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5. Seibu’s Technique

What Issues in These Belongings?

One of the simplest ways to get a greater understanding of such a posh holding construction is to have a look at 2019 numbers.

Many of the ¥590B in revenues got here from development & actual property (37%), adopted by resorts & leisure (35%) and transport (27%).

When working revenue, transport got here first (46%), adopted by development & actual property (42%) and resorts & leisure (12%).

The actual property group contains earnings from each developed and undeveloped properties.

It isn’t very clear from the corporate’s displays if a number of the resorts “below administration” by the actual property phase don’t see a few of their revenue transferred to that division. It’s thus attainable that resort profitability is barely underestimated.

The overall land floor owned is 474 sq. kilometers (183 sq. miles). A small portion is repeatedly bought or developed. This represents a big untapped potential in Seibu’s valuation, however it’s troublesome to worth exactly. The common land worth in Tokyo district was ¥1.1M/m2. That will carry the 474 km2 to an absurd worth of ¥520T.

After all, this was common, together with downtown Tokyo and I feel contemplating a a lot decrease worth for this land would make extra sense. Possibly as little as 1-5 trillion yen. However this might nonetheless be a big margin above a market cap of ¥467B.

So land is unquestionably a hidden asset of Seibu, even when extremely illiquid and exhausting to worth exactly.

The Position of Accommodations in Seibu Holdings

So whereas resorts symbolize a big a part of income, revenue is extra pushed by transport and actual property. I might not, nevertheless, see the resort & leisure phase as essentially much less fascinating, because of the volatility of its income.

This performed negatively throughout the pandemic however can also be the one more than likely o profit from 3 years of pent-up demand.

Most notably, Chinese language households famously accrued collectively $2.6 trillion in extra financial savings in 2022. To this point, they’re largely spending on eating places, film tickets, journey, and luxurious items. We will anticipate Japanese shoppers and Asian shoppers, basically, to be in the identical scenario of planning long-postponed holidays and making an attempt to get pleasure from life.

Whereas the resort exercise will seemingly increase, I anticipate the leisure half will do even higher. This further finances may be spent on higher resort rooms or longer keep, however more likely shall be spent on experiences. And this could increase all of Seibu’s segments, not solely golf and aquaparks, but in addition eating places, malls, and practice tickets.

A Full Leisure and Tourism Ecosystem

As well as, each yen spent within the Seibu ecosystem offers the client extra factors. This can be a nice characteristic to have, with Asian shoppers being well-known for being fanatics about level amassing.

The factors are additionally legitimate for five years, an excellent timeframe for recurring shoppers to have a look at the right way to use the factors from one keep to the following. It additionally helps assure a base variety of Japanese clients already amassing factors from the common commute, day leisure exercise, or buy at Seibu’s malls.

Dangers

The Seibu group has strong probabilities of rising revenues from Japan reopening. There are, however, a couple of dangers that would endanger this restoration.

Business Actual Property

So we must always anticipate a number of the actual property revenue to say no barely within the subsequent few years, even when places of work are only a small portion of an actual property portfolio dominated by residential and retail house.

It may additionally decelerate land improvement, and workplace challenge may be canceled.

Geopolitics

The connection between China and Japan shouldn’t be all the time one of the best and will degrade rather a lot additional in case of rising tensions round Taiwan and the South China Sea. This might damage the stream of Chinese language vacationers to Japan, neutralizing the post-covid increase results.

Liquidity

Liquidity is all the time a difficulty when coping with asset-heavy firms like actual property, resorts, and railways. It doesn’t absolutely matter if property are manner above liabilities if money to fund day by day operations runs out. The choice is then to promote some illiquid property or increase extra debt.

And that is precisely what occurred to Seibu Holdings with COVID. In early 2022, it bought $1.3B value of resorts – a 3rd of its complete portfolio – to the Singapore sovereign wealth fund GIC. Or a 3rd of the overall portfolio. If measured in Yen, this deal turned out higher than anticipated, because it befell simply earlier than the huge devaluation of the yen.

Seibu is predicted to maintain managing the resorts, however will solely function them as an alternative of proudly owning the bodily construction. This could not damage the group’s synergy and cross-profit, whereas it offered it with a much-needed infusion of money to go over the COVID disaster and restart enlargement.

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6. Financials

The Pandemic Impression

2021 was a tough 12 months for Seibu, though not as unhealthy as 2020 when Japan got here to a standstill. It barely managed to get again to optimistic web revenue, largely out of land gross sales.

Optimistic 2022 Forecasts

By every phase, we will have a extra detailed image of the restoration. Seibu Holdings provide wonderful high quality monetary reporting, one thing typically uncommon with a Japanese company.

Total, income are again, however nonetheless at the very least half of what they had been pre-pandemic. This can be a truth to bear in mind when discussing Seibu’s valuation in comparison with its present earnings and money flows.

Seibu Annual Report 2022

Steadiness Sheet & Money Circulation

On the finish of 2022, Seibu had ¥89B in present property, versus ¥284B in present liabilities (of which ¥89B in present borrowing).

Whole property stand at ¥1.58T, versus complete liabilities of ¥1.1T.

This appears worrying at first look however is a priority provided that Seibu is unable to refinance its debt. This may largely rely upon Seibu’s long-term credibility and skill to return to revenue.

Working actions offered a optimistic web money stream of ¥30.5B. Within the final quarter, reimbursement of debt did price ¥60B.

Total, Seibu’s monetary scenario could possibly be described as slightly tense however not alarming. The corporate ought to be capable of safe extra short-term funding if the necessity arises, particularly with Japan’s reopening, tremendously decreasing the chance on such loans.

Valuation

The corporate is buying and selling at a P/E of 4.8 and a price-to-sales ratio of 1.12. Total, Seibu is affordable, and its valuation doesn’t worth any enchancment from additional re-opening and tourism progress.

It may be mentioned that the not-so-perfect stability sheet justifies a reduction. However it is a far cry from worldwide resorts group valuation, for instance, InterContinental Accommodations Group PLC (IHG) buying and selling at a P/E of 32 and a price-to-sales ratio of 2.9.

It appears truthful to say that Seibu’s valuation is low for its property, model, or financials.

A doubling of those ratios would nonetheless hold valuing Seibu at a typical Japanese low cost, and again to the decrease vary of its historic common of a P/E between 11.5 to 21.5.

A revaluation of Seibu is a definite chance however would possibly take on the very least a couple of months, probably a number of years. So traders on this inventory should be very affected person. And doubtless be happy within the meantime with the present dividend of 2.8%.

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7. Conclusion

Seibu is an easy investing thought counting on a particular occasion, the re-opening of Japan after the covid pandemic. Whereas that is considerably of a given, the dimensions and timing of this reopening, in addition to its penalties for the tourism sector, are exhausting to foretell absolutely. One other occasion of unsure period, the weakening of the Yen, may additionally contribute to a Seibu Holdings turnaround.

What’s extra sure is that Seibu Holdings is prone to have handed the important hazard zone of low liquidity in the midst of the pandemic. Returning profitability and pent-up demand ought to carry the corporate again into optimistic money stream territory and overcome most short-term dangers.

From a long-term perspective, Japan’s tourism sector is poised for long-term progress, supported by the nation’s cultural clout and high-quality tourism business. With its diversified provide of tourism companies, leisure sights, infrastructure, and retail, Seibu is well-positioned to capitalize on this progress.

Its actual property property within the Tokyo area can also be seemingly to supply a gradual earnings within the subsequent decade, prone to the extent of the present complete market cap or possibly much more.

From that perspective, Seibu’s entire property are unlikely ever to be bought at a firesale valuation, as one other higher capitalized actual property group or fund would wish to purchase these property and outbid different events. As proven by the latest sale of a number of resorts, the present valuation is as little as it will get for potential acquirers.

Ultimately, Seibu might be greatest for a really inactive kind of investor, prepared to attend for wherever between 3 to fifteen years for the group to develop and its asset’s full worth to come back into play and be accounted for accordingly by the markets.