Thinking Points

  • Fujisan Magazine Service operates an online magazine subscription service, helping over 1,200 publishers build an online presence.
  • The company is lead by Amazon Japan founder Shinichiro Nishino, who left Amazon Japan to start Fujisan.
  • Extrapolating Fujisan’s current business forward, investors can expect a 5-year investment CAGR of 4.3%, without accounting for new monetization platforms currently in the works.

Fujisan Magazine Service (TSE: 3138) operates an online magazine shop called “Fujisan.co.jp”. The company helps over 1,200 publishers build an online presence with a focus on magazine subscriptions, both in paper and online. Currently, Fujisan Magazine Service tops the Small Cap Japan Magic Formula Stocks list with a ROC of 1,421% and an Earnings Yield of 29%. Current EV/EBIT is at 3.7x, adjusted EV/EBIT is at 8.5x (more on that later).

 

How publishing works in Japan

From a western view, an online magazine shop is nothing novel. However, the same isn’t true in Japan. Most people purchase magazines at a physical book store and rarely sign up for a subscription. This is largely attributable to the way Japan’s publishing industry is structured, and the structure is changing rather quickly in recent years.

The structure itself is both simple and common:

First, here are two key points to keep in mind about publishing structure in Japan:

  • Sticky retail prices, no discount – publishers set a retail price and the price actually holds at retailers. (出版物再販売価格維持制度)
  • Consignment system – retailers get to return unsold books. (委託販売制度)

These two points are important. Essentially, this allows book stores to have a wide variety of books without worrying about inventory risk or price competition. The downside of this is the amount of returns, which amounts to 40% of all books in recent years.

As you might imagine, physical bookstore count, along with sales, has decreased over the last couple of decades in Japan.

Source: Nippan website (Japanese)

 

Magazine sales, Fujisan’s area of interest, has been hit particularly hard:

Source: Nippan website (Japanese)

 

Needless to say, the industry is in a crunch. Now here are a few other pointers that’ll give you some more context:

  • Two distributors (取次業者), Nippan (private) and Tohan (private), account for 70% of the print distribution industry.
  • Standard practice is for bookstores to deal with one distributor.
  • With the decline in print sales and bookstore count, competition has gotten fierce.
  • Cost cutting is a priority, and distributor involvement at the store level is getting deep, especially with major room for improvement in inventory returns. Major distributors are acquiring bookstore chains too.
  • Small and mid-sized distributors are going out of business left and right.

The kicker here is that Amazon Japan, which used to go through Nippan, deals directly with publishers as of mid-2017.

 

Meanwhile over at Fujisan

Speaking of Amazon Japan, Fujisan was founded by none other than Shinichiro Nishino. Yes, Shinichiro Nishino! Okay, you probably don’t know who he is, but that’s why I’m here… he’s the founder of Amazon Japan. And in case you didn’t already know, Amazon Japan also started with books. This is when Shin discovered the opportunity in magazines, quit Amazon Japan, and started Fujisan.

Subscription agencies are commonplace in the US, but still new in Japan. And Fujisan is likely the first one in Japan. The company got its start in 2002 with an idea. Today, Fujisan handles over different 13,000 print and 3,600 digital magazines.

Earlier, I mentioned most Japanese people purchase magazines at physical bookstores and rarely sign up for a subscription. Meanwhile, physical bookstores are in decline and magazine sales have been hit particularly hard. Fujisan takes these magazines to build a subscription-based service where paper copies are mailed directly to homes and online copies are accessed through PC/smartphone/tablets. In addition to this effort, Fujisan comes up with other ways to monetize the magazines, like marketing and tie ups with ecommerce.

Source: Magacommerce – golf magazine subscribers get discounts on golf equipment.

 

Fujisan’s Business Model

This is where you get some of the playfulness in what is essentially a late stage startup – the company’s strategy is a twist on Abenomics and the three arrows. Here is what Fujisan calls “The three arrows of Maganomics”:

  1. Replace the market, shift old magazine business model to a membership-based model.
  2. Strengthen Digital magazine/article sales and distribution, corner market for cloud readers, establish owned media support system.
  3. Develop a sales platform for publishers beyond online sales and advertising – ex. Magacommerce, event support, membership/fan club services.

One major point to note here is that a disproportionate amount of Fujisan’s current business still deals in paper magazines.

Now, for more clarity on how the company actually operates today, let’s review the services Fujisan offers readers and publishers.

For readers:

  1. Subscription services
    1. Readers can subscribe to magazines for one year + plans at increasingly discounted rates, or pay month-to-month.
  2. Partial sales
    1. Readers can purchase individual magazines.
  3. Digital magazine
    1. For readers that prefer not to have paper magazines, Fujisan offers digital only subscriptions. Currently digital selection is at 3,600 magazines.
  4. Bundle service
    1. Readers get both paper and digital copies of magazine.
  5. Free reading
    1. Readers have access to samples through the Fujisan Reader app.

For publishers

  1. Subscription agency service
    1. Fujisan, through its website, acts as the intermediary sales agent. The company receives subscription orders and payment from readers, then transfers order information and payment (minus commission) to publisher. Publisher figures out distribution.
  2. Full service
    1. Fujisan offers publishers everything from marketing, sales, digitization (of paper magazines), distribution, and customer management/support. Fujisan contracts out storage and distribution functions to a third party and doesn’t actually keep inventory.

 

Fujisan effectively expanded the reach of the traditional print distribution model. Instead of delivering just paper copies to physical book stores, it also delivers to homes with the digital option. In addition to individual readers, Fujisan also handles institutional clients. An example would be medical offices (magazines in waiting rooms), coffee shops, etc.

Here’s how the company has performed over the last few years:

wdt_ID(millions of JPY)2010.062011.062012.062013.062013.122014.122015.122016.122017.12
1Handling Volume¥2,954¥3,376¥3,686¥4,452¥2,394¥6,041¥6,967¥7,650¥8,373
2Sales¥796¥925¥1,065¥1,448¥804¥1,941¥2,377¥2,568¥2,919
3Operating Profit-¥54-¥15-¥46¥77¥67¥203¥313¥406¥331
4Member1,969,6892,151,4382,475,0182,756,429
5Paying Member477,147461,665540,321571,388
6Paper Magazine offerings10,25012,17412,52515,782
7Digital Magazine offerings2,5842,8883,3433,660

** Handling volume – For the subscription agency service, Fujisan logs aggregate sales to customer as handling volume. The commission on these sales are logged as revenues. Additionally, full service revenues are logged in the handling volume. The two “subsegments” have different cost structures, but no breakdown/revenue split is provided at this point.

 

Financials & Valuation

  • Handling volume has grown at an 8-year CAGR of 13.9%. 3-year CAGR of 6.3%.
  • Revenues grew at 8-year CAGR of 17.6%. 3-year CAGR of 7.1%.
  • Operating income at 4-year CAGR of 44% (didn’t generate operating profit until fiscal 2013.
  • Q2 2018 cash & equivalents at 1,914 million yen ($17.2 million USD), but cash & equivalents adjusted for payment to publisher and advance deposit of magazine subscriptions from readers comes out to about 500 million yen ($4.5 million USD).
  • Enterprise Value using adjusted cash & equivalents comes out to 2,450 million yen ($22 million USD).
  • Adjusted EV/EBIT is 8.5x. Unadjusted EV/EBIT is 3.7x.
  • FCF margin of ~10%.
  • Even after adding roughly 1,400 million yen of cash in working capital calculations, net working capital is right around 0.
  • Assuming revenue CAGR of 5%, roughly same operating margin (~8%, H1 2018), and FCF margin of ~6% adding to cash pile,  fair value should be around  1,220 yen per share in five years with comparable EV/EBIT multiple, a 5-year investment CAGR of 4.3%.
  • Increased shift to digital magazines, traction in cross-selling (magacommerce), and new article monetization platform would yield higher margins, adding directly to operating income. Key risks outlined below.

 

Key risks

  • The obvious – Amazon Japan, Rakuten, or some other player eating into magazine digitization. Currently no other company with exclusive focus on magazines.
  • Largest shareholder is Culture Entertainment, a wholly owned subsidiary of Culture Convenience Club (CCC), with 29.57% of issued shares. CCC is the franchisor of Tsutaya stores, the largest video and CD rental company in Japan. The company is private, so there isn’t a whole lot of publicly available information, but it’s probably fair to assume business is difficult. The company is taking measures to keep the physical retail model relevant, however, it’s hard to tell how well that’s working with CCC being private. On the other hand, CCC maintains arguably Japan’s largest point card system “T-point”. Additionally, the company has been on a shopping spree for bookstores and publishers (Japanese). The risk here mainly revolves around CCC’s financial health and whether it’ll be pushed into unloading its shares. Frankly, there’s no telling how well CCC is doing.
  • Full service business relies near-exclusively on one distribution company (Newbook) for warehousing and delivery.
  • In an attempt to mitigate risk, Fujisan uses another distributor, Osaka-ya, for deliveries on magazines already contracted with Osaka-ya (through publisher). Osaka-ya accounted for 37.8% of sales in fiscal 2017. Osaka-ya is the #3 distributor which has been under distress (Japanese).  Merged with #4 Kurita, which was on the verge of bankruptcy pre-merger (2016). Moreover, Rakuten increased its ownership stake in Osaka-ya from 35.19% to 51% in May 2018 (Japanese). So there’s a bit of double risk concerning uncertain financial health and change in business direction. This isn’t particularly surprising, however, with the rapid pace of industry consolidation.
  • Increase in logistics costs pressuring margins – just about every logistics company raising prices in Japan. Logistics accounted for 35.5% of CoGS in H2 2017, 40.8% in H2 2018.

The bottom line

Fujisan Magazine Service discovered a niche opportunity in the publishing industry, successfully building a functioning, recurring, and profitable business model in magazine sales. The company was founded by Amazon Japan founder Shinichiro Nishino, who continues to lead the company with a personal stake amounting to 24.31% of issued shares. Extrapolating Fujisan’s current business forward, investors can expect a 5-year investment CAGR of 4.3%.

Author: Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.