Thinking Points

  • Ekitan (TSE: 3646) is one of the major companies offering public transportation transfer guide services to both consumers and corporate clients.
  • The company got its start as a Toshiba corporate venture, then quickly expanded when its services were adopted as official contents for all the major mobile network companies.
  • More recently, the company started focusing more on travel related and mobility-as-a-service offerings, but hasn’t provided much in terms of clarity in plans.
  • At 578 yen per share, Ekitan trades at adjusted 1.2x EV/EBIT with a market capitalization of 3,139 million yen ($28.7 million USD).
  • Investors can expect an investment CAGR of approximately ~6.0%, inclusive of dividends, over the next three years.

Introduction

Ekitan (TSE: 3646) mainly operates consumer oriented online public transportation transfer guide “Ekitan” and corporate services offering Ekitan’s data. The company is organized into two segments: Consumer and Corporate.

Source: Kenkyo Investing, based on company data

Perhaps the most interesting characteristic of Ekitan is that it is one of the few early and successful attempts of a large mainstay Japanese organization venturing out to the internet business. The company was originally set up as a Toshiba (TSE: 6502) corporate venture in 1997.

The business & environment

Ekitan’s predecessor was founded in 1997 within Toshiba as a corporate venture. Its first major success came about when Ekitan’s public transportation transfer guide was adopted as one of the first official content for NTT Docomo (TSE: 9437), Japan’s largest mobile network provider, in 1999. Soon after, the company onboarded the #2 and #3 mobile network operators,  KDDI (TSE: 9433) and Softbank (TSE: 9984), and Ekitan continues to offer official content for all three major mobile network providers.

In 2003, Ekitan was set up as Toshiba’s consolidated subsidiary. In 2005, Toshiba solidified its plans to focus on digital devices, semiconductors, and nuclear energy businesses. And in 2007, Ekitan joined forces with Polaris Capital Group and moved forward with an MBO. 

The change in ownership structure didn’t seem to affect the company’s operations, and Ekitan was quick to move into smartphone applications, releasing Ekitan Express for the iPhone in July 2008, one year after the iPhone’s release. 

Essentially, the app is best described as a more in-depth version of Google Maps’ direction functions. Ekitan maintains a database of timetables for trains, airplanes, and buses. Users can enter the entraining and exit stations, and Ekitan makes recommendations on transfers. Basic functions are made available for free and include advertisements while more in-depth functions require a paid membership fee of about $3 per month.

Since about 2014, the company added travel offerings, packaging train tickets and hotel reservations together. More recently, the transfer recommendation functions appear to generally be free for consumers while the company offers travel plans and places advertisements within the app and website.

The paid membership plan also leans toward travelling now, availing discounts to restaurants, tourist attractions, fitness centers, etc to members rather than offering in-depth transfer recommendations. For corporate services, the company offers a variety of services including making Ekitan’s transfer recommendation services available for corporate reuse (i.e., customer building the transfer recommendation function into their own website), business travel booking and settlement services, transportation service/delay status data services, etc.

Source: Kenkyo Investing, based on company data

What’s particularly interesting about Ekitan’s core transfer recommendation service functionality is that its use case is generally limited to highly urbanized metropolitan areas. This is because public transportation in less urban areas generally don’t have anywhere near the complexities compared to places like Tokyo or Osaka. In a 2007 interview with CNET Japan (Japanese), CEO Taro Nakamura commented on this, mentioning that the transfer recommendation service is limited to Tokyo metro (at the time), and that he hoped to expand into other major metro areas in Japan.

In terms of industry environment, Ekitan isn’t alone in offering transfer recommendations or travel related services. Just about any major mapping service (like Google or Yahoo! Japan) have built-in functionality for transfers that have been continuously improving over time. Moreover, NAVITIME (private), Val Corporation (private), and Jorudan (TSE: 3710) are formidable competitors with similar services. 

The biggest risk for the company is the loss of the NTT Docomo contract, which generally accounts for more than 50% of company revenues (45.5% of revenues in FY03/19). Interestingly, non-Docomo revenues grew from 1,265 million yen ($11.5 million USD) in FY03/18 to 1,655 million yen ($15.1 million USD) in FY03/19, a 30.8% YoY increase. Meanwhile, operating profit has decreased recently:

Source: Kenkyo Investing, based on company data

In its medium term management plan (ending FY03/24), the company aims to grow revenues to 6,000 million yen ($54.8 million USD) and operating profit to 600 million yen ($5.5 million USD) through M&A, mobility-as-a-service related growth, and new business. The company expects revenue to grow and operating profit to decline into FY03/21, but for revenues and operating profits to grow through FY03/24 after. 

While the company has made a couple acquisitions – one business travel company in 2017 and Japan’s biggest travel guidebook company in 2019 – there aren’t any concrete plans presented as far as mobility-as-a-service goes.

For FY03/20, Ekitan expects revenues of 3,264 million yen ($29.8 million USD, +7.5% YoY) and operating profit of 329 million yen ($3.0 million USD, -31.5% YoY). As of Q2 FY03/20, the company delivered revenues of 1,457 million yen ($13.3 million USD, -2.1% YoY) and operating profit of 214 million yen ($2.0 million USD, -18.1% YoY).

Shareholders

As of Q2 FY03/20 (ending September 30, 2019), Ekitan had 6,888,800 shares issued and 1,410,716 shares in treasury, putting outstanding shares at 5,478,084.

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data

CE Holdings (TSE: 4320) is an electronic medical record systems company that came into the picture in 2012, when Ekitan formed a business partnership with CE Holdings, and Polaris Capital Group sold its shares to CE Holdings. Ever since, CE Holdings has been the leading shareholder.

Increment P is a map content and location services company that mainly provides software for car navigation systems. More specifically, Increment P is a subsidiary of Pioneer Corporation. Given Pioneer Corporation’s close call with bankruptcy, there is a chance that Increment P may become a forced seller down the line. 

It’s unclear who Nobuo Kanbara actually is, but he held 736,200 shares as of March 2019, and has been selling off recently.

The company has 93,600 shares worth of unexercised stock options outstanding, but offers no management equity compensation plans.

Financials & Valuation

  • Ekitan is one of the major companies offering public transportation transfer guide services to both consumers and corporate clients.
  • The company got its start as a Toshiba corporate venture, then quickly expanded when its services were adopted as official contents for all the major mobile network companies.
  • More recently, the company started focusing more on travel related and mobility-as-a-service offerings, but hasn’t provided much in terms of clarity in plans.
  • At 578 yen per share, Ekitan trades at adjusted 1.2x EV/EBIT with a market capitalization of 3,139 million yen ($28.7 million USD).
  • Investors can expect an investment CAGR of approximately ~6.0%, inclusive of dividends, over the next three years.

Ekitan is one of the major public transportation transfer guide companies in Japan. The company emerged as one of the early successful corporate IT ventures, originally backed by Toshiba Corporation. 

The biggest risk and benefit of Ekitan is its exposure to NTT Docomo, the largest mobile network company in Japan. In fact, Ekitan has been an official content provider for all three of Japan’s major mobile network companies since the early 2000s, and the contracts continue today. NTT Docomo specifically has accounted for over half of company revenues for much of the last decade.

Despite guiding for a 7.5% growth in revenues for FY03/20, Ekitan has delivered -2.1% as of Q2 FY03/20. While the company does not disclose revenue by customer in its quarterly filings, there is a possibility that NTT Docomo revenues are continuing to decline while non-Docomo revenues are growing as it did in FY03/19.

Nevertheless, Ekitan’s medium term management plan does not disclose enough concrete information for investors to adequately gauge performance of the operating business. Given this fact, and the increasingly competitive industry environment, it’s fair to say that Ekitan currently operates a medium quality business, but is pressured to continually improve its existing business while developing new businesses.

At 578 yen per share, Ekitan trades at 1.7x EV/EBIT with a market capitalization of 3,139 million yen ($28.7 million USD). Adjusted for long-term investment security holdings, the company trades for 1.2x EV/EBIT.

The first thing to note for Ekitan is the inherent unpredictability of its operating business’ health over the next decade or so. The company has meaningfully transitioned from offering transfer guides to mixing in travel packages with the transfer guides in recent years. It’s safe to assume Ekitan would need to continue adding services in order to remain profitable as larger companies like Google and Yahoo! Japan offer increasingly in-depth services at no cost to the consumer.

Given the lack of clarity in the medium term management plan, small scale of Ekitan’s business, and the increasingly competitive industry environment, a 2x EV/EBIT multiple is about appropriate. Taking into account the company’s expected decline in operating profit, investors can expect approximately ~6.0% in investment CAGR, inclusive of dividends, over the next three years.

The bottom line

Ekitan is one of the major online public transportation transfer guide companies in Japan. The company is one of the earliest examples of a successful corporate IT venture, backed by Toshiba Corporation in the beginning. Today, the company remains healthy and profitable, but faces formidable threats. While management provides financial targets, its disclosed plans do not offer enough clarity for investors to gauge performance. At 578 yen per share, investors can expect an investment CAGR of approximately ~6.0%, inclusive of dividends, over the next three years.


Kenkyo Investing
Kenkyo Investing

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