Thinking Points

  • Billing System (TSE: 3623) develops and sells billing-related software and systems as a service, mainly to financial institutions.
  • The company’s core operations are its Quick Deposit and Bill Collection business lines, but it proactively experiments with new business lines.
  • Recently, the NFC Card Reader business — one of its new business lines — came to a hard stop, significantly deteriorating FY12/19 results.
  • At 1,023 yen per share, Billing System trades at an adjusted 50.5x EV/EBIT with a market capitalization of 6,618 million yen ($60.3 million USD).
  • Investors are advised to look elsewhere and consider revisiting the company if share price goes below 500 yen, or a market cap of 3,200 million yen ($29.2 million USD).

Introduction

Billing System (TSE: 3623) develops and sells billing software and systems as a service to customers, mainly financial institutions. The company is a single segment operation, but breaks down revenues into seven categories: Quick Deposit, Bill Collection, Money Transfer, Public Utilities, NFC Card Readers, Finance, and Other.

Source: Kenkyo Investing, based on company data

** FY12/19 results announced at the time of this report with no revenue breakdown. Using FY12/18 results above for clarity in business exposure.

The company primarily offers services to financial institutions, with its Quick Deposit business catering to foreign exchange and securities brokers. Its Bill Collection business gives clients a way to offer various ways for end-customers to pay bills (online, convenience stores, ATM, etc). More recently, Billing System is focused on pursuing new clients for existing businesses and expanding its new white-label mobile payment app, instant fund transfer, and mobile wallet compatible thin-client payment processing services.

The business & environment

Billing System was founded in 2000 in Tokyo to provide payment settlement services. Prior to the founding, founder and current CEO Toshihiko Edo worked for Sumitomo Mitsui Banking Corporation (subsidiary of Sumitomo Mitsui Financial, TSE: 8316). In 1998, he became the project lead for the inter-company e-commerce project. However, the project came to a halt as the Japanese banking industry was struggling and moving towards consolidation, with many banks taking a conservative stance toward investing in new services.

Toshihiko quit his job in 2000 and started Billing System at the age of 45. The initial funding came from his own retirement savings. The first two years were spent focused on development, but the company signed JAL Card (subsidiary of Japan Airlines, TSE: 9201) as a partner in 2001, providing bill collection services through postal savings for Japan Airlines’ ticketless service.

The following year in 2002, Billing System started offering money transfer support services to consumer financing companies through Japan Net Bank. In the same year, the company started offering Quick Deposit services to securities brokers. According to Toshihiko, the company generated losses for the first six years.

After extending its services to insurance companies in 2004 through the creation of e-Jibai, an auto liability insurance collections system, Billing System solidified its focus on financial institutions, setting the path for the company’s developments leading to today.

Although Billing System does not disclose margins by segment, it has mentioned that the Quick Deposit business tends to generate high margin revenues. This segment likely generates the bulk of profits despite accounting for 19.5% of FY12/18 revenues.

Source: Kenkyo Investing, based on company data


The simple way to view the Bill Collection business is that the company operates as an integrator of various payment channels. Rather than integrating payment systems with each channel, clients are able to accept payments from a wide variety of channels by using Billing System’s services.

For the Quick Deposit business, Billing System offers instant deposit systems to foreign exchange and securities brokers. This is the sort of system that instantaneously posts a fund transfer from an investor’s checking account to brokerage account. The company is particularly tied in with foreign exchange brokers.

As mentioned earlier, the company commented several times in the past that the Quick Deposit business generates high margin revenues. Some of the risks associated with the exposure to foreign exchange brokers are heightened forex regulations. 

Back in 2011, regulations called for a decrease in maximum real leverage of 25x (from 50x). In 2017, there were discussions for further lowering this figure down to 10x, although the discussion came to a halt. The company managed to grow Quick Deposit revenues from FY12/12 onward, however, this was largely a function of inheriting ~10 customers from a competitor backing out of the industry.

More recently, the NFC Card Reader business started generating significant revenues. Billing System is working together with Aeon Delight (TSE: 9787), subsidiary of retail giant Aeon (TSE: 8267), to install mobile payment compatible NFC card readers on vending machines. The business quickly grew in FY12/17 and FY12/18. Interestingly, ACS Lease, a third-tier subsidiary of Aeon, suddenly became Billing System’s largest customer in FY12/17 and again in FY12/18. This is likely related to the NFC Card Reader business. However, the NFC Card business has since come to a hard stop, driving a revenue decline in FY12/19.

Source: Kenkyo Investing, based on company data


The steep slowdown in NFC Card Reader revenues was also a key driver for the operating profit decline. Previously, Aeon Delight/ACS Lease was the single major client for the business while several other potential clients were on a trial basis. With the halt, Billing System is shifting directions and pursuing non-vending machine sales channels like coin-operated laundromats and parking lot payment machines. Below the operating profit level, the company booked 66 million yen ($600K USD) in impairment charges on a subsidiary credit card payment processing company.

The operating losses in FY12/12 were a result of 50 million yen ($456K USD) in write-offs related to emissions rights (50 million yen) which were booked as CoGS and 192 million yen ($1.8 million USD) of provision for bad debts booked under SG&A. Additionally, the company booked impairment charges on software and corporate tax adjustments below the operating line in FY12/12. The net loss in FY12/16 was largely a result of writing off investments in the now bankrupt UK-based Powa Technologies.

Another key initiative for Billing System is the development and sales of PayB, the company’s own white-label mobile payment solution. Through PayB, clients are able to offer end customers multiple ways to pay bills. The service launched in July 2017. As of February 14, 2020, 15 public utilities, 5,046 companies, and 229 local government organizations implemented PayB.

For each of its business lines, Billing System categorizes revenues into consulting revenues and transaction revenues:

Source: Kenkyo Investing, based on company data


The key businesses for Billing System are Quick Deposits and Bill Collection. In particular, the Bill Collection business is a hot area with emerging competition as Japan recently started shifting toward a cashless society. This isn’t necessarily a tailwind for Billing System, as large players entering the market may result in price competition.Thus far, however, the company has been able to grow revenues rather consistently.

For FY12/20, Billing System expects revenues of 2,967 million yen ($27.0 million USD, +29.5% YoY) and operating profits of 158 million yen ($1.4 million USD, +47.6% YoY). The company plans to continue sales efforts for existing business lines as well as new business lines. It expects upfront investments in systems, personnel, and sales promotions, particularly for the new business lines.

Shareholders

As of Q4 FY12/19 (ending December 31, 2019), Billing System had 6,564,400 shares issued and 190,082 shares in treasury, putting outstanding shares at 6,374,318.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data and Nikkei data


T-SKY is Toshihiko’s fund. Collectively, Toshihiko holds 5.9% of outstanding shares. Tomohiko Sumihara is the company’s CFO, who also worked for Sumitomo Mitsui Banking Corporation, then joined Billing System in August of 2000, two months after founding.

Billing System does not have a notable track record for share repurchases. However, it started paying out dividends since its IPO in 2008 with the exception of FY12/12 and FY12/16, when the company posted net losses. The amount of dividends fluctuate, but generally stay within a payout ratio of 30%.

Financials & Valuation

  • Billing System (TSE: 3623) develops and sells billing-related software and systems as a service, mainly to financial institutions.
  • The company’s core operations are its Quick Deposit and Bill Collection business lines, but it proactively experiments with new business lines.
  • Recently, the NFC Card Reader business — one of its new business lines — came to a hard stop, significantly deteriorating FY12/19 results.
  • At 1,023 yen per share, Billing System trades at an adjusted 50.5x EV/EBIT with a market capitalization of 6,618 million yen ($60.3 million USD).
  • Investors are advised to look elsewhere and consider revisiting the company if share price goes below 500 yen, or a market cap of 3,200 million yen ($29.2 million USD).

Billing System is one of the pioneers of integrated payment processing solutions in Japan. Its core operations consist of the Quick Deposit and Bill Collection business lines. According to the company, the Quick Deposit business generates high margin revenues. With the business catering to foreign exchange and securities brokers for instantaneous deposit transfers, the hurdle for a competitor to win over Billing System’s existing clients is presumably high.

On the other hand, the Bill Collection business enables clients to use multiple payment processing channels (credit cards, mobile wallet, ATM, convenience stores, etc) to receive payments. While this used to be a business model that was difficult to replicate, competition is emerging as Japan moves toward cashless payments. 

Thus far, Billing System, which is backed by large companies like NTT Data (TSE: 9613) and Otsuka (TSE: 4768), has fared well in its core businesses. For the new NFC Card Reader business, however, the company started off well and recently came to a hard stop. 

In evaluating Billing System’s business quality, two major concerns are foreign exchange regulations tightening (Quick Deposit) and emerging competitive pressures (Bill Collection). The latter is particularly concerning as the service is relatively easy to replace. Although the new NFC Card Reader business came to a halt, there may be strong upside potential if Billing System manages to secure clients other than Aeon Delight. This is mainly because the service requires hardware, and hardware installation leads to higher switching costs for the customer.

At 1,023 yen per share, Billing System appears to trade at negative EV with a market capitalization of 6,618 million yen ($60.3 million USD) on some systems. However, the company keeps deposits for its clients, which isn’t accounted for in some systems. Adjusting the company’s cash position for this, the company trades at 50.5x EV/EBIT based on FY12/19 operating profits of 107 million yen ($9.8 million USD).

Investors are advised to look elsewhere and consider revisiting the company if share price goes below 500 yen, or a market cap of 3,200 million yen ($29.2 million USD).

The bottom line

Billing System is a pioneer of integrated payment solutions in Japan. While the country moves toward cashless transactions, this isn’t necessarily a tailwind for the company as competitive pressures intensify. While Billing System maintains a certain level of stability in its core business, particularly for its Quick Deposit business, its current valuation of 50.5x EV/EBIT embeds lofty expectations. Hence, investors are advised to revisit the company if share price goes below 500 yen, or a market cap of 3,200 million yen ($29.2 million USD).


Kenkyo Investing
Kenkyo Investing

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