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Derek C. Cheung, Honne Capital September 4, 2012 Garage Sale: Free Twitter
Derek C. Cheung, Honne Capital!September 4, 2012!
!!
Garage Sale: Free Twitter!
Table of Contents!
Market Misunderstanding . . . . . . . . . . . . . . . . . . 3 - 5!Background and Business . . . . . . . . . . . . . . . 6 - 10 !Kakaku Stake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 - 18!Twitter Stake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 - 24 !Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 - 27!Sum of the Parts . . . . . . . . . . . . . . . . . . . . . . . . . . 28 - 30 !Catalysts and Conclusion . . . . . . . . . . . . . . . 31 - 32!!
2!
Market Misunderstanding!
3!
Digital Garage and FB Correlation!
4!
Japanese investors seem to think that Digital Garage is part of the Facebook bubble. Shares are suffering from “bad apple syndrome.”!
Digital Garage and Mixi Correlation!
5!
DG has also traded with 93% correlation to Japan’s social network, even though DG’s social media holding can be bought for ¥0.!
Background and Business!
6!
Background and Business!• Digital Garage (“DG”) is headquartered in
Tokyo, Japan!• DG was founded in 1995 by Joi (“Joey”)
Ito as an incubator of various Internet companies!
• Joi—now considered an Internet mogul—helped create the first personal website in Japan!
7!Source: Digital Garage website: http://www.garage.co.jp/en/corporate/history.html!
Background and Business!• DG soon began consulting American
Internet companies on how to adapt to the Japanese market!
• In January 2008 Twitter announced that it had formed a partnership with DG to create the official Twitter Japan service!
• DG has similar partnerships with LinkedIn and Path!
8!Source: Digital Garage website: http://www.garage.co.jp/en/corporate/history.html!
Background and Business!• In 2002 Kakaku.com became a subsidiary
of DG!• Kakaku is a group of Japanese websites,
each of which has an American analogue!
9!Source: Digital Garage website: http://www.garage.co.jp/en/corporate/history.html!
Kakaku Website! American Analogue!eiga.com! imdb.com!4travel.jp! TripAdvisor.com!yoyaQ.com! Hotels.com!sumaity.com! Trulia.com!
Background and Business!• In April 2012 DG purchased VeriTrans for
¥13 billion ($157 million)!• E-commerce payment settlement business!• VeriTrans is headquartered in Hong Kong,
allowing it easier access to its major partner, UnionPay, China’s credit card network!
• VeriTrans generated ¥780 million ($10 million) in profit in fiscal year 2012!
10!Source: VeriTrans financial statements: http://www.veritrans.co.jp/company/pdf/16_koukoku.pdf!
Kakaku Stake!
11!
Kakaku Explained!
12!Source: Kakaku Management Vision and Strategy Presentation Quarter Ended March 2012!
Kakaku Website! American Analogue!Eiga.com! Imdb.com!4travel.jp! TripAdvisor.com!yoyaQ.com! Hotels.com!Sumaity.com! Trulia.com!
Kakaku is a group of smartphone apps and websites in Japan that have American analogues:!
Kakaku is benefiting from the feature phone to smartphone shift!
Tabelog is Japan’s Version of OpenTable/Yelp!
13!
• Tabelog is an online reservation service and restaurant review website!
• Accounted for 13.7% of Kakaku’s revenue in FY2012!
• Tabelog’s reservation service is actually free for restaurants; it will begin charging this autumn!
Source: Kakaku Management Vision and Strategy Presentation Quarter Ended March 2012!
Kakaku is a High Margin Business!
14!Source: Kakaku Management Vision and Strategy Presentation Quarter Ended March 2012!
Kakaku is a Diversified Business!
15!Source: Kakaku Management Vision and Strategy Presentation Quarter Ended March 2012!
Kakaku Stake!
16!
• DG owns 11,672,000 shares (20%) of Kakaku (2371:JP)!
• DG accounts for its stake using equity method: Kakaku is consolidated on the income statement!
• Net of cash, Kakaku trades at 30x FY2012 earnings!
• Given Kakaku’s projected 29% growth rate of net income, the current stock price is actually reasonable!
Source: Digital Garage management!
DG Trades at a Discount to its Stake in Kakaku!
17!
DG Market Valuation!Stock Price !¥123,800!Diluted Shares !219,084!Market Cap ! ¥27.12B!Net Cash ! ! !¥1.47B!Enterprise Value ¥25.5B!
!
Kakaku Stake!2371:JP Price ! ! ¥2819!# Shares DG Owns11.67M!MC of Shares ! ! ¥32.9B!Net Cash ! ! ¥5.81B!Enterprise Value ! ¥27.1B!
Source: Digital Garage EDINET filing. Kakaku EDINET filing. Market prices as of September 1, 2012.!
• We confirmed DG’s net cash amount with management!• DG does not consolidate Kakaku’s cash!• Digital Garage trades at a 22% discount to its Kakaku
stake!
DG Trades at the Biggest Ever Discount to its Kakaku Stake!
18!
Net of cash, Kakaku trades at 30x FY2012 earnings. A borrow is readily available through BAML for those wishing to pairs trade.!
Twitter Stake!
19!
Twitter Market Price!
20!Source: Wedbush Securities. Market prices as of September 4, 2012.!
Stock Price ! ! $18!Diluted Shares ! !484M!Market Cap! !$8.71B!
• Twitter shares trade in private transactions between employees (sellers) and institutions (buyers)!
• Prince Alwaleed bin Talal led the most recent funding round in December 2011 at an $8.4 billion valuation!
Twitter Stake!
21!
• DG does not disclose the size of its Twitter stake!• The market ascribes a negative value to DG’s
stake in Twitter!• DG has invested in Twitter at least five times:
1. January 7, 2008 2. June 26, 2008 3. March 26, 2009 4. January 26, 2010 5. May 13, 2010!
Source: Digital Garage 2010 Annual Report!
1st Investment: Capital Tie 01/08!
22!Source: Digital Garage 2010 Annual Report. CNET Japan. Asiajin.!
• On January 7, 2008 DG made an investment in Twitter of several tens of million yen, but not more than ¥100 million!
• DG may have bought as much as 5% of Twitter!• This was just six months after its spinout of
Obvious Corporation by several executives along with Union Square Ventures!
• In the spinout, investors deployed $5 million at a $20 million valuation!
Subsequent DG Funding Rounds!
23!Source: Digital Garage 2010 Annual Report!
Series! Date! $ Raised! $ Valuation! # of Investors!B! 06/26/08! 15M! 100M! 5!C! 03/26/09! 35M! 250M! 5!F! 01/26/10! 200M! 3.7B! ?!N/A! 05/13/10! ?! ?! ?!
• In July 2011 DG did an equity placement—the first ever since becoming a public company!
• The proceeds may have been used to maintain DG’s percentage interest in Twitter, as DST Global invested $400M in the same month!
24!
How Much Twitter Does DG Own?!
• The four Japanese sell-side analysts we interviewed provided estimates ranging from 2% to 5%!
• We believe that 2% is the most accurate estimate because, while DG was one of the earliest investors in Twitter, its shares were diluted by subsequent funding rounds!
• At current prices, the stake is worth over $160 million!
Miscellaneous!
25!
26!
Financial Statements!• DG’s auditor is Ernst & Young!• Audited financial statements are available
on Electronic Disclosure for Investors NETwork (translation attached)!
• Contrary to popular misconception, Japanese companies have great disclosure on financials (in their native language)!
Listed and Unlisted Holdings!
27!
Company! Ticker! # of Shares! Market Val. ¥! Market Val. $!Just Planning Inc.! 4287:JP! 6,170! 254.82M! 3.25M!ALC PRESS Inc.! 2496:JP! 2,000! 54.76M! 699,300!Watami Co.! 7522:JP! 20,000! 35.00M! 446,800!Japan Asia Invest.! 8518:JP! 535,000! 25.68M! 327,800!Istyle Inc.! 3660:JP! 16,600! 11.22M! 143,240!
Source: Bloomberg. Market prices as of September 3, 2012.!!
Company! Concept! Ownership!DoubleRecall! Online Advertising Platform! Partial!Highlight Cam! Social Moviemaking App! Partial!Kicksend! Online Video and Photo Sharing! Partial!Pivotal Labs! Software! Full!
Sum of the Parts!
28!
29!
DG Trades at a 46.5% Discount!DG Market Valuation!
Stock Price !¥123,800!Diluted Shares !219,084!Market Cap ! ¥27.12B!Net Cash ! ! !¥1.47B!Enterprise Value ¥25.5B!
!
Sum of the Parts Value!Kakaku Stake1 ! ! ¥28B!Twitter Stake2 ¥11.6B!VeriTrans3 ! ! ¥7.7B!Listed Holdings ! !¥381M!Total ! ! ! ¥47.7B!
1 After applying 15% capital gains tax!2 Assuming 2% Twitter stake; After applying 15% capital gains tax; $1 = ¥78.35!3 10x VeriTrans 2012 earnings!
• DG trades at a 46.5% discount to its likely SOTP value!
Market prices as of September 1, 2012.!
30!
If DG Only Owns 1% of Twitter?!DG Market Valuation!
Stock Price !¥123,800!Diluted Shares !219,084!Market Cap ! ¥27.12B!Net Cash ! ! !¥1.47B!Enterprise Value ¥25.5B!
!
Sum of the Parts Value!Kakaku Stake1 ! ! ¥28B!Twitter Stake2 ¥5.8B!VeriTrans3 ! ! ¥7.7B!Listed Holdings ! !¥381M!Total ! ! ! ¥41.9B!
1 After applying 15% capital gains tax!2 After applying 15% capital gains tax; $1 = ¥78.35!3 10x VeriTrans 2012 earnings!
• DG trades at a 39% discount to its conservative SOTP value!
Market prices as of September 1, 2012.!
Catalysts!• DG management has suggested that the
company may buy back shares!• Kenta Adachi, Digital Garage Corporate Strategy
Department:“Not only that, we are thinking of buying back some shares, as you mentioned.”!
• Twitter IPO in 2013!• As an insider, DG would be able to sell Twitter
shares in the IPO!
31!
Conclusion!• Thanks to Facebook’s dismal IPO, investors are
dumping DG even though the shares currently offer free exposure to Twitter!
• DG owns 20% of Kakaku, one of Japan’s most lucrative, fastest growing businesses!
• DG’s operations generate significant free cash flow, unlike GSVC, so NAV is increasing not decreasing!
• DG is the world’s best deal in social media!
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Disclaimer!All information provided in this presentation is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition, there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trade marks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use. This presentation is confidential and may not be reproduced without prior written permission from Honne Capital LLC. !!
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