Seibu Holdings (9024.T) Inventory Evaluation

Fast Inventory Overview

Ticker: 9024.T

Supply: Yahoo Finance

Key Information

Trade	Lodge / Railroad / Actual Property
Market Capitalization ($M)	3,530
Value to gross sales	1.12
Value to Free Money Stream	–
Dividend yield	2.81%
Gross sales ($M)	3,130
Free money movement/share	–
P/E	4.87

1. Govt Abstract

Seibu Holdings is a Japanese lodge, railway, leisure actions, and actual property conglomerate. It operates 167km of railway and 83 lodges, 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 through the COVID pandemic, reaching an all-time low in January 2021. It additionally needed to promote a few of its lodges in early 2022 to stave off a liquidity disaster. Consequently, the group is buying and selling at a low valuation, assuming little to no development.

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 needs to be coming again to a extra regular stage, in step with 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 growing reputation with youthful (and even not-so-young anymore) generations.

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

In the long term, Seibu’s massive land holdings are most likely the place many of the group’s complete worth is locked. Even very conservative estimates point out these lands might be price as a lot as the complete present market cap and perhaps a number of instances extra.

Seibu might be most becoming for traders with a really long-term focus, keen to commerce off liquidity for increased long-term returns.

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 most definitely to profit from these adjustments. In the long run, tourism is more likely to be a development business for Japan, carried by its growing cultural attain and affect.

Seibu Holdings

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

Seibu’s Technique

The Seibu lodge section isn’t 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 return again via premium membership and some extent system. Additionally it is sitting on a whole lot of sq. kilometers of worthwhile land, which it’s promoting or growing very slowly to maximise its earnings.

Financials

Seibu has a comparatively weak stability sheet, even when not alarming. It would must 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 belongings like its undeveloped actual property belongings.

Conclusion

Seibu is greatest fitted for traders who’re keen to attend for the group’s belongings to comprehend their worth totally, and for the tourism exercise to select 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

Plenty of consideration has been given to Chinese language lockdowns, which have been particularly harsh, even by Asian requirements. However different international locations within the area had strict Covid-19 insurance policies as effectively, together with the world’s third largest financial 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 coated it in October: “Japan reopens to vacationers with shuttered memento retailers, lodge employees scarcity“.

Masks-wearing continues to be very current, and you must present vaccination and a unfavourable check to enter the nation. However that is lastly altering, with a brand new relaxed border protocol deliberate for Could 8, 2023, that ought to cancel most entry restrictions. General, issues are shifting in a extra liberal path, even when it would doubtless slowly take all of 2023 to get again to a extra regular state of affairs.

It is a fairly massive deal. Within the final 10 years, Japan has turn 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 enhance. This can nonetheless fall wanting 2019, with greater than 30 million for the yr, however that is the primary knowledge level indicating that the business is out of the disaster part.

Foreign money’s Brutal Strikes Boosting Tourism

Japan’s financial system has vastly suffered from COVID, however there has additionally been a big impression from the battle in Ukraine. Japan is very depending on power imports; particularly fuel 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 powerful 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 continues to be but to get well.

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

In order that journey to Japan that somebody needed to wait and postpone for 3 years? It simply obtained 30% cheaper with regards to meals, lodges, parks, points of interest, 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 advanced right into a smooth energy large, efficiently exporting its cultural merchandise and picture overseas.

That is one thing which may not translate into conventional smooth energy, like diplomatic affect or an elevated function in worldwide establishments. However it positively has a big impact on Japan’s picture and the nation’s attractiveness to vacationers.

Based on the Duolingo Language Report 2021, Japanese has turn into the fifth most chosen language on the 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 isn’t a lot pushed by Japan’s financial attraction as by its cultural capital.

https://www.uoc.edu/

Contemplating how onerous to study the Japanese language is, it’s extremely important to see it rating above one other world-class vacationer vacation spot, Italy.

Delicate energy and cultural affect is one thing a bit of onerous to quantify, however I feel a number of landmarks have been achieved in the previous few years.

For instance:

• Since 2018, mangas are outselling superhero comics within the USA.
• The Tremendous Mario Bros. Film scored an astonished 96% constructive 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 turn into much more mainstream, with Netflix on the forefront to show them into bigger franchises:
• Japanese tradition is well-liked approach 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 repute for being an especially protected, 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 well-liked, 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 pals consuming sushi might be extra more likely to put Japan on their tourism guidelines.

This attractivity isn’t restricted to Westerners. In 2019, Japan was essentially 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 repute for high-quality infrastructure, companies, meals, and so on.

4. Seibu Holdings

A Lengthy Historical past

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

• Giant asset base, lowering the chance of a selected area or exercise turning out to be much less well-liked than anticipated.
• Diversified, so as to money in on a number of spending from the identical vacationers with a number of classes of the group belongings 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 needed the rebound of tourism to not be priced in but.

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

The corporate would endure through 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 repute, and was re-listed in 2014.

A Multifaceted Hospitality Enterprise

The holding is managed with 6 completely different enterprise strains:

Transport: Prepare strains and buses. There are 5.5 million residents within the neighborhood of Seibu strains and 1.4 million passengers each 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 lodges in Japan, together with hooked up sizzling springs, spas, golf programs, and ski slopes. It additionally contains one other 33 lodges abroad, in Hawaii, China, Taiwan, the UK, and Australia. This quantities to a complete of 24,366 lodge rooms. The long-term goal of Seibu Holdings is to extend this quantity to 250 over time. The section was anticipated to return to a modest working revenue in 2022.

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

Amusement: This section contains a number of services:

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

The amusement class’s affords can be mixed with lodge 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.

“Snug life“: A really numerous section, largely centered on actual property: particular person houses, trip houses, and a pair of high-end rental & city improvement. But additionally workplaces, insurance coverage, pet care, daycare, a faculty, housekeeping companies, and even cemeteries!

5. Seibu’s Technique

What Issues in These Property?

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

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

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

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

It’s not very clear from the corporate’s shows if a number of the lodges “below administration” by the actual property section don’t see a few of their revenue transferred to that division. It’s thus attainable that lodge profitability is barely underestimated.

The full land floor owned is 474 sq. kilometers (183 sq. miles). A small portion is often offered or developed. This represents a big untapped potential in Seibu’s valuation, nevertheless it’s tough to worth exactly. The common land value in Tokyo district was ¥1.1M/m2. That may 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. Perhaps as little as 1-5 trillion yen. However this could nonetheless be a big margin above a market cap of ¥467B.

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

The Position of Motels in Seibu Holdings

So whereas lodges characterize a big a part of income, revenue is extra pushed by transport and actual property. I might not, nevertheless, see the lodge & leisure section as essentially much less fascinating, because of the volatility of its earnings.

This performed negatively through the pandemic however can also be the one most definitely o profit from 3 years of pent-up demand.

Most notably, Chinese language households famously gathered collectively $2.6 trillion in further financial savings in 2022. Up to now, they’re largely spending on eating places, film tickets, journey, and luxurious items. We are able to count on Japanese customers and Asian customers, basically, to be in the identical state of affairs of planning long-postponed holidays and attempting to take pleasure in life.

Whereas the lodge exercise will doubtless increase, I count on the leisure half will do even higher. This additional funds is likely to be spent on higher lodge rooms or longer keep, however more likely might be spent on experiences. And this could enhance 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. It is a nice function to have, with Asian customers being well-known for being fanatics about level gathering.

The factors are additionally legitimate for five years, a superb timeframe for recurring customers to have a look at find out how to use the factors from one keep to the subsequent. It additionally helps assure a base variety of Japanese clients already gathering 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 number of dangers that might endanger this restoration.

Industrial Actual Property

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

It might additionally decelerate land improvement, and workplace mission is likely to be canceled.

Geopolitics

The connection between China and Japan isn’t all the time the very best and will degrade so much additional in case of rising tensions round Taiwan and the South China Sea. This might harm the movement of Chinese language vacationers to Japan, neutralizing the post-covid increase results.

Liquidity

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

And that is precisely what occurred to Seibu Holdings with COVID. In early 2022, it offered $1.3B price of lodges – 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 passed off simply earlier than the huge devaluation of the yen.

Seibu is anticipated to maintain managing the lodges, however will solely function them as a substitute of proudly owning the bodily construction. This could not harm 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.

6. Financials

The Pandemic Impression

2021 was a tough yr for Seibu, though not as dangerous as 2020 when Japan got here to a standstill. It barely managed to get again to constructive internet revenue, largely out of land gross sales.

Equally, returns on fairness and belongings have been again to constructive territory in 2021, however a lot beneath their historic ranges of 10-12% ROE and 2-4% ROA.

Constructive 2022 Forecasts

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

General, earnings are again, however nonetheless not less than half of what they have been pre-pandemic. It is a reality to bear in mind when discussing Seibu’s valuation in comparison with its present earnings and money flows.

Transport

Lodge & Leisure

Seibu Annual Report 2022

Steadiness Sheet & Money Stream

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

Whole belongings 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 can largely rely on Seibu’s long-term credibility and skill to return to revenue.

Working actions offered a constructive internet money movement of ¥30.5B. Within the final quarter, compensation of debt did price ¥60B.

General, Seibu’s monetary state of affairs might be described as fairly tense however not alarming. The corporate ought to be capable to safe extra short-term funding if the necessity arises, particularly with Japan’s reopening, vastly lowering 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. General, Seibu is reasonable, and its valuation doesn’t value any enchancment from additional re-opening and tourism development.

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

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

A doubling of those ratios would nonetheless maintain 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.

The identical disaffection from traders could be noticed in Seibu’s shareholder construction, with solely 16% of the shareholders being not Japanese.

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

7. Conclusion

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

What’s extra sure is that Seibu Holdings is more likely to have handed the vital hazard zone of low liquidity in the course of the pandemic. Returning profitability and pent-up demand ought to carry the corporate again into constructive money movement territory and overcome most short-term dangers.

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

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

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

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