RKUNF - i-mobile: Offering Tax Breaks And Local Delicious Produce

2023-05-11 02:09:13 ET

Summary

• i-mobile operates a portal that promotes Japan's hometown tax donation program to individuals.
• The benefits of enrolling in this C2G2B business are tax deductions and gifts from the municipalities such as regional gourmet specialties.
• We have concerns over fiscal policy changes and increasing competition between operators. We rate the shares as hold.

Investment thesis

i-mobile ( OTCPK:IMCLF ) (6535 is the local ticker code) is a Japanese online media business operating a portal that promotes tax-efficient shopping and holidays for individuals via the hometown tax donation system. Recent trading is robust, but we have concerns over potential changes to fiscal policy and increasing competition between specialist operators. We rate the shares as a hold.

Quick primer

Established in 2007, i-mobile is a Japanese online media company with two core businesses: 1) the legacy online advertising platform matching advertisers and media with a focus on mobile, and 2) operating a C2G2B (consumer to the government to business) Japanese hometown tax donation portal called ' Furunavi ', under its Consumer Service segment.

Key financials with consensus forecasts

The financials above indicate a relatively volatile topline profile over the last 2 years, with expectations of stable growth for the medium term. Although not high-growth, profitability levels are decent at above 20% and are expected to be stable. An asset-light online business results in high free cash flow generation, a positive sign of value creation.

Our objectives

Despite the company's focus on mobile advertising, its legacy ad platform business makes up only 15% of Q1-2 FY7/2023 revenue and experienced six consecutive years of sales decline. The core earnings driver is the Consumer Service segment, and the increasing activity through the 'Furunavi' hometown tax donation portal.

The hometown tax donation system was launched in 2008, allowing individuals (not corporates) to make donations to a municipality of choice, thereby aiming to balance the tax revenue gap between urban and rural areas.

Making donations provide two attractive benefits : 1) taxpayers can get income and resident tax deductions up to the total amount donated minus a flat ¥2,000 fee, and 2) gifts in return from the municipality, which tend to be local produce and delicacies, such as seafood from Hokkaido, and pork goods from Kyushu. The system had good intentions to stimulate local economies but has rapidly transformed into a tax-efficient shopping method - but donations are capped dependent on income levels and family structure, and unavailable to very low-wage income earners. For example, a salary earner of JPY10 million/USD74,000 who is married with children can donate approximately JPY156,000/USD1,155 per year ( simulator calculator here ). There are multiple variables, but the rule of thumb is claiming around 2-4% of annual income with no upper limit. Donations can be one-offs or recurring.

i-mobile has gained market share with its portal site, competing against many similar services, earning commission income based on transacted donations. The company does not disclose commission rates, we estimate it to be around 10%, although some municipalities Takarazuka City has disclosed its planned commission rate of 13.2% for 2022. It is a profitable business, with operating margins above 20%.

We want to assess if this 'Furunavi' portal can sustain growth and profitability, given regulatory risk over potential rule changes, and the longevity of the business model.

Big pandemic beneficiary

The hometown tax donation system started to gain popularity in 2015 when the system was upgraded, increasing the maximum limit of deductions and simplifying the tax declaration procedure. The pandemic drove demand to record heights, driven by 'nesting consumption' as lockdowns limited shopping opportunities and individuals sought out new experiences online.

The system is beginning to show signs of creating inequality - something that it was originally aiming to solve. The gift-giving element has led to regions with the most sought-after food and delicacies receiving the most donations (unsurprisingly Hokkaido for seafood and Miyazaki for beef), and relatively affluent areas missing out on tax income (such as cosmopolitan Yokohama and Nagoya City). Data for this can be found at the Ministry of Internal Communications and Communications ( only in Japanese ).

Although there are no immediate calls for change, there is growing discussion over how tax should be reformed in Japan to address the regional fiscal imbalance . Amongst the most likely scenarios in the longer term are introductions on further caps on donations, and reducing the amount of tax allowances.

The implications for i-mobile remain positive in the short term. Demand for hometown donations remained brisk for Q2 FY7/2023 results, with sales increasing 42% YoY ( page 10 ). The donation system has also expanded to the travel market, where the municipalities award 'points' as opposed to gifts to be used at selected lodgings and eateries in the region served. With domestic tourism back in full flow, demand here has risen substantially, and more local tourism businesses are enrolling in this program.

The market remains buoyant but the company has no solid competitive edge

There are four key online platforms providing user acquisition services for municipalities advertising their gifts and activities to support the rural economy and environment. The most popular is Furusato Choice, operated by Choice Inc (3962 JP), followed by Satofull (part of the SoftBank Group ( OTCPK:SFTBY )), and online shopping site Rakuten ( OTCPK:RKUNY ).

The content of these sites is essentially the same, but the differences come in 1) the number of municipalities advertising on the sites (said to number over 1,600), 2) the number of gifts presented, and 3) the number of limited offers of special gifts. Variations in terms of UX appear limited. Although there is no disclosure of user churn or activity rates, it would appear all the players are enjoying market-wide secular growth as more individuals participate in this system.

There are two risk factors that make investing in i-mobile difficult. The first is an obvious change in tax law, making it less attractive for users to participate in this donation scheme. Any news of change will be viewed as an immediate negative for all players. Secondly, with consensus forecasts expecting growth to stabilize, we are not seeing an earnings trajectory which makes the growth profile of the business attractive.

Valuation

On consensus forecasts, the shares are trading on PER FY7/2024 8.2x, on a free cash flow yield of 12.0% and a 3.7% dividend yield. The company is cash rich, and hence these multiples look attractive even for a micro-cap.

Risks

Upside risk comes from i-mobile's strategy to shift towards 'experiences' as opposed to gifts to attract individuals to donate through their portal, and gain market share.

The addressable market continues to grow, and the government maintains the status quo and allows this system to continue unchanged.

The downside risk comes from changes introduced to the hometown tax donation program, making it less attractive for individuals to participate.

There could be a pricing war between portals attracting municipalities via commission cuts to gain market share, making the economics less attractive.

Conclusion

There is no denying that the company's valuations are cheap, and earnings visibility looks positive for the short term. However, when how assessing how truly sustainable growth is at the business, and what real competitive advantages it has versus its peers, we are left with few concrete answers.

We may be kicking ourselves in 2 years' time, but we believe the business lacks indications of real quality and rate the shares as a hold.

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