A top Australian fund manager believes the success of Alibaba could soon replicated by an e-commerce business listed on the Tokyo Stock Exchange.
Marco Anselmi, a senior analysts and partner at VGI Partners says he identified the business after studying the success of Tencent and Alibaba in integrating e-commerce, social media and payments across multiple verticals.
After searching across Asia for other business trying to replicate what Tencent and Alibaba have achieved, Anselmi identified Tokyo-based Rakuten Inc. (TYO:4755).
Rakuten’s three pillars
Anselmi says investors can gain a better understanding of the business by breaking it down into three core pillars.
The first pillar is Rakuten’s flagship e-commerce business. According to Webretailer, it’s Japan’s third-largest online retailer, behind Pay Pal Mall and Amazon.
The second pillar is Rakuten’s FinTech operations which includes banking (inlcuding lending and credit cards), insurance, digital payments and online investment brokerage.
“What’s interesting about Rakuten is that it brings all these services together – all of the FinTech and all the e-commerce come together through a single loyalty point ecosystem. We think that’s very powerful,” said Anselmi in an interview.
“If I shop on the Rakuten e-commerce website for some items to get delivered to my door, and use my Rakuten credit card to do so, I accrue more points… We think they’re on the way to creating something similar to WeChat and WePay like Tencent has in China or Alibaba with Ant Financial.”
The third pillar in the company according to Anselmi is telecommunications. Rakuten Mobile launched in 2018 and offers 5G mobile plans to customers, but it has thus far been a costly endeavour.
Rakuten mobile woes
In it’s FY2020 results, released February 2021, the mobile unit posted a US$2.1 billion dollar loss. The loss erased profits generated by other business units.
However, the Australian fund manager remains optimistic on the mobile front.
“Obviously that’s very capital intensive and traditionally been more of a competitive space because you have to build a network infrastructure to start offering these mobile plans,” said Anselmi.
“We think the way Rakuten is going about this mobile investment is also very interesting. A traditional telco, like a Telstra, would have gone to purchase expensive equipment from vendors like Nokia, Ericsson, or Huawei even. The way that Rakuten is going about it is they’re pioneering a new type of cloud infrastructure and we think that has the potential to provide them with a cost advantage essentially.
“We think the market is at the moment focused on the near-term short-term losses that its generating from this investment, but we’re taking a longer-term view.”Marco Anselmi, VGI Partners
“That’s what we’re seeing them do. They’re undercutting all the incumbent telco operators in Japan and pushing very aggressively to gain market share because of this cost advantage that they have. So, we think the market is at the moment focused on the near-term short-term losses that its generating from this investment, but we’re taking a longer-term view.”
In March, Rakuten announced a US$2.2 billion capital raise in which it sold equity as part of tie-ups with Japan Post, Tencent and Walmart.
A strategic business alliance was also announced with Japan Post.
“Through this new capital and business alliance, the Japan Post Group and the Rakuten Group will seek to maximize synergies by effectively leveraging the business resources and expertise of both Groups to provide greater convenience for customers, give back to local communities, and grow their businesses,” said Rakuten in a statement.
Anselmi believes the partnership will be significantly advantageous for Rakuten.
“Japan Post will end up owning almost 10% of Rakuten after this capital raise. And, Rakuten has been investing in their own logistics network to improve fulfilment and delivery capabilities for the e-commerce business.
“Obviously Japan Post has over 1000 outlets throughout Japan so it will really help with that last mile delivery. It will also help to distribute the mobile phone plans – the incumbent telco operators in Japan have got a store network and Rakuten will be able to leverage the existing Japan Post retail distribution to sell those mobile plans.”
Look at the “bigger picture”
Finally, Marco Anselmi says investors need to remain focussed on the bigger picture. A picture that could see Rakuten emerge as Japan’s Alibaba.
He places confidence in the leadership and vision of Hiroshi Mikitani, Rakuten’s founder who remains CEO. Mikitani still owns a third of the company.
“Not many people out there would have had the appetite to invest over US$10 billion in building a mobile telecommunications infrastructure. He knew that it probably wouldn’t be good for the share price and that it wouldn’t be taken very well, but he’s the kind of leader that has that vision.
“So, we really like that and we share the same vision because we’re long-term investors and we can see the bigger picture. We see the near-term losses that the telecommunications business is generating, but we also see the bigger picture that he’s trying to achieve. And we think it has the potential to be very powerful.”