Quicky #14 on Koshidaka (2157 JP)

This is part #14 about Koshidaka Holdings, which business mostly consists of karaoke services in its domestic Japan market.

This is not investment advice. Please read the disclaimer.
I might currently or at a later point in time own shares (economic interest) in mentioned or related companies.

I first got to know about the company Koshidaka Holdings on Nov 26th via reddit and Asian Century Stocks without reading the articles prior to drawing my own conclusions (I read their analysis afterwards).

This is another part of my series of Quickies on new companies.

Koshidaka operates one of Japan’s largest karaoke networks. We all know that the Japanese love to sing karaoke (and sometimes to get drunk) during their emotional performances. Thus I believe it could potentially be a good business to be had cheap due to strong temporary headwinds (read: the pandemic). But various vaccines for its enternainment businesses are underway. Further, Japan handled the pandemic much better than most developed countries.

A look at its stock price seems to support my idea. But, they spun off Curve Holdings.

Koshidaka is innovative and much more modern compared to Japanese standards. It did not only divest one of its businesses (a novelty in corporate Japan), but it also claims a good 24% of store managers are female (numbers).

»We are dedicated to constantly creating and expanding new business models in existing industries.« – Koshidaka


Key financials seem solid and growing nicely, according to their non-adjusted consolidated results. For getting a ballpark of normalized results adjusting its historic financials for its former Curves segment is necessary.

Its long-term strategic plan is for strongly growing karaoke sales and rooms. with a successful strategic execution this could be a very profitable compounder (in a shrinking market).

extract from FY8/2020 presentation

A first quick and dirty valuation perspective can be derived on FY 8/19 financials (12 months ending Aug 2019). Koshidaka reported an operating profit of JPY 9,507m, minus 5,679m for curves fitness results in an operating profit of JPY 3,828m, adj. for curves segment. Non-operating or extraordinary effects are rather small (negligible). The corporate tax rate in Japan stands at 30.62%. Adjusted net income ex-curves fitness comes out at about JPY 2,640m. The current market cap is JPY 36,200m, resulting in a rough multiple of 13x.

This calculation should likely err on the conservative side since the operating profit of JPY 9,507m ‘includes general and administrative expenses that cannot be attributed to reportable segments’ (results, p 14) and assuming that some of this overhead costs will cease to exist (or stagnate with growing top-line) after the curves divestment seems more than reasonable.

This looks rather promising, when assuming that karaoke life will be back to (a new) normal in next financial year (Sept 2021 to Aug ’22), give or take. It could make for a very profitable investment when adding to the equation its (i) long growth runway of karaoke sales and some (ii) efficiency gains. These factors need to be verified.

Growing karaoke business

extract from 8/2019 presentation

Operating profitability for the karaoke segment seems to trend higher, reaching an operating margin of 12.6% in FY 2019, after 9.9% (’18), 6.9% (’17) and 4.2% (’16). Obviously, the pandemic broke this trend in FY 2020. But, further runway through its strategy (below). Underlying karakoe segment margin is likely even higher than reported due to some growth expenses. Actually, the below slide supports this notion: opening expenses + advertising (likely higher for new stores).

extract from FY 8/2019 presentation

Historicals (operational profit results) are not shown for segments. I sent them an email and asked where to find older financial reports. I found some information on bridge-salon.jp, but not what I searched for (older english reports, ideally originals). I got some tipps on twitter, but did not find what I was looking for disclosure.edinet-fsa either. To my positive surprise, I found segmentational data on bloomberg. Since it is correct for the last financial years, I trust the data for older periods (and a chart can be found on slide #19 of FY 8/2019).

(extract from FY 8/2019 presentation)

Segment assets were steadily increased, as were the number of Karaoke rooms (in a slowly shrinking market).

The strategy to operate larger locations and to focus on facilities near railway stations /in prime shopping areas seems sound to me. Operational efficiency gains should be possible with more rooms per location and people can reach those facilities better (more convenient). In todays world, many people optimize for ease of use.

High net investments for growing locations & rooms from 11.9k to 20k in FY 2024 and eventually to as much as 30k, will result in depressed cashflows vs reported earnings for a considerable time with the chance to increase operating margins.

Koshidaka could be a very interesting investment if they continue to grow locations /rooms per location as well as revenue and margins per room for years to come (many FY 8/2019 developments and its strategy support this notion). A pre-condition for this strategy to work is that Japanese will stick to their karaoke tradition. if they do, they might find it most comfortable to visit Manekineko locations near train stations …

The pandemic could very well be a possibility to
expand into prime locations at lower prices

A quick and dirty calculation results in a FY 2024e net profit of JPY 6,550m on the below key assumptions for the karaoke segment.

  • 20k rooms (up from 11.9k in Aug 2020)
    • with sales per room of JPY 3.45m (up from 3.13 in FY 8/2019)
  • an operating margin of 13.6% (up 1%p from 12.6% in FY 8/’19)

  • Q1 2021: The company reported results for the three months ending November 2020
    • Q1 loss of JPY 565m (vs 700m profit)
    • sees H1 loss of JPY 1,100m
    • initial share price reaction was negative (new corona cases rising)

Update Aug 2021: While trying to write down an IRR estimate for my portfolio holdings (to tackle my position sizings) I had the notion that Koshidaka is more risky (shrinking karaoke market, covid) and will probably generate lowere returns than Shinoken, thus I sold my Koshidaka shares on Aug 4 and 5 and increased my Shinoken (8909 JP) position.

Further readings

Significant shareholders are below Koshidaka individuals, Youzan KK (25.91%), a private company, ‘offering construction services’ and Imo KK (4.6%). There is not much information available about the Youzan, but likely the Koshidaka family holds (indirectly) a significant stake of Koshidaka (2157 JP), via Youzan. Established 2006: Youzan Co., Ltd for Purchase, Manage and sell stocks and bonds, Property management

  • Hiroshi Koshidaka (2.8%, President & Representative Director)
  • Osamu Koshidaka (2.7%)
    • President & Representative Director at IMO KK (info)
  • Miwako Koshidaka (1.2%, Managing Director & Managing Executive Officer)
    • President & Representative Director at Youzan Co., Ltd.

Google trends for Karaoke, Manekineko were expectedly lower during 2020


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