Highlights:
- Rakuten's three main segments (E-commerce, Financial Services and Mobile Telecom) all recorded varying degrees of revenue growth and profit growth (or loss reduction). The overall operating performance improved steadily. The mobile telecom is putting less pressure on the Group's liquidity than before.
- The Group issued a number of bonds since the beginning of the year, demonstrating the Group's debt financing ability. It has sufficient funds to repay its bonds maturing on or before 2025. Its leverage level is manageable, with a strong equity financing ability.
- Investors could consider its 2027 USD Bond, RAKUTN 11.250% 15Feb2027 Corp (USD), with a YTM of 7.2%.
Chart 1: Rakuten Group’s Structure
Source: Company’s Presentation
We mentioned a few points in our article, “Idea of the Week: Rakuten Group, a Rare Opportunity to Capture 9% Return”. In our previous article, we mentioned that Rakuten Group (“Rakuten”)'s operating performance improved across the board, and we were positive about the Group's prospects. Considering that the Group owned a lot of valuable assets, with strong equity financing abilities, there were potential sources of liquidity. We believe the overall credit risk remained at a manageable level.
What implications do the latest 2024 interim results have for investors, half a year later?
Operating Performance Improved Steadily, with Mobile Telecom Putting Less Pressure on its Liquidity than Before
As shown in Table 1, in the first half of 2024, Rakuten's three main segments (E-commerce, Financial Services and Mobile Telecom) all recorded varying degrees of revenue growth and profit growth (or loss reduction). The overall operating performance improved steadily.
Table 1: Rakuten's Operating Performance
(JPY Billion) | 2024 1H Revenues | YoY | 2024 1H EBITDA | YoY |
E-commerce | 589.6 | +4% | 51.7 | +15% |
Financial Services | 396.2 | +14% | 112.6 | +28% |
Mobile Telecom | 194.8 | +10% | -48.4 | Loss reduced 55% |
Total* | 1,050.9 | +8% | 119.6 | +223% |
*Considering the adjustment part, the total amount is not equal to the sum of three segments Sources: Company’s Announcements, iFAST compilations Data as of 30 June 2024 | ||||
For the E-commerce segment, the revenue and EBITDA increased by 4% and 15% YoY respectively to JPY 5,896 billion and JPY 517 billion, primarily benefiting from the take rate rising significantly from 14.7% to 15.7% YoY (see Chart 2), while part of the growth was offset by a decline in total gross merchandise sales (GMS).
Chart 2: Rakuten's Total Gross Merchandise Sales and Take Rate
Currently, the E-commerce industry in Japan is gradually maturing. The growth rate of e-commerce sales will be slower than before, while there is still some room for a slight increase in the take rate. Therefore, going forward, it is likely to maintain a single growth in the revenue and improve the margin by better cost control, thus driving a stronger profit growth.
In terms of the financial services segment, the overall performance was quite outstanding. The revenue and EBITDA of this segment increased by 14% and 28% YoY to JPY 3,962 billion and JPY 1,126 billion respectively. Its subsidiaries, Rakuten Bank and Rakuten Card, both recorded a high profit growth. Their operating profits increased by 37% and 18% YoY respectively. Their combined operating profits accounted for as much as 76% of the overall segment, reflecting the importance of these two subsidiaries to the segment and the Group.
Rakuten Bank set a medium- to long- term operating and profit targets. By 2026, Rakuten Bank aims to achieve annual growth rates of more than 15% in the number of bank accounts and more than 20% in deposits respectively, and aims to realise a CAGR of 10% and 15% or more in revenues and profits. The revenue growth of Rakuten Card is still expected to reach double-digit growth. Combined with its cost-saving plan and lower delinquency ratio, we expect Rakuten Card to attain a double-digit profit growth.
Therefore, these two core assets (Rakuten Bank and Rakuten Card) are expected to maintain relatively high (at least double-digit) profit growth rates, reflecting both the Group's stable operating performance and good equity financing abilities.
It is worth noting that Rakuten Group suspended its listing plan for Rakuten Securities and is going to restructure its financial services segment by merging securities, credit cards and insurance businesses into Rakuten Bank, which could help maintain Rakuten Bank's valuation and equity financing ability.
As we previously mentioned, we think that the mobile telecom segment is showing early signs of success and entering into a phase of stable development, and is expected to notably improve the earning quality in the next few years. Based on the interim results, the revenue from this segment grew 10% YoY to JPY 1,948 billion. The EBITDA loss narrowed again to JPY 484 billion. With the Group's commitment to have a cost control, we believe the Group is likely to achieve positive EBITDA by mid-2025.
In addition, the capital expenditure of the mobile telecom segment in the first half of 2023 was JPY 420 billion, down 38% from the second half of last year. We believe the peak investment period for this business is past, and the future cash outflows will remain at controllable levels (annual capital expenditure will be less than JPY 1 trillion), putting less pressure on the Group's liquidity than before.
Sufficient Funds to Repay its Bonds Maturing on or before 2025
In early February, Rakuten Group repurchased two 2024 USD bonds, which were “RAKUTN 3.546% 27Nov2024 Corp (USD)” and “RAKUTN 10.250% 30Nov2024 Corp (USD)”, through a tender offer. The repurchased principal amount was approximately USD 970 million, which lowered the outstanding principal amount of these two bonds to approximately USD 430 million and USD 350 million respectively. These could avoid large cash outflows due to one-off repayment of a large amount of bond principal.
In addition, Rakuten Group issued a number of bonds since the beginning of the year (see Table 2) with a total principal amount of approximately USD 4.12 billion. The relatively large size of these new bond issues, especially in USD bonds, at least demonstrates the Group's debt financing ability, despite higher coupon rates associated with these new bond issuances.
Table 2: Rakuten Group’s 2024 Bond Issuance
Bond Name | Issue Date | Coupon Rate | Tenor | Issue Size |
RAKUTN 11.250% 15Feb2027 Corp (USD) | 15 February 2024 | 11.25% | 3 years | USD 1.8 billion |
RAKUTN 9.750% 15Apr2029 Corp (USD) | 15 April 2024 | 9.75% | 5 years | USD 2.0 billion |
RAKUTN 6.000% 24Apr2029 Corp (JPY) | 24 April 2024 | 6% | 5 years | JPY 50 billion (Around USD 320 million) |
Total | Around USD 4.12 billion | |||
Sources: Company’s Announcements, iFAST compilations Data as of 13 September 2024 | ||||
As a result of these new bond issuances, Rakuten Group has sufficient funds to repay its bonds maturing on or before 2025, including two USD bonds maturing in 2024, “RAKUTN 3.546% 27Nov2024 Corp (USD)” and “RAKUTN 10.250% 30Nov2024 Corp (USD)”, with a total principal amount of approximately USD 780 million. Therefore, the credit risk of these two bonds is low.
Manageable Level of Leverage and Strong Equity Financing Ability
As Rakuten Group consolidates the financial statements of a number of subsidiaries (including banking and securities businesses etc.), it is difficult to analyze the consolidated balance sheet of the Group.
At the Group's level, as shown in Table 3, as of the end of June 2024, the Rakuten Group’s net gearing ratio and total debt/other assets stood at 89% and 42%, respectively, which is somewhat worse than at the end of last year, but still at a manageable level. If we replace total equity with Rakuten Group’s market capitalization, which reflects the Group's current equity financing ability, the Group's net debt / total market capitalization is 77%, again reflecting a manageable level of leverage.
Table 3: Rakuten Group’s Credit Metrics (At the Group Level)
(JPY billion) | Dec 23 | Jun 24 |
Total Cash | 206.9 | 306.2 |
Other Assets | 4,106.2 | 4,492.5 |
Total Debt | 1,420.0 | 1,871.5 |
Total Equity | 1,690.1 | 1,749.3 |
Net Gearing Ratio (%) | 72% | 89% |
Total Debt / Other Assets (%) | 35% | 42% |
Net Debt / Total Market Capitalization (%) | 90% | 88% （77%^） |
Sources: Company’s Announcements, iFAST compilations Data as of 30 June 2024 ^Total market capitalization data as of 11 September 2024 | ||
The market capitalization of Rakuten Group itself is as high as JPY 2 trillion, which is similar to its total debt level. When the Group needs funds for business development or for relieving liquidity pressures, the Group could raise capitals through a share placement or rights issue. For example, the Group successfully raised approximately JPY 294 billion through share placement and rights issue in May 2023, which fully demonstrates its stronger equity financing ability.
In addition, Rakuten Group, in which Rakuten Group currently holds a 49% stake, has a total market capitalization of approximately JPY 539 billion, representing a value of approximately JPY 264 billion held by Rakuten Group. These shares are the potential liquidity source for Rakuten Group. The Group can sell or pledge these shares in exchange for funding and liquidity.
In addition, Rakuten Group also has a total of 48 private equity investments valued at JPY 87.4 billion (see Chart 3), which can be exited and be liquidated to enhance the Group's liquidity.
Chart 3: Rakuten Group’s Private Equity Investments
Source: Company’s Presentation
Rakuten Card (100% owned by Rakuten Group) and Rakuten Securities (51% owned by Rakuten Group) are currently private companies and could be merged into Rakuten Bank, and these two subsidiaries are quite profitable. Based on the results of the latest six months, the two subsidiaries can generate annual operating profits of approximately JPY 62.2 billion and JPY 33.8 billion respectively. The potential valuation of each of the two subsidiaries is at least over JPY 200 billion each, which is believed to be available in providing liquidity to the Group at critical times. For example, the Group could sell its subsidiary shares to a third party or list its subsidiaries to raise funds.
Summarizing the above points, which are the steadily improving operating performance, decent profitability from the E-commerce and financial services segments, the mobile telecom segment putting less pressure on the Group's liquidity than before, a certain debt financing ability, a strong equity financing ability and valuable assets available for sales, we believe that the credit risk of the Rakuten Group in the short to medium term is under control.
Investors could consider 2027 USD Bond, with YTM of 7.2%
The current credit rating of Rakuten Group is BB (S&P), which belongs to the non-investment grade level. Given Rakuten Group’s credit risk being under control over the short to medium term, investors could consider the 2027 USD bond (see Table 4), with a YTM of 7.2%.
Table 4: Some Rakuten Group’s USD Bonds
Bond Name | Tenor (Years) | Ask Price (Investors Buy) | YTM |
| RAKUTN 11.250% 15Feb2027 Corp (USD) | 2.4 | $108.8 | 7.2% |
| RAKUTN 9.750% 15Apr2029 Corp (USD) | 4.6 | $107.8 | 7.8% |
Sources: Bondsupermart Data as of 13 September 2024 | |||
As for perpetual bonds or the 2029 USD bond, these bonds have a longer holding time, with a higher uncertainty, we believe investors could have a “wait and see” attitude for these bonds.
Related Risks
Rakuten Group still has to deploy a certain capital expenditure in its mobile telecom segment. If the capital expenditure unexpectedly increases, it could result in a deteriorating liquidity and affect the debt repayment ability.
Rakuten Group’s operating performances could be related to the equity financing abilities of the Group and its subsidiaries, or even the value of the subsidiaries. If any of the three main segments (E-commerce, Financial Services and Mobile Telecom) has a deterioration in the operating conditions, it could increase the Group’s credit risk.
Conclusion
Rakuten's three main segments (E-commerce, Financial Services and Mobile Telecom) all recorded varying degrees of revenue growth and profit growth (or loss reduction). The overall operating performance improved steadily. The mobile telecom is putting less pressure on the Group's liquidity than before.
The Group issued a number of bonds since the beginning of the year, demonstrating the Group's debt financing ability. It has sufficient funds to repay its bonds maturing on or before 2025. Its leverage level is manageable, with a strong equity financing ability.
Investors could consider its 2027 USD Bond, RAKUTN 11.250% 15Feb2027 Corp (USD), with a YTM of 7.2%.
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in RAKUTN 11.250% 15Feb2027 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.
