/ BAILLIE GIFFORD /
-KINGS
Baillie Gifford Shin Nippon’s Praveen
Kumar names three Japanese
e-commerce companies that look set to
dominate their respective industries
B
AILLIE GIFFORD SHIN NIPPON, which
means New Japan, aims to achieve long-term
capital growth by investing in small Japanese
companies with above-average prospects for
capital growth. It has net assets of almost
£250m (as at 30 April 2017). Here, manager Praveen Kumar
shares his enthusiasm for three of his favourite holdings
which, he believes, have the ability to continue growing
their sales and earnings rapidly over the long term.
iSTYLE
istyle operates online beauty portal, @cosme,
which attracts 13.8 million monthly unique users
and has a strong following among females in
their 20s and 30s. Cosmetic brands and other
beauty related businesses pay to advertise on the
website, generating revenues for istyle, which
also operates a small number of offline stores,
stocking the most popular products. It has
recently started selling cosmetics online in China.
The market appears to view istyle as an online
cosmetics retailer, but we think its real value lies in
its independent online ratings system. Originating as a
makeup review site, @cosme now has a database of over a
quarter of a million beauty products, which have been rated
and reviewed by its online users. This proprietary ratings
system aggregates the online reviews, spitting out a final
rating based on a number of different criteria. The ratings
system is rapidly becoming the de facto industry standard.
@cosme rankings are starting to appear alongside product
details on in-store sales promotions, underscoring how
quickly this business is becoming entrenched within the
broader cosmetics market.
If, as we believe, its ratings system becomes widely
adopted over time, then it will have huge ramifications
for cosmetics companies’ advertising and marketing
spend. We therefore believe istyle to be a disruptor
of the traditional advertising model and not just an
e-commerce company selling cosmetics.
If this is the case, industry estimates suggest the target
market for istyle will be worth around ¥600 billion per
annum. This roughly equates to the current annual
advertising and marketing spend on cosmetics and
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toiletries in Japan. At present,
just 8 per cent of this is online
advertising, which is low by other
developed markets’ standards.
Given the unique attractions of
istyle’s offering, and that of online
advertising in general, we believe
the shift to online advertising in
the Japanese cosmetics industry
could be rapid, with istyle growing
faster than the market.
START TODAY
If istyle is the go-to Japanese beauty
portal, then ZOZOTOWN is where
Japanese fashionistas go to online for
their fashion apparel. It is operated
by Start Today, who have fended
off competition from the likes
of Amazon and a host of smaller
players to become Japan’s leading
multi-brand “mall style” website, a
one-stop online shop for hundreds
of fashion brands.
We first bought the shares for
Shin Nippon in early 2009. Since
then, the share price has increased,
but this does not mean the growth
story has run its course, or that we
are in agreement with the market
on the prospects for the company.
Pleasing though the increase in
share price may be, it does not
take into account two factors in
Start Today’s long-term growth
opportunity, which we believe are
underappreciated by the market.
For one, we believe five years
from now the number of people
shopping for clothes online will
be a lot higher than the market is
currently envisaging. This means
there is still a significant untapped
growth opportunity that other
investors are not factoring into
their valuations. Second, we rate its
young management team and its
innovative approaches to increasing
member engagement and upping
ZOZOTOWN’s appeal very highly.
Although a small part of the business
today, new sales avenues such as
overseas expansion and ZOZOUSED
– an online platform for selling
used clothes – may become more
meaningful parts of the business.
MonotaRO
MonotaRO proves that the
potential for online Japanese
businesses disrupting their offline
counterparts is not limited to goods
that you might once have bought
on the high street. Through its
website, it sells over three million
products including overalls, hard
hats, nuts and bolts, and drills
to businesses operating in the
manufacturing, automotive and
construction industries.
Also purchased for Shin Nippon
in 2009, MonotaRO’s share price
has risen impressively since then
and, like Start Today, while its
growth opportunity is becoming
better appreciated by the market,
we do not believe investors have
fully appreciated the extent of that
opportunity or the ability of the
management to take advantage
of it. By focusing on the monthly
operating figures disclosed by
MonotaRO, financial analysts tend
to form a short-term view of the
company’s growth prospects and,
in doing so, obscure the extent of
the substantial long-term growth
opportunities that increased online
penetration should bring.
As with istyle and Start Today,
MonotaRO is working hard to
increase online penetration within
what has been a very traditional
industry. While the overall
market is said to be worth almost
¥8trn, only 9 per cent of sales are
currently online, with MonotaRO
commanding less than 10 per
cent of those. This translates into
a miserly 1 per cent of the overall
market, underscoring the massive
growth opportunity available
to the company going forward.
And so, while the shift to online
has progressed slower than it has
for other industries, the money
to be saved from procuring the
products directly from online
suppliers via MonotaRO’s website
means that the proposition will
become increasingly attractive
to the businesses which it sells
to and continue to drive further
sales increases.
SHIN NIPPON ANNUAL PAST PERFORMANCE (%)
31/03/12 – 31/03/13 31/03/13 – 31/03/14
Share Price
49.6
31/03/14 – 31/03/15 31/03/15 – 31/03/16
20.3 41.8
12.4
31/03/16 – 31/03/17
28.6
Performance source: Morningstar, total return. Past performance is not a guide to future returns.
Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any
income from it. Shin Nippon invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any
income it may pay) to go down or up. The trust can borrow money to make further investments (sometimes known as “gearing” or “leverage”).
The risk is that when this money is repaid by the trust, the value of the investments may not be enough to cover the borrowing and interest costs,
and the trust will make a loss. If the trust’s investments fall in value, any invested borrowings will increase the amount of this loss. Market values
for securities which have become difficult to trade may not be readily available and there can be no assurance that any value assigned to such
securities will accurately reflect the price the trust might receive upon their sale. The trust can make use of derivatives which may impact on its
performance. Investment in smaller companies is generally considered higher risk as changes in their share prices may be greater and the shares
may be harder to sell. Smaller companies may do less well in periods of unfavourable economic conditions. The trust’s exposure to a single market
and currency may increase risk.
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