ZIGExN
a media company from Japan
ZIGExN
a media company from Japan
By Manuel Maurício
November 26, 2021
Symbol: 3679 (TYO)
Share Price: 322 JPY
Market Cap: 35.97 Billion JPY
Introduction
Here’s a type of business that I’m not usually interested in.
ZIGExN owns and operates a multitude of search aggregators.
It’s like a venture capital fund that buys and integrates all these niche aggregators.
From Japan.
Japanese companies aren’t known for being shareholder friendly.
It seems that Japanese managers are more worried about resilience and preservation of the company, and not so much about performance or profitability.
You see, lifetime employment is still a big thing in Japan.
So is honor and values.
So you’ll see companies like Nintendo not really optimizing returns and – maybe more annoying than that – not caring about western investors when they ask them though questions about capital allocation.
Japanese managers are famous for being highly conservative.
Of the regular criticism that is made to Japanese companies, a recurring one is the fact that they keep a lot of cash on the balance sheet instead of returning it back to the shareholders.
ZIGExN has plenty of cash on its balance sheet, but there’s good reason for that.
* Before we proceed, I’d like to thank @VanVianney and @Tristanwaine for helping me better understand this business.
First things first.
The proper way to read the company’s name is Jigen so I’ll call it Jigen from now on as it’s much easier for me to say than ZIGExN – What did these guys have in mind when they came up with this name?
Segments
The operations are organized under 3 different segments: Human Resources, Real-Estate, and Lifestyle.
The 2 major ones are Human Resources and Real Estate.
In Human Resources, the company operates in the niche areas of Beauty and Nursing care; in Real Estate, the company works primarily in the niche areas of leasing real estate and renovation; and in Lifestyle, the company works in the niche ares of travelling and second hand auto marketplaces.
I believe that the company now owns more than 20 websites. Among them you can find sell.tc-v.com for used cars, sp.minden.jp for fortune tellers (yeah, I know), fc-hikaku.net for buying and selling franchised businesses, pronuri.com for finding exterior walls painting companies, or miraxs.co.jp for nursing caregivers to name a few. You can find them all here.
As with most 2 sided marketplaces, it’s usually more important to get the service providers first and then go after the users. Think about it. Who would user the Uber app more than twice if there were no cars around? That’s why Uber got the supply side of the equation first (with great success).
For Jigen the companies that are advertising their services are called the “clients” whereas the users landing on those websites are called “users”.
Jigen’s management makes these 5 year plans – just like the Chinese Government – and, lucky us, they’ve published their latest one recently.
For the next 5 years, the company will be focused on 2 things: Attracting more clients and retaining them.
Pretty easy, right? It’s a simple equation. You attract the clients and you make them stick around. Easy peasy.
They’re putting a large amount of effort in order to achieve those two goals such as giving its real estate clients a free CRM (Customer Relationship Manager) and stepping up the advertising spend both online and in the real world. They’ve mentioned that in a specific city where they posted ads in taxis, the number of users grew by 8%.
The cool thing about marketplaces is that, as they grow, the customer acquisition cost (CAC) gets lower. Think about it. At first, the marketplace isn’t that well known so the company must spend money in marketing and in attracting the clients.
But then, as the marketplace gains scale and users, the cost of acquiring another client gets lower as the bargaining power shifts towards the marketplace. This means that there’s some winner-take-all effects; which in turn means that these can be great businesses as they scale.
I’ve been looking to find businesses that get better as they get bigger. Marketplaces and search aggregators look like they might fit the bill.
The cool thing about Jigen’s technology is that the service and technology that they provide is the same for all of those industries. It doesn’t matter if the marketplace sells oranges or sailing boats. There’s a client needing to advertise a service/product and there’s a user looking to find it. It’s a matching business.
The company points to its matching technology as its competitive advantage. I don’t know about that, but the numbers sure seem to indicate that the clients like it.
And as the matching technology can be used in many different businesses, it’s only natural that the company goes after all those scattered businesses.
According to the newest 5 year plan, the company is looking to grow its Human Resources and Real Estate businesses by, not only attracting more clients, but also by entering new niche verticals.
The goal is to reach 2025 with ¥35 Billion in revenue and ¥10 Billion in EBITDA (more than double from today’s numbers).
Which leads me to the company’s strategy:
Strategy
Jigen grows, not only organically, but also through acquisitions. As the technology is the same for all of those different markets, this strategy works well. They buy other smaller companies and then they apply their tech and best practices.
The company has made 19 acquisitions since the IPO with an annualized rate of return of 27%.
The chart below shows us the relationship between cumulative price paid for those acquired companies (EV or Enterprise Value) and the cumulative EBITDA (profits, kind of) extracted from those companies.
All of this is fruit of a very interesting culture. Jigen’s works as a talent incubator.
The company fosters entrepreneurship as it needs a lot of human capital to run all the different sub-companies. The managers are encouraged to lead the businesses with a lot of freedom as if they owned them.
In fact, there’s something about this company’s culture that I really like and that is hard to put into words.
There are clear paths for career progression and it’s usual to see young employees stepping up the corporate ladder pretty quickly to become business leaders in just a couple of years.
Management
All of this is due to a very driven founder. Joe Hirao is the brains behind all of this. He’s just 39 years old and owns 50% of the company.
To make a long story short, he was working for RECRUIT Holdings – a much larger company focused on HR – where he climbed the corporate ladder to become director of one of RECRUIT’s businesses (later named ZIGExN). In 2010 he performed a Management Buyout of ZIGExN taking it public in 2013 at the age of 31!
Let’s now look at the financials:
Financials
The revenue growth, at 38% annually since the IPO, is nothing short of amazing.
But this has come at the cost of declining margins.
In 2019 the company lost an important client and 2020 and 2021 were… well they were 2020 and 2021, so I wonder if we could be seeing the margins go back to where they were in the past.
Anyway, the management has been able to keep the Return on Invested Capital high and somewhat stable.
Balance Sheet and Capital Allocation
At the beginning of this write-up I mentioned that Jigen holds a lot of cash on its balance sheet, 8.65B to be more precise. For a company that has very little capital needs, that might seem like a lot.
But for a company that grows through acquisitions, and which has historically paid cash for those acquisitions, that’s dry powder waiting to be deployed.
In fact, the company has a peculiar Capital Allocation policy.
It will take the profits from the previous year, subtract the expenditures needed for growing the business, subtract the dividends paid, and what is left will be used for buybacks.
I can’t say that I’m a big fan of this strategy as it seems to ignore valuation, but I also can’t say that I hate it.
Conclusion
I’ve purposely made this write-up short, not because there’s few things to talk about, but precisely because of the opposite. The company posts so many KPI’s, metrics, and data that I’m still reading and learning.
I think it’s obvious that I’m quite interested in Jigen, but I still don’t fully understand the business. It’s sitting just in the limit of my circle of competence.
It’s still hard for me to understand the moat of the search aggregators. I know that I’ve explained the network effects up there, but I still have to feel that I understand them. For now, I just understand them in an intellectual way.
In the coming week I’ll be continuing my research on ZIGExN and its competitors.
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