Deep-dive 2020-7: Koshidaka Holdings Co Ltd
Koshidaka Holdings (2157 JP) is a karaoke-operator run by serial entrepreneur Hiroshi Koshidaka. The man has an incredible track record and he continues to put his entire focus on the company.
The main part of the business is a chain of karaoke bars run under the brand name "Maneki-neko". While the karaoke industry is stagnant, Koshidaka has managed to consolidate the industry. They focus on the lower-end market, offering easy-to-use equipment, clean facilities, low prices and convenience by allowing visitors to bring their own drinks. The strategy of building karaoke boxes around key railway stations and very densely populated urban areas has served them well. ROEs are very high by Japanese standards. Koshidaka has managed to double its market share from 5% to 10% in the past decade, despite a slow-growing overall market.
In early 2020, Koshidaka spun off its fitness segment into Curves Holdings (7085 JP). Given that the 90% of the tax basis was attributed to parent Koshidaka, we believe that most investors chose to sell Koshidaka rather than Curves. And the facts support this view. Curves is now trading at a very high multiple (3.1x sales vs 1.1x for Koshidaka itself). Curves's shares are now back to the initial trading price right after the spin-off, whereas Koshidaka’s share price is down over 40%. We think that the post-spin selling pressure has already abated, because over 170 million shares have changed hands since the spin-off - more than enough for existing shareholders to get out of the stock.
The spin-off highly says something about Koshidaka's capital allocation. If all they cared about was building a family empire, they would not have structured the spin-off in this fashion. Also, the company's ROE is high and book value has compounded at high rates. Hiroshi Koshidaka himself has been the key driver behind the overall strategy of Manekineko and Curves, with some of the best operating performances in their respective industries.
While COVID-19 has undoubtedly been negative for the karaoke business, there is light at the end of the tunnel. Koshidaka's karaoke boxes are now open again, and if a vaccine gets widely distributed, customers would likely come back.
With a theoretical calculated intrinsic value of around JPY 729/share, the upside in this potential scenario would then be +82%.
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