Newsletters

Jade Group (3558) – Lack of clarity around growth ambitions

Over the period, Jade Group (“Jade”), the apparel E-commerce distributor, was the largest detractor, reducing performance by -123bps as its share price fell -26%.

During Q2 2024, Jade’s share price was strong on the back of a press release made in July, which showed signs of successful post-merger integration of MagaSeek in a demonstration of improved IR communications, an area in which much of our recent engagement had focused. Unfortunately, since the announcement in July 2024, Jade has not made adequate disclosure around the significant acquisition, leaving shareholders and prospective investors in the dark on its progress. In its FY25 Q2 presentation material released in October 2024, rather than provide a clear timeline for cost cutting measures, management alluded to cross-sales as the likely method to revitalise sales to meet the FY25 forecast. This sent the share price down nearly -15% in the week that followed, and it has drifted a further -11% lower since.

Since we initiated our position in November 2021, Jade has made several acquisitions in pursuit of its ambitious growth path to cement itself as the #2 player in Japan’s Y2.4tn fashion e-commerce market. We have supported management in pursuing this growth, however, with the market-wide reform that is occurring in Japan, the importance of investor relations cannot be understated, and we believe Jade is not meeting expectations.

With net cash reduced following several M&A transactions, uncertainty around plans for margin improvement through PMI, and managements apparent lack of desire to enhance IR disclosure, we have reduced our position in AJOT to 1.7% of NAV at month end. To date, we have generated an ROI of +32% for an IRR of +14% over the more than three year holding period.

Jade Group (3558) – PMI consolidation costs

Jade Group (“Jade”) was the largest detractor during the month, reducing performance by -90bps as its share price fell -15.7%.

In mid-October, Jade announced its Q2 results, which showed H1 operating profits down -30% YoY due to warehouse and headquarter consolidation costs related to the acquisition of Magaseek earlier in the year. Despite full-year guidance remaining unchanged, the market was not receptive to the disclosed plan to revitalise sales through cross-selling initiatives, sending the share price -10.6% lower over the remainder of the month.

In recent years, Jade has remained steadfast in its growth ambition to become the #2 player in Japan’s Y2.4tn fashion e-commerce market behind Zozo. Led by President Tanaka, Jade has completed several acquisitions, the most notable of which, prior to Magaseek, being Reebok Japan in 2022. Since initiating our position in 2021, we have supported Jade’s investment in long-term growth. Meanwhile, Jade have made strides in improving its IR communications and reduced its reliance on sales promoted by YouTube influencers.

To date, our nearly three-year investment has generated an ROI of +38% for an IRR of +18%. Trading at a forward EV/EBIT multiple of just 10x, we anticipate a further +44% upside to the current share price. As a top ten position, Jade accounts for 4.3% of AJOT’s NAV at month-end.

Over the period, JADE GROUP (“JADE”), the apparel E-commerce distributor, was the largest contributor, adding +171bps to performance as its share price rose +26.8%.

JADE’s share price was strong on the back of a press release in July, which highlighted the successful post-merger integration of MagaSeek in a demonstration of improved IR communications, an area in which much of our recent engagement had focused. Over the course of our three-year investment, JADE have made promising strides in this area. Since the press release in July, the share price is up +8%, evidencing the benefits of disclosing comprehensive information to the market. On the back of share price weakness, we strategically added to our position at the end of Q2, allowing us to fully benefit from the press release that followed.

Trading on a lowly 7.5x forward EV/EBIT multiple, JADE’s 5.4% position in AJOT (eighth largest holding) is reflective of our conviction that, as JADE continues to cement itself as the #2 player in Japan’s Y2.4trn fashion e-commerce market, we estimate there remains around +100% upside to the current share price. To date, our investment has generated a +55% ROI for a +25% IRR.

Over the month, JADE GROUP (“JADE”), the apparel E-commerce distributor, was the second largest contributor, adding +61bps to performance as its share price rose +10.6%. JADE’s share price was strong on the back of a press release in July, which highlighted the successful postmerger integration (PMI) of MagaSeek in a demonstration of improved IR communications, an area in which much of our recent engagement had focused. Over the course of our three-year investment, JADE has made strides in this area. Since the press release in July, the share price is up +18%, evidencing the benefits of disclosing comprehensive information to the market. Trading on a lowly 7.3x EV/EBIT multiple, JADE’s 5.7% position in AJOT (seventh largest holding) is reflective of our conviction that as JADE continues to cement itself as the #2 player in Japan’s Y2.4trn fashion e-commerce market, there remains significant upside to the current share price in the order of +125%. To date, our investment has generated a +61% ROI and +29% IRR. Further discussion of JADE and the company’s performance this year can be found in last month’s newsletter.

Over the month, JADE GROUP (“JADE”) (previously Locondo), the apparel e-commerce distributor, was the largest contributor, adding +131bps to performance as its share price rose +20.8%. The share price increased +30% in the first quarter, propelled by the announcement of the acquisition of Magaseek, a leading fashion ecommerce platform 75% owned by DOCOMO and 25% by Itochu.

The purchase is expected to double gross merchandise value (GMV) and profits by 2026. The shares then plummeted -41% in the second quarter, ending the first half of 2024 down -23% overall as the market was sceptical given the downward trend in Magaseek’s profits from FY20-FY22.

JADE responded in early July with a timely press release demonstrating to the market the full potential of its acquisition of Magaseek, highlighting the successful post-merger integration (PMI), as Magaseek saw its operating income rise by +63% in May on an annualised level relative to FY23. The market appreciated this, with the share price rising +18.3% in a single day of trading. We were pleased to see this deserved recognition, as much of our recent engagement with JADE had focused on suggesting improved disclosure to allow the market to fully comprehend the upside of the acquisition.

Over the course of our three-year investment, JADE has made strides in improving IR communications, reduced the reliance on sales promoted by YouTube influencers, and successfully executed six acquisitions the most notable of which, prior to Magaseek, being Reebok Japan. When asked whether JADE is seeking to complete more acquisitions, management’s response was unequivocal: “we absolutely want to do more.”

Trading on a lowly 6.6x EV/EBIT multiple, JADE’s 5.4% position in AJOT is reflective of our conviction that as JADE continues to cement itself as the #2 player in Japan’s Y2.4trn fashion e-commerce market, there is significant upside to the current share price in the order of +130%. To date, our investment has generated a +49% ROI and +25% IRR.

Following a stellar first quarter in terms of share price performance, JADE’s share price crashed back to earth after the market was underwhelmed by management’s disclosure regarding the Magaseek acquisition. As we wrote in our Q1 letter, we perceive the Magaseek acquisition, expected to double Gross Merchandise Value (GMV) and profits, as a pivotal move for JADE. Unfortunately, the market did not share this view, with the share price falling by -32% following JADE’s earnings results at the beginning of April, having already fallen by – 19% from its peak in March.

We attribute the share price reaction to several factors; (1) JADE’s share price had appreciated by +97% from Nov2023 to the peak in March, offering investors a natural opportunity for profit taking, (2) individual investors own 55% of JADE, and they tend to have a more short-term focus, seemingly less interested in the profit impact from Magaseek, which is not anticipated until the year ending Feb 2026, and (3) management’s disclosure surrounding the acquisition left much to be desired.

Considering these factors are non-fundamental, the share price weakness offered an enticing opportunity to increase our stake, which we promptly seized by increasing our holding by 44%, resulting in a 12% ownership. Management was equally perplexed by the share price weakness, and they too stepped into the market, with JADE buying back 5% of its shares within two weeks.

In private conversation, management acknowledged that they could have done a better job with disclosure, which they committed to rectify moving forward. While the short-term impact on our NAV isn’t pleasant, as long-term investors, we view such share price distortions as an excellent opportunity to add to a well-known position. The management team have our full support, and we are confident that as they execute the integration of Magaseek and see profit growth, the share price will follow suit. We just need to be patient. In the meantime, we estimate that Jade is trading on an EV/EBIT multiple of 4x to its FY26 expected profit.

JADE GROUP (JADE) (previously LOCONDO) has ascended to a top ten position in the portfolio and saw its share price increase +30% over the quarter. Since the date of our first investment, JADE’s share price has increased by +138%, generating a healthy ROI and IRR of 102% and 41% respectively.

The shares were propelled higher over the quarter after it announced the acquisition of Magaseek, a leading fashion ecommerce platform owned 75% by DOCOMO and 25% by Itochu. The purchase is expected to double Gross Merchandise Value (GMV) and, although not yet confirmed by the Company, we believe it could also double profits by 2026.

We invested in JADE in November 2021, after its share price had fallen -70% from a COVID-intoxicated high in August 2020. While JADE was viewed as a “growth stock”, and not an obvious candidate for a value-driven engagement fund, it had become undervalued with a substantial net cash backing. We understood JADE’s business model having had an indirect investment in Zalando, JADE’s European equivalent, through our global fund. We watched in marvel as Zalando rolled out its partners program across Europe and recognised a similar potential for JADE in the Japanese market.

Over the subsequent three years, led by President Tanaka and the newly appointed de facto CFO, Shigetoshi, JADE continued its ambitious expansion. As the largest shareholder, we have actively supported management in pursuing its growth strategy. We agreed that the dividend should be scrapped to focus on M&A and share buybacks, and sent letters highlighting JADE’s undervaluation. Needless to say, it has been a busy period for management. They have made strides in improving IR communications, reduced the reliance on sales promoted by YouTube influencers, and successfully executed six acquisitions the most notable of which, prior to Magaseek, being Reebok Japan.

The acquisition of Reebok Japan through a 66/34 JV with Itochu marked a pivotal moment for JADE, facilitating the move into direct management and ownership of a well-known brand. Utilising its marketing and logistics expertise, JADE seamlessly integrated Reebok into its existing infrastructure, benefiting from operating leverage which will drive operating profits +77% higher this year (year ending Feb 2024).

Having proved the model with numerous acquisitions, we believe the market is yet to fully comprehend how pivotal the Magaseek acquisition could be. Trading on a lowly 10x forward EV/EBIT, we anticipate that as management communicates the expected impact from the Magaseek acquisition in the coming months, the market will gain a better understanding of its significance and reevaluate accordingly. When asked whether JADE is seeking to complete more acquisitions, management’s response was unequivocal: “we absolutely want to do more”. With JADE cementing itself as the #2 player in Japan’s Y2.4trn fashion e-commerce market, its Y60bn GMV still has a long way to go to catch up with Zozo’s Y560bn, not to mention its valuation (18x EV/EBIT)

JADE GROUP’s share price fell by -9.9% over the month, after a volatile reaction to what we believe were respectable results. After announcing gross merchandise volume and operating profit growth of +28% and +356%, on track to achieve the Company’s +77% full-year operating profit growth guidance, the share price proceeded to fall – 9.0%. Our confusion was shared by management, who the next day announced an increase in their buyback program from 3.6% to 5.2% to take advantage of the weakness, sending the shares +13.6% higher. The share price then drifted lower to end the month down.

The share price fall leaves the Company with 22% of its market cap covered by net cash, which it has committed to share buybacks and M&A, and trading on an 8.4x EV/EBIT – remarkably cheap for a company growing earnings at double digits. We share management’s enthusiasm about the company’s prospects and are glad they are more aggressively buying back their shares.