halmek (the “Company” or “Halmek” – H is capitalized in this report) is in the business of satisfying unmet needs of women aged 50 and older.

 ·      It has grown by serving the needs of expanding but underserved segments of the Japanese population – women aged 50 and older. Halmek acquires customers through the publication of the magazine “Halmek”, which is the No. 1 magazine in terms of sales volume.

·      Halmek then proposes and sells the customers its original products (original product ratio: 70%) that are linked to the magazine’s contents by mail order.

·      The Company also offers events such as lectures and group travels that are linked to the magazine’s special features, etc., to increase customer satisfaction and generate revenues.

 It went public in 3/22 and raised ¥4.05 Bn, ¥3.81 Bn of which was used to pay down debt. The remainder is earmarked for system investment.

Who is Halmek?

The company operates under two major segments:

1) Halmek with 3 subgroups, and

2) National Mail Order.

These two businesses are designed to cross-sell each other’s business and propel the company’s goal in cultivating a devoted following of customers who are passionate about Halmek brand.

 The details of each group follow:

 1) Halmek

 1 – a) Contents/Flagship Halmek Magazine

·      The magazine “Halmek” is a magazine that is only sold by subscription and is delivered to subscribers’ home, not available for purchase at bookstores. It provides a wide range of articles that respond to the anxieties, dissatisfaction, and expectations of senior women. Its content includes special features, fashion, health, recipes, handicrafts, interviews, and serials that respond to the entire lives of senior women. As of 12/2022, it has received widespread support and acclaim with 500,000 subscribers. The subscription fees are ¥6,920/year. Halmek enjoyed the highest circulation in Japan for the first half of 2022 by Japan ABC Association report.

 ·      Core magazine Halmek is not only an information provider but a customer acquisition center as well.

 The below bar graph highlights Halmek’s exceptional growth (CAGR of 26% for 2017 through 1H/2022) against its peers.

(Source: Company)

Halmek also operates “halmek 365” as a website for slightly younger women. In addition to free articles, video, and voice services are provided to users on a monthly subscription.

 1-b) The mail-order product sales

 The company develops and sells products centered on the needs of halmek subscribers. As many products are in the middle to high price range, the services are differentiated from those of the nationwide mail-order businesses which are mainly in the low price range.  Halmek products enjoy solid demand, despite their higher-price points, since:

 · The products address the concerns and reflect the expectations of their customers, based on their feedback, and

·      Halmek’s target demographics tend to be better off vs. younger women (discussed in TAM section below).

 1-c) The communities

The company provides opportunities for experiences and connections related to information contents of Halmek magazine and products sold by mail order group. A total of over 100 online and offline events were held in FYE 3/2022.

2) Nationwide Mail Order Business

The nationwide mail-order business is a business that operates mail-order sales by sending mail-order catalogs to consumers who are attracted mainly through newspaper advertisements, i.e, not through Halmek’s magazines. This business also targets senior women, but the products are in lower priced than those sold to Halmek subscribers.

3) New Businesses

 The below smaller but promising operations are reported under “New Businesses”.

(Source: Company)

 1. Investment Thesis

Halmek’s investment merits can be summarized as its ability to grow its profits by satisfying the unmet needs of a growing segment of Japanese consumers.

1) Growing Target Accessible Markets (TAM) to drive Halmek’s top line.

The below bar graph plots a trend of the Japanese female population from 2010. Older women is expected to account for 53% of the female population by 2025, up from 46% in 2010.

(Original Source: Nationale Institute of Population and Social Security Research, reported by the company)

Not only are women aged 50 and older increasing their share among the population, but they have also accumulated financial assets that far surpass those of their younger counterparts. In March 2022, it was estimated that the financial assets of women aged 50 and older amounted to a staggering JPY 1,600 trillion. In contrast, the total financial assets of younger women were estimated to be JPY 40 trillion. This significant difference highlights the financial strength and independence of older women, i.e., higher spending power.

Note: These statistics are calculated by the company, based on the numbers from “Bank of Japan Fund Circulation Statistics”.

2) Meeting a customer’ unfulfilled needs in multiple facets of her life the company’s ability to serve them like no one else.

 As shown above, mature ladies present a huge and growing industry segment. Then,

 Why this segment is underserved.

There exists a profound misunderstanding regarding the desires and necessities of mature women. Society often overlooks their unique perspectives and individuality, leading to a misrepresentation of their true needs and wants. For example, Halmek’s customer inquiry, using multiple venues, has discovered that despite a commonly shared perception that mature women prefer dull-colored or loose-fitting clothes, they often prefer to wear more feminine outfits. Also, senior ladies have wide-ranging interests, outside of “babysitting or other home-bound activities” and “end-of-life planning”.

 How Halmek is serving their customers/fans

 ·      By ongoing and expansive customer research, the company has discovered untapped needs and strived to satisfy these needs.  Halmek continuously conducts customer research, such as online survey, customer interviews at the company-sponsored discussion meetings, and trial use of Halmek brand goods/clothes)

 ·      The company’s success in serving its target customers is reflected in the steady increase in both subscribers and customers shown in the graph below. Halmek’s success is in stark contrast to the overall Japanese publishing industry which has suffered from a gradual but steady decline (second bar graph).

(Source: Company)

 *Note: The customers denote a customer who purchases a product/service of Halmek Group once within a year.

(Source: Sales value of the publishing industry in Japan from 2014 to 2022)

3) Many cross-selling opportunities –> synergies among groups lead to LTV  (lifetime value of a customer) improvement

The groups are aligned to cross-sell each other ’s products and to enhance a customer’s LTV (see Business Model section for further discussion).

• Information content: Provides useful information to senior women through magazines such as “Halmek” and “Halmek 365”.
• Merchandise sales: Develops original products based on the voices of senior women and sells them through own EC site, catalog mail order, and stores.

The below graph visualizes that, as the subscription months progress, the subscriber’s use of mail orders increases: 10% after a month of subscription to about 30% after 12 months.

(Source: Company)

 3) Growth plan in place to sustain its current growth momentum

 3-a) The company has many new growth initiatives in place in Halmek group.

One of these initiatives is Halmek 365 which is a subscription-based video and audio service aimed at digitally savvy pre-senior women.  Via Halmek 365, the company is striving to captivate a younger female audience, with an average age profile in their mid-forties, while Halmek magazines have garnered popularity among older women, with an average age of 71 years

 3-b) Expansion to B to B

The company generates vast majority of revenues directly from consumers (BtoC, about 94% as of 12/22).  However, the company is expanding its corporate relationships by providing advertising services: placing corporate customer advertisements in magazines and mail-order catalogs issued or on the website operated by the company.

2. Technically Speaking

(Source: buffet-code.com)

The above chart shows that the shares have not entered into so-called “IPO secondary” stage yet.  After a huge jump in stock prices during a few days of IPO, stock tends to suffer from sharp selloffs from early investors to capture profits. When the sell-offs are complete, the stock will likely trade on its own fundamental merits and can resume its ascend (IPO secondary). Halmek has two price clusters at around ¥1,800 and ¥2,360. Therefore, it may be premature to start a position with Halmek at this point, but this is a worthwhile stock for a watch list.

Valuation: Halmek’s unmatched and focused service solutions render peer comparison rather fruitless. One company that has a similar corporate profile is Brangista (6176) which supports clients’ promotion strategies on a subscription basis. Its market cap is ¥11.4 Bn vs. Helmek’s ¥17.1 Bn. Its PE is 28.5x and PEG at 0.8x.  Halmek appears less expensive with PE of 11.8x and PEG ratio of 0.7x.

3.  Business Model

 Halmek’s business model focuses on creating a positive cycle of converting a subscriber into passionate fans of Halmek’s various products by expanding customer contact points to raise a cross-sell opportunities. The company improves a life term value of a customer via a non-stop relevant content introduction supported by deep-dive consumer research. Specifically,

1) High number of new customer acquisition: Halmek magazine & Web get new customers at a rate of 270,000/year and national mail order operations at a rate of 140,000/year

2) Consistently high renewal rate of contents and satisfaction rate of mail order businesses which leads to an improvement in the lifetime value of a customer as shown in the below diagram.

(Source: Company)

KPI (Key Performance Indicators)

To gauge the success of their LTV improvement efforts. Halmek tracks a shift in number of Halmek subscribers and mail-order customers.  National mail order segments went through revamping of its product offerings which prompted the customer’s decline in FY3/2020 and 3/2021. However, Halmek has successfully resumed its customer growth by fortifying its efforts in acquiring new customers. The graph below really highlights the strength of Halmek brand which makes the 2nd look worthwhile.

(Source: Company)

The graph below plots the increase in spending per customer as the years of her relationship with Helmek lengthen, i.e, an increase in a customer’s lifetime value.

(Source: Company)

 It is worth reiterating that the company is persistently launching new products to address the unfulfilled needs of mature women in various areas. The newest example is Halmek 365.

 Halmek 365:

 Segment goals:

·      Increase B-to-B subscription product offering.

·      Adjust to the client’s shift to digital platforms,

·      Expand reach to younger/pre-senior ladies,

·      Enhance content consumption experience through Audio/visual contents

Halmek 365 Pricing

 1) Magazine subscribers: ¥550/month

2) Non-subscribers ¥770/month

4. Financial Highlights

 Financial Results for FYE 3/2023 vs.  FYE 3/2022:

(Source: company)

The company experienced a continuous increase in both sales and profit growth across all three of its Halmek subsegments. This growth can be attributed to an increase in subscribers and mail-order customers. The company’s unwavering dedication to cultivating and enhancing Halmek’s content has been the driving force behind its robust performance. Strategic promotions in newspapers and the successful launch of original apparel products helped the year-on-year growth of national mail-order customers.

 Guidance:

(Source: Company) 

Halmek operations are expected to generate a 10% plus increase both in sales and EBITDA supported by sprouting growth in new initiatives discussed earlier. National mail order will experience sales growth, but EBITDA is lower due to higher client acquisition costs.

 Halmek’s performance has large seasonal fluctuations and is heavily weighted towards the second half of the year. This is because the company holds promotional events in June and Nov/Dec periods. Furthermore, for FYE 3/2024, it expects a decrease in profits due to a one-time cost burden of 130 million for the repayment of borrowed money in the first half and 200 million for the advance investment in sales promotion expenses for acquiring new customers ahead of schedule. However, it plans a significant increase in profits for the second half of the year.

 Balance sheet

 Halmek carries ¥4,452 million goodwill on its balance sheet as of FY3/2023 as a result of numerous acquisitions. This amounts to 32% of fixed assets and will remain on its balance sheet since IFRS accounting principle does not require goodwill amortization. Management is aware of these non-producing assets and is prepared to generate profits as if the company is amortization goodwill.

 

5. Total Addressable Markets (TAM)

The size and the sustainable growth profile of the target market is the major stock driver (discussed in the investment thesis section)

6. Strengths and Weaknesses

Strengths

The company takes pride in its achievement of having the largest readership among publications. This significant mindshare of a growing demographic is difficult to replicate, as the company continues to deepen its understanding of senior ladies. The company has successfully translated this understanding into products and services, further accelerating its market share in the industry it dominates.

Weaknesses

Potential disparagement of Halmek brand

In the vast retail industry, there always is a risk to a company’s reputation. Once a brand is tarnished, it can be challenging to regain customer acceptance. However, the company’s rapid growth, propelled by multi-pronged market research, sets it apart from its competitors. These competitors will have a difficult time catching up with the company’s cross-selling ability, which has created a virtuous cycle of understanding of and selling to its readers.

7. Near-term Selling Pressure

As noted in the useful tips section of www.JapaneesIPO.com, when the stock’s outstanding margin buy volume is high and rising, that will function as near-term selling pressure. For Halmek, the margin buy-sell ratio is high, although it is slowly coming down.  Also, the chart in the Technically Speaking section reveals there is near-term selling pressure on Halmek shares. We have to conclude that the near-term selling pressure is high at this point.

 [Disclaimer]

The opinions expressed above should not be constructed as investment advice. This commentary is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future performance