Description

Investment Thesis:

TBS is a long time value trap that has recently shown signs of being less of a value trap. If one is positively inclined towards recent signs of corporate governance improvement in Japan, TBS is a compelling candidate with a decent underlying business and massive unrecognized value in the form of real estate and shareholdings in publicly held securities (which they have been slowly but surely selling down).

Company Background:

• TBS is the 3^rd largest TV broadcaster in Japan. The business model isn’t totally dissimilar to the broadcast model we are familiar with in the US but there are some nuances mentioned below. Fundamentally though, their TV business gets ~40% of revenue from advanced ad sales (similar to upfronts), ~40% from spot ad sales, and the remainder from streaming and other sources.
• As one might imagine, the TV business has been fine, if not exactly a major growth driver

• The more interesting element here, is that TBS has emphasized their non-broadcast businesses to the extent that almost half of their revenue comes from non-broadcast services (mostly real estate) and lifestyle and real estate now drive roughly the same EBIT as the overall media business (and ~15% of that segment is broadcasting at all)

• I think the real estate segment here is arguably the most interesting with ownership of Akasaka City Project which is a mostly office oriented development which also houses entertainment events like Harry Potter experiential stores. Akasaka is in a prime area of Tokyo and the Company is continuing to develop the area with 2 more towers under development.
• Then beyond that, TBS also has stakes in several prominent Japanese companies. Cross shareholdings have been an enduring albatross around the neck of attempts to maximize value for shareholders, but TBS has been selling down their stakes fairly consistently and have sold over JPY 116Bn of securities over the past 5 years (this is meaningful in the context of their ~320Bn JPY EV).
  • They have used proceeds to both repurchase stock and fund capex for the Akasaka development project.

• The Company still has large stakes in a handful of public companies worth almost 2x their entire EV
  • Some of these stakes are arguably quasi strategic, but many are not.

Sum of the Parts:

Why now?

• The cumulative impact of governance changes in Japan seems to be placing the onus on companies to improve shareholder returns. Specifically, the Tokyo Stock Exchange recently enacted rules requiring companies which trade at P/B <1 to disclose their policies and specific initiatives for improvement. This has led to more aggressive capital return initiatives and TBS’s P/B ~0.45x places them in the cross-hairs of this initiative.

• There has also been discussion of lifting the ownership caps of the broadcasters and raising the threshold for foreign ownership which would encourage foreign investors (who would presumably demand greater ROEs). Notably, calls for lifting these caps has come from the broadcasters themselves.

Risks

• The most obvious one is that potential signs towards rationality with respect to capital allocation is a false start. This is partly mitigated by the fact that compared to some other Japanese companies, TBS hasn’t been as intransigent in selling down cross shareholdings, but obviously there is still a lot left to be desired.
• The underlying business is also a potential risk. Terrestrial broadcasting isn’t exactly firing on all cylinders, but if this slow burn accelerates that could be problematic. This risk is mitigated by the fact that the broadcasting business could be a zero and the stock could still work by virtue of the hidden asset values from real estate and cross shareholdings.

Industry Background:

• Terrestrial TV in Japan still has ~75+% share of TV consumption in Japan vs <30% in the US which has seen the market fragment with the proliferation of pay-TV.
• In Japan, broadcast areas are effectively broken down by prefecture, and stations are independently run (there are ~115 regional stations and 5 Tokyo stations). This is a sub-optimal structure since it precludes leveraging scale in advertising and program production in an environment with declining regional populations
  • Consolidating these regional stations into larger geographical blocks would help leverage scale
  • There are other restrictions on broadcast stations which have been problematic like restrictions on owning a station in both Osaka and Tokyo as well as caps on foreign ownership.
• Elimination of any of these structural caps on efficiency or growth would be very positive for the broadcasters. There has been discussion of increasing the cap threshold on foreign ownership and reducing some of the operational restrictions has also been discussed, but I’m not assuming any imminent changes.

Catalyst

Continued sales of security portfolio and movement towards real-estate (and non-broadcasting) revenue drivers