Quick Look

Sessa Investment Research

December 7, 2023

arara｜4015

Initiation

TSE GrowthHigh-growth fintech company in a country lagging in the
cashless space
HiddenassetsSummary• Overview: arara primarily serves retailers such as supermarkets and restaurant chains,
offering Dokuji Pay (branded currency payment + marketing) and high-speed e-mail delivery
software as a service. With its Dokuji Pay service, where clients are the issuers, the company
has a certain level of distinction from its competitors in this niche field, and is solidifying its
market position. Starting in March 2024, the company plans to integrate its digital signagerelated business as well, aiming to quickly accelerate its retail marketing platform strategy tohelp retail stores strengthen their connection with consumers both inside and outside theirstores. Taking advantage of this opportunity, the company plans to rename itself PaycloudHoldings and become a holding company.
• Earnings: The company has formulated a three-year medium-term management plan that
ends in FY2025/8, targeting sales of ¥7.0 bn and EBITDA of ¥1.5 bn. In FY2024/8, the halfway
point of the plan, the company expects annual transaction volume in its mainstay cashlessservice business to grow from ¥1.2 tn in FY2023/8 to ¥1.5 tn in FY2024/8. In addition, it plans
to consolidate Cloudpoint (CP), which operates a digital signage-related business, in 2H,
which it projects will bring sales to ¥6.9 bn and EBITDA to ¥650 mn. However, since thecompany has not yet determined the basis for calculating the goodwill cost of CP and theamount of amortization at this time, it is only disclosing a tentative operating profit forecast
for FY2024/8.
• Share price insights: Since the company has not disclosed its forecast for ordinary profit,
net profit, or EPS for FY2024/8, the EV/EBITDA multiple is the most effective way to evaluate
the company's shares. Based on the company's EBITDA forecast for FY2025/8, its current
Enterprise Value is only about 6x EBITDA, a level that probably does not reflect the company's
earnings growth in FY2025/8 onward. However, once the company takes advantage of its
name change to Paycloud Holdings, which better reflects its business activities, to refine its IR
disclosure and rectify the information asymmetry in the process, the equity market may gain
more conviction of the company's earnings growth story for FY2025/8 onward and evaluate it
as a high-growth fintech company.
• Risks: Once a system failure occurs, which are common to all system companies, its
payment services will not be operational at stores. On the other hand, the company's businessmodel is basically an anonymous cashless service, so there is no risk of personal information
leaks. One potential risk in terms of investment is the possibility of equity financing (stock
dilution) as a method of raising funds in the event of major M&A deals in the future, but thecompany noted that it has no intention of raising capital at the current stock price level to raise
its cost of capital.
2020/8 NC

1,201

Operatingprofit15.3
1362021/8 NC

1,461

21.6

305

124.3

280

97.2

229

2022/8 NC

1,165 (20.3)

(160)

(152)

(1,506)(638)(1,834)2023/8 C

4,476 284.1

163

N/A

133

N/A

114

2024/08 CE
6,900 54.2
200
22.7
Source: Compiled by SIR from the company’s financial statements.

N/A-

Y mn, %

Sales

YoY

YoY
29.5

Ordinary
profit
142

YoY
27.9

Net profit
143

YoY

EPS

Focus Point

arara's selling point is its evolution
into a promising high-growth
fintech company, taking advantage
of its company name change that
better reflects its business totransition to a holding company
and separate management andexecution, while also rectifying theinformation asymmetry that has
likely contributed to the discounton its share price.

Key Indicators
Share price (12/6)
YH (23/9/28)
YL (23/1/4)
10YH (15/11/24)
10YL (22/12/29)
Shrs out. (mn shrs)
Mkt cap (¥ bn)
Equity ratio
FY23/8 P/B (act)FY24/8 P/E (CE)FY23/8 ROE (act)FY24/8 DY (CE)

569
967
283
3,905
273
11.855
6.745
48.5%
3.16x
—
6.34%
—

Stock Price Chart 52 Weeks

Source: Trading view

DPS

25.4

25.32

60.1

0.0

37.34

0.0

(901) (252.06)

0.0

N/A

10.65

0.0

N/A

-

0.0

Kenichi Sugimoto, Analyst
research@sessapartners.co.jp

Note1: The company has not disclosed projections for ordinary profit and profit attributable to owners of parent for FY24/8 as it positions net sales, adjusted EBITDA, andoperating profit as key performance indicators in its management strategy. Furthermore, since it does not disclose profit attributable to owners of parent, it does not disclose EPS
figures either. 2. The operating profit projection for FY24/8 may change as the amount of goodwill resulting from the business integration with Cloudpoint is yet to be determined.

This report was prepared by Sessa Partners on behalf of the subject company. Please refer to the legal disclaimer at the end for details.
Quick Look Reports are released every other quarter to follow earnings.

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arara｜4015
Company profile

Sessa Investment Research Summary: Japan's top player in branded currency payment services
Currently, arara inc. provides high-speed e-mail delivery service and its subsidiary Valuedesign
Inc. provides its Dokuji Pay* (branded currency payment + marketing) service as a SaaS offering.
The company's mission is "Striving to make the world better and the people happier with new
ideas and technologies," and by integrating its cashless service business into Valuedesign, whichmerged with the company in June 2022, the company has established and is further enhancing
its position as a top player in Japan’s branded currency payment market.
In the mainstay cashless service business, clients (retail stores, etc.) use the company's services
to become their own branded currency payment provider and reward point issuer, encouraging
their consumers to use the service. Clients can carry out sales promotions, such as offering
additional e-money or reward point campaigns based on the frequency of store visits and theamount of money spent. Major clients include supermarkets and restaurants, with annualtransaction value topping ¥1.2 tn. The company receives a portion of the Dokuji Pay transaction
value as a system usage fee. It does not disclose the rates of this fee, but notes that they are
lower than the typical fees paid by credit card merchants to credit card companies (5% of thetransaction amount for restaurants, 4% for retail stores, and about 1% for convenience stores).
The company defines Dokuji Pay as a service that combines payment and marketing, andprovides the sales promotion and marketing functions essential for encouraging regularcustomers to return to stores as a single package deal. The company itself is not directly involvedin the issuance, operation, or settlement of the Dokuji Pay service. The payment providers andreward point issuers for Dokuji Pay are the company’s clients themselves.
In the solutions business, the company provides a high-speed e-mail delivery messaging service,a data security service featuring a personal information search solution, and an AR service. The
messaging service includes an e-mail delivery service that automatically delivers large volumes ofmarketing e-mails for sales promotions and transaction e-mails such as notifications tocompanies and organizations with large numbers of members and users, reducing the risk of email delivery delays and undelivered e-mails. Major clients include airlines, financial institutions,
online shopping sites, and local public organizations.

*About Dokuji Pay
Client-specific payment service Dokuji Pay = branded currency payment + marketing
Autonomous ecosystem of Dokuji Pay
Increase in paymenttransaction volume

MarketingBusiness

Payment related business(branded currency
payment, etc.)
Value provided to clients
Improve client cash
flow through advancepayments

Turn end users
into loyal
customers

Turn end users into
loyal customers

Source: Compiled by SIR from the company IR material.

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arara｜4015

Sessa Investment Research History and Future: Company name change and conversion to holding company
planned for March 2024
In 2006, Yosuke Iwai, the current representative director and vice chairman of thecompany, established repica as a cashless service business. In 2007, it launched amessaging service business and then changed its name to arara in 2016. In November
2020, the company listed on the Mothers section of the Tokyo Stock Exchange, and inJune 2022, the company made Valuedesign, which was established in 2006 by Toru Onoe,
the current president of the company, into its wholly owned subsidiary through a shareexchange, integrating the cashless service businesses of the two companies and taking
the top share of the branded currency payment market in Japan.
arara announced that it will strengthen its retail media and marketing-related
business using digital signage by making Cloudpoint into a consolidated subsidiary inMarch 2024.
Taking this opportunity, the company plans to change its name to Paycloud Holdings
and transition to a pure holding company structure. In addition to the three existing
businesses of Valuedesign, which operates a cashless service business, arara, which
operates a solutions business, and Cloudpoint, which operates a signage-related business,the holding company will also pursue new businesses through potential M&A deals andby creating businesses organically.

March 2024 (Plan)
2023 Capital and business tie-up withCARTA HOLDINGS Inc.

• Transition to Paycloud Group Holding Company system• Business integration with Cloudpoint Inc.
• Convert solutions business into an operating company

2022 Business integration through a shareexchange with Valuedesign Inc.
2020 Listed on the Mothers section of the Tokyo Stock
Exchange2020 Entered into a business tie-up with Toshiba Tec Corporation toprovide chargeback systems to client stores in the cashlessservice business2016

Completed an absorption-type merger with arara inc., a wholly owned
subsidiary, and renamed the company from repica Inc. to arara inc.

2013 Acquired the ACCELMAIL e-mail distribution system and P-Pointer individual detection
software from Klab Inc., and began providing these services through arara inc.
2010
2007
2006

Established arara inc. as a wholly owned subsidiary to develop an AR business

Launched Messaging service business

Established repica Inc.

Launched cashless service business/Repica System (now arara Cashless) service
Source: Compiled by SIR from the company IR material.

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arara｜4015

Sessa Investment Research

Promoting separation of management and execution by converting to a holding company

Source: Compiled by SIR from the company IR material.

FY2023/8 segment information(¥mn)
Net sales
Operating Profit (OP)OP Margin

Cashless Service
Business

Solution
Business

Total

Adj.(*)

Grand total

3,792

689

4,481

(5)

4,476

620

226

846

(683)

163

16.4%

32.8%

18.9%

3.6%

Note*: Adjustments include corporate expenses not included in any segment, the majority of which are generaland administrative expenses.
Source: The company IR material.

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arara｜4015
Business model

Sessa Investment Research Business model and business strategy:
Following the business integration of Valuedesign, the company's business segments in
FY2023/8, the first 12-month financial results disclosed, consisted of the cashless service
business and the solutions business. The cashless service business is the growth driver ofthe company, accounting for about 85% of sales and 73% of unadjusted operating profit.
The solutions business, on the other hand, has been relatively stable and highly profitable,with an unadjusted operating profit margin of about 33%.
 Business model of cashless service businessPrior to the business integration, the former arara and Valuedesign were fiercely competingfor market share as the two largest independent players in the cashless service business.
However, the two companies agreed to further strengthen their market competitiveness andto enhance their Enterprise Value in the areas of payment and sales promotion by efficiently
providing various cashless DX services to retailers and other clients by taking advantage of
economies of scale. The business integration was completed in June 2022 through a shareexchange in which 3.2 shares of arara common stock were allocated for each share of
Valuedesign common stock.
Specifically, the company consolidated the cashless service businesses of the twocompanies into Valuedesign and unified the sales and client success functions in January 2023.
This not only shared and expanded both companies' human resources for new clientacquisition, sales agent network, and know-how for Dokuji Pay support, but also ended thefee discounting battle that had taken place as a result of the competition for market sharebetween the two companies. In addition to the unification and consolidation of new clientacquisition activities, the two companies have clearly strengthened their support for existingclients, developing measures to help clients attract more customers and expand sales byacquiring new users and boosting the payment ratio of their branded currency payment
service.
In the cashless service business, the payment commission (system commission), which is acertain fee rate multiplied by the Dokuji Pay transaction value on the client side, is recorded
as sales. Prior to the business integration, the fee rate was not only relatively low owing to theconstant competition for clients, but also differed slightly from client to client. However, thefee rate for new clients has improved after the business integration. Accordingly, thecompany has noted that they need to expand transaction value in order to boost sales in the
cashless service business, and that the growth driver for this is to pursue both new clientacquisition while bolstering existing clients. In terms of pursuing both growth drivers, themanagement team has stated that it plans to expand its sales force headcount by 10% eachyear, taking on a manpower tactic that is in line with the recruiting and training activities
outlined in the medium-term management plan. In addition, the company intends to revise
system usage fees during FY2024/8, and plans to implement the price revisions gradually
starting in November 2023.
 Advantages of introducing Dokuji Pay
The company’s Dokuji Pay is a prepaid system that enables customers to top-up cash onto
a card or smartphone application before purchasing products, so that cash is received by
the store as an advance payment at the time the card is loaded. As a result, client retailstores can (1) improve their cash flow and business conditions; (2) benefit from a lower fee
rate of the Dokuji Pay service compared to credit card and general-purpose QR code
payment services; (3) implement their own effective campaigns based on customer attributes
and purchase histories using the sales promotion functionality provided as a standard featureof Dokuji Pay; (4) encourage customers to return to the store and become loyal customers
5arara｜4015

Sessa Investment Researchby offering them various benefits and preferential services at the time of payment as thepoints granted to customers can only be used at their own stores; and as a result, (5) easily retain
regular customers. Ultimately, the amount loaded (advance payment) will further increase as end
users of client branded currency payment systems become loyal customers, and retailers will beable to achieve the same benefit as financing through bank loans and other means.
In contrast, with common payment methods such as credit card and QR code payments, theissuer is the credit card company or code payment company, which uses a portion of the several
percent in fees collected from the merchant to provide rewards and benefits, so the rewards andbenefits are less generous than those offered when using Dokuji Pay. Furthermore, on top of
merchants not being able to run their own campaigns, the rewards do not necessarily encouragecustomers to return to the merchant's store. In this sense, Dokuji Pay can be seen as a productenabling retailers to take on their own initiatives to encourage repeat visits to their stores.
To illustrate Dokuji Pay being a product enabling retailers to take on their own initiatives toencourage repeat visits to their stores, let's take a hamburger store as an example. Suppose there
is a burger store selling a hamburger for 300 yen, and the burger store also sells its Dokuji Pay
card for 1,000 yen. The card is designed in a way where when a customer loads 1,000 yen into thecard, it is worth 1,100 yen. When a customer purchases a ¥1,000 card using cash, common QR
code payment methods such as PayPay or a credit card, the purchased card is worth ¥1,100, so
the customer has three opportunities to purchase a ¥300 burger, with ¥200 still remaining, thus
providing an incentive for a fourth visit to the store. From the burger store's point of view, this is a
way of selling the Dokuji Pay mechanism as a different type of product that secures the fourth
visit (selling price of ¥1,200) for ¥1,000. Since customers can load the money through otherpayment methods, Dokuji Pay does not necessarily compete with other cashless payment
services, and can even complement them in some ways.
One of the points that distinguish the company from general payment service providers is that it
has accumulated intangible assets such as promotional expertise in various industries, such as
restaurants, apparel, and supermarkets, by working together with its clients. For example, in thecase of a Dokuji Pay campaign for a supermarket, customers who load their card can be given a
box of tissues to take home as a gift. This encourages others who come across the reload
campaign to take an interest by motivating them to reload their cards by offering a tissue box. The
accumulation of common expertise and knowledge is in understanding that the perfect signature
gift for a program like this is a tissue box, which is too big to fit into a shopping bag and lets otherpeople know that there is a campaign going on at the store.
 Businessmodel of the solutions business
The core of the solutions business is the messaging service, which accounts for about 75%
of its sales. This is primarily an automated email delivery service for the mass andsimultaneous delivery of transaction emails, such as promotional marketing emails andnotifications, which has the advantage of reducing the risk of customer email delivery
delays and undelivered emails. Marketing emails are emails aimed at attracting customers
and creating loyal customers, which is highly complementary with the Dokuji Pay service.
Transaction emails include automatic notification emails in response to customer actions
such as reservations and registrations for products and services, and are used to distribute
emails linked to core systems, such as execution notifications at securities firms. By
facilitating the coordination between core systems and high-speed email delivery systems,
which are paramount for customer service, the company has secured a critical position.
Furthermore, by providing a safe, secure, and stable API, the company has ensured longterm client use (average client use of API is nearly 8 years).

6

arara｜4015

Sessa Investment ResearchService usage fees are the main source of sales in this business, and sales are calculated
by multiplying the fixed monthly fee per client by the number of client companies. To
boost sales, the company is focusing on acquiring and retaining new clients rather than raising
the price per client. Its churn rate during FY2023/8 was low at 0.2%, and the company had an
average of 254 clients in 4Q (vs. 220 clients at the end of FY22/8). The company's share of theJapanese email delivery market is estimated to be around 2%, and there is room for broad
expansion as the company acquires new clients in the future.
According to interviews with the management team, the cost structure of this businessmainly consists of fixed costs such as outsourcing expenses (server costs and outsourcing costs)
and personnel expenses, so the marginal profit ratio is high, and sales beyond the break-evenpoint easily ties directly into profit. As a result, the business is more profitable than the cashlessservice business, with an unadjusted operating profit margin of about 33% in FY23/8.
 MRR growth rate and transaction value as KPIs
The company has been disclosing monthly recurring revenue (MRR) growth rate (YoY),
transaction value (renamed from payment value owing to the launch of online reload
service from September 2023), total accumulated ID count, and total store count as key
performance indicators (KPIs) on a monthly basis starting from September 2022.
The company defines recurring revenue as the sum of payment fees in the cashlessservice business and system usage fees in the solutions business (cashless services,messaging services, and data security services), which are paid to the company on an
ongoing basis based on the use of its services, and is directly related to the sales line in thecompany's income statement. For the cashless service business, which accounts for 85% of
total sales, the company separately discloses the MRR growth rate for just the cashlessservice due to its importance. However, it should be noted that the MRR growth rate is the
YoY growth rate of gross revenue including new contracts signed during the month, anddiffers from comparable store revenue growth rate, which excludes the impact of newstores. Accordingly, it goes without saying that as long as the company continues signing
new contracts, MRR and transaction value will be positive YoY (over 100%). With that said,
since the company began disclosing the figures, both transaction value and MRR have been
growing YoY, and with the exception of May-June of the previous FY2023/8, the cashlessservice MRR growth rate has been higher than the overall MRR growth rate, whichindicates that the company's business is steadily expanding.
Monthly transaction value and MRR growth rate

(¥mn)

Sep.

Oct.

Nov.

FY22/8 Transaction value
FY23/8 MRR(RHS)
FY24/8 Cashless (RHS)

Dec.

Jan.

Feb.

Mar.

FY23/8 Transaction value
FY24/8 MRR(RHS)

Apr.

May

Jun.

Jul.

Aug.

FY24/8 Transaction value
FY23/8 Cashless(RHS)

Source: Compiled by SIR from the company IR material.

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arara｜4015

Sessa Investment Research

On the other hand, total accumulated ID count is the number of issued IDs, consisting of
two types: Reusable reloadable IDs and gift card-like IDs that are disposed of when fully
used. It is also difficult to determine when to deactivate a reusable ID in cases where it has
not been used for several months, and neither the company nor the contracted issuing
company can accurately determine the number of IDs that are active or inactive. The total
store count includes store IDs for stores that have been closed as they are managed by theclient, and the company is unable to determine the total active store count. In this sense,
the total ID count and total store count are the accumulated gross consumer andcontracted store counts of clients that have previously installed the company's services,and do not take into account withdrawals or service discontinuations. As such, theimportance of these figures among the KPIs comes below MRR and transaction value.
Based on the breakdown of arara's non-consolidated cost of sales and SG&A expenses in
the FY22/8 annual securities report, fixed costs, consisting mainly of server costs, laborcosts, and business outsourcing costs, account for nearly 80% of total expenses, resulting ina high marginal profit ratio (before amortization of goodwill) of approximately 70%.
Therefore, unless the company makes a series of large investments that would result in a
substantial increase in fixed costs, the company's profitability should improve dramaticallyas long as it continues to expand its business steadily as sales would come in well beyond
the break-even point.

8

arara｜4015

Sessa Investment Research Summary of Cloudpoint's digital signage-related businessAt the time of its FY2023/8 earnings result announcement on October 13, 2023, the company
also announced a stock swap and business integration with Cloudpoint ("CP"), to take effect on
March 1, 2024.
Founded in 1990 by Takashi Miura, CP is involved in digital signage, spatial design, andadvertising, and plans and proposes sales promotions, spatial design, and cost reductions using
video equipment in a variety of locations, including commercial facilities, retail stores,transportation facilities, outdoor advertising, and public facilities.
Digital signage is a generic term for a system that uses screens and other electronic display
devices connected to a network to distribute information in a variety of locations, including foroutdoor advertising, inside and outside of stores, public facilities, and transportation systems.
Specific examples are as follows.
 KFC* and Baskin Robbins* stores installed digital signage for menu boards and POP displays,
enabling them to deliver menu and other information as well as promotional content
tailored to the time of the day.
 Metro Ad Agency* installed an ultra high-definition LED vision system on the second
basement concourse of Shibuya Station, utilizing a total of 12 pillars and 24 screens for storylike images and life-size representations of people, characters, etc. using large verticalscreens. It is used for various purposes including information dissemination, spatial design,
advertising, and sales promotion.
KFC

Baskin-Robbins

Metro-adMenu-board

Menu-board

Pillar ads

Source: The company IR material.

CP provides digital signage services such as sales promotion advertisements on menuboards and fixed displays to 48,000 screens in approximately 20,000 locations nationwide,
including restaurant chains, shopping centers, and convenience stores. CP's strength lies
is its one-stop execution of all operations from installation to operation, including
consulting and planning, equipment selection, system proposal, installation work, content
creation, distribution and operation, equipment maintenance, and analysis. While there
are companies in Japan that are strong in each of these eight business fields, no othercompany is able to comprehensively provide all services as a one-stop shop. By leveraging
this strength, CP can resolve customers' labor shortages, improve operational efficiency,
and promote in store DX.
CP's digital signage-related business mainly generates spot lump-sum sales, such as fromthe sale of goods and initial sales of digital signage equipment and system installations,rather than recurring service usage fees and maintenance fees from contracted clients.
Unlike the cashless service and solutions businesses, which generate recurring sales, sales
in the digital signage-related business is likely to be more volatile.
9arara｜4015

Sessa Investment Research Significance of Cloudpoint integration in terms of growth strategy
The main applications of digital signage fall into three categories: information dissemination,
advertising and sales promotion, and spatial design. In the area of advertising and sales
promotion and spatial design, the company expects to achieve synergies with Valuedesign,
which boasts a client base of retail stores and restaurants.
To accelerate the Dokuji Pay eco-system, the service will serve as a touchpoint with
consumers outside the store, providing coupons and special offers provided by stores andmanufacturers through apps and other means, and promoting store visits with e-gifts. CP’s
digital signage was an indispensable piece of the retail marketing platform strategy, as
consumers who visit stores are notified of great deals through digital signage on permanent
displays in stores. Once they are motivated to make a purchase through a “last push” using
the client branded currency payment service, clients can then launch receipt-based
promotions that motivate consumers to return to their stores. CP, arara, and Valuedesign
shared the same vision in this regard, which led to the business integration.
An example of the evolution of the business model through this integration andconsolidation of CP effective March 2024 is the idea of possessing the point of monetizationfrom a marketing perspective, and being able to provide all of the solutions that enable
stores of cashless service client companies to seamlessly connect with consumers. To give a
concrete example, the company will use LINE Mini Apps developed by Digiclue, a subsidiaryof CARTA HOLDINGS Inc., which the company entered into a capital and business tie-up within March 2023, to stimulate consumer purchase interest and encourage store visits byproviding information on store advertisements and campaigns (e.g., coupons). Digital signage
advertisements operated by CP will be placed at the storefronts to provide information about
the day's events and other information to stimulate consumer purchase interest when they
visit the store. Consumers can use coupons posted on the LINE Mini App and pay for otherpurchases with the branded currency payment service available on their LINE My Card. In thisway, the company will be able to repeatedly provide a total marketing solution that
promotes store revisits for regular customers with Dokuji Pay accounts and improve cash
flow and business efficiency, by bringing potential customers (consumers) outside of thestore inside, visually stimulating their purchase interest, and providing points they can use
the next time they visit the store by paying with the Dokuji Pay system.
Retail Marketing Platform Strategy
Digitalad/promotion

Autonomous ecosystem of Dokuji Pay

Message

Signage

Connecting

Consumers withinformation consumers

Store Consumers

in the store

Connecting
with
consumers
outside thestore

Consumers
information

Dokuji Pay

AppPush notification
Cooperation with
CARTA

Source: Compiled by SIR from the company IR material.

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arara｜4015
Business
opportunities
and risks

Sessa Investment Research Major growth potential offered by a country lagging in the cashless space
According to materials prepared by the Study Group on the Future Direction of Cashless
Payment under the Cashless Payment Promotion Office, Commerce and Service Industry
Policy Group, Ministry of Economy, Trade and Industry in March 2023, Japan's cashlesstransaction value in 2021 amounted to ¥95 tn, with the cashless ratio at 32.5% of privatesector final consumption expenditure. In 2022, the Ministry of Economy, Trade andIndustry (METI) reported that the cashless payment ratio was 36.0% ( ¥111 tn), of which
credit cards accounted for 30.4% (¥93.8 tn), debit cards 1.0% (¥3.2 tn), electronic money
2.0% (¥6.1 tn), and code payments 2.6% (¥7.9 tn). Compared to other countries, Japanlags in the cashless space and has a lot of room to expand.
The Cashless Vision formulated by the Study Group in April 2018 clearly stated the
direction of cashless policy promotion, stating, "Toward the Osaka-Kansai Expo (2025),
we pledge to realize a high cashless payment ratio and achieve the 40% cashless payment
ratio target set in the 'Future Investment Strategy 2017' as a 'Payment Method Reform
Declaration' ahead of schedule. Furthermore, in the future, we will aim for 80%, thehighest level in the world."
Cashless payment ratio comparison by country (2020)
Korea
China
Australia
UK
Singapore
CanadaUSA
FranceSwedenJapan
Germany
Source: Compiled by SIR based on materials from the Study Group on the Future Direction of Cashless Payment
published in March 2023 by the Cashless Payment Promotion Office, Commerce and Service Industry Policy Group,
Ministry of Economy, Trade and Industry.

Based on data from Yano Research Institute Ltd.'s "2022 Edition: Actual Conditions andFuture Forecast of the Japan Cashless Payment Market," the company estimates the
prepaid serviceable available market (SAM) to be ¥23 tn, of which it estimates theserviceable obtainable market (SOM) for Dokuji Pay to be ¥5.2 tn. Based on this data, it
formulates its growth strategy for the cashless service business.

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arara｜4015

Sessa Investment Research Taking on a variety of business opportunities while cementing its niche position
Players in the broadly defined cashless service market include a significant number ofgeneral-purpose cashless providers, such as credit, debit, QR/barcode payment, andgeneral-purpose e-money services from the transportation and distribution sectors. As
mentioned earlier, Dokuji Pay does not necessarily compete with general-purpose
cashless payment services, and can even complement them in some ways.
On the other hand, there are only a few operators that provide SaaS-type systems to retailstores similar to Dokuji Pay. One of these is the cashless service offered by the CGC Group (acooperative chain of small and medium-sized supermarkets nationwide), and about 100 of
the 208 CGC member stores (4,436 total stores) have already introduced this service.
However, the company noted that since CGC only offers this service to CGC member stores, itdoes not compete with CGC for the approximately 800 supermarkets nationwide that are not
CGC member stores. Less than half of supermarkets have installed the Dokuji Pay system andthere is room for further growth. The company has approximately 250 supermarket clients,
or about 25% of all supermarket companies. There is also a system company competing withthe company in restaurant chain sector (family restaurants, Japanese and Chinese restaurants,
fast food, etc.). This company has not moved into the small in restaurant chain sector, thus
creating a certain degree of segregation. Accordingly, it is fair to say that the company has
cemented a solid position in this niche business area.
The company is also actively working with local governments. If there is an existingsupermarket client in the municipality, it is easier for the company to bring the local
government on board as a new client. The current local pay program for local governments
is subsidized by the Japanese national government and is therefore seasonal. The company
is now proposing a scheme to local governments that does not rely on national government
subsidies with the aim of offering the service year-round. This is something it is working onwith NTT DOCOMO, called the iD scheme, and this could be another business opportunity
going forward.
With the acquisition of the license for iD e-money provided by NTT DOCOMO, thecompany now has the environment enabling the use of Valuedesign’s Dokuji Pay service inmore than 2 million iD member stores nationwide. For Dokuji Pay issuers, this will not only
improve convenience for Dokuji Pay users (consumers), but will also boost fee income andusage data collection. The new business opportunity for the company also means that it
will be able to expand iD services to local currencies such as those used by local
governments, which the company has not been able to capture to date.

 International expansion of cashless service may also be a promising business
opportunity in the future
The company also provides cashless services in overseas markets. In the Indian market,
it offers digital gift services, and in the Thai market, it focuses on CRM and loyalty point
services.
In the Indian market, the company is working with EazyDiner, a leading local restaurant
reservation service provider, to expand its digital gift distributor business, which can beused at over 12,000 partner restaurants. Most recently, the company signed anagreement with Amazon and began handling Amazon Pay eGift Cards. The company is
now poised to reach approximately 500 mn consumers in major cities in India.
The company noted that it does not disclose the amount or scale of overseas revenues
because they are still minor and immaterial in terms of the company's overall size.

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arara｜4015

Sessa Investment Research Potential business risks
The most significant business risk for the company would be a system failure. Once systems
go down, stores will not be able to use its payment services. However, this is a risk common
to all system operators and is not unique to the company. The company implements system
redundancies to avoid this, but it keeps the system decentralized because if it were to
manage balances entirely on a single system, all clients would experience downtime in theevent of a system failure.
Since the company's database generally does not hold customer information related topersonal information, the risk of personal information leaks in the company’s cashless service
is basically nonexistent given its business model, which is basically a white-labeled cashlessservice. On the other hand, in the solutions business, clients occasionally upload personal
information to the server temporarily.
The emergence of new competitors is also unlikely to be a major factor. In terms of barriers
to entry, it is not as simple as switching to another card company simply because they have asystem, since expertise in campaigns and promotions for cashless services plays an importantrole. While the major players target the general-purpose payment business, the company's
forte is in the B2B market for individual stores, which is a niche market. Accordingly, newentrants into this area are quite rare.
On the other hand, should technological innovation advance faster than expected alongwith rapid changes in business practices and consumer purchasing behavior, the company's
dependence on SaaS offerings may slow its response, and the risk of a major revision to its
growth strategy is not entirely unrealistic over the long term. While this is not a short-term
risk, if it does materialize, the one that comes to mind today is the Buy Now Pay Later (BNPL)
scheme, which is a popular payment method for online shopping in the US in particular,
where even non-credit card holders can pay later in installments with no installment fees,with the merchant covering the payment settlement fees. This service is gaining popularity inEurope and the US, especially among young people, including Generation Z, as it enables
installment payments even for expensive items. In terms of BNPL-related companies, USbased Affirm is publicly listed, while Australia's AfterPay (subsidiary of US-based Block) and
Sweden's Klarna (unlisted) have been growing their business. In Japan, Paidy, a subsidiary ofUS-based PayPal, already offers a deferred payment service for online stores, but is not yet
profitable according to its FY22/12 earnings announcement. However, since BNPL's businessdomain currently focuses on online shopping and not physical retail, the benefits ofintroducing BNPL to the company’s physical retail store clients using the Dokuji Pay service
are minimal. As such, the business model of BNPL services are opposite to that of thecompany’s, and it is unlikely that there will be any direct competition. However, it remains tobe seen what will happen if Generation Z, which will become the core of the company's endusers, becomes accustomed to paying later and begins to dislike prepayments. Ultimately, it
is likely, that the payment service that the end-users believe offers the best value fromamong the various payment methods will win out the competition.

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arara｜4015
Medium-termManagement
Plan
EBITDA = sum of operating
profit and depreciation andamortization [including
amortization related tointangible assets]

Sessa Investment Research FY2025/8 earnings targets: Net sales of ¥7.0 bn, EBITDA of ¥1.5 bn
In March 2022, the company formulated a three-year medium-term management plan
ending in FY2025/8. The plan's main objectives are to boost profitability by focusing
management resources and streamlining operations through the integration of arara andValuedesign, and to expand profits by leveraging Dokuji Pay’s leading market share in Japan.
For FY2025/8, the company is targeting sales of ¥7.0 bn, as well as EBITDA of ¥1.5 bn, which
it sees as a key performance indicator in its management strategy. The company explains that
this earnings target assumes not only organic growth of existing businesses, but also a certain
amount of revenue contribution from potential M&A deals. In addition, the company also
added that the earnings targets are not calculated from the bottom up based on KPIs (such as
total ID count and store count), but rather represent a rough earnings level as a stepping stone
in the medium- to long-term growth phase. The reason the company does not disclose
operating profit targets is because it positions M&A opportunities as one of its growth drivers
and cannot forecast the goodwill that will be recorded in connection with the acquisition of
Valuedesign. As such, it believes that operating profit after amortization of goodwill does notnecessarily accurately reflect the company's actual earnings.

Source: Compiled by SIR from the company IR material. Note: The full-year FY2024/8 earnings forecast includes Cloudpoint's earnings forecast figures added together from March 1(2H), the scheduled effective date of the business integration.

Results summary FY2023/8 results exceeded initial projections
In FY2023/8, the first year of the medium-term management plan, the company reported net
sales of ¥4,476 mn, EBITDA of ¥497 mn, operating profit of ¥163 mn, ordinary profit of ¥133
mn, and profit attributable to owners of parent of ¥114 mn, exceeding both the medium-termtargets of ¥4,300 mn in sales and ¥300 mn in EBITDA (also exceeding the FY2023/8 forecast of¥100 mn in operating losses disclosed on the FY2022/8 earnings summary report).
The main reason behind actual EBITDA coming in above the company's FY2023/8 forecast is
the higher-than-expected sales growth, such as from reaching ¥1.22 tn in Dokuji Pay transaction
value versus the original plan of ¥1.2 tn. In addition, the company had originally targeted a cost
reduction of over ¥100 mn, but it managed to stop the price war for new clients between arara
and Valuedesign in a healthy way, promoting the management integration in a sound mannerand pursuing new clients together, which helped yield integration benefits that surpassed thecost reduction target.
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Sessa Investment Research
The company also improved its financial position. It refinanced ¥1.4 bn of borrowings from
Mizuho Bank through a syndicated loan arranged by Mizuho Bank (totaling ¥1.0 bn, with equal
principal repayments of ¥200 mn annually over the next 5 years), which improved the shortterm and long-term balance of interest-bearing debt, thereby improving the financial
condition of the company, particularly its current ratio.

Full-year earnings  FY2024/8 earnings forecast: Net sales of ¥6.9 bn, EBITDA of ¥0.65 bn
The company plans to include Cloudpoint's earnings in its consolidated financial results fromforecast

March 2024 (i.e., 2H FY2024/8). As a result, the company projects net sales of ¥6,900 mn and
EBITDA of ¥650 mn for FY2024/8, which is just shy of targets for the final year of the mediumterm plan of ¥7,000 mn for net sales and ¥800 mn for EBITDA, respectively. The company has
not made any changes to its original medium-term management plan for FY2025/8, and plansto drive its business forward to achieve its targets.
EBITDA estimates appear to have been revised downward from the ¥800 mn figure
projected when the medium-term management plan was formulated. According to thecompany's explanation, the breakdown is as follows: (1) In the cashless service business
operated by Valuedesign, the delivery of a major project originally scheduled to be recorded
in FY2024/8 was brought forward to FY2023/8, and the earnings of the cashless service
business will likely level off, accounting for part of the ¥170 mn drag in EBITDA; (2) Weakerthan-expected growth in the solutions business led to a downward revision of ¥90 mn; (3)Upfront investments in new business development led to a downward revision of ¥40 mn; (4)Reduction of head office expenses came in above projections, leading to an upward revisionof ¥20 mn; and (5) The company expects the consolidation of Cloudpoint (CP)'s earnings from
2H to boost EBITDA by ¥130 mn for the six-month period. As a result, the company revised its
EBITDA forecast lower by ¥150 mn compared to the initial plan.
The company plans to expand its sales force by 10% annually as part of its medium-term
management plan. As the company's promotion projects for existing clients increase, it willneed to assign support staff to these clients and stores, and sales-related personnel resources
are often allocated to existing clients rather than to new client acquisition.
For FY2024/8, the company plans to make system investments of about ¥160 mn in the
cashless service business and about ¥30 mn in the solutions business, along with about ¥3 mn
in marketing expenses for updating its corporate website, for a total of about ¥190 mn ininvestments. Since this is within the company's FY2024/8 EBITDA of ¥650 million and shortterm borrowing repayments of approximately ¥200 million, it is unlikely that the investments
will strain the company's balance sheet.

Factors contributing to changes in EBITDA

Source: Compiled by SIR from the company IR material.

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arara｜4015

Sessa Investment Researcharara has set an FY2024/8 annual transaction value target of ¥1.5 tn for its mainstay
cashless service business. The company launched a credit card payment service thatenables the use of credit cards to reload funds to the Value Card. Previously, SMEs
needed to sign individual contracts with credit card companies, and had to pay higher
fees than larger businesses. However, the arara Group now acts as an intermediary
between credit card companies and SME businesses that use its Dokuji Pay service, andsince it expects transaction values at stores using Dokuji Pay to grow, the company
stepped in to offer credit card reloading at a discounted rate (closer to that of large
businesses) compared to individual contracts by entering into a comprehensive lumpsum contract with credit card companies. By extending this service to existing Dokuji Pay
stores, not only will the transaction value of Dokuji Pay increase on the back of reloadingwith credit cards, but the company will be able to earn a prepayment transaction fee
from credit card companies. In addition, the company believes it is about time to review
rates and increase the payment fees.
According to the company's disclosure of CP's earnings results for FY2023/8, sales
amounted to ¥3,160 mn with operating profit at ¥220 mn, and the FY2024/8 forecast
calls for sales of ¥3,370 mn and operating profit of ¥220 mn. Therefore, based on asimple calculation, CP's earnings for 6 months in 2H (sales of approximately ¥1,700 mn
and operating profit of approximately ¥110 mn) would be consolidated into thecompany's results.
Although the company projects an operating profit of ¥200 mn for FY2024/8 in its
earnings summary, there is little point in debating whether the company will be able toachieve this target. This is because the basis for calculating the goodwill for the CP
acquisition, which will be recorded in 3Q FY2024/8 (March 1, 2024 to May 31, 2024), has
not yet been determined. Since all shares of CP were acquired through a share exchange(3.47 shares of arara common stock for each share of CP common stock), the totalpurchase price of CP will be based on the closing price of arara stock on March 1, 2024,with purchase price allocation taking place thereafter. Since arara’s share price is also an
uncertainty, it is impossible to estimate the goodwill cost at this point in time.
Incidentally, there will be some dilution in terms of the number of issued shares of the
new holding company, with a 31.7% increase in share count from 11,848,563 shares atthe end of August 2023 to 15,604,348 shares.

16

arara｜4015
Share priceinsights

Sessa Investment Research Share price level reflecting substantial information asymmetry
It is difficult to evaluate arara’s share price valuation as the company provides fewer disclosurescompared to other publicly listed companies when it comes to information related to earnings per
share, which is often used to determine what the appropriate valuation multiple is. In addition, it isalso difficult to compare the company with other companies in the same industry, as there are nolonger any publicly listed competitors engaged in prepaid cashless services. While not directlycomparable, the following companies are worth mentioning: POS register SaaS service provider
Smaregi (TSE Growth: 4431), online payment service collection agency Billing System (TSE Growth:3623), and product and service-exchangable e-ticket and e-gift distribution provider Giftee (TSE
Prime: 4449).
arara has not disclosed its forecast for ordinary profit, net profit, or EPS for FY2024/8. Accordingly,
based on the limited information available, the most useful multiple for comparing its share pricevaluation with the four companies is likely the EV/EBITDA multiple. As shown in the table below,
the EV/EBITDA ratio based on the arara's FY2024/8 forecast is 13x, with Billing System at 10x,
Giftee at over 30x, and Smaregi at about 50x, indicating that equity investors are giving relatively
high valuations to Giftee and Smaregi. A multiple north of 10x suggests that investors have highgrowth expectations, but it is worth noting that the company’s EV/EBITDA multiple is equivalent toa no-growth company at 6x, based on its FY2025/8 EBITDA forecast of ¥1.5 bn, taking into accountthe dilution from the new shares to be issued after the consolidation of CP (assuming a 31.7%
increase in share count immediately following the March 1, 2024 announcement of a shareexchange and business integration with CP).

Valuation comparison of comparable companies
TSE Code

4015

4431

Name

arara

Smaregi

Latest act. year
Share priceShrs out.
Mkt cap
EV
PER

PBR
PSR
PCFR
EV/EBITDA

EBITDA

ROE¥
2023/12/5 cp
1,000 shrs Latest FY
Fully diluted after¥mnLatest FY
Fully diluted after¥mnLatest FY
Fully diluted afterX
Latest FY
CE (current period)
Consensus forecast(next period)X
Latest FY
X
Latest FY
CE (current period)X
Latest FY
X
Latest FY
CE (current period)
Consensus forecast(next period)
Consensus forecast(Fully diluted after)¥mn
Latest FY
CE (current period)
Consensus forecast(next period)%
Latest FY

2023/8576
11,856
15,604
6,829
8,988
6,594
8,753
59.9
N.A.

2023/4
2,847
19,6593623
Billing
System2022/12
902
6,564

4449

55,9695,921

54,62050,632

4,611

52,923

61.5
85.8

17.6
23.1

5,462
N.A.

N.A.

59.2

N.A.

N.A.

3.16
1.53
0.99
12.2
14.0
13.0

11.66
9.23
7.10
55.4
50.8
48.9

2.51
1.65
1.60
-5.0
8.6
10.1

6.75
11.56
7.85
128.8
79.2
35.8

4.4

32.5

N.A.

N.A.

497
650

1,048
1,083

536
455

668
1,462

1,500

1,551

N.A.

N.A.

6.3

20.0

15.1

0.1

giftee2022/12
1,867
29,255

5.8

Note: Medium-term management plan target used for arara’s consensus FY2025/8 EBITDA forecast.
Enterprise Value of Billing System adjusted to include clients’ deposits as a type of interest-bearing debt.
Source: Complied by SIR from SPEEDA data.

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arara｜4015

Sessa Investment Researcharara has very limited investor relations disclosure materials available in English.
According to the company, there are some foreign investors in its shareholder list, but it
does not disclose their shareholding ratios. Although Billing System does not provide
investor relations information in English, it discloses on its website that foreign
shareholding ratio stood at 12.9% as of the end of December 2022. In contrast, Smaregi’s
foreign shareholding ratio was at 14.3% according to the most recent Toyo Keizai Shikiho.
In addition, Smaregi's website shows multiple sell-side analyst coverage, with investor
relations information disclosed in English as well. Giftee does not disclose shareholding
ratios by investor category, but it shows multiple sell-side analyst coverage on its website
and discloses investor relations information in English.
One might speculate that the high valuations of Smaregi and Giftee may be linked totheir relatively well-known profile. Information asymmetry may be at the root of arara's
valuation discount.

 Will a company name change trigger a rerate?
However, once the company takes advantage of its name change to Paycloud Holdings,
which better reflects its business activities, to refine its IR disclosure and rectify the
information asymmetry in the process, the market may gain more conviction of thecompany's ability to reach or surpass ¥1.5 bn in EBITDA in FY2025/8 and see the growthpotential for FY2026/8 onward and evaluate arara as a high-growth fintech company.
With that said, the company’s growth strategy going forward includes creating new
businesses through M&A deals, and it has occasionally resorted to equity financing
through stock swaps and issuing new shares since its IPO, diluting its shares each time.
While equity financing would be one option for raising funds in the event of major M&A
opportunities in the future, the company's management has made it clear that it has nointention of increasing its cost of capital by raising capital at the current share price levelof around ¥600.

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arara｜4015

Sessa Investment Research

Income Statement¥mn, %

2019/82020/82021/82022/82023/82024/08(CE)2025/08(CE)Total Revenue

1,043

1,201

1,461

1,165

4,476

6,900

7,000

Cost of Sales

396

428

435

418

2,180

Gross Profit

647

773

1,027

748

2,297

62.03

64.36

70.29

64.21

51.32

Selling, General and Administrative
Expenses

541

637

721

908

2,133

Operating Profit

106

137

306

(161)

164

200

Operating Profit Margin

10.2

11.4

20.9

(13.8)

3.7

2.9

Non-Operating Income

9

9

10

0

14

Interest and Dividends Income

0

0

0

0

1

Non-Operating Expenses

3

3

36

1,346

44

Interest Expenses

1

1

2

19

24

(1,325)5Gross Margin(%)

Income from Equity Method - NonOperating
Ordinary Profit

112

142

280

(1,506)133

Ordinary Profit Margin(%)

10.7

11.8

19.2

(129.3)3.0

Extraordinary Gains/Losses

(12)

0

(1)

(295)

2

10

14

1

Extraordinary Gain
Extraordinary Loss

12

1

1

305

12

Pretax Profit

100

142

279

(1,801)136

Pretax Profit Margin(%)

9.6

11.8

19.1

(154.6)

3.0

Income Taxes

(15)

(2)

50

33

22

Income Taxes - Current

13

16

35

2

73

Income Taxes - Deferred

(28)

(18)

16

31

(51)

Net Profit Attribute to parent
company shareholders

115

144

229

(1,834)114(1,834)114(157.4)

2.5

Net Profit
Net Profit Margin (Attribute to parent
company shareholders)(%)

11.0

12.0

15.7

Adjusted EBITDA

497

650

1,500

Adjusted EBITDA Margin(%)

11.1

9.4

21.4

Source: Complied by SIR from SPEEDA data.
Note: Non-consolidated financial results until FY2021/8.

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Sessa Investment Research

Balance Sheet / Statements of Cash Flows¥mn
Total Assets
Current Assets
Cash & Cash Equivalents And Short-term Investments
Cash & Cash Equivalents
Accounts Receivables
Non-Current Assets
Property, Plant & Equipment (PPE)Intangible Assets
Goodwill
Investments and Other Assets
Investment Securities (inc. Subsidiaries and Affiliates)
Deferred Tax Assets - Non-Current
Current Liabilities
Trade Payables
Accounts Payable - Other and Accrued Expenses
Short-Term Debt
Short-Term Borrowings
Current Portion of Long-term Debt
Advances Received
Non-Current Liabilities
Long-Term Debt
Straight Bonds
Deferred Tax Liabilities - Non-Current
Total Shareholders' Equity
Capital Stock
Capital Surplus
Retained Earnings
Share Warrants

2019/8
556
383
252
117
4
172
26
78

2020/8
1,055
844
700
133
1
211
22
103

2021/8
3,387
707
561
134

68
2
28
273
30
71
20

86
0
47
634
21
44
100
100

2,404
2,333
31
577
52
47
300
100
200
106
1,500
1,500

277
332
332
(387)

421
332
332
(243)

1,310
662
662
(13)

1,431
695
2,559
(1,848)252023/8
4,402
2,350
1,491
699
88
2,052
68
1,897
1,045
87
0
30
1,135
349
127
317
5
312
188
1,104
903
36
163
2,163
1,002
2,866
(1,733)30¥mn

2019/82020/82021/82022/82023/8Cash Flows from Operating Activities

146

417

47

-218

562

Depreciation and Amortization - CF

32

28

33

37

334

Cash Flows from Investing Activities

(63)

(43)

(2,511)

(194)

(88)

20
111
6
6

118

2,680
25
250

2022/8
3,856
1,777
1,094
441
150
2,080
92
1,878
1,601
110
0
2,162
134
155
1,664
50
1,614
151
263
194
68

Proceeds from Sales of Securities and Investment Securities
Payments for Purchases of Stocks of Subsidiaries andAffiliates
Purchases/Sales of PPE

2

(2)

(4)

(9)

(9)

(20)

Purchases/Sales of Intangible Assets

(53)

(44)

(170)

(181)

(111)

Cash Flows from Financial Activities

(43)

74

2,324

(97)

(81)

Repayments of Short-Term Borrowings

(15)

100

(50)

(50)

(2,333)

Increase in Long-Term Debt

1,683

Proceeds from Issuance of Bonds
Repayments of Long-Term Debt

5

984
100

(28)

(26)

(200)

Redemption of Bonds(1,593)(32)

Proceeds from Issuance of Stock

660

54

613

Changes in Cash

40

448

(140)

534

397

Cash & Cash Equivalent - Beginning

212

252

700

561

1,094

Cash & Cash Equivalent - Ending

252

700

561

1,094

1,491

Free Cash Flow (FCF)

83

374

(2,464)

(412)

474

Source: Complied by SIR from SPEEDA data.
Note: Non-consolidated financial results until FY2021/8.

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Sessa Investment Research

LEGAL DISCLAIMER
This report is intended to provide information about the subject company, and it is not intended tosolicit or recommend investment. Although the data and information contained in this report havebeen determined to be reliable, we do not guarantee their authenticity or accuracy.
This report has been prepared by Sessa Partners on behalf of the concerned company for which it hasreceived compensation. Officers and employees of Sessa Partners may be engaged in transactions
such as trading in securities issued by the company, or they may have the possibility of doing so in
the future. For this reason, the forecasts and information contained in this report may lackobjectivity. Sessa Partners assumes no liability for any commercial loss based on use of this report.
The copyright of this report belongs to Sessa Partners. Modification, manipulation, distribution ortransmission of this report constitutes copyright infringement and is strictly prohibited.

Sessa Partners Inc.
#5a i-o Azabu, 2-8-14
Azabujyuban, Minato-ku, Tokyo

info@sessapartners.co.jp

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