Quick Look

Sessa Investment Research

May 7, 2024

Paycloud Holdings ｜4015

TSE Growth

2Q Follow-up

High-growth fintech company trading at a P/B ratio of justunder 1.4x
HiddenassetsSummary• 1H Results: On April 12, 2024, Paycloud Holdings Inc. announced its 2Q FY2024/8
earnings, its first earnings announcement since becoming a holding company andchanging its name on March 1, 2024. In 1H FY2024/8, the company reported net salesof ¥1,990 mn, adjusted EBITDA of ¥226 mn, and operating profit of ¥86 mn. It had anirregular 5-month accounting period in 1Q FY2023/8 that included the July-August2022 earnings following a change in the accounting period of the former Valuedesign
Inc., which was merged with the company. As a result, the company's earnings
summary for 1H FY2024/8 show sales being down 12% YoY, adjusted EBITDA up 2%
YoY, and operating profit up 237% YoY. Excluding the impact of the irregularaccounting period, net sales rose 6% YoY, adjusted EBITDA grew 35% YoY, andoperating profit increased 467% YoY, reflecting steady business growth. The
company's management is becoming more confident after 1H adjusted EBITDA camein higher than initial projections, mainly driven by steady sales growth and reductions
in cost of sales and SG&A expenses such as outsourcing and subcontracting expenses.
• 1H ordinary profit amounted to ¥77 mn, but the company reported a net loss of ¥14
mn. This is attributable to the fact that the company had not yet implemented thegroup tax relief system, under which the pre-tax income of each subsidiary is added to
the group's total income and taxed as a whole. Specifically, while the taxable incomeof cashless service operator Valuedesign increased and resulted in commensurate tax
obligations, this was not offset by the loss recorded by the former arara, which had aconcentration of corporate functions and cost centers for new businesses. As a result,
Valuedesign's corporate tax obligations remained. According to the management team,this falls within its expectations and the corporate tax rate for FY24/8 will appear
somewhat skewed, but this problem will be resolved in FY2025/8 with theimplementation of the group tax relief system.

Focus Point
The company's selling point is its
evolution into a promising highgrowth fintech company, taking
advantage of its company namechange that better reflects its
business to transition to a holding
company and separate
management and execution, while
also rectifying the information
asymmetry that has likely
contributed to the discount on its
share price.

Key Indicators
Share price (4/25)
YH (24/1/12)
YL (24/4/17)
10YH (20/11/24)
10YL (22/12/29)
Shrs out. (mn shrs)
Mkt cap (¥ mn)
FY24/2 Equity ratio
2024/3 P/B (Est.)
FY24/8 P/E (CE)FY23/8 ROE (act)FY24/8 DY (CE)

367
617
338
3,905

273
15.711
5,766
48.8%
1.39x
—
6.34%
—

Stock Price Chart 52 Weeks• Performance Trends: Key March 2024 KPIs disclosed on April 25 showed a strong
start to 2H, with monthly recurring revenue (MRR) growth of 18% YoY, including
21.7% YoY growth in MRR for cashless services, as well as a 12.2% YoY increase intransaction value to ¥117.4 bn.
YoY

OperatingprofitYoY

Ordinary
profitYoY

Net profit

YoY

EPS

DPS

Y mn, %

Sales

2020/8 NC

1,201

15.3

136

29.5

142

27.9

143

25.4

25.32

0.0

2021/8 NC

1,461

21.6

305

124.3

280

97.2

229

60.1

37.34

0.0

2022/8 NC

1,165(20.3)(160)(152) (1,506)(638) (1,834)(901) (252.06)

0.02023/8 C

4,476

284.1

163

N/A

133

N/A

114

N/A

10.65

0.0

2024/8 CE

6,900

54.2

200

22.7

-

N/A

-

N/A

-

0.0

Source: Compiled by SIR from the company’s financial statements.
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, and operating 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.

Source: Trading view

Kenichi Sugimoto, Analyst
research@sessapartners.co.jp

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.

1

Paycloud Holdings ｜4015

Sessa Investment Research• Share Price Insights: Based on the company's EBITDA forecast for FY2025/8 (¥1,500 mn),the recent share price stands at just 3-4x Enterprise Value, equivalent to that of a zero-growthcompany. Furthermore, the P/B ratio comes in at 1.39x based on the latest estimated diluted
BPS (¥263), a surprisingly low valuation even for a small cap value stock. The company's
shares have been sold off excessively in response to news headlines of "disappointing results"
each time the company announces quarterly earnings. However, SIR believes that there are
no negative factors that justify the current share price level, which has fallen beyond theimpact of the approximately 31% share dilution, in light of the underlying fundamental factorsthat point toward a strong likelihood that earnings will surpass company projections.

1H FY2024/8
Earnings results*Share-based payment
expenses were added as apart of adjusted EBITDA
starting in FY2024/8.
The formula for adjusted
EBITDA is: Operating profit +depreciation (including
amortization related tointangible assets) + sharebased payment expenses.

◼ Cashless Service Business Performance Trends
The cashless service business, where the company receives a portion of the transaction
value from the Dokuji Pay service provided by consolidated subsidiary Valuedesign as asystem usage fee, accounts for 82% of the group's total sales. In 1H, net sales rose by ¥95
mn YoY (+6%) to ¥1,633 mn, adjusted to exclude the impact of the irregular accounting
period. This business drives overall earnings growth and is the company's cash cow,
generating adjusted EBITDA* of ¥443 mn, which exceeds the companywide adjusted
EBITDA of ¥226 mn. Transaction value, one of the main KPIs, remained strong, reaching¥339.1 bn in 1H. Both total store count and total end-user count are expanding steadily
thanks to new customer acquisitions.
The main factors driving the sales growth were an increase in payment commissions andhigher initial sales from new installations. In particular, the increase in payment
commissions reflects better-than-expected acceptance of the system usage fee revision(price increase) that has been underway since the beginning of FY2024/8, and the full
impact of the revision will likely be seen in FY2025/8, if not within FY2024/8.
On the other hand, business performance appears slightly weak for the three-monthperiod of 2Q (December 2023-February 2024), where YoY comparisons were not affectedby the irregular accounting period in FY2023/8. Sales fell nearly 10% YoY to ¥761 mn andsegment profit came in largely flat at ¥161 mn. This is because sales recognition for some
one-time sales secured in 2Q slipped into 3Q. Furthermore, YoY comparisons were morechallenging as sales in the cashless service business were boosted by special demand
related to My Number Point campaigns in 2Q FY2023/8.

Note: Figures on the rightshow the sum of KPIs for theformer arara andValuedesign.
Note: Transaction value isdefined as transaction value
directly related to recurring
sales as shown below.
1. Dokuji Pay transaction
value (previously referred
to as “payment value")
2. Amount deposited into
Dokuji Pay throughcomprehensive
agreements with credit
card companies (added as
KPI in FY2024/8)

Total Store Count and End-user Count

Transaction Value(¥100 mn)

¥339.1 bn(Store: Number of stores,
End-user: 1K people)

K

peoplestores

FY2019/8 FY2020/8 FY2021/8 FY2022/8 FY2023/8 FY2024/8

FY2019/8 FY2020/8 FY2021/8 FY2022/8 FY2023/8 FY2024/8

Source: The company IR material.

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Paycloud Holdings ｜4015

Sessa Investment Research

Segment information
Segments(¥ mn)

Cashless Service

Net Sales

Solution

Tolal

FY2023/8
9-11

FY2023/8
9-11

Gross

Net

FY2023/8
12-2

FY2023/8
3-5

FY2023/8
6-8

FY2024/8
9-11

FY2024/8
12-2

Gross

1,069

695

Operating Profit

101

N/A

159

183

177

162

OP Margin

9.5%

18.9%

20.4%

18.0%

18.5%

Net Sales

176

167

166

174

167

Operating Profit

64

51

42

69

52

30.7%

25.2%

39.8%

1,009

1,066

1,155

OP Margin

36.3%

Net Sales

1,246

FY2023/81 FY2023/81 FY2024/8
H
H
1H

872

842

900

981

872

761

Net

Change 1H Change 1H
YoY
YoY
Gross

1,911

1,537

1,633

-15%

161

261

N/A

21.2%

13.6%

19.8%

323

24%

190

344

357

4%

71

115

123

6%

31.0%

37.3%

33.6%

1,039

951

2,255

Net
6%

34.3%
1,811

1,990

Adjustments*

(197)

(153)

(143)

(190)

(163)

(197)

(350)

Operating Profit

(39)

(49)

64

82

56

50

36

26

15

86

OP Margin

-3.1%

-5.6%

6.3%

7.7%

4.8%

4.8%

3.8%

1.1%

0.8%

4.3%

Adj EBITDA

83

29

138

120

106

221

168

226

-12%

6%

237%

467%

2%

35%

(360)

Source: Complied by SIR from the company IR materials.
Note: (*)Adjustments include company-wide expenses that are not included in each segment, and most of them are SG&A expenses.
Gross is a 5-month irregular financial statement including revenue for July-August 2022 due to the change in the fiscal year-end of the former
Valuedesign, which was merged in the 1Q of the previous year.
Net is a three-month financial statement that does not include revenue for July-August 2022.

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Paycloud Holdings ｜4015

Sessa Investment Research◼ Solutions Business Performance Trends
In the solutions business operated by consolidated subsidiary arara, the company
provides a high-speed e-mail delivery messaging service, a data security service featuring apersonal information search solution, and an AR service. The business expanded steadily in
1H FY2024/8, with sales up 4% YoY to ¥357 mn and adjusted EBITDA coming in at ¥138 mn
on the back of solid growth in messaging services coupled with the recording of one-timesales from the AR service.
Solutions Business : Net sales(¥mn)

Solutions Business : Adjusted EBITDA¥192 mn

FY2022/8

FY2023/8

FY2024/8(¥mn)¥78 mnFY2022/8

FY2023/8

FY2024/8

Source: The company IR material.

*A bulk sender refers tosomeone who sends morethan 5,000 emails per day toGmail addresses.
https://blog.google/products/gmail/gmail-securityauthentication-spamprotection/

One interesting event that took place during 2Q was Google's decision to strengthen its
anti-spam measures by reinforcing requirements for bulk senders* sending emails to
Gmail accounts from February 2024, including setting and authenticating the source
domain, authenticating IP addresses, and encrypting communications. Failure to comply
with these requirements is resulting in emails not being reached. arara was quick to pickup on this change in requirements, and its in-house system development team took
action to create an environment that enables bulk email distribution. This has proved
successful, and arara has been able to capture customers switching over from competing
services that were unable to address the change.

Monthly Transaction Value and Monthly Recurring Revenue (MRR) Growth Rates (YoY)

(¥mn)
1,400

125%

1,304
1,174

1,200

1,097
1,025

1,051

1,033

120%

1,053

1,000

115%

800

110%

600

105%

400

100%

200

95%

Sep.
9月

Oct.
10月

Nov.
11月

Dec.
12月

22/8期取扱高
FY22/8Transaction value
23/8期MRR(RHS)
FY23/8MRR(RHS)FY24/8Cashless (RHS)
24/8期キャッシュレス(RHS)

Jan.
1月

Feb.
2月

Mar.
3月

23/8期取扱高
FY23/8 Transaction value
FY24/8 MRR(RHS)
24/8期MRR(RHS)

Apr.
4月

May
5月

Jun.
6月

Jul.
7月

Aug.
8月

24/8期取扱高
FY24/8 Transaction value
23/8期キャッシュレス(RHS)
FY23/8 Cashless(RHS)

Note: The company defines recurring revenue as the sum of payment fees in the cashless service 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
the company's income statement.
Source: Compiled by SIR from the company IR material.

4

Paycloud Holdings ｜4015

Sessa Investment Research◼ Goodwill for Cloudpoint coming in smaller than initially expected
Effective March 1, 2024, the company made digital signage-related business provider
Cloudpoint a wholly owned subsidiary through a stock swap, partially amended its articles
of incorporation, including changing its company name to Paycloud Holdings, andtransitioned to a pure holding company structure.

The company recorded ¥1,411 mn in goodwill as a result of the business integration of
Cloudpoint through a stock swap. The calculation is as follows:(1). In accordance with the stock swap ratio (3.47 shares of former arara common stock
were allocated for each share of Cloudpoint common stock), 3,755,785 shares of thecompany's stock were distributed to Cloudpoint shareholders.
(2). The applied share price for the company's stock is ¥511 per share, the closing price on
March 1, 2024.
(3). The acquisition value of Cloudpoint amounted to ¥1,919 mn, after multiplying (1) and(2) above.
(4). Cloudpoint's net asset value at the end of February 2024 was ¥508 mn(5). The difference between the acquisition value from (3) and the net asset value from(4) came out to ¥1,411 mn, which was recorded as goodwill for the Cloudpoint
acquisition
Accordingly, if the company were to amortize the goodwill over 10 years starting inMarch 2024, the annual amortization expense would be approximately ¥141 mn, and theimpact on FY2024/8 earnings would come out to about ¥70 mn for 2H FY2024/8.
According to the management team, the goodwill of about ¥1.4 bn came in smaller thaninitially expected as a result of the applied share price being lower than originally
anticipated.

◼ Latest estimated diluted BPS is ¥263
As a result of (1) above, the company's issued shares increased from 11,955,563 sharesat the end of February 2024 to 15,711,348 shares as of March 1, 2024, an increase(dilution) of approximately 31%.

At the same time, net assets grew by ¥1,919 mn, the same amount as in (3), to ¥4,103
mn as of March 1, 2024. Diluted book value per share (BPS) increased to ¥263.

◼ Cloudpoint performance remains steadyDuring the three-month period from December 2023 to February 2024, Cloudpoint
installed 2,250 new digital signage screens and 1,450 new locations (addresses), bringing
the total installation base to 51,150 screens and 22,750 locations at the end of February.
Installations moved forward across various industries, such as for menu boards in major
convenience stores (retail media), commercial facilities, car dealerships, as well as in
major fast food stores and drive-throughs. In addition, there were many cases where
digital signage has been installed during office renovations as part of efforts to create
comfortable work spaces.
Even before the business integration, Cloudpoint had projected sales of ¥3,370 mn andoperating profit of ¥220 mn for FY2024/8. According to the management team, thegrowing demand for digital signage has served as a tailwind and boosted 1H results, withsales coming in at ¥1,860 mn (55.4% progress vs. full-year plan) and operating profit at¥120 mn (56.1%).

5

Paycloud Holdings ｜4015
FY2024/8
Full-year earnings
forecast

Sessa Investment Research◼ Confidence in Creating Synergies with Cloudpoint
The management team has gained considerable confidence that it will generate synergies
with Cloudpoint in earnest starting in 3Q, when the business integration took place.
Cloudpoint's clientbase overlaps with that of Valuedesign and includes major convenience
stores, large commercial facilities, and major fast-food chains. This has already created apositive dynamic of cross-selling Cloudpoint's signage to Valuedesign's existing and new clients,
and Cloudpoint selling Dokuji Pay as an added option. The management team has made it
clear that it intends to have each operating company flexibly work together in reaching out toits common client base. It also appears that the company plans to reduce costs by having
Paycloud absorb some of the corporate functions that Cloudpoint had before the merger.

◼ Maintained initial projections but progressing ahead of plan
Paycloud Holdings has a three-year medium-term management plan that ends in
FY2025/8 and calls for sales of ¥7,000 mn and EBITDA of ¥1,500 mn. In FY2024/8, themidpoint of the plan, the company expects annual transaction value in its mainstay cashlessservice business to grow to ¥1.5 tn, up from ¥1.2 tn in FY2023/8. In addition, the company
projects net sales of ¥6,900 mn, adjusted EBITDA of ¥650 mn, and operating profit of ¥200
mn, as Cloudpoint will become a consolidated subsidiary in 2H.
In addition to adjusted EBITDA surpassing initial forecasts in 1H, there is a high probability
that Cloudpoint, which will become a consolidated subsidiary from 3Q, will show an upswing
in performance. Despite this, the company maintained its initial full-year earnings forecast
after announcing 1H earnings results. SIR believes that there is little cause for concern about
the company's earnings outlook, and given the steep upturn in KPI figures for the most recent
March period, an upward earnings forecast revision is highly likely. If this happens, investor
attention is likely to shift toward the scale of the upward revision to performance targets for
FY2025/8, the final year of the medium-term management plan, as well as the details of thenext medium-term management plan, which will kick off in FY2026/8.

New initiatives inJapan andoverseas◼ Japan: Launched Furumachi Pay to support community revitalization andlocal governments
Valuedesign developed a service that enables users to make hometown tax donation
payments right away while traveling. By scanning QR codes placed in stores and facilities attravel destinations with a smartphone, the user can make a donation to the local governmenton the spot, and an e-gift (digital coupon) will be downloaded to the user's smartphone rightaway as a thank-you gift. The company only provides the payment system, and is not involvedin a hometown tax payment agency business.
Specifically, this Furumachi Pay mechanism consists of the user donating (paying) ¥10,000
using their smartphone to support the local government of the area they visit and findappealing, and at the same time, an e-gift worth ¥3,000 is downloaded to their smartphoneon the spot as a thank-you gift. Apart from the donation, when users purchase ¥20,000 worth
of souvenirs at their travel destination, they can use the e-gift to pay for ¥3,000 of the bill first,
and then pay the remaining ¥17,000 using another payment method. In this case, (1) local
governments will have more opportunities to receive donations, (2) member stores will see
an increase in customer spend and overall sales, and (3) general consumers (donors) will
enjoy good deals through the tax savings, taking advantage of the One-Stop Special Exception
System. In addition, the company's e-gift system is easy to use, as users can track theirremaining balance in one-yen increments.
The company just launched the service in April and is actively promoting activities toencourage local governments to set up QR codes, but the future potential of this service isunknown. It was launched with Furumachi Pay, but the company is already negotiating withsome local governments to use the service for local currencies, and plans to expand theservice going forward.
6

Paycloud Holdings ｜4015*The Open Network for
Digital Commerce is a digital
infrastructure initiated andlaunched by the Indian
government in December
2021 to boost e-commerce
adoption in India, and is an
integrated domestic open
source e-commerce network.
By connecting to ONDC,
small businesses will be able
to compete on an equal
footing with large global ecommerce platforms.

Sessa Investment Research◼ Overseas: Began selling gift cards through ONDC, an initiative driven by the
Indian government
In the Indian market, the company is working with EazyDiner, a leading local restaurant
reservation service provider, to expand its digital gift distribution business serving over
12,000 partner restaurants. Most recently, the company signed an agreement with
Amazon and began handling Amazon Pay eGift Cards.
In addition, Valuedesign's Indian subsidiary, Valuedesign Services Private Limited, in
collaboration with Earnest Data Analytics Pvt. Ltd. will newly launch digital gift sales
through the Open Network for Digital Commerce (ONDC)*, an e-commerce network
initiated by the Indian government. This will not only expand Valuedesign India’s
distributer base to more than 47,000 e-commerce businesses selling its clients’ digital
gifts, but also enable it to handle more than 1,000 types of branded digital gifts via ONDC
as well as its own branded gift cards.
Previously, the company's business scope was limited to processing operations for managing
in-house branded gift card balances and purchasing and handling gift cards for somecustomers. However, through ONDC, Valuedesign India started a new business in India as a
distributor, purchasing and selling a wide variety of gift cards and earning new fee income.
Still, this initiative was also recently launched, so its future potential is unknown. In
addition, the amount and scale of overseas earnings are still minor relative to thecompany's overall size, so the company has not provided detailed disclosures. Nevertheless,the company is considering disclosing information at some point in the future.

◼ High-growth fintech company trading at a P/B ratio of just under 1.4x

Share priceinsights＊As of the end of Feb 2024(¥mn)
Interest-bearing debt
+ 1,090
cash equivalent- 1,919

Net debt total-829

Share price performance for Paycloud Holdings has been weak since closing at ¥725 on
October 13, 2023, when the company announced its stock swap and business integration
with Cloudpoint, its transition to a holding company, and the company name changescheduled to take effect on March 1, 2024, as well as its FY2024/8 earnings forecast. Its
share price has roughly halved since those announcements, having been sold off
excessively in response to news headlines of "disappointing results" each time thecompany announces quarterly earnings results. Since the company has not disclosed its
forecast for ordinary profit, net profit, and EPS for FY2024/8, it goes without saying that
there may be some information asymmetry when it comes to earnings figures and details.
Nevertheless, SIR believes that there are no negative factors that justify the current shareprice level, which has fallen beyond the impact of the approximately 31% share dilution,in light of the underlying fundamental factors that point toward a strong likelihood thatearnings will surpass company projections.
Based on the company's EBITDA forecast for FY2025/8 ( ¥1,500 mn), the recent shareprice stands at just 3-4x Enterprise Value, equivalent to that of a zero-growth company.
Furthermore, the P/B ratio comes in at 1.39x based on the latest estimated diluted BPS(¥263), a surprisingly low valuation even for a small cap value stock.
The management team is proactive about disseminating information through videos andsocial media. However, its IR activities are limited to Japanese language only, and thecompany has expressed its commitment to providing information in English as a priority
going forward. Once the company refines its IR activities both quantitatively andqualitatively, including through information distribution, and rectifies its information
asymmetry in the process, the the equity market may gain more conviction of thecompany's earnings growth story for FY2025/8 onward and evaluate it as a high-growth
fintech company.

7

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.
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info@sessapartners.co.jp

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