Temporary stock price surge, but it becomes clear in the earnings report that SoftBank is dangerously dependent on ●●
Hello, this is Shimosan.
"SoftBank is over. It's bad."*
"There might be a bankruptcy, and SoftBank Shock could occur."
When you trade stocks,you inevitably hear
the negative rumors about SoftBank Group.
In particular, since the WeWork issue last year, there has been growing concern
about President Son’s investment skills and discernment.
There are rising voices of anxiety.
SoftBank Group's stock price has a very large influence on the Nikkei Stock Average,
so if something like the "SoftBank Shock"
it would not be a trivial matter for many stock traders.
Therefore, this time, based on
the February 2020 Q3 results briefing
and the latest "financial notices,"
we will scrutinize whether SoftBank Group is really dangerous,
if dangerous, what exactly is dangerous.
We will examine these points.
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From Bill Gates to Buffett,
is that what it means?
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What stood out at the February 12 results briefingwas
President Son's use of the word "adventurer-investor".
In response to the question, "Is Son now not a businessman but an investor?"
he replied,
"Actually, he is an information revolutionist."
and then added,
"to put it plainly for the public, he is an investor."
He explained.
And,
"From Gates to Buffett, is that what it means?"
to this question, he answered as follows.
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Buffett is not an adventurer-investor, right?
He is a safer, smarter investor.
I am still somewhat naughty,
a crazy investor.
Well, perhaps close to an adventurer-investor.
SoftBank
2020 February Q3 Results Briefing
Q&A with Masayoshi Son
https://webcast.softbank.jp/ja/detail/video/ref:20200212_01_ja
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"Adventurer-investor"
This term encapsulates Son’s approach as an investor,in a straightforward way.
It is not low risk and low return; rather, it seeks
high risk and high return,
and that mindset is conveyed.
At this point, a sense of danger lingers.
The returns when successful could be large, but
the damage when failing would be immeasurable.
That said, Son's words alone cannot determine this,
so we will follow the concrete numbers disclosed in this earnings report.
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1.2 trillion yen from Alibaba stock sale
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First, the latest "financial highlights."
For those unfamiliar with the financial highlights as well,
you can get the gist by looking at the first page overview.
If you like, please view the first page of SoftBank Group's February 2020 financial highlights.
“2020 Year/3Q Financial Highlights”
(https://cdn.group.softbank/corp/set/data/irinfo/financials/financial_reports/pdf/2020/softbank_results_2020q3_001.pdf)
For the period from April 1, 2019 to December 31, 2019, the following figures are listed as profit data.
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Operating profit: minus 12.9 billion yen
Profit before tax: 13,453 billion yen
Net profit: 656.4 billion yen
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First, the operating profit is a deficit of 129 billion yen.
However, the profit before tax is
1,345.3 billion yen.
Even though operating profit is negative, it appears that profits were made elsewhere,
but where did the profit come from?
"Alibaba stock."
On page 4,
it states
"Alibaba stock forward sale contract settlement gains"amounting to 1,218.5 billion yen,
and this shows the profit from settling Alibaba stock.
Then, for the period April 1, 2019 to December 31, 2019,
the net profit after tax was656.4 billion yen.
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Breakdown of the 5 trillion yen rise in shareholder value is risky
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However, Son says
"revenue and operating profit are not important."
During the briefing,
"SoftBank Group is a investment company,
so operating profit is no longer relevant. Look at shareholder value."
This is consistently stated.
"Shareholder value" means, in other words,
the value of the shares SoftBank Group holds
minus the amount of "net debt"
is what is referred to.
Why does Son want people to watch "shareholder value"?
As explained in the briefing,
SoftBank Group
(in effect) directly holds
Alibaba stock and other holdings,
but increases in their prices do not reflect in sales or profits.
This is determined by accounting rules.
Therefore, no matter how much sales or profits rise,
the true value of SoftBank Group cannot be seen.
So, when viewed by the yardstick of
"shareholder value," what happens to SoftBank Group?
Looking at SoftBank Group's holdings value,
data from September 30, 2019 and February 13, 2020 shows
rises from 26 trillion to 31 trillion yen,an increase of 5 trillion yen.
In just four months, 5 trillion yen increased.
Consequently, "shareholder value" also increased by
the same 5 trillion yen,
which is an enormous amount in four months...
As Son says, when looking at SoftBank Group through "shareholder value,"
it becomes a remarkably strong company.
However,
one thing to beware of.
The breakdown of the 5 trillion yen rise in holdings shows that,
Alibaba: from 12.2 trillion to 16.1 trillion
SoftBank KK: from 4.7 trillion to 4.8 trillion
Sprint: from 2.3 trillion to 3.2 trillion
Arm: from 2.7 trillion to 2.7 trillion
Vision Fund: from 3.1 trillion to 3.2 trillion
Others
are listed.
As you may notice,
the main driver of the 5 trillion rise is almost entirely Alibaba.
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Ultimately, Alibaba determines everything
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Selling Alibaba stock records 1,345.3 billion yen
“profit before tax”
If Alibaba stock rises,
shareholder value increases by about 4 trillion yen.
Thus,
as seen in this earnings briefing and the financial highlights,
the current SoftBank Group is
extremely Alibaba-dependent.
In the briefing, Son said,
"Alibaba still has room to grow,
and I have no intention of selling in a hurry."
But what if Alibaba collapses?
The dependence on Alibaba is extremely high,
and a rather dangerous situation would be unavoidable.
Last year,
there were reports that the Trump administration was considering delisting Chinese stocks listed in the US,
and there is also a possibility that Alibaba could be delisted in the US.
Whatever happens, it wouldn’t be surprising.
"If banks stop lending, it's bad"
or "they might go bankrupt,"
are among the persistent rumors about SoftBank Group,
but the high dependence on Alibaba is not the only risk for SoftBank Group today.
So, please continue listening till the end today as well.
Thank you for watching.
Keizo Shimoshi
