“We still don’t know whether Uber is a real business. It has never had to live on the cash it generates,” wrote Bloomberg columnist Shira Ovide on 16 Aug 2018. Despite the ubiquity of the rideshare services and its aim to morph into an indispensable everyday app in new categories of growth such as food delivery, Uber continues to be loss-making and has burned through more than $11 billion in cash in its lifetime after taking in over $21.7 billion from stock sales and borrowings. French ride-sharing unicorn BlaBlaCar and Israeli-based hailing app Gett also had their valuations cut this week as the European ride-sharing market becomes increasingly competitive. Valuation is tricky, which skeptics like NYU Professor Aswath Damodaran find out when he asserted that Uber was overvalued at $17 billion after a 2014 investment round, based on data points from the global taxi and car-service market, concluding the real number should be $5.9 billion. Since the 2014 article which prominent VCs such as Bill Gurley criticized for a “faster horse” mentality, Uber has shot past his estimate to be valued at $62 billion.
Is it ever possible for sharing economy disruptive tech firms like Uber to achieve profitability with healthy cashflow generation given the ever increasing customer acquisition costs being capitalized and shifted into the balance sheet? After all, network effect, popularized by Carl Shapiro and Hal Varian in their 1998 seminal book Information Rules: A Strategic Guide to the Network Economy, posits that increasing returns to scale and profitability is supposed to be forthcoming once the network gains a critical mass of users, and that increasing value cannot continue indefinitely beyond the critical mass unless the system is enlarged. Or is this the better question: Are there sharing economy firms that generate healthy profits and cashflow and what can investors and entrepreneurs learn form them?
How CEO Koichi Nishikawa scale Park24 (TSE: 4666) into the world’s only profitable car-sharing company bears useful insights for value investors in understanding the dynamics of platform business models. Park24 is Japan’s largest car-sharing company commanding over 70% market share with 980k monthly subscription paying members for the “Times Car PLUS” services introduced since 2009 which has generated 13 billion yen in sales and 1.69 billion in operating profit as at April 2018 (FY15 Sales 6.45bn yen, OP 0.37bn yen). Times Car PLUS can be found near almost every train station in central Tokyo and 60% of shinkansen bullet train stations outside Tokyo. For a monthly fee of 1,030 yen, or about US$9.33, members who sign up online or with a smartphone receive a member card that functions as a car key. Vehicles are booked online or using Park24’s smartphone app. Subscribers are charged in 15-minute increments of 206 yen, and the tank need not be refilled before the vehicle is returned. By leveraging its core business as the largest parking company with an infrastructure of over 590k parking spaces in Japan under the Times brand and dynamically using Times parking sites to expand the scale of its fleet operations, Park24 has established a solid leadership position in Japan for car sharing services.
The core business of Park24 is parking lot management and it is the world’s largest parking company in the Asia/Oceania region with the world’s largest number of sites and the number of parking spaces managed reaching over one million (590k in Japan, 540k overseas), commanding over 54% domestic market share in parking with a network of around 18,000 parking facilities and supported by 6.5 million Times Club members. Despite increased development of parking facilities, there is a chronic shortage of parking spaces and only one-third of the demand in Japan is being met. There are also ample amounts of unused sites that are suitable for development. Through acquisitions of National Car Parks in Aug 2017 and Secure Parking in Jan 2017, Park24 is the number one leader in UK with 30% share in parking and in Australia with 38% share (vs 33% for Wilson Parking which is backed by HK billionaire Kwok family) respectively. Park24 also provides road services, which comprise onsite emergency handling and car-carrying services to automobiles and motorcycles.
Park24 also offers B-Times, a membership service launched in Aug 2016 that matches a landowner who wants to utilize idle land effectively with a driver who wants to park their car. “Drivers who are members of the Times Club administered by Park24 can book vacant parking spaces as small as one unit at sites registered by the owners or managers of houses, shops, commercial buildings or other properties. Owners can rent out their parking spaces with confidence, thanks to the track record of the Times brand parking systems. The use of online and credit card payments means capital investment for checkout machines or other infrastructure is unnecessary. Park24 will be able to operate parking spaces on small plots of land and in locations that are unsuitable for Times parking facilities is contributing to the expansion of the Group’s parking network. The introduction of the B-Times reserved parking service will allow us to establish a new mobility network by integrating various resources, including around 17,000 parking facilities, 43,000 Times Car vehicles, with the B-Times system. Through the aggressive development of B-Times, we believe that we can contribute to the creation of a city with no parking on the street that the Park24 Group is aiming for,” commented CEO Nishikawa.
Park24 was founded in 1971 by Kiyoshi Nishikawa originally selling “No Parking” signs, expanded into sales of parking facility equipment, and started to manage parking sites in 1991 after the opening of its first 24-hour unmanned under the Times brand. The founder passed away in July 2005 and was succeeded in 2004 by his son Koichi Nishikawa who joined the family business in 1993 and was instrumental in transforming the traditional business of parking management into an innovator centered on TONIC (Times Online Network & Information Center), his farsighted investments in the IT and big data analytics system introduced in 2003 which enabled Park24 to scale exponentially and create new categories of growth centered on the parking lot, changing city lifestyle, increasing operating profit, EBITDA and operating cashflow by over 350%, 550% and 940% to US$192.5m, US$431.3m and US$427.6m respectively, and compounding over 500% to a market value of US$4.49 billion.
“Our greatest strength is our ability to create networks using our TONIC (Times Online Network and Information Center) IT infrastructure. While expanding the scale of our existing management resources, such as members, vehicles and parking facilities, we will continue to deploy our Times Pay settlement system and capture driver destination information within communities as part of our customer sharing and business support activities for stores near Times parking facilities. We want Park24 to be a driving force in the new mobility society. We will work to achieve this vision by networking these management resources and using the big data that they generate to offer services that anticipate changes in the automobile society, including the provision of temporary parking for self-driving vehicles, new mobility services based on self-driving vehicles, and charging facilities for electric vehicles. Park24 is dedicated to the realization of its corporate philosophy of creating a comfortable automobile society,” Nishikawa exclaimed with a sense of greater purpose.
Elaborating on Park24’s exponential edge in its TONIC IT infrastructure, CEO Nishikawa said, “An IT system is essential in order to stably move parking lots of this size on a daily basis, providing the location of the Times parking lot and empty lots information instantaneously, reducing the driver’s difficulty of finding a parking lot. You can also use credit cards and electronic money settlement. Times Club members can also collect and save loyalty program points on their Times Club Card. Without this system, it would not have been possible to expand at the current pace. Even if the parking lots in Japan doubled to 1 million now, the system itself can tolerate, and because of this system, innovative new services such as Times Car PLUS car sharing and B-Times parking reservation could be introduced and we can discover new possibilities, develop new businesses. By using this system, all parking lots, car sharing cars, car rental are connected online.”
“I tried to introduce this TONIC IT system at around 2000 when I presented at the board meeting that ‘we cannot survive unless IT systems are introduced in the future.’ At that time, Times parking lot had been rapidly increased, but it was in fact impossible to manage even what was broken. Since I could not get any data before the introduction of TONIC, I did not know whether the parking lot was working properly and how much profit it generated unless I went to the site. I envisioned the fear that management cannot be done when expanding in such a state. It was imperative to introduce the IT system quickly. When I started taking data from a certain time, I found that the loss due to cars not being charged accounted for 15% of the total. As the sales at that time were about 20 billion yen, there was a loss of 3 billion yen. If there is such a loss, if you make capital investment and reduce the loss, profits will be improved. However, the annual profit at the time was 2.5 billion yen. As we proposed an IT system investment of 4 billion yen, it was dismissed twice by the board of directors. But I did not give up. I tenaciously persuaded the founding generation who gave the go ahead the third time, saying ‘Do as much as possible’. Well, I had a hard time, there was no company to cooperate in making the system. We did it on our own and I checked the machines in the parking lot one by one, analyze the circuit, rush around with the staff.”
“With the introduction of TONIC in 2003, we connected all of the Times parking spots scattered all over Japan online so that we can grasp the operating situation at a glance and enhance customer service. Information on whether the parking lot is full, empty, crowded, etc. are delivered to web pages and mobile phone terminals, car navigation companies, map companies, content companies in real time. We are able to promptly share information by completing services such as parking lot cleaning, collecting money, maintenance of parking lot equipment and call center all within the group so that we can provide timely and speedy service. It is a big difference. By constructing a management system that utilized IT in this way to discover and recover equipment failures and malfunctions at an early stage and solve information distribution to increase occupancy rate, the gross profit margin improved significantly. The system we created has contributed to revenue bigger than expected. As all data was managed all at once, the range of business expanded widely.”
“Park24’s move towards IT is not limited to this. In the smartphone application ‘Times Parking Lot Search’, users get real time empty car information, parking lot position information, fee structure etc. Without TONIC, it would have been impossible to scale to and feel the size of the current Park24. In the car sharing service, as the center grasps the operating status of all cars through the system, for example, you can see the spots where there are many people who demand the services, and you can provide data that they need. With the ability to collect and manage data, the range of services that can be offered is expanding. Park24 is also advancing tie-ups with other transportation agencies, such as for those who ride on a transportation IC card using the Times parking lot or car sharing, they can receive preferential treatment for usage fees. By utilizing not only parking lot and checkout machine but also customer information of membership organization Times Club, driving route and driving information can be collected from onboard equipment mounted on car sharing vehicles, the company can offer various services. For example, in the parking lot business, it is important to establish a good relationship with shops near the facility. Therefore, the company delivers neighborhood store information, campaign information, etc. to members who frequently use a specific parking lot. In the case of managing a parking lot of a commercial facility, it also supports promotional activities by providing attributes and usage status of customers visiting parking lots. In addition, in car sharing, points are gathered when cherishing the car carefully for other members, and a program is offered that gives benefits according to the number of points. One of the items is ‘rapid acceleration / Eco driving without sudden deceleration’. It is a mechanism realized by utilizing the information of the onboard device. It provides favorable service to corporate members by providing a service that visualizes the driving situation of sales representatives who use cars and helping to promote safe driving. The reason we were able to create such unprecedented new services is because we had an environment where we could analyze and utilize information of parking facility, on-board equipment, members etc. cross-sectionally. For many years since constructing TONIC, the culture of data utilization that has been rooted in the company greatly contributes to the company’s current competitiveness.”
Above all, CEO Nishikawa shared the critical values system of Park24 imprinted by the founder: “We do not have inventory, do not deal with corrupting things, do not follow fashionable trends in business. If there is stock inventory, there is worry of stock bankruptcy; if you deal with what corrupts, you will collapse as soon as possible when you need to deal with it; and if you follow a fashionable trend, you will be responsible for the response after the epidemic leaves. For example, in 1991, the Road Traffic Act and the Garage Law was revised, so self-propelled multistage prefabricated parking lot became popular and companies were able to sell quite a bit. There was a discussion whether it should also be sold in Park24, but the founder says ‘Do not do this because this is a transient boom’. The fashion really ended in one year.”
CEO Nishikawa shared emphatically on Park24’s vision and its exponential journey ahead: “With cars becoming indispensable in everyday life, the role of the parking facility is changing rapidly from a mere place where vehicles are parked to a center of urban activity. The Park24 Group aims to help achieve a comfortable automobile society by developing and offering mobility services, including parking, car sharing, and car rentals, and expanding our membership network. I would like to pursue whether there is anything we can do as a ‘transport infrastructure company’ in a way that makes use of the acquired knowledge as we develop these businesses. We will continue to fulfill our social mission as a transportation infrastructure company by taking advantage of the resources of the Park24 group. We aim to create new mobility services by utilizing the network, know-how and various data that our group has built up and accumulated. The Park 24 group will make every effort to remember the challenge that is the DNA from our foundation and continue to take the customer’s voice firmly, in order to become a transportation infrastructure service company to contribute to the development of the mobility society of the future and to meet the needs of the times. We aim to make Park24 indispensable to the automobile society, and to all of our stakeholders, by expanding our operations in Japan and developing overseas businesses to drive our future growth, and by creating new forms of mobility.”
Intrigued and want to read more? Download this week’s H.E.R.O. HeartWare: Weekly Asia Tech News with brief highlights of the inspiring entrepreneurial stories of tech leaders in Asia whom we have been monitoring over the past decade in our broader watchlist of over 200 listed Asian tech companies and our focused portfolio of 40 HERO Innovators who reveal their problems and successes behind building the company. Inspired by Brandon Stanton’s photo-journalistic project Humans of New York which collects and highlights the street portraits and moving stories of people on the streets around us who were doing things that changed lives and made a difference in the city but often went unnoticed, we have curated a collection of Hear the Heart of the H.E.R.O. stories on our website which we aim to update with refreshing and uplifting new stories weekly. Please check them out and give us your valuable feedback so that we can improve to make them better for you. In this issue, we have:
- Koichi Nishikawa 西川光一, CEO of Park24 Co パーク２４ (TSE: 4666, market cap US$4,490m), the world’s largest parking company in the Asia/Oceania region with the world’s largest number of sites and the number of parking spaces managed reaching over one million (590k in Japan, 540k overseas), commanding over 54% domestic market share in parking with a network of around 18,000 paring facilities and supported by 6.5 million Times Club members. Despite increased development of parking facilities, there is a chronic shortage of parking spaces and only one-third of the demand in Japan is being met. There are also ample amounts of unused sites that are suitable for development. Park24 is also Japan’s largest car-sharing company commanding over 70% market share with 980k monthly subscription paying members for the “Times Car PLUS” services introduced since 2009 and is likely the only company In the world to achieve profitability. Times Car PLUS can be found near almost every train station in central Tokyo and 60% of shinkansen bullet train stations outside Tokyo. Rental costs are calculated in 15-minute increments, and the tank need not be refilled before the vehicle is returned. By dynamically using Times parking sites to expand the scale of its fleet operations, Park24 has established a solid leadership position in Japan for car sharing services. Park24 also offers rent-a-car service under the Times Car RENTAL brand that provides use of a vehicle for business and leisure purposes. Park24 also offers B-Times, a membership service that matches a landowner who wants to utilize idle land effectively with a driver who wants to park their car. Park24 also provides road services, which comprise onsite emergency handling and car-carrying services to automobiles and motorcycles. Through acquisitions of National Car Parks in Aug 2017 and Secure Parking in Jan 2017, Park24 is the number one leader in UK with 30% share in parking and in Australia with 38% share (vs 33% for Wilson Parking which is backed by HK billionaire Kwok family) respectively. The company was founded in 1971 by Kiyoshi Nishikawa originally selling “No Parking” signs, expanded into sales of parking facility equipment, and started to manage parking sites in 1991 after the opening of its first 24-hour unmanned under the Times brand. The founder passed away in July 2005 and was succeeded in 2004 by his son Koichi Nishikawa who joined the family business in 1993 and was instrumental in transforming the traditional business of parking management into an innovator centered on TONIC (Times Online Network & Information Center), his farsighted investments in the IT and big data analytics system introduced in 2003 which enabled Park24 to scale exponentially and create new categories of growth centered on the parking lot, changing city lifestyle. Park24 is headquartered in Tokyo.
It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?
Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?
Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.
We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.
During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the H.E.R.O Innovators Fund, (surprisingly) the only Asian SMID-cap tech-focused fund in the industry.
The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.
As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.
The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our ARCHEA Asia HERO Innovators Fund to add value to our clients and the community. Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.
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