Raccoon Holdings (TSE: 3031), Japan’s Leading B2B Online Wholesale Marketplace “SUPER DELIVERY” – H.E.R.O. Innovators Insights from CEO Isao Ogata | H.E.R.O. HeartWare | 8 April

What would an Asian online-only membership-based Costco Wholesale (NASDAQ: COST) boosted by artificial intelligence look like? What is the value of this “Asian online Costco” who innovated to become the only online wholesale marketplace in the world that combines a B2B ecommerce service with its own PayPal-like credit settlement payment and credit underwriting infrastructure which enables buyers to procure goods in bulk more easily through longer-term credit and allows sellers to focus on product development since they do not have to deal with credit payment risk themselves?

What would an Asian online-only membership-based Costco Wholesale (NASDAQ: COST) boosted by artificial intelligence look like? What is the value of this “Asian online Costco” who innovated to become the only online wholesale marketplace in the world that combines a B2B ecommerce service with its own PayPal-like credit settlement payment and credit underwriting infrastructure which enables buyers to procure goods in bulk more easily through longer-term credit and allows sellers to focus on product development since they do not have to deal with credit payment risk themselves?

Costco’s subscription model of 96.3 million loyal members generates over US$3 billion in fee income which flows straight down and contributes to over 60% of its operating earnings. The recurring fee and over 90% membership renewal rate make Costco’s earnings more predictable, propelling the warehouse club wholesaler to hit an all-time high in its market value at US$108 billion and a rare standout despite the dominance of Amazon. Both Warren Buffett and Charlie Munger have long spoke about their admiration for Costco which is also a Berkshire Hathaway stock holding and Munger is a board member since January 1997.

This week, we highlight the under-the-radar listed Asian exponential innovator Raccoon Holdings (TSE: 3031), Japan’s leading B2B ecommerce service platform with its “SUPER DELIVERY” (https://www.superdelivery.com) wholesale marketplace connecting small-and-medium-sized suppliers, manufacturers, wholesalers (sellers) with small-sized retailers (buyers) in over 856,000 products (FY04/2016: 559,272) from fashion (apparel, accessories & jewelry), furniture & interior accessories to everyday household goods (kitchenware, stationary & crafts, daily necessities, toys & hobbies), electrical appliances and F&B/confectionery.

Launched in Feb 2002, Raccoon’s “online Costco” marketplace focuses on companies who buy/sell in bulk and has 1,391 member suppliers (FY04/2016: 1,138) and ~119,000 member retailers (FY04/2016: 52,372), with an average purchase per retailer of over 247,000 yen while average sales per supplier is 2.2m yen, and commands a high ratio of repeat customers who repurchase within six months of over 94% and customer loyalty in which around two-thirds of member suppliers (sellers) use only SUPER DELIVERY for online wholesaling, thus differentiating from the typical loss-making and cash-burning B2C marketplaces with the need to spend aggressively on promotions/discounts/subsidies to attract fickle customers to expand GMV (gross merchandise value) in order to keep raising capital. Raccoon does not hold inventory and instead helps other companies reduce inventories by facilitating distribution.

Raccoon generates both stable recurring monthly subscription revenue from suppliers who pay basic monthly fees of 40,000 yen and increase in transaction value in system usage fees (10% of each transaction) and from member retailers (buyers) who pay monthly membership fees of 2,000 yen. Raccoon is not charging monthly membership fees to overseas retailers (buyers) and Japanese buyers who are not retailers. Revenue from system usage fees comprised 63.3% of FY04/18 segment revenue, subscription revenue from member suppliers (sellers) 21.9%, and subscription revenue from member retailers (buyers) 14.4%.

Raccoon is unique because it is the only company in Japan and worldwide that combines a B2B EC service (SUPER DELIVERY) with credit risk underwriting services (“PAID”, “T&G Credit Guarantee” & the fully online accounts receivable guarantor service “URIHO”). Member retailers can procure goods more easily since they have access to a wealth of product information and a system for buying with credit (through PAID), reducing the financial burden. Thus, SUPER DELIVERY is user-friendly to member suppliers in expanding sales channels even for first-time transactions with a buyer without taking on credit risk, eliminates paperwork in invoicing, and offers sales campaign management tools to target corporate buying groups.

“We are striving to create and provide new ecommerce and credit settlement payments infrastructures for B2B transactions enable the carrying out of business with trustworthiness and ease of use. We will evolve into an infrastructure tool that small- and medium-sized Japanese manufacturers will use for global rollout,“ comments Isao Ogata 小方功, founder and CEO of Raccoon who owns 26.75% of the shares.

With the community and compellingness exponential edge, Raccoon’s business model generates stable and recurring monthly subscription revenue and transaction fee, achieving a 45% and 62% absolute increase in sales and operating profit in the recent three years and generates decent profitability with EBIT margin of 18.3%, positive free cashflow margin of ~14.7%, ROE (= EBIT/ Equity) of ~21-22.3% and ROA of ~7-7.7%, propelling a 325% increase in market value in the past five years to US$114m. EC platform services business SUPER DELIVERY contribute around 66.6% and 51.6% of sales and operating profit respectively in FY04/2018, while financial services account for 33.4% and 48.4% of sales and operating profit. Transaction value marked an annual growth rate of 5.2% over the past seven years (FY04/2011 to FY04/2018). For FY04/2018, domestic retailers made up 90% of transaction value and overseas retailers 10%. In FY04/2018, the growth rate of transaction value for domestic retailers increased 2.6% YoY and overseas transaction value experienced higher growth (+67.8% YoY) to account for more than 10% of all transaction values (FY04/2016: 5%).

On 6 March 2019, Raccoon announced its 3Q FY2019 in which 9M sales (May 2018 – Jan 2019) increased 14.6% yoy to 2.16bn yen and operating profit rose 17.7% yoy to 393m yen. Noteworthy is that Raccoon booked one-time expenses in (1) 100% acquisition of ALEMO (26m yen in brokerage fees and 11m yen in goodwill amortization) at the SG&A expense level and (2) Transition to a holding company structure (19m yen) at the extraordinary loss level. For cumulative 3Q FY04/2019, total transaction value increased 4.4% yoy, led by a 43.6% yoy growth in overseas transaction value which was blunted by 0.6% yoy decline in domestic transaction value. Raccoon also announced an upward revision in FY04/2019 results with sales revised upwards by 10% yoy to 2.98bn yen and operating profit revised upwards by 6.2% yoy to 545m yen. Balance sheet is relatively healthy with 2.275bn yen (US$20.5m) net cash (2.823bn gross cash and 548.66m in gross debt) which is around 16.8% of market cap. Management targets EBITDA of 1bn, around twice the level of FY04/18, at an early stage after shifting to a holding company structure in Nov 2018.

Raccoon launched SD Export (https://www.superdelivery.com/en) in August 2015 to provide support to manufacturers who sought to export and sell their products overseas, not just in Japan, without undertaking complicated procedures. Raccoon is engaged in initiatives to expand its operation from Japanese member retailers to overseas retailers and Japanese businesses aside from retailers. SD Export had over 860 member suppliers (FY04/2016: 500) and more than 42,000 retailers (buyers) (FY04/2016: 5,000) in more than 180 countries. Raccoon sees overseas expansion as a growth initiative for SUPER DELIVERY because products made and designed in Japan are popular overseas. Total value of transactions going through SUPER DELIVERY during cumulative 3Q FY04/19 rose 4.4% yoy to 8.2bn yen; domestic transaction value was down 0.6% YoY for cumulative Q3 while the value of overseas transactions (SD Exports + overseas shipments placed on SUPER DELIVERY’s Japanese-language website) rose 43.6% yoy. Asia accounts for ~80% of the total value of distribution on SD Export.

SUPER DELIVERY stands out not only because it is the only B2B marketplace that charges a monthly membership fee which encourages the retailers to stay active, but also because of its strict screening process (approval rate of about 30% as of April 2018), which looks at whether a retailer (buyer) has a high likelihood of procuring, such as verifying photos of store exteriors (which must carry visible signs) and merchandise on display, and if the applicant operates an online store, verify the website, store concept, and scale; member suppliers undergo inventory verification to improve the quality of its services. This process eliminates those companies who seek to resell the products and helps member suppliers (sellers) avoid credit risk. Participating suppliers (sellers) can expand their sales channels to small- and medium-sized retailers (buyers) both in Japan in different regional locations and overseas while minimizing operating costs incurred from traveling, creating catalogs, and exhibiting products and administrative costs since invoicing becomes unnecessary. SUPER DELIVERY has been praised for giving stores in regional areas access to the products available to stores in urban areas; over 70% of the member retailers are located outside of metropolitan areas like Tokyo and Osaka. In June 2016, the company won the First Nihon Service Award, a prize from the nation’s regional revitalization minister. The Nihon Service Award is Japan’s first award that recognizes businesses with outstanding services. Since July 2016, Raccoon has been working on lifting customer numbers and transaction value by extending its membership to include non-retail businesses in the restaurant, hotel, beauty and hair, lodging, and education industries.

PAID (https://paid.jp) was launched by Raccoon in Oct 2011. PAID independently handles the credit settlement function between companies and manages the entire process, from invoicing suppliers to collection of payment after products are sold or services are provided. Raccoon receives a guarantee fee (1.9% to 3.0% of the transaction) from the merchant seller, with invoices sent by the 20th of the month for payment due on the 25th of the following month. In FY04/18, 65.3% of SUPER DELIVERY’s transactions went through PAID. PAID has over 3,200 member companies. PAID is benefiting from an increasing number of clients ranging from startups with few employees to new businesses run by major corporations in various industries, since there is strong demand for streamlining payments. Internal transactions made up 29.6% and external transactions 70.4% (+33.7%) of the segment revenue in 3Q FY04/2019 with overall value of transactions growing 19.9% yoy to 16.8bn (vs 37.2% and external transactions 62.8% of the segment revenue in FY04/18. A variety of businesses and industries use the Paid service, including the apparel and merchandise, furniture, printing, and online services industries, as well as the Electric Vehicle Support service offered by Mitsubishi Motors (TSE: 7211).

PAID introduced detailed credit screening and judgment using artificial intelligence from Jan 2018 using a deep learning system developed independently based on the unique transactions data of more than 200,000 companies: The credit review which required up to 2 business days by manual checks is completed by the introduction of AI in as little as 1 second; the credit limit initially granted to 80% or more of the companies has been improved, and the initial credit limit of the increased companies is more than doubled on average compared to before introduction.

Raccoon uses the T&G Credit Guarantee service to guarantee accounts receivable in transactions between companies. T&G has accumulated much data on its customers since its founding in 2004. Raccoon has built up a highly-regarded track record and expertise in its credit underwriting service and in managing credit risk for small transactions by SMEs. The guarantor’s business T&G (acquired in 2010) is seeing higher revenue as Raccoon expands its services through operational tie-ups with regional financial institutions and improves the convenience of its products through package discounts on accounts receivable services. T&G’s accounts receivable guarantor service offers two plans: limited guarantee (limited to a predetermined amount during the approval process at 0.2% to 0.55% a month for an average of 4-5 months) and sales guarantee (the guaranteed amount is based on actual sales value at 1.2% to 3.0% of company sales). The guarantee fees are the sales of the accounts receivable guarantee business and are recognized in monthly installments over the guarantee period. Thus, the business generates recurring sales based on the balance of its total guarantees, and barring the occurrence of several large subscriber customers becoming overburdened by debt in a short period of time, the business yields an operating profit margin of 20% or more. OPM (including internal transactions) in FY04/2018 was 21.0% (23.3% in FY04/2017). Internal transactions made up 30.9% of the payments handled by the Paid service and external transactions made up 69.1% of the segment revenue in FY04/2018. External transactions also grew 26.9% yoy in cumulative 3Q FY04/2019. Most of the companies whose payments are guaranteed are small, with annual sales of 5bn yen or less, and most of the payment guarantees are also small, at 2–3m yen each. T&G controls the risk it underwrites by setting the guarantee amount limit for each buyer during buyer screening. T&G also works to diversify risk to minimize the effects losses on claims have on profit by (1) utilizing counter guarantees and offering products with disclaimers; (2) revising screening criteria for buyer companies as needed and working to curtail losses on claims. T&G also hedges its risks by applying a counter guarantee provided by non-life insurance companies.

Raccoon also operates COREC (https://corec.jp), a cloud-based service for sending, receiving, and managing orders that was launched in Mar 2014 serving over 20,000 users vs 5,903 as of end FY04/2016. The freemium SaaS model charges subscribers 1,980 yen for suppliers and 980 yen for buyers. Raccoon is focused on gaining customers and improving visibility for COREC, so the service’s revenue contribution is limited. In March 2016, Raccoon began offering the COREC API service. Among the external partners with this service are Yahoo! Shopping, Square Regi, and Air Market. Raccoon looks to grow the service over the long-term by linking it with its other businesses, as some users who used COREC’s streamlined ordering then adopted the PAID service.

Raccoon was also ranked in the “Great Place to Work” for three consecutive years since their first entry in 2017. Inspired by how new innovative ideas such as PAID, URIHO, COREC etc were developed internally, Raccoon formally established recently an intrapreneurship system to create new businesses, especially in utilizing AI and combining its accumulated data and expertise, and to support its next generation leaders. 

Thus far, of the 67 entrepreneurs and CEOs whom we had highlighted in our weekly research brief HeartWare, around one-third are in our focused portfolio of 40 HERO Innovators, while the rest are in our broader watchlist of 200+ stocks.

We are thankful as always to be invited by John Mihaljevic, Chairman of MOI Manual of Ideas Global, to speak at the upcoming Asian Investing Summit 2019 to take place live online on April 10-11. We look forward to sharing with the MOI community of investors about the distinctive value opportunity in a selected group of under-the-radar Asian SMID-cap exponential innovators who generate high profitability and positive free cashflow in solving high-value problems for their customers and society with a higher sense of purpose, as well as the learning insights from our investment mistakes as the world shifts structurally from Value 2.0 (the world where Charlie Munger nudged Warren Buffett from the Ben Graham-style of statistically cheap net-net asset plays in Value 1.0 towards Value 2.0 in qualitative investing in outstanding companies at reasonable prices) to Value 3.0 where disruptive innovation forces sweeping across industries create ever more “value trap” losers and a selected under-the-radar group of winners with exponential edge. Download the presentation slides in PDF (Link)

Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated and transparent UCITS fund structure to protect investors’ interests has deepened our conviction for the positive change that we will make together with H.E.R.O. – and we are now in the final stage of giving birth in April 2019 to H.E.R.O., the only Asia SMID-cap tech-focused fund in the industry and guarding investors’ interests in the regulated UCITS fund structure with daily NAV & daily liquidity and no exit fees.

To our interested clients who have been asking, we sincerely apologize for the prolonged labor in the birth of HERO over the past months as we have been preparing for a coordinated delivery of our whole family of Swiss fund series and HERO will also be invigorated with the healthy seed from farsighted committed long-term institutional clients to journey far to compound value for investors. Do watch out in the coming weeks for our press release on the birth and launch of H.E.R.O.

If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.


“We are striving to create and provide new ecommerce and credit settlement payments infrastructures for B2B transactions enable the carrying out of business with trustworthiness and ease of use. We want to make Japan’s complicated wholesale business practices simple and concise and to streamline the distribution between manufacturers and retailers. I experienced myself the distributors’ difficulties in cultivating sales channels. From this experience, the thought of ‘Is there a mechanism to search efficiently retail shops across the country which handle products, a smooth distribution, and a secure settlement of accounts’ becomes the starting point of our business model. We have dealt with the problems on B2B transactions and developed the service available for each need on the basis of our mission, ‘Making Corporate activities more efficient and convenient.’ We will evolve into an infrastructure tool that small- and medium-sized Japanese manufacturers will use for global rollout,“ comments Isao Ogata 小方功, founder and CEO of Raccoon who owns 26.75% of the shares.

Raccoon Holdings (TSE: 3031) is Japan’s leading B2B ecommerce service platform with its “SUPER DELIVERY” (https://www.superdelivery.com) wholesale marketplace connecting small-and-medium-sized suppliers, manufacturers, wholesalers (sellers) with small-sized retailers (buyers) in over 856,000 products (FY04/2016: 559.272) from fashion (apparel, accessories & jewelry), furniture & interior accessories to everyday household goods (kitchenware, stationary & crafts, daily necessities, toys & hobbies), electrical appliances and F&B/confectionery.

Launched in Feb 2002, Raccoon’s “online Costco” marketplace focuses on companies who buy/sell in bulk and has 1,391 member suppliers (FY04/2016: 1,138) and ~119,000 member retailers (FY04/2016: 52,372), of which over 12,000 are active members with an average purchase per retailer of over 247,000 yen while average sales per supplier is 2.2m yen, and commands a high ratio of repeat customers who repurchase within six months of over 94% and customer loyalty in which around two-thirds of member suppliers (sellers) use only SUPER DELIVERY for online wholesaling, thus differentiating from the typical loss-making and cash-burning B2C marketplaces with the need to spend aggressively on promotions/discounts/subsidies to attract fickle customers to expand GMV (gross merchandise value) in order to keep raising capital. Raccoon does not hold inventory and instead helps other companies reduce inventories by facilitating distribution.

Raccoon generates both stable recurring monthly subscription revenue from suppliers who pay basic monthly fees of 40,000 yen and increase in transaction value in system usage fees (10% of each transaction) and from member retailers (buyers) who pay monthly membership fees of 2,000 yen. Raccoon is not charging monthly membership fees to overseas retailers (buyers) and Japanese buyers who are not retailers. Revenue from system usage fees comprised 63.3% of FY04/18 segment revenue, subscription revenue from member suppliers (sellers) 21.9%, and subscription revenue from member retailers (buyers) 14.4%.

Raccoon is unique because it is the only company that combines a B2B EC service (SUPER DELIVERY) with credit risk underwriting services (“PAID” and guarantor services “T&G Credit Guarantee” & “URIHO”) which allow suppliers to focus on product development since they do not deal with payment credit risk themselves. Member retailers can procure goods more easily since they have access to a wealth of product information and a system for buying with credit (through PAID), reducing the financial burden. Thus, SUPER DELIVERY is user-friendly to member suppliers in expanding sales channels even for first-time transactions with a buyer without taking on credit risk, eliminates paperwork in invoicing, and offers sales campaign management tools to target corporate buying groups.

With the community and compellingness exponential edge, Raccoon’s business model generates stable and recurring monthly subscription revenue and transaction fee, achieving a 45% and 62% absolute increase in sales and operating profit in the recent three years and generates decent profitability with EBIT margin of 18.3%, positive free cashflow margin of ~14.7%, ROE (= EBIT/ Equity) of ~21-22.3% and ROA of ~7-7.7%, propelling a 325% increase in market value in the past five years to US$122m. EC platform services business SUPER DELIVERY contribute around 66.6% and 51.6% of sales and operating profit respectively in FY04/2018, while financial services account for 33.4% and 48.4% of sales and operating profit. Transaction value marked an annual growth rate of 5.2% over the past seven years (FY04/2011 to FY04/2018). For FY04/2018, domestic retailers made up 90% of transaction value and overseas retailers 10%. In FY04/2018, the growth rate of transaction value for domestic retailers increased 2.6% YoY and overseas transaction value experienced higher growth (+67.8% YoY) to account for more than 10% of all transaction values (FY04/2016: 5%).

On 6 March 2019, Raccoon announced its 3Q FY2019 in which 9M sales (May 2018 – Jan 2019) increased 14.6% yoy to 2.16bn yen and operating profit rose 17.7% yoy to 393m yen. Noteworthy is that Raccoon booked one-time expenses in (1) 100% acquisition of ALEMO (26m yen in brokerage fees and 11m yen in goodwill amortization) at the SG&A expense level and (2) Transition to a holding company structure (19m yen) at the extraordinary loss level.  For cumulative 3Q FY04/2019, total transaction value increased 4.4% yoy, led by a 43.6% yoy growth in overseas transaction value which was blunted by 0.6% yoy decline in domestic transaction value. Raccoon also announced an upward revision in FY04/2019 results with sales revised upwards by 10% yoy to 2.98bn yen and operating profit revised upwards by 6.2% yoy to 545m yen. Balance sheet is relatively healthy with 2.275bn yen (US$20.5m) net cash (2.823bn gross cash and 548.66m in gross debt) which is around 16.8% of market cap. Management targets EBITDA of 1bn, around twice the level of FY04/18, at an early stage after shifting to a holding company structure in Nov 2018.

Raccoon launched SD Export (https://www.superdelivery.com/en) in August 2015 to provide support to manufacturers who sought to export and sell their products overseas, not just in Japan, without undertaking complicated procedures. Raccoon is engaged in initiatives to expand its operation from Japanese member retailers to overseas retailers and Japanese businesses aside from retailers. SD Export had over 860 member suppliers (FY04/2016: 500) and more than 42,000 retailers (buyers) (FY04/2016: 5,000) in more than 180 countries. To increase transactions and improve customer draw by making the payment system more convenient, Raccoon has made the SD Export site compatible with PayPal rather than its own PAID service.

Raccoon sees overseas expansion as a growth initiative for SUPER DELIVERY because products made and designed in Japan are popular overseas. Total value of transactions going through SUPER DELIVERY during cumulative 3Q FY04/19 rose 4.4% yoy to 8.2bn yen; domestic transaction value was down 0.6% YoY for cumulative Q3 while the value of overseas transactions (SD Exports + overseas shipments placed on SUPER DELIVERY’s Japanese-language website) rose 43.6% yoy. Asia accounts for ~80% of the total value of distribution on SD Export.

SUPER DELIVERY stands out not only because it is the only B2B marketplace that charges a monthly membership fee which encourages the retailers to stay active, but also because of its strict screening process (approval rate of about 30% as of April 2018), which looks at whether a retailer (buyer) has a high likelihood of procuring, such as verifying photos of store exteriors (which must carry visible signs) and merchandise on display, and if the applicant operates an online store, verify the website, store concept, and scale; member suppliers undergo inventory verification to improve the quality of its services. This process eliminates those companies who seek to resell the products and helps member suppliers (sellers) avoid credit risk. Participating suppliers (sellers) can expand their sales channels to small- and medium-sized retailers (buyers) both in Japan in different regional locations and overseas while minimizing operating costs incurred from traveling, creating catalogs, and exhibiting products and administrative costs since invoicing becomes unnecessary. SUPER DELIVERY has been praised for giving stores in regional areas access to the products available to stores in urban areas; over 70% of the member retailers are located outside of metropolitan areas like Tokyo and Osaka. In June 2016, the company won the First Nihon Service Award, a prize from the nation’s regional revitalization minister. The Nihon Service Award is Japan’s first award that recognizes businesses with outstanding services.

However, while governance quality of the online wholesale marketplace is possibly the best in Japan, by targeting active retailers as customers due to the rigorous member screening, Raccoon has faced steady, healthy but suppressed growth. Since July 2016, Raccoon has been working on lifting customer numbers and transaction value by extending its membership to include non-retail businesses in the restaurant, hotel, beauty and hair, lodging, and education industries.

Financial Services Business: PAID (https://paid.jp)
PAID was launched in Oct 2011. PAID independently handles the credit settlement function between companies and manages the entire process, from invoicing suppliers to collection of payment after products are sold or services are provided. Raccoon receives a guarantee fee (1.9% to 3.0% of the transaction) from the merchant seller, with invoices sent by the 20th of the month for payment due on the 25th of the following month. In FY04/18, 65.3% of SUPER DELIVERY’s transactions went through PAID. PAID has over 3,200 member companies. PAID is benefiting from an increasing number of clients ranging from startups with few employees to new businesses run by major corporations in various industries, since there is strong demand for streamlining payments. Internal transactions made up 29.6% and external transactions 70.4% (+33.7%) of the segment revenue in 3Q FY04/2019 with overall value of transactions growing 19.9% yoy to 16.8bn (vs 37.2% and external transactions 62.8% of the segment revenue in FY04/18. A variety of businesses and industries use the Paid service, including the apparel and merchandise, furniture, printing, and online services industries, as well as the Electric Vehicle Support service offered by Mitsubishi Motors (TSE: 7211).

PAID introduced detailed credit screening and judgment using artificial intelligence from Jan 2018 using a deep learning system developed independently based on the unique transactions data of more than 200,000 companies: The credit review which required up to 2 business days by manual checks is completed by the introduction of AI in as little as 1 second; the credit limit initially granted to 80% or more of the companies has been improved, and the initial credit limit of the increased companies is more than doubled on average compared to before introduction.

Raccoon uses the T&G Credit Guarantee service to guarantee accounts receivable in transactions between companies. T&G has accumulated much data on its customers since its founding in 2004. Raccoon has built up a highly-regarded track record and expertise in its credit underwriting service and in managing credit risk for small transactions by SMEs. The guarantor’s business T&G (acquired in 2010) is seeing higher revenue as Raccoon expands its services through operational tie-ups with regional financial institutions and improves the convenience of its products through package discounts on accounts receivable services.

Raccoon’s strategy is to increase revenue from guarantee fees by having more merchants (companies that receive payments) and PAID members (companies that make payments), which will increase the value of payments handled. Raccoon plans to increase transactions between merchants and PAID members by investing in systems development to improve user convenience. Raccoon provides the Paid B2B credit sales and invoice settlement service to competitors and multiple e-commerce sites. From June 2016, Raccoon began providing its PAID service to rival B2B EC website NETSEA, which is operated by Aucfan (TSE: 3674), and Zakka Net.

Raccoon also provides PAID to companies offering services related to setting up B2B EC sites such as Hamee’s (TSE: 3134) NEXT ENGINE, Flight Holdings’ (TSE: 3753) EC-Rider Inc. and Lockon (TSE: 3690). In April 2017, Raccoon began offering PAID to GMO Payment Gateway (TSE: 3769). In June 2017, Raccoon began providing PAID as a payment method to businesses using the EC site operated by leading 100-yen shop Can Do Co. (TSE: 2698). Raccoon eliminates credit risk and paperwork associated with payments for the businesses that use these EC sites. In Nov 2015, PAID started serving the Shiirekan website operated by Yume (TSE: 2484), and in Dec 2015, it started offering its services on the LINE@ advertising service. In Nov 2018, Raccoon began offering PAID account settlement services for the long-term deferred payment option on Aperza which runs the Cluez online catalog site and the Aperza price comparison site focused on industrial supply products. In Jan 2019 Raccoon started with 24-hour/year-round service using automated deposit confirmation that shows PAID members their usage limit and allows immediate update of the limit, in response to member companies who are restaurants and retail operators who transfer after the closing hours of the store at night or on weekends which are treated as transfers on the next business day.

Raccoon is building a system that allows buyers to become PAID members without creating additional labor for the merchants (sellers). Transactions via shopping cart accounts for about 80% of PAID’s handling volume. However, about 70% of the merchants are promoting Paid membership to the sellers face-to-face, which is inhibiting improvement of membership rates. In response, Raccoon is simplifying contracting procedures for new members in order to increase PAID membership rates (utilization rates) for face-to-face transactions, which is an issue for the company.

Use of PAID became possible in all 88 VIVA Home stores (operated by LIXIL TSE: 5938) nationwide in April 2018 (preliminary operations had begun at select stores in July 2017). These stores offer an abundance of materials and related products to not only general customers but also professional customers such as building contractors. VIVA Home’s professional customers can now procure materials and related products across VIVA Home stores using PAID simply by presenting their Urikake Cards (credit payment card issued by LIXIL VIVA).

Financial Services Business: Guarantor business T&G (https://www.urikake.jp) and URIHO (https://uriho.jp)
In its Guarantor business, Raccoon’s subsidiary Trust & Growth (T&G) offers accounts receivable guarantor services and rent guarantees for commercial property in Nov 2010. T&G provides three main services: (1) T&G accounts receivable guarantor services; (2) the fully online URIHO accounts receivable guarantor service for companies with annual sales of 500m or less, (3) and rent guarantor service for commercial property. In B2B transactions, T&G guarantees creditors (sellers) collections on accounts receivable from debtors (buyers) that buy via credit sales. Raccoon also guarantees payment of rent arrears on commercial property. T&G charges sellers a guarantee fee and books those fees as revenue. If a buyer is unable to pay, T&G pays the seller in its stead.

By using T&G’s guarantor services, sellers and rental property owners avoid irrecoverable debt, transfer credit risk to T&G, and reduce the work of collecting accounts receivable. Sellers can safely increase their transaction volume without taking on credit risk and do not need to notify buyers that their payments are being backed. T&G’s accounts receivable guarantor service offers two plans: limited guarantee (limited to a predetermined amount during the approval process at 0.2% to 0.55% a month for an average of 4-5 months) and sales guarantee (the guaranteed amount is based on actual sales value at 1.2% to 3.0% of company sales).

The guarantee fees are the sales of the accounts receivable guarantee business and are recognized in monthly installments over the guarantee period. Thus, the business generates recurring sales based on the balance of its total guarantees, and barring the occurrence of several large subscriber customers becoming overburdened by debt in a short period of time, the business yields an operating profit margin of 20% or more. OPM (including internal transactions) in FY04/2018 was 21.0% (23.3% in FY04/2017). Internal transactions made up 30.9% of the payments handled by the Paid service and external transactions made up 69.1% of the segment revenue in FY04/2018. External transactions also grew 26.9% yoy in cumulative 3Q FY04/2019.

Raccoon is steadily accumulating guarantees outstanding at 18.4bn yen in FY04/18 (FY04/2016: 9.1bn yen), including 1.7bn yen (9.3%) in guarantees outstanding for transactions within the group while external transactions made up 90.7%. Companies in various industries use the company’s guarantor services, although the service industry holds the largest share at ~31.4%, 26.7% in wholesale, 13.7% in retail, 12.0% in construction, and 16.2% in other industries. Most of the companies whose payments are guaranteed are small, with annual sales of 5bn yen or less, and most of the payment guarantees are also small, at 2–3m yen each.
T&G controls the risk it underwrites by setting the guarantee amount limit for each buyer during buyer screening. T&G also works to diversify risk to minimize the effects losses on claims have on profit by (1) utilizing counter guarantees and offering products with disclaimers; (2) revising screening criteria for buyer companies as needed and working to curtail losses on claims. T&G also hedges its risks by applying a counter guarantee provided by non-life insurance companies.

Sales channels are divided into direct sales and agency sales. Currently, about 40% of sales come from direct sales and 60% from affiliated partner agencies that include regional banks, insurance agencies, credit clearing houses, and other organizations. When an affiliated agency introduces a client, Raccoon pays 10% of the guarantee fee as commission to the agency. Competitors include factoring companies that are subsidiaries of major financial institutions which offer accounts receivable factoring, and eGuarantee (TSE: 8771) which offers guarantor services for corporations and financial institutions. T&G offers the only guarantor services that cover late payments, unlike its peers that only provide coverage when the debtor goes bankrupt. With this type of service, a seller can use T&G’s guarantor services to aggressively pursue new buyers and to prevent credit risk even from first-time buyers.

URIHO is a fully online accounts receivable guarantor service with a flat monthly rate system which can be used even by small to medium sized companies with annual sales of 500m yen or less (first of its kind in the industry).

T&G launched the service in July/Aug 2016. Application, credit check, and execution can all be conducted online. Raccoon can now target companies, which its in-person guarantor service had not been able to before due to company size (companies with annual sales 500m yen or less; more than 80% of all companies). Small to medium sized companies making 500m yen or less in annual sales now have access to accounts receivable guarantor services, which it could not use before. This fully online accounts receivable guarantor services unique to Raccoon and are possible only because the company group possesses both the credit know-how in the Guarantor business and operational know-how for B2B EC business transactions.

Since June 2017, Raccoon has been operating a commercial property rent guarantor service for businesses (retail stores, offices) through its own brand. Not only can a lessee rent the properties smoothly by using T&G services, but it can also create an environment that sets a lessor and property management company’s mind at ease to rent out the property. T&G’s rent guarantee service can provide a 24 months long-term guarantee service and cover the expense for recovering to the original condition, removing leftovers and applying for the enforcement of the lawsuit. Using the screening database and track record it cultivated as a guarantor specializing in commercial transactions, Raccoon will conduct full-fledged expansion of its rent guarantor service for businesses.

Raccoon anticipates continued growth in demand in both the commercial and residential property rent guarantor market in the years ahead, as changes in Japan’s Civil Code that will go into effect in 2020 will make it even more difficult for individuals to act as co-signers on leases. Because rent guarantee services for commercial properties are yet not as widespread as rent guarantee services for residential properties and there is also less competition, Raccoon is looking to become a major player in this market by moving early to build up its market share. On Nov 2018, Raccoon entered into a business partnership with Global Trust Networks (GTN) to  jointly develop and launch a rent guarantee service for commercial properties (stores, offices, warehouses, factories) leased to foreign tenants, foreign companies or foreign business owners that look to start or expand their business in Japan.

The market environment for rent guarantee services for residential properties has grown more favorable in recent years as the aging of Japan’s population along with the growing number of single-person households and long-term foreign residents has led to increased demand for rent guarantees from companies rather than from private individuals. Coupled with the upcoming changes in Japan’s Civil Code in 2020, this points to continued growth in demand for rent guarantee services going forward.

On 7 Dec 2018, Raccoon acquired 100% of ALEMO (https://www.alemo.jp) Inc. for 296m yen (270m plus 26m yen in brokerage commissions; FY09/2018 revenue 267m yen, recurring profit 33m yen, net asset 102m yen). ALEMO mainly operates a rent guarantee business for private residential properties located in the Kanto area and is enjoying steady growth in revenue thanks to its own multifaceted credit assessment system, which has allowed it to underwrite rent guarantees for a wide range of properties (including commercial properties) and deal with a number of different real estate companies. The acquisition will allow Raccoon to offer rent guarantee services for both residential and commercial properties. Such a service would be very convenient from the perspective of real estate companies that handle different kinds of properties, as it would allow them to use the same rent guarantee company for all their properties. As a result of the acquisition, the balance of rent guarantees outstanding at the end of 3Q FY04/2019 is 59.9bn yen (19.9bn of which was originated by Raccoon Financial and 40bn by ALEMO), a 258.2% increase over the end of FY04/18. Financial segment operating profit of 97m yen was up 36.2% YoY. Excluding the 26m yen in brokerage fees booked in connection with the acquisition of ALEMO, segment operating profit rose 73.3% to 123m yen.

Following the transition to the holding company structure in Nov 2018, PAID, T&G, URIHO and ALEMO are consolidated under Raccoon Financial (https://financial.raccoon.ne.jp/yachin) headed by Akiyama Koji, while Raccoon Commerce (SUPER DELIVERY, SD Export, SD Factory) is headed by Wakui Takeshi. As at the end of 3Q FY04/2019, Raccoon’s allowance for doubtful accounts is 186m yen, an increase from 7m yen as at the end of FY04/2018, a result of the transition to the holding company structure. Before the transition, T&G guaranteed PAID’s business based on a guarantor contract. In cases of customer default, T&G would pay in place of the customer of Raccoon, with T&G recovering this in rights to claim compensation which is a net amount after deducting the allowance for doubtful accounts (72m yen in rights to claim compensation in FY04/18). Under the holding company structure, there is no guarantor contract, and the rights to claim compensation have become account receivables.

Raccoon also operates COREC (https://corec.jp), a cloud-based service for sending, receiving, and managing orders that was launched in Mar 2014 serving over 20,000 users vs 5,903 as of end FY04/2016. The freemium SaaS model charges subscribers 1,980 yen for suppliers and 980 yen for buyers. Raccoon is focused on gaining customers and improving visibility for COREC, so the service’s revenue contribution is limited. In March 2016, Raccoon began offering the COREC API service. Among the external partners with this service are Yahoo! Shopping, Square Regi, and Air Market. Raccoon looks to grow the service over the long-term by linking it with its other businesses, as some users who used COREC’s streamlined ordering then adopted the PAID service.

SUPER DELIVERY competes with NETSEA which is operated by Aucfan TSE: 3674) and took over the DeNA B2B marketplace business from DeNA (TSE: 2432). As of April 2018, NETSEA had about 5,000 member suppliers (about 3.5X more than Raccoon), about 300,000-400,000 member buyers (about three to four times as many as Raccoon), and about 1.7m listed items. The screening process is relatively lenient, and Aucfan has adopted “Just three minutes to register” as one of its slogans. Since it is easy for companies with a low probability of making a purchase to join NETSEA, Aucfan’s transaction value is lower than Raccoon’s. Aucfan marked a transaction value of around 6.6bn yen in September 2017, while Raccoon’s transaction value in FY04/18 was about 1bn yen. In its guarantor business, Raccoon competes with eGuarantee (TSE: 8771) which was established as a subsidiary by Itochu Corp (TSE: 8001) for guaranteeing factoring companies’ financing receivables from e-commerce payments. Since eGuarantee offers guarantee services for low-risk major corporations, it has a lower guarantee rate than Raccoon.

Raccoon and SUPER DELIVERY were founded in 1993 and 2002 respectively by Isao Ogata who owns 26.75% of the shares. Raccoon undertook three rounds of issuance of subscription rights to shares to raise 2.2bn yen in stages in accordance with improvements in business results, with each round having different exercise values with a premium placed on the stock price at the time of exercise with the exercise period between 24 Aug 2018 to 23 Aug 2021. The exercise value of the first round was 600 yen; the second round at 650 yen; and the third round is an amount not below 700 yen.

While Raccoon is profitable and positive free cashflow generative now, CEO Ogata shared that his personal and entrepreneurial journey to start Raccoon has been full of struggles. CEO Ogata shared reflectively the inspiring story: “I was born in Sapporo City, Hokkaido, in 1963, studied engineering at Hokkaido University and graduated in 1988. The same year, I joined Pacific Consultants, a major construction consultancy company. In 1992, at the age of 29, I left Pacific Consultants and studied abroad in Beijing for one year to learn Chinese, saw that the sales of oolong tea surpassed Coca-Cola and prepared to start my own business. In May 1993, I established Raccoon Trade Service, a import/export trading business, from an apartment room in Komae City, Tokyo. It was a really terrible situation for about the first three years of our establishment. I sold health foods and miscellaneous goods brought back from China through mail order, but I suffered from the irrational business practice of the Japanese distribution industry. Goods that were supposed to be sold to retail stores were returned, or a rebate was requested.”

“I noticed that ‘Who sells to whom’ is the most important. I thought that the key lies is in the wholesaler. However, no one has analyzed this field in detail in the past. Then, I thought that I was going study this field thoroughly with my background training in engineering. The Japanese retail industry is unique in that it has many layers of intermediaries. This industry began with middlemen involved in transportation, warehousing, and consignment sales during the Kamakura period (1185–1333). During the Muromachi, Edo, and Meiji periods (1336–1912), merchants focused on transportation and wholesaling.”

“Have you seen the map of Japan from the viewpoint of distribution? It is quite long lengthwise and it is almost impossible to go to business in Okinawa or Kyushu after going to Hokkaido for sales. Since the Japanese archipelago is separated by the ocean, there are airplanes right now, but it was necessary to cross over by the boat a while ago. The demand for imported apparel or sundries from Tokyo, Osaka, Nagoya is evenly distributed throughout the country. In order to distribute these, we first carried things with a container ship.”

“However, as Japanese consumers started demanding a wider variety of products and with the advent of massive, automated distribution warehouses capable of frequently shipping small packages, intermediaries were forced to merge, shortening supply chains. Historically, intermediaries acted as sales agents for manufacturers (with manufacturers determining retail prices and entering exclusive sales agent contracts), but today there is a greater demand for intermediaries to function as purchasing agents for consumers.”

“Even if there are similar things in wholesaling in America or China, it exists in a different form in Japan. Japanese wholesalers have evolved not only by carrying things, but also with unique superior technology, such as settlement and information transmission, different from overseas. Thus, the wholesaler has three functions necessary for business between the manufacturer and the retail store: (1) Logistics in delivering goods, (2) Information that tells you about new products and sellers, and (3) Finance and credit settlement.”

“Later I got acquainted with the director of a mail-order company and over drinks, I learnt that manufacturers and mail-order companies were suffering from inventory disposal problems. I thought that solving this inventory problem was a fine business, so I started a stock resale business in parallel with the import/export trading business. In order to create a mechanism to improve the distribution in Japan, the service was diversified at the beginning. We would resell inventory to other suppliers, load them into containers and export them to China, fax product lists to a lot of companies, and we finally develop this on the internet.”
“When the Internet came out around 1997, I felt that I could solve the problem of time, problem of location, speed, and the amount of information. In short, what we did is an online deep discount wholesale store that can dispose of excess inventory. It was in 1998. However, although the ideal is good, the reality is severe, and at the beginning we went through a lot of hardships. At that time, in an embarrassing story, I mixed salt into flour, boiled the mixture and ate it. The reality was hard.”

“When the business began to take off, we imported a large number of commodities requested from a major company, but dealings suddenly stopped which leaves us holding excess inventory. Although we survive this near-bankruptcy crisis, I thought, ‘Why should we be overwhelmed by a selfish major company and face the situation of excess stock inventory and be forced into a crisis of bankruptcy?’ On the other hand, from the experience of getting out of the crisis of bankruptcy, our reputation of being good at stock handling has also risen, and we brought in some consultation work on inventory handling. We later won the ‘Nikkei Internet Award’ in Oct 2000. Based on these experiences, we will start building a business model to eliminate excess inventory.”

“Also, excess inventory is only a few percent of the annual sales of each company, even if dealing with only that, profits do not go up as you think. Then, considering to handle more than 90% of the remaining, we started in 2002 the B2B online wholesale marketplace SUPER DELIVERY, which has grown to become the core foundation of our business. At that time, I thought that consumers would still like to buy these items by touching them, trying them on, and adjusting them and I thought that it would be better to use the Internet not as B2C but rather as B2B intermediate distribution from the manufacturer to the retailer. We also specialize in B2B in BtoB because there is a collective amount of orders and it is possible to conduct transactions with continuity.”

“Why is SUPER DELIVERY unique? To satisfy demand from both retailers that want to adapt to consumers’ diverse preferences and manufacturers and wholesalers that are looking to expand their sales channels, Raccoon created SUPER DELIVERY. Small lot short delivery time is possible and you can purchase as many items as you want. In terms of quality, we ship only after all inspection, so member retailers can purchase with confidence. Meanwhile, manufacturers and wholesalers can efficiently and safely dispose of excess inventory. This convenience and confidence makes over 94% of our member retailers (buyers) a repeat customer who have a track record of repurchasing within 6 months.”

“A lot of wholesalers deal with only items that sell well. It takes a lot of time and labor to do small transactions. Apparel and miscellaneous goods manufacturers and retailers who want to differentiate themselves from rivals are dissatisfied and underserved with a narrow list of wholesalers and a limited number of merchandise to purchase. The one with the most problems I have seen is the distribution of apparel. The apparel product is actually very complicated with different gender, sizes and colors; faces season factor and fashion obsolescence risk. Even if the fashion trend has ended at the sales floor, there are in-process inventory in the factory and which cannot be reduced suddenly. I wondered whether or not this distribution could be made more efficient or that there is a more modern and better way.”

“Raccoon provides product information for retailers looking to adapt, as consumers demand more options. Diversifying consumer preferences led to the creation of store formats offering products suggesting certain lifestyles. Since retailers can now procure goods quickly, often, and in small lots, they need to satisfy consumer demand for diverse products to stay competitive. As a result, intermediaries have gone out of business or merged, shortening the supply chain.”

“Credit payments are a common practice in B2B transactions in Japan. About 90% of all B2B transactions via credit. For buyers, credit payments ease demand on cash flow (since payments are delayed) and since multiple invoices can be paid off at once. For sellers, the added convenience for buyers can stimulate sales, although credit payments do force sellers to take on credit risk. Beginning transactions with a new buyer can be difficult and time-consuming for the seller, since setting up invoicing for a first-time buyer is time intensive and the seller must take on credit risk. It also takes time to receive approval from suppliers. Raccoon, by taking on the credit risk, streamlines B2B transactions for both parties, especially for small- and medium retailers. In 2010, Raccoon purchased a company that can manage credit to develop the credit payment function.”

“We listed on 6 April 2006 on Mothers and promoted to the First Section on 29 March 2016. Thus, we were able to evolve the business based on our own experience on the troubles that distributors face in market cultivation, doing what only we can do as a result of sticking to what we do, to make corporate activities more efficient and convenient as our company’s management philosophy.”

“We started the SD Export services in Aug 2015. We have systematized everything we must do when Japanese SMEs want to sell to the world. It was probably the first system in the nation as a cross-border B2B EC. B2C’s services will not have customs documentation. In Nov 2015, we established the matching service ‘SD Factory’ (https://factory.superdelivery.com) connecting fashion apparel & accessories maker and garment factory. In Feb 2016, we started the SD Select co-ordination service to select overseas brands to purchase and bring into Japan. Common to all of them is we provide services that did not exist before to solve challenging and rewarding problems. In 2016, SUPER DELIVERY was awarded the ‘Regional Creation Minister’s Award’. I would like to continue to develop services that will help enhance SMEs’ marketing activities and help them.”

On the strategy to expand SUPER DELIVERY, CEO Ogata shared: “Increasing SUPER DELIVERY’s transaction value is vital to boosting EC business revenue. In July 2016, Raccoon began expanding our service to businesses outside of the retail industry in order to increase membership, such as those in the restaurant, medical, beauty and hair salon, lodging, and education industries, in response to increasing demand from non-retail businesses for appliances, packaging material, promotional products, and other goods as SUPER DELIVERY expands the number of products and product categories offered. For example, non-retail businesses are now able to use SUPER DELIVERY, so that a lodging company can purchase pillow covers, towels, sheets, and other disposable household items, or a restaurant company can purchase tables. Member suppliers can decide beforehand whether or not to allow non-retail buyers to purchase their products. Raccoon does not charge these new member companies (buyers) monthly membership fees.”

“On 1 Nov 2018, SUPER DELIVERY partnered with Japan Association of Long-Term Care to support the procurement of equipment, furniture & bedding, consumables (e.g. diapers and masks) and daily necessities (dishes and slippers) for nursing care companies. From now on, we will participate to support more than 7,000 members belonging to the Japan Nursing Association and in events and seminars such as our sponsored nursing event ‘Kaisen Koshien’. On 29 Aug 2018, SUPER DELIVERY collaborated with Japan Freelance Interior Coordinators Association (JAFICA) to support product procurement for interior design coordinators. On June 2017, SUPER DELIVERY becomes a supporting member of the Renovation Housing Promotion Council.”

“Raccoon wants to make SUPER DELIVERY a platform small Japanese manufacturers can use to sell their products to the world. We want to build up SUPER DELIVERY so that overseas retailers can always find the particular Japanese products they are seeking when they search there. Raccoon is creating infrastructure to deal with big-ticket international orders (e.g., container shipping) and we aim to make our dedicated Asian website more convenient and re-examine our overseas delivery methods to make them cheaper and more convenient.”

We noted that overseas transactions value on SUPER DELIVERY is experiencing faster growth at 67.8% yoy in FY04/2018 and 43.6% yoy in cumulative 3Q FY04/2019. On the strategy to grow SD Export and its overseas business expansion, CEO Ogata shared: “SD Export was launched for overseas retailers (buyers) in Aug 2015 and manufacturers can do easy and secure transactions with retailers and companies around the world without complicated export procedures. We help member suppliers (sellers) reduce operating costs incurred from traveling, creating catalogs, exhibiting products, creating English-language contracts, and making English-language website; reduce administrative costs since filling out export-related documents becomes unnecessary; cut cargo insurance fees and product liability insurance fees (since Raccoon covers all products); and collect payments with ease and without credit risk since Raccoon is responsible for collection.”

“SD Export helps member retailers (buyers) eliminate travel cost; procure products four to six days after shipment from warehouse in Saitama Prefecture using Japan’s Express Mail Service; cut cargo insurance fee and product liability insurance fee (since Raccoon covers all products). Since Raccoon is acting on behalf of the member suppliers and manufacturers in collecting the payment from the overseas member retailers, we guarantee 100% payment, so member suppliers and manufacturers can sell wholesale overseas with confidence.”

“More than half (740) of domestic manufacturers that are members of SUPER DELIVERY, are registered in SD Export and there are now over 30,000 member retailers (buyers) in more than 180 countries. For FY04/18, domestic retailers made up 90% of transaction value and overseas retailers 10%. In FY04/18, the growth rate of transaction value for domestic retailers increased 2.6% YoY and overseas transaction value experienced higher growth (+67.8% YoY) to account for more than 10% of all transaction values.”

“If you officially deal with an overseas company, you must sign an English-language transaction agreement, receive a notice of L/C (letter of credit) issued by the other party when trading is established, and accompany the documents such as invoice. Deliver the goods to the bonded warehouse and freight carrier, deal with the customs broker and ship it after the declaration of export to the customs and receiving the documents. If you want to cash L/C, please bring the B/L (Bill of Lading) received from the shipping company to the bank. Even if it is greatly simplified, this complicated procedure is necessary.”

“However, the needs of Japanese products overseas are increasing due to the expansion of the market scale of B2C in cross-border EC. In response to these needs, SD Export was developed to clear the problems that domestic companies face in exporting overseas. SD Export deal with all operations related to logistics and procedures for export, from product storage and management to shipping, by partnering with distribution specialist DMS who carries out order processing on SD Export. Sending a special ticket to the warehouse of DMS in Saitama prefecture and sending the goods will complete all the export business.”

“It sounds easy, but no company had succeeded this in the past. The law on trade differs from country to country, among which the conditions concerning import and export are finely determined according to the category and amount of goods. In order to make it systematic, it is necessary to solve the problem of complicated conditions intertwining the system, operation or cooperation.”

“Another major issue in overseas sales is the collection of the price. As SD Export takes over on behalf of the member customers like in SUPER DELIVERY, it is a marketplace for companies to open up overseas sales channels with confidence. Because I know the practice, I can trust the marketplace. Also, there are anxieties and difficulties in dealing with breakage and returned goods. SD Export responds to handling returned goods and exchanges related to shipping accidents so there is no need to worry about the risk that companies will incur the costs for returning or exchanging. Uneasiness related to foreign language response to inquiries is resolved by our English templates and cheap plans for exclusive contract with translation company for complex exchange. Translation of product pages is done automatically. Product liability insurance is also applied to all member companies.”

“The service design of SD Export thoroughly verifies the anxiety factors and resolves them. This practical knowledge is unique to Raccoon. Wholesale EC is not just a service that requires information only, but also the value of reliability based on experience. Once the marketplace is in place, the original value of the item to be traded will activate the market. We wish to promote products that are made or developed in Japan which are growing in popularity abroad in accordance with the needs of the world regardless of genre.”

“SD Export uses logistics company DMS Inc. (JASDAQ: 9782) to simplify the shipping process for manufacturers and wholesalers. DMS handles all logistics-related tasks (from product storage and management to overseas shipping for an SD Export participating supplier), eliminating the need for domestic suppliers to deal with the export procedures. Once a participating supplier receives an order from an overseas retailer, to fulfill the order the supplier only needs to attach a special tag to the products and send the products to a DMS warehouse in Hiki District, Saitama Prefecture, Japan. Raccoon also guarantees payment in full since it is responsible for collecting payments from the overseas buyer. Raccoon provides translation support for product descriptions on its website.”

“In February 2016, Raccoon launched SD Selection, a service of placing joint orders with other companies that includes brands that have yet to enter the Japanese market. SD Selection encourages member retailers (buyers) to procure rare or high value-added brand products from overseas that have limited sales channels both in Japan and abroad. For the first joint product order, Raccoon took products from seven Italian manufacturers with brands that were showcased at Pitti Immagine Uomo, a men’s fashion exhibit held in Italy. Member retailers can purchase these products through SUPER DELIVERY as they would any other product, and Raccoon groups the orders together and processes them as one order, as well as taking on the rest of the process from importing the goods to processing payments.”

“On 18 Mar 2019, we introduced a new logistics service for HK to respond to low-cost delivery needs with consolidated containers.”

“We had also started SD Factory service to match domestic factories and brands since November 2015. Many overseas brands wish to manufacture in domestic plants from the viewpoint of quality and technology. Labor costs in China have risen to the point that some Japanese manufacturers that had moved their production bases to China are returning their production to Japan. Apparel plants in Japan are therefore interested in the SD Factory service. In addition, the SD Factory service can be used to provide added value to retail stores wishing to produce original apparel and to designers seeking to develop a new brand, On the factory side, there is a desire to operate underutilized capacity during the quiet period. We launched the SD Factory service to stimulate domestic production, to revitalize our domestic factories and to promote Japanese manufacturing.“

When asked to elaborate about PAID and the AI credit screening developed, CEO Ogata comments: “The need for credit settlement in B2B transactions is high, and it is a necessary settlement method for sales expansion. However, considering the time and cost involved in billing operations such as credit management, billing, and payment collection, and the risk of uncollected payments, it is not easy to introduce credit payment. Therefore, PAID is acting on behalf of all billing business that occurs in credit settlement in B2B transactions, and pays 100% price even when non-payment occurs. By introducing PAID, sellers can eliminate the burden of billing operations and leaks, and realize safe and quick credit transactions. Buyers can trade on a monthly basis, helping to improve cash flow. The effort and time required for billing can be reduced and you can concentrate on the original business and sellers can actively trade with new customers because there is no unrecoverable risk. Because PAID conducts a thorough credit review for each client of the implementing company, members can trade safely. More than 3,200 companies have used PAID. PAID will continue to create a society where all companies can focus on business growth.”

“PAID introduced detailed credit screening and judgment using artificial intelligence from 16 Jan 2018 using a deep learning system developed independently based on the unique transactions data of more than 200,000 companies: The credit review which required up to 2 business days by manual checks is completed by the introduction of AI in as little as 1 second; the credit limit initially granted to 80% or more of the companies has been improved, and the initial credit limit of the increased companies is more than doubled on average compared to before introduction. In the future, we will make efforts to further improve the credit judgment accuracy, with the first grant of up to 10 million yen by AI also in sight. This is expected to lead to an increase in the transaction amount, as the implementing company can provide sufficient credit limit to the correspondent company from the first time. In the future, PAID will realize a society where large-scale over-the-counter transactions can be completed in an instant.”

“CrowdWorks (TSE: 3900), Japan’s largest crowdsourcing service platform, uses PAID from July 2017. CrowdWorks is a platform that enables companies (clients) and individuals (workers) to connect directly via the Internet, and to order a wide range of jobs such as web development, design, and writing. The fee paid by the client is collected by CrowdWorks, and deposited into the bank account of the worker after delivery and inspection of the work is completed. PAID was introduced to CrowdWorks as a way to collect money from clients. Until now, when work orders were completed on CrowdWorks, clients had to pay in advance. If the payment is not completed, the requested job can not be started, so it takes time to pay for each order and a time lag before starting. In addition, the burden on clients is also large in terms of financial control, and we have received many requests that they want to respond to monthly lump sum payments. Although CrowdWorks has provided monthly lump sum payments only to some clients, it has decided to introduce PAID in order to provide monthly lump sum payments to clients that they have not been able to handle until now. PAID will support further the promotion of CrowdWorks’ vision of ‘Working Style Revolution’ by reducing the stress on payment.”

CEO Ogata summed up by emphasizing Raccoon’s management philosophy, corporate culture and intrapreneurship system: “I think that Ameba management philosophy which draws out the stakeholders’ awareness of all parties is servant leadership, which guides the leaders of the new generation, as well as help in shaping our human resource management in regarding people as strategic resources. An organization is not to make the leader’s dream come true and the hero is the employee. We think that it is important for leaders in each division to think carefully about how active people can be and to create an environment for that, that is, maximize the potential of each individual with his or her unique innate personality.”

“In Raccoon, we have several groups such as writing competition group to give advice to the company as an essay, business model study group. WE regularly hold various events and I personally took part to find individual suitability that not even the person himself or herself will notice among themselves and to allocate the optimum duties among the organizations. I think that it will lead to organizational value creation.“

“Raccoon was ranked in the ‘Great Place to Work’ (https://Hatarakigai.Info/ranking) for three consecutive years since our first entry in 2017. The ranking investigates and analyzes workplaces in about 50 countries around the world and companies and organizations are recognized as having reached a certain level. GPTW is a company where employees has a sense of pride in their work and a sense of solidarity with people working together.”
“Raccoon’s management policy emphasizes two things: ‘Do you impress customers?’ and ‘Do employees work with their individuality?’ We believe that the most important service ability is whether services provided by Raccoon are inspiring customers, and in order to do so, we believe that the main focus should be on employees. We also have the idea of ​​maximizing the individuality of our employees to work in order to strengthen their organizational capabilities.”

“Raccoon emphasizes training of creativity and holds a creativity training contest once a year. All employees submit ideas and business expansion proposals. Prizes are awarded to the winners, and comments and advice are given to all the submitted ideas by judges. Several ideas that came out in this contest are actually adopted and realized. It has become a place for employees to promote proposals and abilities that are not within the scope of their work, and for Raccoon to uncover individual strengths.”

“Raccoon established an intrapreneur system internally to facilitate new business development within the group, especially our Financial business where our financial services are highly compatible with AI and FinTech. By actively utilizing AI in our existing businesses, we plan to increase revenue while combining our accumulated data with our expertise in settlement and guarantor services for SMEs to promote building a credit settlement platform for B2B transactions using AI.”

“All employees are encouraged to put forward new business ideas and the company will provide support so they can succeed. If a proposal proceeds successfully through three steps, a subsidiary will be established. Step one: an idea is presented at an internal business proposal meeting (first one planned for January 2019). Step two: the sponsor is paired with a mentor with more experience at the company and they are given time to draft a plan. Step three: an investment committee meeting decides whether to go ahead and specific details such as investment amount, and the business is launched. Subsequently, a subsidiary will be established if a meeting to assess business viability gives it the green light. This system was enacted with the idea of not only aiming for company growth by creating new business but also wanting to support our next generation leaders.”

“We do not succeed because there is money. When other people’s capital increases, we may have to pursue short-term interests and may not be able to do meaningful work. The most important thing is to set up our own management philosophy , clarify what to sell and to whom, and never waver from there. It will take time but the business will grow bigger.”


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 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.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

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