ZIGExN (pronounced Ji-gen) is a Japanese search aggregator (both online and offline) with exposure to various industries. It’s value proposition is 2-sided to provide clientele with a platform to advertise content to consumers, and consumers a place to search effectively for specific media. The beauty of this data-aggregation model is that it can be used across most industries. It seems counterintuitive that large players such as Seek, Airbnb, Carsales, Booking etc. would focus as a pure play as it exposes them to the economic risks that come through concentration. On the flip side of this, competition is fierce and a strategy of spreading your bets means little likelihood of domination.
The man behind this is none other than Joe Hirao, the 40 year old founder (basically) and CEO of the business who, whilst working in internet marketing & HR at Recruit was appointed as a director of the then “Drecom Media” in 2006, a joint venture by Recruit & Drecom Co. He then went on to buy this venture out in 2010, re-name it and list it on the TSE mothers exchange in 2013, and subsequently the first section in 2018. Through these exit events, Joe has retained an existing stake of 49% of the group.
Since the initial listing, ZIGExN has compounded EBIT at a rate of 27% p.a Since 2013. If you look at the results since founding, he has compounded the business's capital at a rate of 54% p.a. This is impressive no matter how you look at it, and the consistency of the trend is another point to note, with Sales & EBITDA growing in all years but 2020 due to the coronavirus impacting their business.
To understand the opportunity here, it is crucial to understand how this business works, notably, the flow of cash. This varies slightly between subsidiaries but generally speaking ZIGExN acts as an intermediary and is entitled to a charge on transactions between a client and user. For example, in the Vertical HR segment users are job-seekers, who submit job applications without charge, instead it is the client or agency that pays ZIGExN the charge for hosting their service. This is generally levied either on hiring, application or posting models. Similarly, Real estate agencies pay advertising, application or closing charges based on the business. These various types of charging models across various industries makes ZIGExN revenue quite stable in nature.
The cost structure is entirely variable, with mostly advertising being the main expenditure at ~25% of sales and personnel also at ~20% of sales. General administrative costs account for another 10% of sales and cost of sales of ~15% mainly relating to personnel associated with website-related development & maintenance. As a result, the EBITDA margins of the group are about 30% in any normal given year. To give you an idea of what to expect in the next few years, the business has signalled intent to focus on improving the client base and retention so you should see both increased marketing & development costs, driving these margins down in the near term. M&A may also change the business mix, which has happened in the past and is reasonably unpredicatable. Given these costs are mainly variable in nature, there is no real fixed-asset investment on the balance sheet, making the business capital light in nature, and as such, applying a tax rate to EBITDA will get you relatively close to normalised net margins of ~20% give or take.
As alluded above, the company has previously identified weaknesses in their unit economics, leading to a deterioration of the LTV/CAC in some of their subsidiaries. To remedy this, the Z-Core management plan outlines plans to invest into expanding existing services horizontally to improve retention rates whilst expanding their ability to attract users by strengthening their sales efforts and branding. This investment to expand the client base forms the foundation of their ‘network effect’ so-to-speak which leads to user data, increasing the value of their media, providing more effective advertising to the client side and so on.
“There are companies that have various kinds of normal websites, but our strength is that we have focused not on attracting people, but on encouraging them to take action, which is why we have a very strong ability to increase conversions.”
~ Joe Hirao
When expanding the client base there are several options, and the main one that ZIGExN seems to prioritise is to conduct M&A deals, which expands both the amount of companies using their services along with vertically expanding into new industries. ZIGExN is quite close to what Mohnish Pabrai might call an “Apex Spawner” with continuous spawning of related and unrelated businesses, acquisitions of smaller businesses to grow and cloning existing businesses. ZIGExN seems to skew towards niche pockets of the market with limited scale and higher barriers to entry due to this limited market size.
To give some further context on the success of the M&A strategy here, the average entry multiple of EV/EBITDA has been ~6-8x, which implies assuming no growth an annualised pre-tax return of 12-17%. But utilising their integration strategy has resulted in further organic growth and margin expansion adding 10-15% for an annualised return of 27% over the past 14 deals (excluding those done in FY21 & FY22 YTD + one sale).
Joe attributes this success to their “Business officer creation cycle” which involves hiring graduates/mid-career employees, training them over several years and deploying them into new subsidiaries, sometimes even tasking them with the task of finding suitable deals. This is really quite an interesting strategy and one that I can see create a cultural alignment through immense opportunity to grow through the business.
On valuation*, I suspect near term declines in margins to be inevitable, but even so ZIGExN is currently (as at 4th Feb 2022) trading at a price of ¥307 with ¥57 of net cash per share. When compared to an EBITDA target of ¥10B (which is ¥65 per share after tax) for 2026 (21% CAGR relative to 2021), we have quite a compelling case where it could be trading at just ~4x (250/65) the post tax earnings for 2026. If this is the case, it would be reasonable to expect excessive multiple expansion or buybacks in the near future. It would not surprise me to see this stock do 5x or more over the next 4 years (~45% CAGR) but I won’t hold my breath on this exact outcome. I for one however, would like to remain a shareholder for much longer than this, so will hold optimistically for their longer term future as I believe this business is something special.