ANALYSIS-Softbank's rally: Too far, too soon?
By Miki Shimogori
TOKYO, June 29 (Reuters) - Ask any Japanese investor: Softbank Corp can do no wrong. Its outspoken, entrepreneurial founder is Japan's version of the American Dream.
Shares in Softbank have more than tripled this year as the firm and its president Masayoshi Son made headline after headline, building up an Internet empire through high-profile ventures.
Not so fast, analysts warn.
They say the share price's meteoric rise may be deviating from reality -- and the firm's fundamental financial health.
''I see the risk rising, with the price already beyond levels warranted by fundamentals,'' said Makoto Ueno, a Daiwa Institute of Research analyst. Softbank is still exposed to risks such as further falls in U.S. Internet stocks, which could make it difficult for the company to repay its debts, he said.
''It does not look quite healthy...It seems that people are investing in dreams, rather than reality,'' he said.
Shares in the Internet-whiz firm last week hit 25,680 yen, up from 6,610 in early January and the highest since its Tokyo Stock Exchange listing in 1998, as both domestic and foreign investors eagerly gobbled up the stock.
Softbank ended at 24,450 yen on Tuesday, up 1,250 yen or 5.39 percent from the day before.
But calculated from the combined value of Softbank's net assets and its latent profits in stock holdings, including those in unlisted firms, the value of the Softbank shares should be somewhere around 19,000 yen, Ueno said.
''What we are seeing is buying on the concept of the Net, and if you want to buy Internet stocks here, there are only a few other choices,'' said Mitsuko Morita, a senior analyst at Morgan Stanley Dean Witter.
The added value is also a premium paid for the vision of Son, the firm's charismatic leader who has vowed to build up an Internet ''zaibatsu'' -- a reference to Japan's big pre-war conglomerates -- via an expansion-through-acquisition policy.
Kota Nakako, a senior analyst at Warburg Dillon Read, said that it was unclear if Softbank's new ventures could survive the intensifying competition in the Internet business area, and also to what extent the ventures could generate much-needed cash flow.
The company has been fast extending its reach into lucrative online businesses, unveiling at least seven new ventures in June alone, including retailing books and toys via the Internet.
Softbank also surprised the market with a plan to team up with the Nasdaq Stock Market of the United States to create a sister electronic trading system here, dubbed Nasdaq Japan.
But in the business year to March 1999, Softbank suffered a consolidated current loss of 15.45 billion yen ($127.69 million), hit by dismal earnings at U.S. publishing unit Ziff-Davis Inc, although the pain was mitigated by selling part of its stake in Yahoo! Inc.
Softbank, which has issued more than 210 billion yen worth of bonds that fall due in the next 10 years, could be forced to sell off more of its shareholdings to cover negative cash flows in the years ahead, analysts said.
Originally started as a computer software distributor, Softbank has aggressively expanded and now holds stakes in more than 100 Web-related firms in Japan and the United States.
It has some 1.66 trillion yen in unrealised gains from stakes in listed firms like U.S. publisher Ziff-Davis, Yahoo! Inc, GeoCities Inc and Internet broker E*Trade Group Inc.
Softbank's market capitalisation has meanwhile jumped to 2.45 trillion yen from just above 500 billion yen in October.
But although founder Son has often been compared to Microsoft founder Bill Gates, and was recently featured on the cover of U.S. magazine Forbes ranking the world's richest people, his company is still no Microsoft.
Microsoft's market capitalisation was $433.51 billion as of June 1998, while return on equity was more than 35 percent.
Softbank's ROE stood at 14.23 percent at the end of March 1999 and its debt-to-equity ratio was 2.12, compared with Microsoft's slim 0.366 as of the end of June 1998.
''Softbank looks more like an Internet fund,'' said Morgan Stanley's Morita. She said the firm's planned switch to a holding company structure in October may further help spur the development of its Internet-related investments.
Given the relatively small cost for investment in new Web ventures, if one new venture scores a big success that may cover the cost of ten other failures, Morita said.
Other analysts are less optimistic.
''Softbank relies too much on unrealised shareholding gains. The group's profit and cash flow levels are not enough,'' said Tsuyoshi Kuwabara, a senior analyst at Schroders Japan who maintains a ''sell'' recommendation on the stock.
Analysts say the risk in Softbank shares is likely to remain high with no clear prospects for profits from its new online ventures, although they could cement its pioneer status in the field.
They added that the focus is now on the next one to two years as Softbank's financial ventures such as E*Trade and Nasdaq Japan aim to take off, propelled by Japan's ''Big Bang'' financial reforms.
Yoshitaka Kitao, a Softbank managing director and a veteran of top Japanese brokerage Nomura Securities who was hand-picked by Son, is anchoring the firm's closely watched expansion into the online financial business.
($1=121 yen)
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