Description

In the west, music firms’ business is largely risk-aggregating speculative assets (future albums) at various stages of maturity and bundling various services. They’ll increasingly be leasing future catalogs and must re-buy their most successful bets at competitive rates (a 3-album deal doesn’t get you albums 4-12).

Japan has long been the 2nd largest market for music, and their industry firms (like Korea) effectively have 360-degree deals (claim on every facet of artist revenue). In some practical sense, they frequently own the band and musicians are paid employees of the “manager” who incubated the stars by providing a wage, training, distribution, and the showcase opportunities that lead to their economic productivity.

Amuse’s major business was historically being the manager of the Southern All Stars (SAS), one of the top-selling Japanese bands of all time (Wikipedia: “only group to ever have 44 songs on the Oricon Top 100 weekly single chart simultaneously”). They’ve often been viewed as a single-horse bet on SAS, but today that is an outmoded perception (albeit there is still concentration in top acts – another of which is Masaharu Fukuyama).

I think their attractive business model and intrinsic value are obscured by highly conservative accounting that I feel meaningfully understates their earnings and balance sheet value. At a high level, I view Amuse as containing (3) distinct economic assets:

• A pile of cash and investments that exceeds the current market cap
• A catalog of perhaps ~15,000 masters or publishing rights that I believe could be independently worth more than the market cap, and
• Their core "artist management" business that grew revenue ~3x in the decade pre-Covid while producing more than their current market cap in operating profits (with de-minimis employed capital) and creating an "exhaust" of free catalog assets

The first two pieces offer good downside protection and are somewhat self-explanatory.

Cash is a mixed bag, but it’s at least indicative of a business that produced a huge mountain of cash while growing nicely. Obviously it leads to questions about capital allocation, but I would say a) it seems to be improving, and b) the Japanese music industry really should have consolidation (much more fragmented vs. globally) and it could make sense for them to play a role if the opportunity arose.

Their catalog of historically produced music contains attractive heritage songs that may be a large beneficiary of Japan’s lagged transition to streaming. Of huge importance – this legacy catalog seems to receive the “free” addition of perhaps ~10 songs/week! This suggests to me their catalog is worth a massive premium to a static catalog or that (more logically) their artist management segment meaningfully underreports earnings (which should include the NPV of newly generated publishing rights – a huge part of what Western labels are actually laying out money for in a record deal).

“Artist management” might more accurately be described as “band ownership” since they receive revenue from concerts, merch, fan club subscriptions, and corporate sponsorships. This segment grew nicely in the 2010s, with pretax profits averaging about ¥4bn (pretax) during 2015-19. I think that figure under-reports economic earnings, thanks to the aforementioned publishing rights “exhaust”.

COVID obviously was horrible for the live music business, and Japan was slower to end restrictions (legally and culturally). I’d expect this segment to return to growth (subject to a bunch of variables like tour schedule, band popularity and alive-ness, etc.), and that could create a fair bit of positive operating leverage.

Currently through - a slow concert calendar and increased investments in new artists and content (which are expensed - so negatively impact their P&L - likely further understating economic earnings) have depressed recent results. 

But considering that the founder and major shareholder started off managing a single band and has thus-far developed a solid talent roster with a large recurring revenue base (catalog and fan clubs), I feel the company’s long-term track record is bankable.

Still, a portfolio of bands is admittedly a tough asset to value. While the live music industry is a growing field, musicians get older and at some point, even Springsteen is a depreciating asset. On the flip side, positive developments in this segment could lead to excellent upside. To put the magnitude into perspective, I’d suggest observing how certain comps in other geographies trade.

In summary, I think each of these (3) assets are likely worth more than the market cap, with the cash and catalog offering strong downside protection and the artist management division having the potential to drive an outstanding result.

I’ve had the pleasure of speaking with this firm several times (in person and telephonically), and I’d say their communications to shareholders have already meaningfully improved and that they want to get better in that arena. I also believe their guidance and goals are quite conservative. They are obviously in a very difficult business to forecast, which perhaps makes that stance logical. Considering all those factors and the price, I think the risk-reward is currently quite compelling.

Risks: Among others - artist popularity and ability to perform

Disclosure: Have ownership interest in Amuse Inc. at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of Amuse Inc. without notice for any reason at any time.

Catalyst

I can see several possibilities, but TBD