375% Return on One Startup to Help SoftBank Get Past WeWork Woes

As Softbank Group Corp. tries to rebuild its reputation as a startup investor, the Japanese conglomerate will be able to point to several recent successes, including an obscure Chinese property startup that pulled off a blockbuster initial public offering.

SoftBank invested $1.35 billion last November in a Beijing-based company called KE Holdings Inc., which went public this August. Shares in the company, also known as Beike, soared from offering through Sept. 30 to lift the value of SoftBank’s reported stake to $6.4 billion, a 375% return. KE’s stock is up another 20% since the quarter’s close.

SoftBank founder Masayoshi Son is certain to highlight such winners when he announces quarterly earnings results on Nov. 9. The Japanese billionaire scored hits early in his career by backing Alibaba Group Holding Ltd. and Yahoo! Inc. But his reputation suffered from recent troubles at other startups, including the office-sharing firm WeWork, leading to record losses in the last fiscal year.

“SoftBank is recovering from the worst,” Shinji Moriyuki, an analyst at SBI Securities Co. “Internet companies can lead to huge returns. It should be okay for SoftBank to find one company that will become like Alibaba in future.”

The KE investment, coupled with likely gains on several American tech giants, could help SoftBank surpass estimates for the second fiscal quarter. The company is expected to report 150.3 billion yen ($1.4 billion) of net income for the three months ended Sept. 30, according to the mean consensus by three analysts compiled by Bloomberg. It posted a 700 billion yen loss for the quarter a year earlier.

Estimating earnings for the company has grown increasingly difficult as it moved away from the predictable telecom industry into complex financial instruments. The firm said in August it will stop disclosing its operating income as it doesn’t reflect gains from its securities investments and dividend.

In October, Son talked up Beike at SoftBank World, an event he holds annually to explain the company and its startups. He highlighted how the company uses artificial intelligence to match buyers and sellers in the Chinese property market.

“It is an awesome firm,” Son said, showing graphics to detail the company’s business. “It’s growing rapidly and posting huge profits already.”

SoftBank has engineered a comeback this year after missteps with startups like WeWork and concerns about fallout from the coronavirus pandemic. It unveiled plans to sell 4.5 trillion yen in assets and buy back a record 2.5 trillion yen of its own stock, pushing shares to a two-decade high in October.

The IPO market has also improved, opening the door for SoftBank portfolio companies to go public. ByteDance Ltd., the developer of the TikTok app and backed by Son, is considering a listing in Hong Kong, Bloomberg News reported. Even WeWork expects to revisit plans for an IPO after its disastrous attempt in 2019.

“With investors getting used to the COVID-19 pandemic, unicorn stocks are appreciating,” Yoshio Ando, an analyst at Daiwa Securities Co., said in a report dated Oct. 26. “We expect Softbank Group’s profile to change dramatically this year. We look to the firm to navigate its way through a world unknown to investors.”

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SoftBank also benefited from the Nasdaq’s strong third quarter. If it held its stakes in Netflix Inc., Amazon.com Inc. and 23 other U.S. firms disclosed in U.S. securities filings for the period, its paper gain would be about $570 million, according to calculations by Bloomberg. The return for those securities was 15%, compared with 11% for the index.

Son has increasingly discouraged investors and analysts from focusing on quarterly profit — one of the reasons he eliminated the disclosure of operating income. While profit was a reasonable indicator of performance when SoftBank was primarily a telecom operator, it’s less relevant as the company has evolved into an investment holding company, he has said.

Accounting rules mean that investment gains or losses are treated differently on SoftBank’s income statements if they come from the Vision Fund or the parent company — even though the effect on the company is essentially the same. He would prefer investors focus on the value of SoftBank’s holdings, like its stakes in Alibaba and KE Holdings, rather than net income.

“What is more important is the shareholder value,” he said on the earnings call in August.

— With assistance by Yuji Okada, and Shintaro Inkyo

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