Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div><p>The short notional in the market for the data released 10 March is US$24.94bn (up by US$1.92bn excluding FX movements) with the largest short positions in <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>,<span style="color: #0b0114;"><a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>.  </span></p></div><div><p>Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3700:1">Anritsu Corp (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a> and <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a> while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1"></a><a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a>, <a href="https://www.smartkarma.com/entities/j-trust-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:20246:1">J Trust Co Ltd (8508 JP)</a> and <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>. </p></div><div><p>The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a>, <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5718:1">Shiseido Co Ltd (4911 JP)</a> and <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:12933:1">Kao Corp (4452 JP)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a>, <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-gr" target="_blank" rel="noopener" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a> and <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a>.   <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1"></a></p></div><div><p>Sectorally, short positions increased in Consumer Discretionary (US$649m), Consumer Staples (US$522m) and Information Technology (US$368m), while shorts were covered in Financials (US$56m) and Health Care (US$26m).</p></div>

The short notional in the market for the data released 10 March is US$24.94bn (up by US$1.92bn excluding FX movements) with the largest short positions in Itochu Corp (8001 JP), Toyota Motor (7203 JP),Fast Retailing (9983 JP), Canon Inc (7751 JP) and Taiyo Yuden (6976 JP).  Most shorted stocks as a percentage of free float are Anritsu Corp (6754 JP), Taiyo Yuden (6976 JP), Aruhi Corp (7198 JP) and Tokai Carbon (5301 JP) while the stocks with the highest days to cover are Vital Ksk Holdings (3151 JP), Katakura Industries (3001 JP), J Trust Co Ltd (8508 JP) and Itochu Corp (8001 JP). The largest increases in short notional over the week were Fast Retailing (9983 JP), Canon Inc (7751 JP), Shiseido Co Ltd (4911 JP) and Kao Corp (4452 JP) while shorts were covered in Tokai Carbon (5301 JP), Itochu Corp (8001 JP), Sumitomo Mitsui Financial (8316 JP) and Subaru Corp (7270 JP).   Sectorally, short positions increased in Consumer Discretionary (US$649m), Consumer Staples (US$522m) and Information Technology (US$368m), while shorts were covered in Financials (US$56m) and Health Care (US$26m).

Spike in Shorts on Consumer Discretionary and Staples - Fast Retailing, Shiseido, Kao, FamilyMart

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Thematic (Sector/Industry)

<div><p style="text-align: center;"><strong>• RELATIVE PRICE SCORE •</strong></p></div><div><p><strong>RELATIVE PRICE SCORE OUTLIERS </strong>- The <strong>Relative Price Score</strong> (<strong>RPS</strong>) is a measure of price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices over the last 28 years and 24 months, respectively. As all companies are put on a comparable scale, '<strong>Overbought'</strong> and '<strong>Oversold</strong>' outliers and short-term changes in scoring can offer interesting trading opportunities.</p></div><p>The data for all 3,871 currently-listed Companies is cap-weight-aggregated into <strong>Relative Price Scores</strong> for our 328 <strong>Peer Groups</strong> and 30 <strong>Sectors.</strong> The Overbought and Oversold outlier 'thresholds are set' at <strong>+4</strong> &amp; <strong>-2</strong> for Companies, <strong>+3</strong> &amp; <strong>-1.5</strong> for Peer Groups and <strong>+2</strong> and <strong>-1</strong> for Sectors, respectively. These thresholds equate with the top and bottom percentiles of over one million historical observations.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/120/245/original/2020-02-27_08-50-00.png?1582762915" class="editor-image img-responsive" data-smartkarma-image-id="120245"></figure><div class="content-caption">Source • Japan Analytics</div><p>With a few exceptions, mean reversion from these extreme outlying states occurs typically in weeks or months. The twenty-eight-year history of Sector Relative Price Scores illustrates the ebbs and flows of investment themes in the market, from the 2000 <strong>Technology</strong> 'bubble' to the <strong>REIT</strong> and<strong> Real Estate</strong> peak of 2013/14, the <strong>Healthcare</strong> and <strong>FB&amp;T</strong> market of 2016/17. On the downside, there is greater 'persistence' in the Oversold zone, particularly recently for <strong>Energy</strong>, <strong>Banks</strong> and <strong>Utilities</strong> Sectors.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/120/400/original/2020-02-28_07-33-54.png?1582842856" class="editor-image img-responsive" data-smartkarma-image-id="120400"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/120/402/original/2020-02-28_07-34-58.png?1582842919" class="editor-image img-responsive" data-smartkarma-image-id="120402"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CONSUMER SERVICES</strong> - The most recent case of Sector mean reversion is in <strong>Consumer Services</strong>, driven primarily by the performance of <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a>, a business that is now seeing a direct impact from Covid-19 with the closure of Tokyo Disneyland until March 15th announced today. This news is prompting some short-covering in the Friday afternoon session; however, at 31X EV/OP, there is still 63% downside to a residual income-based no-growth valuation. We expect both the Sector's and company's RPS to retrace the gains of the last two years.  </p><div><p>In the<strong> DETAIL</strong> section below, we provide an update on  Sector and Peer Group trends, over the last three months and adds some stock-specific comments. A separate Insight to follow in the next few days will cover the Relative Price Scores for individual companies.</p></div>

• RELATIVE PRICE SCORE •RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices over the last 28 years and 24 months, respectively. As all companies are put on a comparable scale, 'Overbought' and 'Oversold' outliers and short-term changes in scoring can offer interesting trading opportunities.The data for all 3,871 currently-listed Companies is cap-weight-aggregated into Relative Price Scores for our 328 Peer Groups and 30 Sectors. The Overbought and Oversold outlier 'thresholds are set' at +4 &amp; -2 for Companies, +3 &amp; -1.5 for Peer Groups and +2 and -1 for Sectors, respectively. These thresholds equate with the top and bottom percentiles of over one million historical observations.Source • Japan AnalyticsWith a few exceptions, mean reversion from these extreme outlying states occurs typically in weeks or months. The twenty-eight-year history of Sector Relative Price Scores illustrates the ebbs and flows of investment themes in the market, from the 2000 Technology 'bubble' to the REIT and Real Estate peak of 2013/14, the Healthcare and FB&amp;T market of 2016/17. On the downside, there is greater 'persistence' in the Oversold zone, particularly recently for Energy, Banks and Utilities Sectors.Source • Japan AnalyticsCONSUMER SERVICES - The most recent case of Sector mean reversion is in Consumer Services, driven primarily by the performance of Oriental Land (4661 JP), a business that is now seeing a direct impact from Covid-19 with the closure of Tokyo Disneyland until March 15th announced today. This news is prompting some short-covering in the Friday afternoon session; however, at 31X EV/OP, there is still 63% downside to a residual income-based no-growth valuation. We expect both the Sector's and company's RPS to retrace the gains of the last two years.  In the DETAIL section below, we provide an update on  Sector and Peer Group trends, over the last three months and adds some stock-specific comments. A separate Insight to follow in the next few days will cover the Relative Price Scores for individual companies.

🇯🇵 JAPAN • March Sector & Peer Group Relative Price Scores -

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/119/968/original/2020-02-26_03-36-31.png?1582661261" class="editor-image img-responsive" data-smartkarma-image-id="119968"></figure><div class="content-caption">Source: Japan Analytics</div>
<p><strong>DELAYED ONSET</strong> - The Japanese market's response to the growing number of Covid-19 cases outside China and Yokohama docks was delayed by the Monday holiday for the new Emperor's birthday. Tuesday's 3.3% decline will be followed by another substantial decline today following Wall Street's overnight 3% decline and the Yen's breach of ¥110 against the US Dollar.</p>
<p><strong>ILL-EQUIPPED</strong> -  Japan is as ill-equipped as the US to handle large-scale outbreaks of infectious diseases. The country's greater reliance on public transportation and preference for overcrowded open-plan offices, however, makes containment more of challenge. For security reasons, most Japanese companies do not permit employees to work from home or use personal computing devices for work. Many companies require employees to lock their office PCs when they take a bathroom break. For cultural and practical reasons, Chinese or Italian-style cordoning off of infected communities will prove impossible to implement to here.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/119/981/original/2020-01-30_06-58-37.png?1582667889" class="editor-image img-responsive" data-smartkarma-image-id="119981"></figure><div class="content-caption">Source • NHK World</div>
<p><a href="https://www3.nhk.or.jp/nhkworld/en/news/20200225_31/" target="_blank" rel="noopener"><strong>'BASIC' POLICY</strong></a> - The government's 'basic policy' announced <a href="https://www3.nhk.or.jp/nhkworld/en/news/20200225_31/" target="_blank" rel="noopener">yesterday</a> relies on post-symptomatic self-isolation and delegates the decision-making on the holding of large public gatherings or home working to the organisers or companies affected. These measures are already proving to be insufficient, and the IOC has mooted the possibility of a cancellation of the cherished summer Olympic Games - an outcome the government appear desperate to avoid, but may well have encouraged by their laxity. Japan's Covid-19 'policy' could best be described, with apologies to the '<em>The Flying Tigers</em>" as being 'on a wing and a prayer'.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/119/980/original/2020-02-26_06-55-08.png?1582667752" class="editor-image img-responsive" data-smartkarma-image-id="119980"></figure><div class="content-caption">Source • Dentsu</div>
<p><strong>FROM 'TEAMWORK' TO 'HOMEWORK'</strong> - Following the confirmation of an employees' infection last night, <a href="https://www.smartkarma.com/entities/dentsu-inc" target="_blank" data-smartkarma-citation="entities:12434:1" rel="noopener">Dentsu (4324 JP)</a> is requiring all employees in their head office to work from home from today until further notice. This decision will prove to be an interesting challenge for a company that prides itself on 'teamwork'. Many more Japanese companies will be forced to adopt similar working practices. </p>
<p><strong>TESTING THE LOWS</strong> - Our All-Market Composite has declined by 7% from the recent peak of 20th January. Yesterday's decline was the steepest one-day decline since December 2018, although a further 13% decline is required to match the low reached on Christmas Day that year. In the<strong> DETAIL</strong> section below, we will look at several market indicators to determine test if the conditions for a bear-market rally have been met. </p>
</div>


Source: Japan Analytics
DELAYED ONSET - The Japanese market's response to the growing number of Covid-19 cases outside China and Yokohama docks was delayed by the Monday holiday for the new Emperor's birthday. Tuesday's 3.3% decline will be followed by another substantial decline today following Wall Street's overnight 3% decline and the Yen's breach of ¥110 against the US Dollar.
ILL-EQUIPPED -  Japan is as ill-equipped as the US to handle large-scale outbreaks of infectious diseases. The country's greater reliance on public transportation and preference for overcrowded open-plan offices, however, makes containment more of challenge. For security reasons, most Japanese companies do not permit employees to work from home or use personal computing devices for work. Many companies require employees to lock their office PCs when they take a bathroom break. For cultural and practical reasons, Chinese or Italian-style cordoning off of infected communities will prove impossible to implement to here.
Source • NHK World
'BASIC' POLICY - The government's 'basic policy' announced yesterday relies on post-symptomatic self-isolation and delegates the decision-making on the holding of large public gatherings or home working to the organisers or companies affected. These measures are already proving to be insufficient, and the IOC has mooted the possibility of a cancellation of the cherished summer Olympic Games - an outcome the government appear desperate to avoid, but may well have encouraged by their laxity. Japan's Covid-19 'policy' could best be described, with apologies to the 'The Flying Tigers" as being 'on a wing and a prayer'.
Source • Dentsu
FROM 'TEAMWORK' TO 'HOMEWORK' - Following the confirmation of an employees' infection last night, Dentsu (4324 JP) is requiring all employees in their head office to work from home from today until further notice. This decision will prove to be an interesting challenge for a company that prides itself on 'teamwork'. Many more Japanese companies will be forced to adopt similar working practices. 
TESTING THE LOWS - Our All-Market Composite has declined by 7% from the recent peak of 20th January. Yesterday's decline was the steepest one-day decline since December 2018, although a further 13% decline is required to match the low reached on Christmas Day that year. In the DETAIL section below, we will look at several market indicators to determine test if the conditions for a bear-market rally have been met. 


🇯🇵 JAPAN MARKET UPDATE • On a Wing and a Prayer

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Bottom-Up

<ul>
<li>The three key catalysts of <a href="https://www.smartkarma.com/entities/cheil-worldwide-inc" target="_blank" data-smartkarma-citation="entities:506:1" rel="noopener">Cheil Worldwide (030000 KS)</a> include a) <strong>Samsung's Roll-Out of New 5G Smartphones; b) </strong><strong>Tokyo Summer Olympics and National Assembly General Election in Korea; and c) </strong><strong>Excellent growth of digital ad spend. </strong>
</li>
<li>
<a href="https://www.smartkarma.com/entities/506" target="_blank" data-smartkarma-citation="entities:506:1" rel="noopener">Cheil Worldwide Inc (030000 KS)</a> is the advertising agency of the Samsung Group. Cheil Worldwide is the largest advertising agency in Korea and the 19th largest advertising agency globally in terms of 2018 revenues. Its major customers include the Samsung Group, Adidas, Coca-Cola, GE, General Motors, and Microsoft.</li>
<li>The consensus net profit estimate in 2021 is 171 billion won. Using the average historical P/E multiple in the past four years (17.5x) applying to the estimated net profit of 171 billion won in 2021, this would suggest an implied market cap of 3.0 trillion won (26,020 won per share), which would represent a 22% upside from current levels. Therefore, given the reasonably attractive upside, we have a positive view of <a href="https://www.smartkarma.com/entities/cheil-worldwide-inc" target="_blank" data-smartkarma-citation="entities:506:1" rel="noopener">Cheil Worldwide (030000 KS)</a>. </li>
</ul>


The three key catalysts of Cheil Worldwide (030000 KS) include a) Samsung's Roll-Out of New 5G Smartphones; b) Tokyo Summer Olympics and National Assembly General Election in Korea; and c) Excellent growth of digital ad spend. 


Cheil Worldwide Inc (030000 KS) is the advertising agency of the Samsung Group. Cheil Worldwide is the largest advertising agency in Korea and the 19th largest advertising agency globally in terms of 2018 revenues. Its major customers include the Samsung Group, Adidas, Coca-Cola, GE, General Motors, and Microsoft.
The consensus net profit estimate in 2021 is 171 billion won. Using the average historical P/E multiple in the past four years (17.5x) applying to the estimated net profit of 171 billion won in 2021, this would suggest an implied market cap of 3.0 trillion won (26,020 won per share), which would represent a 22% upside from current levels. Therefore, given the reasonably attractive upside, we have a positive view of Cheil Worldwide (030000 KS). 


<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/966/original/2020-02-20_07-38-18.png?1582151941" class="editor-image img-responsive" data-smartkarma-image-id="118966"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<p><strong>MINISTRY OF INFORMATION</strong> - <a href="https://www.smartkarma.com/entities/dentsu-inc" target="_blank" data-smartkarma-citation="entities:12434:1" rel="noopener">Dentsu (4324 JP)</a>, which was founded in 1901, had a long and less-than-illustrious history as a government propaganda outlet before 1945, which has been airbrushed out of the corporate history. Since the formation in 1955 of the Liberal Democratic Party, the LDP has been Dentsu's most important client. This close relationship has continued into the Internet era with the establishment of the party's 'Team Truth' initiative.  Dentsu has long held a virtual lock on advertising on broadcast media in Japan and plays a key role as a promoter/ organiser of major sporting and social events.</p>
<p><strong>TAINTED</strong> - In recent years, Dentsu's image has been tainted with allegations of bribery in connection with the awarding of the 2020 Olympic Games to Tokyo and the unfortunate suicide of a 24-year old female employee driven to 'death by overwork' which forced the LDP to change some of the labour laws that allowed the excessive unpaid 'overtime' practices that are rife in this industry in Japan.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/968/original/2020-02-20_07-44-21.png?1582152290" class="editor-image img-responsive" data-smartkarma-image-id="118968"></figure>
<div class="content-caption">Source • worldatlas.com</div>
<p><strong>GLOBAL FOOTPRINT</strong> - Following the acquisition of the Aegis Group in 2012 and numerous other blot-on deals, Dentsu is now the world's fifth-largest advertising company and boasts fo operating in over 145 countries and regions with 60% of revenues generated outside Japan and 44,069 employees based overseas - 70% of total headcount. The new digital era has been less than kind to Dentsu's business model, which focuses heavily on traditional media formats, especially free-to-air television broadcasting in Japan. At the same time, the newly-acquired businesses have less secure positions in their core markets compared to that of Dentsu in Japan. With the industry facing several existential challenges, the timing of Dentsu's global expansion was far from optimal. It will require considerable management flexibility to transition to a model more appropriate for the mobile age.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/970/original/2020-02-20_08-07-28.png?1582153678" class="editor-image img-responsive" data-smartkarma-image-id="118970"></figure>
<div class="content-caption">Source • Company</div>
<p><strong>TEAMING COMPANY</strong> - To meet these challenges Dentsu aims to transform itself into a new 'dentsu group' - a 'Teaming Company' with three strategic priorities:- </p>
<ul>
<li>
<strong>Growth</strong> in new markets utilising the groups 'diverse capabilities' to create 'integrated growth solutions'</li>
<li>Offering 'socially-driven <strong>Value</strong>' to society and consumers in response to 'social challenges'</li>
<li>Creating a '<strong>Team</strong>ing Platform' based on development collaboration and integration to allow employees to gain a 'deeper understanding'. </li>
</ul>
<p><strong>STRATEGY REVIEW</strong> - Dentsu has been acquiring a myriad of digital media companies in the hope that one or more of them might offer a 'magic bullet'. As a result, they are becoming increasingly dependent on data and data suppliers that will come under increasing regulatory scrutiny base on concerns over privacy. Terrestrial broadcasting still accounts for almost half of revenue and this 'bread-and-butter' business is rapidly becoming 'toast'. Similarly, their dependence on shiny creative best-guess intuition is increasingly outdated. Significant cultural gaps remain between the lifetime-employment-oriented domestic operation and the international business, which has only one board representative and one other Executive Officer. Dentsu has an exciting future as a consulting and marketing communications hybrid. At present, much of the former is given away for free, while the latter is spread over hundreds of business units. Perhaps the model of <a href="https://www.smartkarma.com/entities/japan-tobacco-inc" target="_blank" data-smartkarma-citation="entities:13498:1" rel="noopener">Japan Tobacco (2914 JP)</a> where JTI is a separate business run by no-Japanese executives based outside Japan might be a solution; however, the implied loss of 'control' would be a step too far given the company's antecedents.  </p>
<p><strong>BELOW BOOK</strong> - It remains to be seen if these platitudes will be enough to improve Dentsu's current business model. In the short-term, the company is retrenching in several formerly key markets such as China and has implemented draconian cost-cutting in its domestic operations. Although the stock is now trading below book value and has been on od the worst-performing large caps in Japan since peaking in July 2015, we find little reason for optimism. </p>
<div class="content-highlight">
<p><strong>In the DETAIL section below, we review Dentsu's business and financial performance, returns and cash flow and suggest an appropriate valuation using a residual income valuation model. We also offer some suggestions as to how the company might finally address its 21st-century challenges.</strong></p>
</div>


Source • Japan Analytics
MINISTRY OF INFORMATION - Dentsu (4324 JP), which was founded in 1901, had a long and less-than-illustrious history as a government propaganda outlet before 1945, which has been airbrushed out of the corporate history. Since the formation in 1955 of the Liberal Democratic Party, the LDP has been Dentsu's most important client. This close relationship has continued into the Internet era with the establishment of the party's 'Team Truth' initiative.  Dentsu has long held a virtual lock on advertising on broadcast media in Japan and plays a key role as a promoter/ organiser of major sporting and social events.
TAINTED - In recent years, Dentsu's image has been tainted with allegations of bribery in connection with the awarding of the 2020 Olympic Games to Tokyo and the unfortunate suicide of a 24-year old female employee driven to 'death by overwork' which forced the LDP to change some of the labour laws that allowed the excessive unpaid 'overtime' practices that are rife in this industry in Japan.

Source • worldatlas.com
GLOBAL FOOTPRINT - Following the acquisition of the Aegis Group in 2012 and numerous other blot-on deals, Dentsu is now the world's fifth-largest advertising company and boasts fo operating in over 145 countries and regions with 60% of revenues generated outside Japan and 44,069 employees based overseas - 70% of total headcount. The new digital era has been less than kind to Dentsu's business model, which focuses heavily on traditional media formats, especially free-to-air television broadcasting in Japan. At the same time, the newly-acquired businesses have less secure positions in their core markets compared to that of Dentsu in Japan. With the industry facing several existential challenges, the timing of Dentsu's global expansion was far from optimal. It will require considerable management flexibility to transition to a model more appropriate for the mobile age.

Source • Company
TEAMING COMPANY - To meet these challenges Dentsu aims to transform itself into a new 'dentsu group' - a 'Teaming Company' with three strategic priorities:- 


Growth in new markets utilising the groups 'diverse capabilities' to create 'integrated growth solutions'
Offering 'socially-driven Value' to society and consumers in response to 'social challenges'
Creating a 'Teaming Platform' based on development collaboration and integration to allow employees to gain a 'deeper understanding'. 

STRATEGY REVIEW - Dentsu has been acquiring a myriad of digital media companies in the hope that one or more of them might offer a 'magic bullet'. As a result, they are becoming increasingly dependent on data and data suppliers that will come under increasing regulatory scrutiny base on concerns over privacy. Terrestrial broadcasting still accounts for almost half of revenue and this 'bread-and-butter' business is rapidly becoming 'toast'. Similarly, their dependence on shiny creative best-guess intuition is increasingly outdated. Significant cultural gaps remain between the lifetime-employment-oriented domestic operation and the international business, which has only one board representative and one other Executive Officer. Dentsu has an exciting future as a consulting and marketing communications hybrid. At present, much of the former is given away for free, while the latter is spread over hundreds of business units. Perhaps the model of Japan Tobacco (2914 JP) where JTI is a separate business run by no-Japanese executives based outside Japan might be a solution; however, the implied loss of 'control' would be a step too far given the company's antecedents.  
BELOW BOOK - It remains to be seen if these platitudes will be enough to improve Dentsu's current business model. In the short-term, the company is retrenching in several formerly key markets such as China and has implemented draconian cost-cutting in its domestic operations. Although the stock is now trading below book value and has been on od the worst-performing large caps in Japan since peaking in July 2015, we find little reason for optimism. 

In the DETAIL section below, we review Dentsu's business and financial performance, returns and cash flow and suggest an appropriate valuation using a residual income valuation model. We also offer some suggestions as to how the company might finally address its 21st-century challenges.


4324 🇯🇵 Dentsu - The Teaming Company

Japan

DENTSU INC. mainly provides comprehensive advertising services.  The Company also provides marketing and event planning & promotion services.  Dentsu has associated companies in the US, Europe, and Asia.

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Dentsu Inc (4324 JP)

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