'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

Former Japan Equity PM with over 30 of experience now providing database-driven analysis of the market, sectors, peer groups and stocks for LightStream Research.

Leveraging data and graphic analysis provided by Japan Analytics, and the related Japan Analytics iPad App, we provide insights on companies are often ignored by the sell-side as well as challenging conventional wisdom on the market overall.

'Quantamental' Japan Specialist

Dentsu BIG Buyback - Both Larger and Smaller Than It Appears

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. 

Equity Bottom-Up

<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

Dentsu Inc

4324 🇯🇵 Dentsu - The Teaming Company