Digital Garage (4819) – Change in Investment Strategy Makes Sense

If the last decade has been about smartphone hardware, mobile operating systems and apps, the next decade will be about what can be built on top of, around, and from the smartphone foundation which has been laid.  
The post-smartphone era is imminent, with AI, Augmented Reality (AR) / Virtual Reality (VR), IoT, FinTech, etc. either on the horizon, or already well in sight. Amid the fast-changing markets, and given the increasing number of start-ups, it is getting harder and harder for investors to keep up, and to make the right investment calls. One relatively safe way to do this is by buying stakes in companies with an investment / VC arm. Similar to investing in a real estate investment trust (which provides diversification, thus allowing your portfolio to access high-profile properties which you might not otherwise be able to afford if investing in properties directly), holding interests in companies which have an incubation business can give you exposure to not one, but all the start-ups in their investment portfolios. Furthermore, often companies which have an investment division are mature, dividend-paying entities, with an operating history, and established core businesses. This means you are receiving returns even while these start-ups are still being incubated and there is a risk they may fall short of expectations.  
For these reasons, we consider Digital Garage (DG, 4819), creator of a number of Japan’s first Internet businesses – such as Kakaku.com (2371) in which DG currently has a 20.67% stake – to be an interesting play. The company relies on its strong network capabilities in both Japan and Silicon Valley to find investment jewels. As of March 2017, there were 136 companies in its investment portfolio, including Blockstream (sidechain technologies developer), Droom (leading online marketplace for new and second-hand automobiles in India) and Welby (health apps developer).  
In the past, DG’s investment strategy was ‘’early exit’’. However, going forward, the company will adopt a mid- to long-term view and will be holding on to some stocks for longer. This change in strategy was the root cause of DG’s disappointing irregular FY17 (9-month period Jul 2016 – Mar 2017; the company changed its financial term from June to March starting from FY17) results: DG revised the portfolio which was originally to be sold and, conservatively, booked an impairment loss on acquired stocks. The failure to meet its FY03/17 guidance and the decision to extend the investment holding periods have contributed to the share price depreciation since its earnings announcement during market hours on May 12th.