Oasis has been actively engaged with Digital Garage Inc. (“DG” or the “Company”) since 2020, including numerous letters and meetings with management.
The shift towards cashless transactions in Japan represents a once-in-a-generation growth opportunity for payment service providers, including DG. Today, Japan’s economy is among the most cash-driven in the world, with just 32.5% of Japan’s payments being cashless, according to a METI presentation. However, the government aims to increase Japan’s cashless settlement ratio to 80% over the near-term. This seismic shift in Japan’s consumer spending habits has already been accelerated by the Covid-19 pandemic, and we expect it will continue to grow in the near future. DG must act now to position itself to benefit from this shift.
The payment service provider market in Japan is expected to grow from JPY23.0tr to JPY33.8tr in the next 4 years. With its strong position in the Financial Technology segment as a payment service provider, DG must not miss this opportunity.
DG is a payment service provider and investment business with great potential; however, management has not been able to realize its true value:
Ø The Financial Technology (“FT”) segment, which runs the payment service provider business, has fallen behind its main competitor, GMO Payment Gateway, Inc. (“GMO PG”), in terms of growth. We believe this is due to a lack of management focus and insufficient sales staff resources.
Ø The Incubation Technology (“IT”) segment has not yet leveraged its great track record of stellar performance.
We believe DG will be a better company if it splits into two fully independent entities: DG Financial Technology and DG Investments.
Ø Under our proposed plan, DG’s current Financial Technology segment and Marketing Technology (“MT”) segment will become DG Financial Technology.
Ø DG’s current Incubation Technology segment and Long-term Incubation (“LTI”) segment will become DG Investments.
The FT segment and IT segment can achieve their full potential under this new proposed structure:
Ø Spinning off DG Financial Technology as an independent company would significantly increase management’s focus on competing with GMO PG and capitalizing on Japan’s shift towards cashless payments. The FT sales department should also increase personnel and establish a project management department, appealing to the strength of DG’s product and creating sales teams specialized by sector.
Ø An independent DG Investments could leverage its stellar track record to raise third party capital to invest alongside DG in the continued opportunity set. This would be easier to achieve as a standalone entity. While DG currently has KK DG Daiwa Ventures as an equity method consolidated company for this purpose, we believe an independent DG Investments could further raise third party capital and expand the business.
DG’s businesses would also benefit from a fully engaged, independent CEO. DG’s Chairman, Mr. Kaoru Hayashi, holds a concurrent position as Chairman of Kakaku.com Inc. We believe Mr. Kaoru Hayashi should step down from this role to focus on the growth of DG’s FT segment.
DG is asset rich; however, investors are not confident that the Company will return capital to shareholders. DG Financial Technology should focus on returns to shareholders through capital gain, and DG Investments should focus on shareholder returns through buybacks and dividends. This will send a clear message to investors, and shareholders will then apply value to the Company’s significant net cash (incl. Kakaku shares), which accounts for 67% of DG’s current market cap.
In addition, DG should fully divest its Kakaku shares.
With these changes, we believe DG can increase estimated 2025 profit before tax by 6.8Bn yen and realize +94% upside to its share price.
We urge DG’s management to seriously consider these proposals and seek shareholder approval for them at the next AGM.
This is an important mission in which all stakeholders should be engaged. We all want the same thing: A Better DG