Thinking Points

  • CDG (TSE: 2487) is a marketing solutions company with a particular strength in promotional goods with a lineup of about 10,000 different product offerings.
  • With the rise in internet advertising, however, demand for promotional goods is declining, and CDG is still in the middle of transitioning into a well rounded marketing solutions company.
  • Although the company comes with positive indicators, like signing a BPO contract, recent business performance has been weak, and will likely continue to be weak over the medium term as the company transitions.
  • At 1,309 yen per share, CDG trades at an adjusted 172% NCAV with a market capitalization of 7,347 million yen ($66.9 million USD).
  • Investors can expect an investment CAGR of between 0% and 12.9%, inclusive of dividends, over a three year period.

Introduction

CDG (TSE: 2487) is a marketing company offerings sales promotion, content marketing, product development and manufacturing, sales channel strategy support, and consulting services. The company is a single segment operation, presenting a revenue breakdown by customer industry:

Source: Company filings

While the company offers internet marketing services, it’s strength has historically been in physical sales promotion goods, like pocket tissue. More recently, with a rapidly shifting marketing services environment, CDG faces challenges, and revenues have remained relatively flat over the last six years.

The business & environment

CDG was founded by Katsunori Fujii shortly after the 1973 oil shock. Before the crisis, he worked at a paper company that manufactured female sanitary product materials. When the crisis happened, the company, along with the whole paper industry, came to a production halt. Amid layoffs, Katsunori resigned and decided to work outside of the paper industry.

Then one day, he got a phone call from the owner of a trash bag company. The owner heard about Katsunori looking to work outside the paper industry and wanted him to sell trash bags. As it turns out, Katsunori sells over 100 million yen ($910K USD) of trash bags in a year. He then took the 1 million yen ($91K USD) he received as commission to start CDG.

In 1974, Katsunori first opened an office in Osaka with plans to set up shop as a Japanese paper maker. In the following year, he opened a sales office in Tokyo and a pocket tissue factory in Gifu prefecture. From then on, the company started expanding its product line-up to include box tissues, paper towels, memo pads, ball point pens, and more. Today, the company has a lineup of about 10,000 products, most of which is used as promotional goods.

On the company website, CDG presents several marketing projects from the past, including those for reputable large companies like snack maker Ezaki Glico (TSE: 2206) and farming equipment maker Kubota (TSE: 6326) as well as popular spa facility, Raku Spa.

For Ezaki Glico, CDG took on a marketing campaign for Pocky and Pretz, two household name snacks. The company was tasked with a convenience store campaign geared for young people. The general message was to deliver a brand image of eating Pocky and Pretz outdoors. CDG collaborated with popular fashion brand WEGO, offering convenience store customers who bought Pocky or Pretz a raffle for WEGO wear.

Source: Company website

CDG’s Kubota campaign was similar to the Ezaki Glico campaign in that participants received goods in exchange for engagement. In Kubota’s case, the campaign involved farmers sending in comic haikus, with winners and runner ups receiving goods. The campaign involved a variety of channels to reach customers, including internet ads, direct mail, and industry magazines. The first round of the campaign received over 10,000 comic haikus, above company expectations.

The Raku Spa campaign was different in that CDG was tasked with designing a set of bathrobes for spa customers with a modern Japanese theme. The company collaborated with Kyoto-based textile brand SOU SOU to produce its designs.

Source: Company website

From the highlighted campaigns, it quickly becomes clear that CDG’s strength is in merchandise. Since 2012, however, the company has worked on transitioning into a more wholesome marketing solutions company, offering in-store marketing, digital promotions, and supply chain management services. CDG now presents itself as a one-stop shop for all things marketing.

Meanwhile, business has more or less stagnated since 2012 despite CDG’s efforts to transition into a wholesome marketing solutions company.

Source: Company filings

In recent filings, the company repeatedly notes the increasingly competitive and internet advertising environment and the decrease in use of promotional goods, resulting in a revenue decline for promotional goods as a result. H1 2019 was a particularly challenging period for CDG, with revenues down 1.1% YoY and operating income down 81.1% YoY.

With that said, the company accepted a business process outsourcing (BPO) contract for purchasing support from an automotive client during Q1 2019, yielding results for supply chain management services. The company will likely continue to face challenges over the medium term as it transitions into a wholesome marketing solutions company. Although operating performance is weakening, revenues remaining relatively steady despite a decline in promotional goods is a positive sign since the company is taking on new business and needs some time to layout operating procedures.

For fiscal 2019, CDG guided for revenues of 11,500 million yen ($104.8 million USD, +6.3% YoY) and operating income of 750 million yen ($6.8 million USD, +17.8% YoY). After Q2, full year forecasts were adjusted down to revenues of 10,500 million yen ($95.7 million USD, -3.0% YoY) and operating income of 300 million yen ($2.7 million USD, -52.9% YoY). Three quarters in, the company has delivered revenues of 7,702 million yen ($70.2 million USD, -5.2% YoY) and operating income of 161 million yen ($1.5 million USD, –62.8% YoY).

Shareholders

As of Q3 2019 (ending December 31st, 2018), CDG had 6,240,000 shares issued and 598,456 shares in treasury, putting outstanding shares at 5,641,544.

Here are the major shareholders:

Source: Company filings & Nikkei

The largest shareholder is still founder Katsunori Fujii, who is no longer CEO of the company as of fiscal 2014. His son, Atsushi Fujii owns a 1.8% stake in CDG, making the family stake at 43.5% of outstanding shares.

In an interview with Shacho Meikan (Japanese), Katsunori specifically mentioned that his son will not be CEO. Hideo Konishi, who assumed the CEO position in June 2018 has a background in sales.

The company currently has an estimated 252,000 shares (~4.5% of outstanding shares) worth of unexercised options.

The last time the company repurchased shares was in November of 2017. CDG repurchased 250,000 shares for 464 million yen ($4.2 million USD), which comes out to a share price of 1,859 yen. The company consistently repurchased share in smaller amounts between 2009 and 2014, but had not repurchased between 2015 and 2017.

It’s also important to note that CDG shares transferred listing from the JASDAQ section to Second section in May 2016, and then to First section in February of 2017, likely having more exposure to index funds as a result.

Financials & Valuation

  • CDG is a marketing solutions company with a particular strength in promotional goods with a lineup of about 10,000 different product offerings.
  • With the rise in internet advertising, however, demand for promotional goods is declining, and CDG is still in the middle of transitioning into a well rounded marketing solutions company.
  • Although the company comes with positive indicators, like signing a BPO contract, recent business performance has been weak, and will likely continue to be weak over the medium term as the company transitions.
  • At 1,309 yen per share, CDG trades at an adjusted 172% NCAV with a market capitalization of 7,347 million yen ($66.9 million USD).
  • Investors can expect an investment CAGR of between 0% and 12.9%, inclusive of dividends, over a three year period.

CDG got its start by manufacturing pocket tissues, a common promotional good in Japan, back in the 1970s. The company gradually expanded its promotional product line-up, now totalling approximately 10,000 items. Meanwhile, its sales network also expanded, with offices in all major Japanese metropolitan areas.

More recently, with internet advertising gaining popularity, the demand for promotional goods has declined. Since 2012, the company has been transitioning itself into a more comprehensive marketing services company, offering in-store marketing, digital promotions, and supply chain management solutions.

Revenue growth during this period has more or less stagnated with some fluctuation from year to year. Given that CDG is still in the process of transitioning into a comprehensive marketing solutions company, it’s fair to expect weaker performance over the medium term. With that in mind, the long-term outcome for CDG is unclear and the company is best analyzed over the near term.

At 1,309 yen per share, CDG trades at 184% NCAV with a market capitalization of 7,347 million yen ($66.9 million USD). Adjusted for investment security holdings, the company trades for 172% of NCAV. As a side note, CDG’s land holdings is immaterial to the valuation of the company.

Assuming 3-year operating performance in-line with the last twelve months, which is considerably weaker than previous years, investors should expect an investment CAGR of 0%.

Considering CDG competitor Legs (TSE: 4286), which has performed well over the last few years, is trading at 362% NCAV, or 10x EV/EBIT, CDG may trade around similar levels on EV/EBIT terms if it can weather through and get back on a growth track. In this case, investors can expect an investment CAGR of 12.9%, inclusive of dividends, over a three year period.

As a side note, there isn’t a high degree of visibility into CDG’s business. As such, it’s difficult to analyze and gain or lose confidence in the company’s existing and new business lines, making the valuation process unclear as a result. As an example, if CDG’s BPO business is on a growth track and the company decides to provide segment reporting, the market may reevaluate the business and assign a different valuation.

Overall, investors can expect an investment CAGR of between 0% and 12.9%, inclusive of dividends, over a three year period.

The bottom line

CDG is a marketing solutions company with a strength in promotional goods. With the rise of internet advertising, however, demand for promotional goods is on a decline. The company is in the middle of transitioning into a comprehensive marketing solutions company as a result, and recent business performance has been weak. With the company in transition, it’s difficult to evaluate the business over the long term. Depending on how well the transition goes in the near term, investors can expect an investment CAGR of between 0% and 12.9%, inclusive of dividends, over a three year period.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.