Dream Incubator (DI) is a professional consulting firm founded in April 2000. The company says its core values lie in “business producing,” referring to tackling social challenges, planning businesses with visions and ideas beyond industry barriers, formulating strategies, gathering reliable partners, and creating added value. It has produced new businesses crossing various sectors, major companies, venture businesses, and borders since its founding.

Mainstay businesses are the Business Production and Incubation businesses. In Business Production, the company provides strategic consulting, business producing support, M&A advisory, and core management development assistance to major corporations (in Japan and overseas) and national and regional government agencies. In Incubation, the company engages in venture investment and buy-and-hold business investment, and leverages its principal investments to develop venture companies deemed integral to new industries. Overseas, the company aims to support innovation around the world by forming partnerships with promising venture capital companies in the US, China, and India for joint investment and consultation. The company also invests using funds it manages. In terms of accounting, the company books venture investment profits when shares in the invested company are sold, whereas for buy-and-hold business investments, it books consolidated profits or losses in proportion to the ownership ratio in the invested company.

Dream Incubator has two main businesses, Business Production (formerly Professional Services) and Incubation. The Incubation business is further divided into the Venture Capital segment (name changed in Japanese only), the Pet Lifestyle segment (formerly Insurance), the HR Innovation segment (formerly Other), and the newly constituted Other segment, which engages in fan marketing. As of FY03/21, the company had five consolidated reporting segments: Business Production, Venture Capital, Pet Lifestyle, HR Innovation, and Other.

Top management of the company changed in June 2020. The founding members passed the leadership baton to a new management team to carry on the company’s founding spirit. The new team is pursuing four structural reform initiatives: realigning the investment and procurement profile of venture capital investment, strengthening its core competency of business production, utilizing financial functions to expand the Business Production business, and strengthening corporate governance. Through these initiatives the company aims to fulfill its motto of “helping people,” “generating profits,” “growing,” and “sharing,” thereby maximizing shareholder value.

In May 2021, the company announced a capital and business alliance with Dentsu Group Inc. (TSE Prime: 4324). On July 2, Dentsu Group bought additional shares of the company, acquiring more than 20% of voting rights, making DI an equity-method affiliate of Dentsu Group.

Trends and outlook

In FY03/22, the company recorded sales of JPY35.6bn (+28.0% YoY), an operating loss of JPY168mn (versus operating loss of JPY957mn in FY03/21), recurring profit of JPY44mn (versus recurring loss of JPY971mn), and net income attributable to owners of the parent of JPY7mn (versus net loss of JPY2.1bn).

Sales in the Business Production segment were up 22.3% YoY, while sales in the Venture Capital segment were down 28.3% YoY. Sales rose 25.4% YoY in the Pet Lifestyle segment, and grew 21.2% YoY in the HR Innovation segment. Sales in the Fan Marketing segment (launched in February 2021) came to JPY2.0bn (no YoY comparison).

Operating profit in the Business Production segment grew 8.4% YoY. The Venture Capital segment recorded an operating loss of JPY168mn (versus a loss of JPY1.4bn in FY03/21). Meanwhile, operating profit in the Pet Lifestyle segment was down 48.6% YoY. The HR Innovation segment and the Fan Marketing segment posted operating losses of JPY137mn (versus a loss of JPY54mn in FY03/21) and JPY209mn (no YoY comparison), respectively.

The company previously disclosed net asset value (NAV), which reflected the sum value of all its businesses. With an eye toward improving clarity in performance indicators in line with the individual characteristics of each business, however, it now discloses unrealized gains excluding the Business Production business. Market value as of end-FY03/22 stood at JPY23.5bn, comprising JPY13.9bn for Business Investment and JPY9.6bn for Venture Capital. As of the same date, book value was JPY7.9bn (JPY2.6bn for Business Investment and JPY5.3bn for Venture Capital), which yields estimated unrealized gains of JPY15.6bn (JPY11.3bn, JPY4.3bn).

The company believes that profit calculated on the basis of the unearned premium method for regular policy reserves, and not taking into account provision of the catastrophe reserve, is a useful indicator of the profitability at ipet Insurance Co., Ltd., one of its key subsidiaries. On that basis, Dream Incubator reported adjusted recurring profit of JPY1.7bn (adjusted recurring loss of JPY233mn in FY03/21).

FY03/23 company forecast: Owing to the inherent difficulties in projecting sales and earnings at some of its businesses, the company does not issue a public forecast. While projecting sales and earnings for its Business Production segment is fairly easy, making projections for other businesses is more problematic. More specifically, under Incubation, the Venture Capital segment derives most of its sales from the sale of stock holdings, making it subject to the state of the stock market in general and conditions in the IPO market in particular.

Business Production business: The company reports that orders for new projects have shown steady growth in FY03/22, and accordingly projects sales of JPY3.3bn (+16.0% YoY) in FY03/23. Meanwhile, it expects operating profit to remain largely flat YoY as it plans to continue aggressive investment into bolstering human resources, among other initiatives. From FY03/24 onward, however, DI will aim to achieve profit recovery in this business following the turnaround in sales, and will also work to establish a solid and stable earnings base for the medium to long term.

Incubation business

In the Pet Lifestyle segment, the company sees ongoing growth in the pet insurance market as a whole underpinning sales growth at its own pet insurance business. On the profit front, it expects a YoY increase in expenses associated with systems development to establish a firm foundation for long-term growth, an thus projects adjusted recurring profit at ipet Holdings to fall 40.7% YoY to JPY1.1bn.

In the Venture Capital segment, as usual, the company does not expect to be in a position to make a reliable forecast for sales or earnings because so much depends on the ups and down of the stock market, particularly the IPO market. As of May 13, 2022, the company plans to collect returns on multiple investments by means of IPOs and trade sales, but there is always the risk that in any given timeframe the stock market will suffer a downturn that would not only reduce the capital gains on stock sales but also lead to additions to reserves for losses on investments.

Subsidiaries Work Style Lab and PEACS operating businesses under the HR Innovation and Fan Marketing segments are slated for exclusion from DI's scope of consolidation in FY03/23, subject to progress in their respective sale.

Strengths and weaknesses

Shared Research believes that Dream Incubator’s strengths are its clearly formulated management strategy and philosophy, growing and cash-flow generating businesses, and the high retention rate of consultants and management quality. Weaknesses are a limited track record in business investment, few opportunities to source venture capital deals, and limited experience in global consulting.

Key financial data

Income statement		FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18		FY03/19		FY03/20		FY03/21		FY03/22		FY03/22
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.: Insurance adjusted	Cons.	Cons.: Insurance adjusted	Cons.	Cons.: Insurance adjusted	Cons.	Cons.: Insurance adjusted	Cons.	Cons.: Insurance adjusted	Est.
Sales		7,693	9,092	13,343	12,691	14,526	18,418	18,418	20,705	20,705	22,755	22,755	27,776	27,776	35,566	35,566	na
	YoY	17.9%	18.2%	46.8%	-4.9%	14.5%	26.8%	26.8%	12.4%	12.4%	9.9%	9.9%	22.1%	22.1%	28.0%	28.0%	-
Gross profit		3,711	4,811	7,914	6,384	7,018	9,551	9,825	9,303	9,933	10,440	11,084	10,987	11,724	14,724	16,335
	YoY	27.2%	29.6%	64.5%	-19.3%	9.9%	36.1%	33.0%	-2.6%	1.1%	12.2%	11.6%	5.2%	5.8%	34.0%	39.3%
	Gross profit margin	48.2%	52.9%	59.3%	50.3%	48.3%	51.9%	53.3%	44.9%	48.0%	45.9%	48.7%	39.6%	42.2%	41.4%	45.9%
Operating profit		768	1,141	1,348	538	517	1,854	2,128	124	754	124	768	-957	-220	-168	1,443	na
	YoY	-30.2%	48.6%	18.1%	-60.1%	-3.9%	258.2%	139.7%	-93.3%	-64.6%	-90.1%	1.9%	-	-	-	-	-
	Operating profit margin	10.0%	12.5%	10.1%	4.2%	3.6%	10.1%	11.6%	0.6%	3.6%	0.5%	3.4%	-3.4%	-0.8%	-0.5%	4.1%
Recurring profit		759	1,101	1,373	525	527	1,915	2,189	277	908	-25	619	-971	-233	44	1,656	na
	YoY	-31.3%	45.1%	24.7%	-61.8%	0.3%	263.2%	143.9%	-85.5%	-58.5%	-	-31.9%	-	-	-	-	-
	Recurring profit margin	9.9%	12.1%	10.3%	4.1%	3.6%	10.4%	11.9%	1.3%	4.4%	-0.1%	2.7%	-3.5%	-0.8%	0.1%	4.7%
Net income attributable to owners of the parent		671	854	993	420	101	899	1,071	378	358	-198	63	-2,105	-1,806	7	656	na
	YoY	-19.4%	27.3%	16.3%	-57.7%	-75.9%	787.4%	199.0%	-57.9%	-66.5%	-	-82.3%	-	-	-	-	-
	Net margin	8.7%	9.4%	7.4%	3.3%	0.7%	4.9%	5.8%	1.8%	1.7%	-0.9%	0.3%	-	-	0.0%	-
Per-share data
Shares issued (year-end; '000)		96	9,783	10,054	10,181	10,244	10,301		10,301		10,381		10,422		10,455
EPS		7,002.0	88.1	103.2	43.0	10.3	92.4		38.6		-20.3		-215.2		0.8
EPS (fully diluted)		6,766.8	83.7	98.9	41.7	10.1	90.7		36.7		-		-		-
Dividend per share		2,100.0	2,600.0	29.0	12.0	3.0	26.0		-		-		-		-
Book value per share		89,573.4	1,364.9	1,085.9	1,033.8	1,015.3	1,078.6		1,141.5		1,090.8		955.6		1,003.0
Balance sheet (JPYmn)
	Cash and cash equivalents	4,889	5,555	6,497	7,307	7,409	6,299		6,559		4,745		12,449		15,700
Total current assets		9,012	16,322	14,029	14,858	14,990	15,235		15,926		20,497		23,528		28,001
Tangible fixed assets		198	180	152	130	159	197		341		491		680		916
Investments and other assets		309	385	375	470	1,288	3,217		6,396		2,847		3,339		2,859
Intangible assets		1,438	1,286	1,176	674	909	718		2,041		2,588		2,001		1,796
Total assets		12,056	19,539	15,734	16,134	17,348	19,368		24,705		26,424		29,549		33,574
	Accounts payable	39	29	23	-	-	-		131		194		384		-
	Short-term debt	4	1	1	1	102	108		697		1,122		1,647		1,495
Total current liabilities		2,420	5,026	4,266	4,817	5,912	7,247		9,502		11,521		14,819		19,017
	Long-term debt	13	168	2	-	329	251		1,018		940		1,085		1,648
Total fixed liabilities		13	168	21	71	467	474		1,347		1,265		1,533		2,101
Total liabilities		2,434	5,195	4,287	4,889	6,380	7,722		10,850		12,786		16,353		2,119
Total net assets		9,622	14,344	11,446	11,245	10,967	11,646		13,855		13,638		13,196		12,454
Total interest-bearing debt		17	169	3	1	431	359		1,715		2,062		2,732		3,143
Cash flow statement(JPYmn)
Cash flows from operating activities		1,504	1,622	2,421	907	1,509	864		1,292		-1,178		-700		7,822
Cash flows from investing activities		610	-1,463	-1,026	74	-873	-1,865		-3,285		-61		-1,510		317
Cash flows from financing activities		-1	-141	-618	-33	-126	-100		2,891		401		1,816		955
Financial ratios
ROA (RP-based)		6.7%	7.0%	7.8%	3.3%	3.1%	10.4%		1.3%		-0.1%		-3.5%		0.1%
ROE		8.2%	7.8%	8.3%	4.0%	1.0%	8.8%		3.5%		-1.8%		-21.2%		0.1%
Equity ratio		71.6%	68.3%	67.2%	63.2%	56.8%	54.4%		45.5%		40.2%		31.3%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company conducted a 100-for-1 stock split, effective April 1, 2014.

By segment						FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYmn)						Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Sales						7,693	9,092	13,343	12,691	14,526	18,418	20,705	22,755	27,776	35,566
	YoY					17.9%	18.2%	46.8%	-4.9%	14.5%	26.8%	12.4%	9.9%	22.1%	28.0%
		Business Production				2,379	2,171	2,504	2,667	3,202	3,454	2,556	2,679	2,319	2,837
				YoY		20.6%	-8.7%	15.3%	6.5%	20.1%	7.9%	-26.0%	4.8%	-13.4%	22.3%
				% of total		30.9%	23.9%	18.8%	21.0%	22.0%	18.8%	12.3%	11.8%	8.3%	8.0%
		Incubation				-	-	-	-	-	-	-	20,088	25,494	32,825
			YoY			-	-	-	-	-	-	-	-	26.9%	28.8%
			% of total			-	-	-	-	-	-	-	88.2%	91.7%	92.0%
				Venture Capital segment		426	1,011	3,671	703	1,179	2,752	2,867	800	1,062	761
					YoY	-56.5%	137.3%	263.1%	-80.8%	67.7%	133.4%	4.2%	-72.1%	32.8%	-28.3%
					% of total	5.5%	11.1%	27.5%	5.5%	8.1%	14.9%	13.8%	3.5%	3.8%	2.1%
				Pet Lifestyle segment		4,284	5,100	6,363	8,126	10,067	12,212	14,876	18,317	22,859	28,654
					YoY	28.8%	19.0%	24.8%	27.7%	23.9%	21.3%	21.8%	23.1%	24.8%	25.4%
					% of total	55.7%	56.1%	47.7%	64.0%	69.3%	66.3%	71.7%	80.5%	82.2%	80.3%
				HR Innovation segment		-	-	-	-	-	-	-	957	1,092	1,324
					YoY	-	-	-	-	-	-	-	-	14.1%	21.2%
					% of total	-	-	-	-	-	-	-	4.2%	3.9%	3.7%
				Other segment		-	-	-	-	-	-	-		442	-
					YoY	-	-	-	-	-	-	-	-	-	-
					% of total	-	-	-	-	-	-	-		1.6%	-
				Former segment
				Other		594	809	803	1,193	78	-	448	-	-	-
					YoY	-	36.2%	-0.7%	48.6%	-93.5%	-	-	-	-	-
					% of total	7.7%	8.9%	6.0%	9.4%	0.5%	-	2.2%	-	-	-
		Adjustments				-	-	-	-	-	-	-43	-12	-38	-96
Operating profit						768	1,141	1,348	538	517	1,854	124	124	-957	-168
	YoY					-30.2%	48.6%	18.1%	-60.1%	-3.9%	258.6%	-93.3%	-90.1%	-	-
	Operating profit margin					10.0%	12.5%	10.1%	4.2%	3.6%	10.1%	0.6%	0.5%	-	-
		Business Production [1]				779	490	1,288	1,439	1,861	1,685	652	967	1,054	1,143
				YoY		91.4%	-37.1%	162.9%	11.7%	29.3%	-9.5%	-61.3%	48.3%	9.0%	8.4%
				Operating profit margin		32.7%	22.6%	51.4%	54.0%	58.1%	48.8%	25.5%	36.1%	45.5%	40.3%
				% of total		64.3%	30.0%	52.8%	87.4%	114.3%	62.0%	63.7%	94.1%	-	-
		Incubation				-	-	-	-	-	-	-	62	-1,106	-372
					YoY	-	-	-	-	-	-	-	-	-	-
					Operating profit margin	-	-	-	-	-	-	-	0.3%	-	-
					% of total	-	-	-	-	-	-	-	6.0%	-	-
				Venture Capital segment [2]		89	835	2,577	-148	-344	632	261	-166	-1,382	-168
					YoY	78.0%	838.2%	208.6%	-	-	-	-58.7%	-	-	-
					Operating profit margin	20.9%	82.6%	70.2%	-	-	23.0%	9.1%	-	-	-
					% of total	7.3%	51.2%	105.6%	-9.0%	-21.1%	23.2%	25.5%	-	-	-
				Pet Lifestyle segment [3]		460	451	-1,046	157	177	402	134	333	276	142
					YoY	-38.1%	-2.0%	-	-	12.7%	127.1%	-66.7%	148.5%	-17.1%	-48.6%
					Operating profit margin	10.7%	8.8%	-16.4%	1.9%	1.8%	3.3%	0.9%	1.8%	1.2%	0.5%
					% of total	38.0%	27.6%	-42.9%	9.5%	10.9%	14.8%	13.1%	32.4%	-	-
				HR Innovation [4]		-	-	-	-	-	-	-	-	-54	-137
					YoY	-	-	-	-	-	-	-	-	-	-
					Operating profit margin	-	-	-	-	-	-	-	-	-	-
					% of total	-	-	-	-	-	-	-	-	-	-
				Other segment [5]		-	-	-	-	-	-	-	-	54	-
					YoY	-	-	-	-	-	-	-	-	-	-
					Operating profit margin	-	-	-	-	-	-	-	-	-	-
					% of total	-	-	-	-	-	-	-	-	-	-
				Former segment
				Other segment [5]		-116	-143	-378	201	-65	-	-23	-105	-	-
					YoY	-	-	-	-	-	-	-	-	-	-
					Operating profit margin	-	-	-	-	-	-	-	-	-	-
					% of total	-	-	-	-	-	-	-	-	-	-
		Adjustments [6]				-443	-491	-1,093	-1,109	-1,111	-865	-899	-904	-905	-938
Adjustments related to ordinary underwriting reserve						-	-	-	-	47	-117	155	64	20	725
Adjustments related to catastrophe reserve						-	-	-	-	322	391	475	580	717	886
		Insurance segment OP (adjusted; [3]')				-	-	-	-	547	676	765	978	1,014	1,754
				YoY		-	-	-	-	-	23.6%	13.2%	27.8%	3.7%	73.0%
				Operating profit margin		-	-	-	-	5.4%	5.5%	5.1%	5.3%	4.4%	6.1%
				% of total		-	-	-	-	27.4%	22.6%	46.3%	58.5%	148.0%	73.7%
Operating profit (adjusted;[1]+[2]+[3]'+[4]+[5]+[6])						-	-	-	-	886	2,128	754	768	-220	1,443
		YoY				-	-	-	-	-	140.2%	-64.6%	1.9%	-	-
		Operating profit margin				-	-	-	-	6.1%	11.6%	3.6%	3.4%	-	4.1%
Recurring profit (adjusted)						-	-	-	-	897	2,189	908	619	-233	1,656
		YoY				-	-	-	-	-	143.9%	-58.5%	-31.8%	-	-
		Recurring profit margin				-	-	-	-	6.2%	11.9%	4.4%	2.7%	-	4.7%
Net income attributable to owners of the parent (adjusted)						-	-	-	-	358	1,071	358	63	-1,806	656
		YoY				-	-	-	-	-	199.0%	-66.5%	-82.3%	-	-
		Net margin				-	-	-	-	2.5%	5.8%	1.7%	0.3%	-	1.8%

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
In FY03/21, the company changed the name of its reporting segments: the former Professional Services segment became the Business Production segment, the Venture Capital segment retained its name (in English), and the Insurance segment became the Pet Lifestyle segment. The newly established HR Innovation segment consists of subsidiary Work Style Lab (WSL), formerly included under the Other segment.

Recent updates

Transfer of consolidated subsidiary (share transfer)

2022-05-16

On May 13, 2022, Dream Incubator Inc. announced that its boards of directors had voted to approve the sale of its entire stake in consolidated subsidiary Work Style Lab, Inc. to Lancers, Inc. The contract was signed on May 13, 2022; the transfer of ownership is scheduled to take place on June 14, 2022.

Background

Work Style Lab operates a matching platform for freelance consultants, IT engineers, and other professions. Acquired by DI in August 2018, Work Style Lab was considered a core subsidiary within the group and, with high hopes for future growth, was at the center of the group's foray into the field of HR Innovation.

More recently, though, DI has been making structural reforms to the group that will allow it to better focus its management resources on its core competency (Business Production) and otherwise simplify and create a more stable business structure. In connection with these structural reforms, the company is working on various initiatives to continue providing support for the companies in which it has invested to increase the value of its equity stake while looking to exit its investment by timing sales to maximize the value from the perspective of shareholders, and to focus on its new investment in areas that help it advance its mainstay Business Production business.

Against this backdrop, the company determined that selling its stake in Work Style Lab to Lancers, which operates its own matching service, would give Work Style Lab the strategic flexibility to fully develop its business under the umbrella of Lancers. At the same time, DI also saw that now would be a good time for the sale and that selling its shares in Work Style Lab would be the right way to maximize value for DI shareholders.

Booking of an extraordinary loss (parent)

Following the completion of the sale, Work Style Lab will no longer be a subsidiary of DI. Based on the price at which the sale of Work Style Lab was set, at the parent company level the sale will result in an extraordinary loss of JPY219mn to be booked by DI. There will be no impact on earnings at the consolidated level, as this extraordinary loss represents valuation losses on the parent company's shareholdings in a subsidiary. At the consolidated level, the book value of these same shareholdings will have already been written down in past years.

Outlook

As a result of the sale of Work Style Lab, in Q1 FY03/23 the company expects to book a gain of roughly JPY50mn on the sale of a subsidiary at the consolidated level.

Transfer of consolidated subsidiary (share transfer)

2022-04-06

On April 5, 2022, Dream Incubator Inc. announced that its board of directors had voted to approve the sale of its entire stake in consolidated subsidiary PEACS Inc. to ADDIX, Inc. Upon completion of the sale, PEACS will no longer be DI's consolidated subsidiary. The contract was signed on April 5, 2022; the transfer of ownership is scheduled for April 28, 2022.

In keeping with its mission statement, "creating businesses and changing societies," DI has worked to develop both its Business Production business and Incubation business (venture investment and buy-and-hold business investment). In the area of buy-and-hold business investment, where it seeks to own a majority stake, the company has been engaged in identifying business opportunities, providing capital backing, and supporting development for companies in three different areas: Pet Lifestyle, HR Innovation, and Fan Marketing.

Subsidiary PEACS, which operates the hobby and lifestyle media intellectual properties (IPs) business and the planning and production of digital marketing and digital services, fits into this picture under Fan Marketing. The subsidiary was expected to serve as the mainstay growth driver since its acquisition by DI in February 2021.

More recently, though, the group is implementing structural reforms to focus its management resources on its core competency (Business Production) and otherwise simplify and create a more stable business structure. Against this backdrop, DI is working on various initiatives to continue providing support for the companies in which it has invested to increase the value of its equity stake while looking to exit its investment by timing sales to maximize the value from the perspective of shareholders, and to focus on its new investment in areas that help it advance its mainstay Business Production business.

The decision by DI to sell its stake in PEACS at this particular time reflects its judgement that now is the right time and the sale of its entire stake in PEACS is the right way to maximize value for DI shareholders, while at the same time allowing PEACS to prosper under its new owner ADDIX as it speeds up its digital transformation and further diversifies into areas such as e-commerce and direct-to-consumer services. PEACS' current representative director Katsuhiko Handa (who was seconded by DI) will stay on in his current capacity at PEACS after the sale.

Details of sale

Number of shares held prior to the sale: 5,000 shares (100% voting rights)
Number of shares to be sold: 5,000 shares
Number of shares to be held after the sale: 0 shares (0% voting rights)
Sale price: Not disclosed due to confidentiality agreement with buyer; priced based on fair value estimates and mutually agreeable negotiations

The company expects to book a gain on sale of shares of subsidiaries of JPY544mn as extraordinary income in Q1 FY03/23.

Revision to subsidiary's full-year earnings forecast

2022-03-25

On March 24, 2022, Dream Incubator Inc. announced that subsidiary ipet Holdings, Inc. had revised its full-year FY03/22 earnings forecast.

On March 24, 2022, ipet Holdings upgraded its company forecast again. The revised forecast calls for recurring revenue of JPY28.6bn (unchanged from the previous forecast), recurring profit of JPY700mn (up JPY450mn), net income attributable to owners of the parent of JPY450mn (up JPY370mn), and EPS of JPY41.57 (JPY7.39 in the previous forecast). Adjusted recurring profit is JPY1.6bn (up JPY450mn from the previous forecast), and adjusted net income is JPY1.1bn (up JPY370mn). The reasons for the revision include: (1) selling and administrative expenses at subsidiary ipet Insurance are forecast to be lower than previously assumed due to improved operational efficiency; (2) the loss ratio has trended below the previous plan.

ipet Holdings discloses its consolidated earnings forecast (Non-GAAP) based on the unearned premium method. Dream Incubator uses adjusted recurring profit and net income attributable to owners of the parent to gauge the true profitability of ipet Holdings. The upward revision will have an impact on these adjusted earnings.

Trends and outlook

Quarterly trends and results

Quarterly earnings		FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales		6,074	7,269	6,592	7,841	7,974	8,821	9,314	9,457
	YoY	16.1%	35.0%	8.0%	29.8%	31.3%	21.4%	41.3%	20.6%
Gross profit		2,503	2,891	2,786	2,807	3,427	3,613	3,936	3,748
	YoY	4.1%	18.7%	-7.2%	8.0%	36.9%	25.0%	41.3%	33.5%
	Gross profit margin	41.2%	39.8%	42.3%	35.8%	43.0%	41.0%	42.3%	39.6%
SG&A expenses		2,679	2,861	2,939	3,465	3,565	3,708	3,690	3,929
	YoY	7.2%	17.3%	13.4%	24.4%	33.1%	29.6%	25.6%	13.4%
	SG&A-to-sales ratio	44.1%	39.4%	44.6%	44.2%	44.7%	42.0%	39.6%	41.5%
Operating profit		-175	30	-154	-658	-138	-95	245	-180
	YoY	-	-	-	-	-	-	-	-
	Operating profit margin	-	0.4%	-	-	-	-	2.6%	-
Recurring profit		-161	93	-200	-703	59	-88	285	-212
	YoY	-	-	-	-	-	-	-	-
	Recurring profit margin	-	1.3%	-	-	0.7%	-	3.1%	-
Net income		-143	-100	-192	-1,670	-21	-108	170	-34
	YoY	-	-	-	-	-	-	-	-
	Net margin	-	-	-	-	-	-	1.8%	-
Cumulative		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Sales		6,074	13,343	19,935	27,776	7,974	16,795	26,109	35,566
	YoY	16.1%	25.7%	19.3%	22.1%	31.3%	25.9%	31.0%	28.0%
Gross profit		2,503	5,394	8,180	10,987	3,427	7,040	10,976	14,724
	YoY	4.1%	11.5%	4.3%	5.2%	36.9%	30.5%	34.2%	34.0%
	Gross profit margin	41.2%	40.4%	41.0%	39.6%	43.0%	41.9%	42.0%	41.4%
SG&A expenses		2,679	5,540	8,479	11,944	3,565	7,273	10,963	14,892
	YoY	7.2%	12.2%	12.6%	15.8%	33.1%	31.3%	29.3%	24.7%
	SG&A-to-sales ratio	44.1%	41.5%	42.5%	43.0%	44.7%	43.3%	42.0%	41.9%
Operating profit		-175	-145	-299	-957	-138	-233	12	-168
	YoY	-	-	-	-	-	-	-	-
	Operating profit margin	-	-	-	-	-	-	0.0%	-
Recurring profit		-161	-68	-268	-971	59	-29	256	44
	YoY	-	-	-	-	-	-	-	-
	Recurring profit margin	-	-	-	-	0.7%	-	1.0%	0.1%
Net income		-143	-243	-435	-2,105	-21	-129	41	7
	YoY	-	-	-	-	-	-	-	-
	Net margin	-	-	-	-	-	-	0.2%	0.0%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Earnings by segment: quarterly

By segment: quarterly				FY03/21				FY03/22
(JPYmn)				Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales
Business Production				508	664	467	680	614	683	736	804
	YoY			-11.3%	-6.2%	-36.8%	3.2%	20.9%	2.9%	57.6%	18.2%
Incubation				5,573	6,611	6,134	7,176	7,364	8,150	8,621	8,690
	YoY			19.5%	38.8%	16.2%	33.3%	32.1%	23.3%	40.5%	21.1%
		Venture Capital segment		141	811	21	92	33	296	393	39
			YoY	-44.3%	437.1%	-93.2%	8.2%	-76.6%	-63.5%	1,771.4%	-57.6%
		Pet Lifestyle segment		5,192	5,545	5,836	6,286	6,639	7,053	7,299	7,663
			YoY	23.3%	25.3%	23.7%	26.7%	27.9%	27.2%	25.1%	21.9%
		HR Innovation segment		240	257	278	317	288	342	343	351
			YoY	21.8%	38.9%	10.8%	-2.2%	20.0%	33.1%	23.4%	10.7%
		Fan Marketing segment		-	-	-	-	401	461	535	592
			YoY	-	-	-	-	-	-	-	-
		Other segment		-	-	-	442	-	-	-	-
			YoY	-	-	-	-	-	-	-	-
Internal transactions or transfer				-8	-5	-9	-16	-5	-11	-43	-37
Operating profit
Business Production				215	379	147	313	241	239	319	344
	YoY			220.9%	54.7%	-57.0%	0.0%	12.1%	-36.9%	117.0%	9.9%
Incubation				-155	-131	-106	-768	-177	-108	164	-251
	YoY			-	-	-	-	-	-	-	-
		Venture Capital segment		-108	-276	-198	-800	-115	-9	264	-308
			YoY	-	-	-	-	-	-	-	-
		Pet Lifestyle segment		-13	156	103	30	74	35	-12	45
			YoY	-	-16.1%	-5.5%	-31.8%	-	-77.6%	-	50.0%
		HR Innovation segment		-34	-11	-11	2	-27	-38	-53	-19
			YoY	-	-	-	-	-	-	-	-
		Fan Marketing segment		-	-	-	-	-109	-96	-35	31
			YoY	-	-	-	-	-	-	-	-
		Other segment		-	-	-	442	-	-	-	-
			YoY	-	-	-	-	-	-	-	-
Company-wide expenses				-235	-219	-194	-257	-202	-226	-237	-273

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Effective Q1 FY03/21, the company changed the name of its reporting segments. The former Professional Services segment became the Business Production segment, the Venture Capital segment retained its name, the Insurance segment became the Pet Lifestyle segment. The newly established HR Innovation segment consists of subsidiary Work Style Lab (WSL), formerly included under the Other segment. For purposes of comparison, segment results for Q1 FY03/20 were recalculated to match the new reporting segment scheme.

Earnings by segment: cumulative

By segment: cumulative				FY03/21				FY03/22
Cumulative				Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Sales
Business Production				508	1,172	1,639	2,319	614	1,297	2,033	2,837
	YoY			-11.3%	-8.5%	-18.9%	-13.4%	20.9%	10.7%	24.0%	22.3%
Incubation				5,573	12,184	18,318	25,494	7,364	15,514	24,135	32,825
	YoY			19.5%	29.3%	24.6%	26.9%	32.1%	27.3%	31.8%	28.8%
		Venture Capital segment		138	949	970	1,062	33	329	722	761
			YoY	-45.5%	134.9%	35.7%	32.8%	-76.1%	-65.3%	-25.6%	-28.3%
		Pet Lifestyle segment		5,192	10,737	16,573	22,859	6,639	13,692	20,991	28,654
			YoY	23.3%	24.3%	24.1%	24.8%	27.9%	27.5%	26.7%	25.4%
		HR Innovation segment		240	497	775	1,092	288	630	973	1,324
			YoY	21.8%	30.1%	22.4%	14.1%	20.0%	26.8%	25.5%	21.2%
		Fan Marketing segment		-	-	-	-	401	862	1,397	1,989
			YoY	-	-	-	-	-	-	-	-
		Other segment		-	-	-	442	-	-	-
			YoY	-	-	-	-	-	-	-	-
Internal transactions or transfer				-8	-13	-22	-38	-5	-16	-59	-96
Operating profit
Business Production				215	594	741	1,054	241	480	799	1,143
	YoY			220.9%	90.4%	13.3%	9.0%	12.1%	-19.2%	7.8%	8.4%
Incubation				-155	-286	-392	-1,160	-177	-285	-121	-372
	YoY			-	-	-	-	-	-	-	-
		Venture Capital segment		-108	-384	-582	-1,382	-115	-124	140	-168
			YoY	-	-	-	-	-	-	-	-
		Pet Lifestyle segment		-13	143	246	276	74	109	97	142
			YoY	-	-20.6%	-14.9%	-17.1%	-	-23.8%	-60.6%	-48.6%
		HR Innovation segment		-34	-45	-56	-54	-27	-65	-118	-137
			YoY	-	-	-	-	-	-	-	-
		Fan Marketing segment		-	-	-	-	-109	-205	-240	-209
			YoY	-	-	-	-	-	-	-	-
		Other segment		-	-	-	54	-	-	-
			YoY	-	-	-	-	-	-	-	-
Adjustments				-235	-454	-648	-905	-202	-428	-665	-938

Full-year FY03/22 results (out May 13, 2022)

Summary

FY03/22 results

Performance versus plan

The company does not make earnings forecasts due to the volatility of results at the Venture Capital segment, where earnings can vary greatly depending on conditions in the stock market and trends in initial public offerings.

Sales

FY03/22 sales were JPY35.6bn (+28.0% YoY).

Operating profit

The company booked an operating loss of JPY168mn in FY03/22 (versus a loss of JPY957mn in FY03/21).

Unrealized gains on investments

Effective Q1 FY03/21, the company changed the name of its reporting segments. The former Professional Services segment will now be the Business Production segment, the Venture Capital segment will retain its name, the Insurance segment will now be the Pet Lifestyle segment. The Other business segment was replaced by the new HR Innovation segment, which consists of subsidiary Work Style Lab (WSL), formerly included under the Other segment. For purposes of comparison, segment results for Q1 FY03/20 were recalculated to match the new reporting segment scheme.

Business Production business

Business Production segment

In FY03/22, the Business Production segment reported sales of JPY2.8bn (+22.3% YoY) and operating profit of JPY1.1bn (+8.4% YoY).

Under the Business Production segment, the company operates a consulting business with the concept of creating leading businesses of the next generation (“business producing”). In addition to providing strategic consulting services for major corporations to support business creation and strategic long-term growth initiatives, the company also offers M&A financial advisory services. It also manages a social impact bond (SIB) fund launched in July 2021. SIBs are a new framework involving public-private cooperation that helps solve social problems.

In FY03/22, new project orders held firm (+42.7% YoY), bolstered by increased demand from clients for business creation. The company invested in reinforcing human resources to enhance the business foundation, but segment profit grew thanks to higher-than-expected sales.

Incubation business

Under its Incubation business, the company counts the Venture Capital segment, Pet Lifestyle segment, HR Innovation segment, and Fan Marketing segment.

Venture Capital segment

In FY03/22, the Venture Capital segment reported sales (to external clients) of JPY761mn (-28.3% YoY) and an operating loss of JPY168mn (versus a loss of JPY1.4bn in FY03/21).

In the Venture Capital segment, the company mainly invests in and fosters startup companies.

The company resolved to dispose of Dimension Inc. in order to concentrate management resources on the Business Production business and curb investment volatility, and effected that transfer on October 1, 2021. Dimension Inc. is the company that operates Dimension Investment Partners Limited (DMS Fund), a fund that invests in Japanese startups.

The company booked capital gains from the sale of shares associated with the IPO of Slogan, Inc. and from the trade sale of its investee in India. However, capital gains fell short of expectations since an investee company slated for a major IPO withdrew its listing application just before DI's fiscal year-end. As a result, sales fell YoY and the segment logged an operating loss.

Pet Lifestyle segment

In FY03/22, the Pet Lifestyle segment reported sales of JPY28.7bn (+25.4% YoY) and operating profit of JPY142mn (-48.6% YoY).

The Pet Lifestyle segment consists of the pet medical insurance business operated by ipet Insurance, the largest company under the umbrella of consolidated subsidiary ipet Holdings. During FY03/21 ipet Holdings acquired Pet’s All Right, an online pet health consultation/pet-related information platform operator, making Pet’s All Right a subsidiary.

As mentioned previously, the company uses adjusted earnings to gauge the true profitability of its pet insurance business. The segment reported adjusted operating profit of JPY1.1bn (versus JPY705mn in cumulative Q3 FY03/21). The difference reflects adjustments to regular policy reserves and catastrophe reserves (excluding regular provisioning) to compensate for a change in its reserve calculation method (from the first-year income-expenditure balance method to the unearned premium method).

Sales growth in the Pet Lifestyle segment reflected continued strong growth in the number of policies in force, driven by an increase in new insurance customers amid robust pet-related demand. At end-FY03/22, the segment reported a total of 728,724 policies in force, up 106,655 from end-FY03/21. On the cost side, the segment saw increases in expenses (such as commissions and collection fees) stemming from the growth in insurance policies sales and the increases in the number of policies in force, and increases in net claims paid and loss adjustment expenses due to an increase in the number of insurance claims filed.

HR Innovation segment

In FY03/22, the HR Innovation segment reported sales (to external clients) of JPY1.3bn (+21.2% YoY) and an operating loss of JPY137mn (versus a loss of JPY54mn in FY03/21).

The HR Innovation segment consists of subsidiary Work Style Lab, Inc. (WSL), which operates a matching platform for freelance consultants and became a wholly owned subsidiary in August 2018.

While sales have tracked a growth trajectory since FY03/21, the company also continued to invest toward future growth. As a result, the segment logged an operating loss.

Fan Marketing segment

The Fan Marketing segment in FY03/22 booked sales (to external clients) of JPY2.0bn (JPY442mn booked under the Other segment in FY03/21) and an operating loss of JPY209mn (operating profit of JPY54mn).

The Fan Marketing segment centers on consolidated subsidiary PEACS (launched in February 2021), which handles the hobby and lifestyle media intellectual properties (IPs) business and the planning and production of digital marketing and digital services.

The operating loss resulted from an increase in expenses associated with accelerated structural reforms at PEACS, including reviewing existing businesses and focusing on growth businesses. Note, however, that earnings have gradually improved, and the segment turned a profit in Q4.

Company outlook for FY03/23

Summary

Owing to the inherent difficulties in projecting sales and earnings at some of its businesses, the company does not issue a public forecast. While projecting sales and earnings for its Business Production segment is fairly easy, making projections for other businesses is more problematic. More specifically, under Incubation, the Venture Capital segment derives most of its sales from the sale of stock holdings, making it subject to the state of the stock market in general and conditions in the IPO market in particular.

Business Production business

The company reports that orders for new projects have shown steady growth in FY03/22, and accordingly projects sales of JPY3.3bn (+16.0% YoY) in FY03/23.

Meanwhile, it expects operating profit to remain largely flat YoY as it plans to continue aggressive investment into bolstering human resources, among other initiatives. From FY03/24 onward, however, DI will aim to achieve profit recovery in this business following the turnaround in sales, and will also work to establish a solid and stable earnings base for the medium to long term.

Incubation business

ipet Holdings: Company forecast for FY03/23

For FY03/23, ipet Holdings projects recurring revenue of JPY32.9bn (+14.7% YoY), the gains stemming largely from growth in insurance underwriting. ipet Holdings sees adjusted recurring profit coming in at JPY1.1bn (-40.7% YoY) and adjusted net profit coming in at JPY770mn (-35.8% YoY), as earnings are weighed down in large part by increased spending on systems development and other measures aimed at bringing its combined ratio down and increasing profitability over the long term.

Medium-term management strategy

Company’s view on numerical targets (recurring profit/loss)

Although the company has not disclosed a medium-term business plan, it says it aims to achieve recurring profit (adjusted for insurance items) of around JPY2.0–2.5bn in FY03/24 (versus a recurring loss of JPY233mn in FY03/21). The company will drive recovery in profitability by means of investments in the Business Production business, while building a stronger, more stable earnings base. The company will also launch a business model that utilizes financial functions and steadily put into place a business foundation that yields profits.

Business Production business target: Sales of JPY4.0–5.0bn, profit margin above 20%.
Incubation business target (venture investment, buy-and-hold business investment): Balance of capital investments JPY4.0–5.0bn, internal rate of return (IRR) above 15%.

Structural reforms

Top management of the company changed in June 2020. The founding members passed the leadership baton to a new management team to carry on the company’s founding spirit. The new team is pursuing structural reform initiatives (see below). More than 20 years have passed since the company was founded in April 2000. New management believes that a relentless pursuit of growth, shaped by the company’s history, will enable DI to meet shareholder expectations while achieving its mission.

The four structural reform initiatives are: realigning the investment and procurement profile of venture capital investment, strengthening its core competency of business production, utilizing financial functions to expand the Business Production business, and strengthening corporate governance. Through these initiatives the company aims to fulfill its motto of “helping people,” “generating profits,” “growing,” and “sharing,” thereby maximizing shareholder value. By moving forward with these structural reform initiatives, the company is aiming to both achieve its mission and grow profits, as well as mitigate volatility while making a bigger impact.

Realigning the investment and procurement profile of venture capital investment

In the course of discussions and deliberations under the new governance structure, the company reviewed the overall policy and decided to separate the domestic investment fund Dimension (this fund will be deconsolidated from Q3 FY03/22). The focus when considering investments will be on projects associated with Business Production. In the Venture Capital business, the company will pare down the investment of its own principal. There will be no new investment in Japan, while activity in India will be focused on investing where synergy is expected with the Business Production business.

Strengthening its core competency of business production

By increasing headcount and forming tie-ups with outside partners, DI will seek to build a stronger, more stable earnings base. The company aims to double sales in FY03/24 compared to FY03/21. By being theme-driven, the company will strive to create strong businesses, implementing strategically focused initiatives in particular. Further, by being customer-driven, it will strive to offer customer-centered support that meets real issues facing customers’ business creation goals. In producing new industries, by being concept-driven, the company will create new business ecosystems through tie-ups with financial institutions.

Utilizing financial functions to expand the Business Production business

To address issues involving environmental and social sustainability, the company will bring together business production and financial functions to go beyond the conventional boundaries separating industries and the public and private sectors, endeavoring to have a greater social impact while at the same time building a business model that enables the pursuit of solid earnings.

Resolving issues regarding environmental and social sustainability through business requires creating ecosystems that transcend traditional barriers between industries and the public and private sectors, and making use of financial tools to fill the gaps in project timing and funding. The company will build financing mechanisms into its business model to sharpen its own competitive strengths in expanding businesses while pursuing more partnerships with financial institutions promoting ESG investment.

Strengthening corporate governance

DI will appoint a majority of outside directors to the board of directors (six out of nine directors). It hopes not only to encourage discussions about strategy, but also reinforce the monitoring of executive responsibilities by having outside directors make up the core of the Nomination and Compensation Committee.

Target business areas

Relationship to Japanese government’s effort to promote SDGs, “Eight priority issues”

The United Nations summit in 2015 agreed on 17 sustainable development goals (SDGs) and 169 targets in addressing issues facing global society. From the SDGs, the Japanese government chose eight priority issues to promote nationwide. In line with this, DI is pursuing, or preparing to pursue, initiatives in the following areas.

Achievement of good health and longevity: DI is preparing a social impact bond to address long-term care and preventative medicine needs.

Creation of growth markets, regional revitalization, and promotion of technological innovation (digital transformation, biotechnology, sustainable cities, etc.): The company is implementing initiatives through its Venture Capital and other Incubation businesses.

Sustainable and resilient land use, promoting quality infrastructure: The company is preparing social impact bonds to address prevention of infrastructure collapse.

Energy conservation, renewable energy, climate change and natural disaster countermeasures, and sound material-cycle society (carbon neutrality by 2050, virtuous economic-environmental cycle, etc.): The company says it wants to establish a decarbonization fund.

Strengthening of the means and frameworks for implementation of the SDGs: The company is preparing to launch an Asian impact investment fund to support the development of emerging economies through public-private partnerships.

Start of Japan’s first SIB project

In cooperation with Toyota city in Aichi Prefecture, DI has started a new business to address long-term care and preventative medicine needs, making use of social impact bonds (SIBs). SIBs are a scheme that allows private investment in the activities government and local governments take to tackle social issues, while government entities draw on the expertise and capital of private companies. Investors receive a performance-based payment from the governments.

Dream Incubator plans to harness the strengths acquired through its business to date to: 1) design models or schemes to solve social problems; 2) liaise with governments, create specific projects, execute and coordinate the projects; and 3) raise funds through networks with investors and others, and manage the funds. The company also plans to invest in projects as an active participant.

In addition to Toyota City, the company is in talks regarding specific projects with Development Bank of Japan, Maebashi City, and other local governments. SIBs have potential in Japan for promoting efforts to reduce the number of elderly people requiring nursing care, building infrastructure such as bridges, promoting employment, assisting effective urban planning, and constructing disaster prevention and mitigation facilities. In elderly nursing care, for example, an estimated JPY3–4tn could be saved in long-term care costs if seniors’ healthy lifespans were extended by encouraging their social participation.

There are many challenges to the full-scale development of SIB schemes. Because SIB projects require enlisting the participation of many diverse organizations, while what constitutes a project’s “success” may need to be defined in advance if there is no precedent. Another problem is the fact that multiple organizations within local governments may be involved. A sustainable business model also needs to be designed. The company is confident it has the business production capabilities to overcome these challenges. It seeks to change society for the better by actively harnessing its capabilities in running projects.

Business and capital alliance with Dentsu Group

DI’s strengths are in business production, through which it connects the business creation efforts of major companies to social issues. Customers are increasingly demanding one-stop support in this area, from conceptualization and strategic planning through to execution. The company hopes to strengthen these capabilities through the alliance with Dentsu Group. Dentsu Group is a leading marketing communication firm, but in recent years has made moves to go beyond marketing and is examining ways to strengthen its organizational capabilities to meet customers’ business creation needs. Recognizing their complementary strengths and value provided, the two companies entered into the alliance with the intent of partnering in business production support and achieving mutual growth. By collaborating with Dentsu Group in providing management and project support to customers, DI also hopes to bolster its earnings base.

Reference: Company’s thinking on its own enterprise value

NAV

Dream Incubator has calculated a theoretical shareholder value as of end-FY03/21 of approximately JPY32.4bn (or JPY3,244 per share) based on the sum of the estimated value of all its individual businesses and FY03/21 results. It expects the theoretical shareholder value to rise to about JPY50.0bn by FY03/23 (assuming CAGR of 20% from FY03/20 to FY03/23). However, as of December 16, 2021, there was a large gap between this theoretical value based on a sum-of-the-parts calculation and the actual market value of JPY13.3bn (JPY1,279 per share).

In the Incubation business, the company invests in other companies and using knowledge, expertise, and other strengths it has cultivated in strategic consulting, raises their corporate value; as a final exit strategy, it then sells the shares it owns, thereby securing profit. However, when it determines that listed companies in which it has invested have corporate values with the potential to rise even higher than current market appraisals, it does not normally sell their shares at that time.

The company believes that it is not possible to appropriately express its corporate value through just the income statements and balance sheets it prepares, which are based on the Japanese GAAP standard (securities other than trading securities are not marked to market). For this reason, and also based on demand from several institutional investors in Japan and overseas, the company looks to disclose its net asset value (NAV; a figure calculated based on mark-to-market valuations of assets) more actively in the future. The company acknowledges that there is room for improvement in terms of its evaluation range and methods, and it plans to refine these elements moving forward.

NAV calculation method used by the company

Dream Incubator calculates its enterprise value using a sum-of-the-parts valuation model as follows.

Venture capital investment and business investment: (1) Listed companies: market capitalization at fiscal year-end x DI’s holdings; (2) Unlisted companies (valuation method to be reviewed as necessary going forward): book value of investment stake at end of fiscal year ± mark-to-market valuation difference (recent financing prices or third-party transaction prices); (3) Holdings that cannot be valued using the methodologies in (1) and (2): book value without revaluation.

Business Production: five-year average after-tax profit x P/E of sector peer.

Theoretical shareholder value based on FY03/21 results

Approximately JPY32.4bn in total (JPY3,244 per share; value calculated by subtracting net debt from the total value of stocks in the Business Production business, business investment, and venture capital investment): Up JPY4.0bn from end-FY03/20* (+JPY433 per share)

*Breakdown of the JPY4.0bn difference since end-FY03/20: (1) +JPY2.4bn in Business Production, (2) +JPY2.5bn in business investment, (3) -JPY800mn in venture capital investment, (4) -JPY100mn in net cash.

Dream Incubator: Calculation of Net Asset Value (NAV)

			End FY03/20	End FY03/21	Note
			End FY03/20	End FY03/21	Note
(JPYmn)			[a]	[b]	(Changes from [a] to [b], and other comments)
Total			28,400	32,400
	YoY		-5.6%	5.2%

	Per share (JPY)		2,811	3,244
	Business Production		9,900	12,300	- Five-year average profit declined; PER assumption: 34x (up from 25x previously)
		YoY	-2.0%	6.0%
		% of total	34.1%	37.2%
	Business Investment		11,500	14,000	- Share price recovered for ipet Insurance Co., Ltd. (consolidated subsidiary)
		YoY	-14.8%	12.0%
		% of total	39.7%	42.3%
	Venture Capital		7,600	6,800	- Recovered large investments - Large impact from rise in valuation losses due to increased impairment losses
		YoY	11.8%	-4.2%
		% of total	26.2%	20.5%
	Subtotal		29,000	33,100
		YoY	-4.6%	6.1%
		% of total	100.0%	100.0%
	Net debt		-600

Source: Shared Research, based on company data
*Note: The proceeds from the sale of venture capital investments are used to fund new venture capital investments

Business

Business description

Consulting firm differentiating itself with “business producing”

Business overview

Dream Incubator (DI) is a professional consulting firm founded in April 2000. The company’s objective is to produce and develop businesses. It has two mainstay businesses: Business Production and Incubation.

In Business Production, the company provides business producing support aimed at creating leading businesses of next generation, growth and business strategy support, M&A advisory, and assistance in developing core management, to major corporations (domestically and overseas) and government agencies. Particularly characteristic of the company are its business producing support (more below), which drives future growth, and its growth strategy design support.

In its Incubation business, the company conducts venture capital investment (Venture Capital) and buy-and-hold business investment, leveraging its principal investments to develop venture companies deemed to be integral to new industries. In its overseas operations, the company aims to support innovation around the world by forming strategic partnerships with promising venture capital companies in the US, China, and India so as to jointly engage in investment and growth. In addition, Dream Incubator also operates the DI India Digital Investment Fund, which invests in Indian technology startups, and the Dimension Investment Partners Limited fund, which invests in domestic startups.

In terms of accounting, the company books venture investment profits when shares in the invested company are sold, whereas for buy-and-hold business investments, it books consolidated profits or losses in proportion to the ownership ratio in the invested company.　

Venture capital investment (Venture Capital): Limited-stake investment (about 20% or less) focused on providing support with risk money. As of end-FY03/21, the company had a principal investment balance of JPY5.8bn (book value), including investment in 51 companies and LP (limited liability) investment in other companies’ funds. DI India Digital Investment Fund had AUM of JPY1.5bn and the Dimension No. 1 fund had AUM of JPY3.5bn.

Business investment: Investment with deeper commitment secured by obtaining near-majority stakes (or higher). As of end-FY03/21, the company held the following three business investments:

ipet Holdings, Inc. (56.1% stake): Second-ranked pet health insurance business in the industry

Boardwalk Inc. (22.14% stake at time of investment in September 2015; 30% as of March 31, 2019 [46% including dilutive shares]; non-consolidated): Operates event ticket sales business; preparing for an IPO (in addition to the company, NTT Docomo, Inc. [TSE Prime: 9437] and Information Services International-Dentsu, Ltd. [ISID; TSE Prime: 4812] are primary shareholders)

Work Style Lab, Ltd. (100.0% stake): Matching platform business for freelance consultants

Dream Incubator’s vision for the future

To mark the 20th anniversary of its founding in 2020, Dream Incubator redefined its mission, vision, and value as follows.

Mission: Create businesses and change societies

Vision: Become the first choice of challengers

Value:：Advance beyond boundaries

Envision beyond boundaries of areas

Formulate beyond boundaries of customaries

Partner beyond boundaries of organizations

Challenge beyond boundaries of ourselves

Dream Incubator provides business investment and incubation services and regards itself as the “The Business Producing Company.” It is committed to continue “creating businesses and changing societies” as its mission in the future. Its vision is to “become the first choice of companies and managers in search of a challenge.” In other words, the company aspires to “be a partner in the pursuit of new challenges.” To produce new businesses, Dream Incubator needs to envision new challenges, formulate strategies, and assemble partners to tackle such challenges. In each of these processes, the company believes the most important value to a business producer is to “transcend boundaries.”

Business producing support

The company states that the core value it offers lies in its ability to "produce business.

The company said its core value is “business producing,” referring to tackling social challenges, planning businesses with visions and ideas beyond industry barriers, formulating strategies, gathering reliable partners, and creating (or producing) added values. The company said that it has produced new businesses beyond the barriers of countries, sectors, major companies, venture businesses, and borders since its founding.

Other major consulting firms typically have strengths in regulated industries, such as banking, insurance, telecom, and medical services. Most of these firms also have teams of consultants specializing in particular sectors. However, many of Dream Incubator’s clients are outside these regulated sectors. The company’s consultants (business producers) do not work in industry-specific teams.

The company’s clients are seeking to create new businesses and establish new pillars of operations by considering medium- to long-term changes in their business environment. Since Dream Incubator’s business producers do not work as part of industry-specific teams, they could, for example, handle two separate projects that cut across different sectors in a given month. As a result, the company can create new businesses that span multiple industries.

The company’s corporate value comprises its assets (venture capital companies and businesses) and its business creation and development mechanism (a combination between its business producing support, which it cultivated in strategic consulting, and its investment and business development). The company is working to ensure continued growth of its own corporate value.

Sales and net income by segment

Source: Shared research based on company data

Dream Incubator’s ecosystem

Through its Business Production segment (strategic consulting), the company has gained society- and industry-level perspectives that extend beyond the boundaries of management and its own businesses. The company is utilizing these perspectives in the Incubation business. On the other hand, in this segment, the company has also cultivated substantive management abilities through working with investees from the perspective of an interested party, as well as networks of global and perceptive entrepreneurs and capitalists. These advantages enable the company to make effective and implementable consulting strategy proposals.

In its overseas operations, the company aims to support innovation around the world by forming strategic partnerships with promising venture capital companies in the US (the Raine Group LLC), China (Legend Capital), and India (Blume Ventures), so as to jointly engage in investment and growth. Dream Incubator says that the alliances it enjoys with domestic and overseas partners serve as a source of added value for its Strategic Consulting Services and Incubation businesses.

Moreover, businesses produced by these services become a catalyst for new and wider networks. The company hopes to cultivate such mutually beneficial relationships by increasing partner companies as it looks to further strengthen its business producing ecosystem.

Dream Incubator’s ecosystem

Source: Company data

Global investment framework

Dream Incubator is focusing its energy on Japan and Asia (particularly India), and is putting together investment strategies for each of these regions. The company aims to establish a network that can keep excellent investment opportunities from slipping away and to systematically expand that network once it is in place.

In Japan, which it considers its home base for global expansion, Dream Incubator is focusing on uncovering the next generation of promising young entrepreneurs. The company uses its own media (DIMENSION NOTE at http://venturenavi.dreamincubator.co.jp/) and SNS to publish interviews with entrepreneurs with proven track records. It also holds closed study meetings for entrepreneurs.

In Asia (particularly India), which it considers the next frontier, Dream Incubator is focusing on fields that have been displaying extraordinary growth (especially B2C), making investments jointly with influential local venture capital investors. In India, it has invested in 19 companies involved in fields including mobile entertainment, fintech, consumer tech, healthcare tech, sharing economy, and HR tech. Furthermore, it established the DI India Digital Investment Fund in April 2018 (details follow).

In the US, which it considers the epicenter of innovation, Dream Incubator is focusing on the most advanced businesses and technical fields, making investments jointly with influential local venture capital investors. It has invested in the latest technology, including digital tools, hardware tech (university-originated technology startups), and digital media, and aims to use this technology in business producing.

Strategic partners by country

Country	The US	China	India
Company	The Raine Group LLC	Legend Capital	Blume Ventures
Profile	VC focusing on digital media; founder is an investment banker specializing in media; advisory group comprised of founders of major media firms.	Subsidiary of major private enterprise; founder of this VC has 30-year experience in the IT sector; of the over 300 companies invested, more than 50 were IPOs and about 40 M&As.	Largest early-stage VC in India; founder has over 15 years’ experience in the TMT sector; biggest number of investments in India, surpassing major European and US VCs.

Source: Shared Research based on company data and websites from partner companies

DI India Digital Investment Fund

In April 2018, Dream Incubator established the DI India Digital Investment Fund as a subsidiary enterprise to invest in technology startups in India (see the Recent updates section). Dream Incubator completed the first round of fundraising, securing a total of JPY1.5bn in committed capital, and investment activities commenced in April 2018. This is the first venture capital fund specializing in India to be operated by a Japanese company alone. Via this fund, Dream Incubator plans to further accelerate its investment activities* in India, which it expects to grow into a major focal point on the global startup ecosystem. In order to promote the creation of business opportunities between Japanese and Indian companies, Dream Incubator aims to nurture the fund into a platform for joint Japan-India digital business initiatives. In the mobile entertainment field, the company will conduct investment activities in partnership with one of the fund’s investors Akatsuki Inc. (also refer to Segment breakdown, Incubation section, fund diagram).

*Dream Incubator began venture capital activities in India in 2015 and as of April 2018 had invested in 10 startups (including non-public companies) chiefly in the area of B2C.
Venture capital in India:
In India, the last and fastest growing frontier, the startup ecosystem has developed rapidly.
・Total 2012–2016 venture capital investment exceeded USD20.0bn. (Source: KPMG, “Venture Pulse Q4 2016 Report”)
・The number of tech startups has exceeded 5,000. (Source: NASCOM: “Indian Startup Ecosystem – Traversing the maturity cycle”)
・India has 10 unicorn companies. (Source: CB Insight, “The Global Unicorn Club (as of March 2018)”)
・Major US and Chinese IT companies (US: Google, Apple, Facebook, Microsoft, and Amazon; China: Baidu, Alibaba, Tencent, and others) are expanding investment. In particular, in light of the rapid increase in smartphone use, leapfrog-type development (in which technology or business develops rapidly, skipping over typical developmental phases) is occurring in the areas of retail and distribution, finance, media and entertainment, medicine, and mobile computing. This has brought significant change to India’s economy and produced numerous globally active companies and entrepreneurs.

Dimension Investment Partners Limited

Dimension Investment Partners Limited invests in Japanese startups. Dream Incubator has established the Dimension No. 1 fund (maximum size of JPY3.5bn; investment period of nine years) with investment from Mizuho Bank, Ltd., Akatsuki Securities, and individual investors. The fund is managed by Dimension Investment Partners Limited (51.3% of voting rights held by DI as of end-March 2020). It will invest in roughly 20 investee companies, and work closely together with these companies to support them. Initial investees will be startups in the nascent, early, or later (but pre-IPO) stages of development. The fund will aim to support a large number of companies operating in advanced technology fields ranging from Internet services to deep tech.

Segment breakdown

Dream Incubator consists of two businesses: Business Production (formerly Professional Services) and Incubation.

The company’s consolidated reporting segments are Business Production (primarily comprising the former Strategic Consulting segment) and Incubation, which breaks down into the Venture Capital segment, the Pet Lifestyle segment (formerly the Insurance segment), and the HR Innovation segment (formerly the Other segment)^*1*2.

*¹ When announcing Q1 FY03/21 results, the company changed the name of its reporting segments. The former Professional Services segment became the Business Production segment, the Venture Capital segment retained its name, the Insurance segment became the Pet Lifestyle segment. The Other business segment was replaced by the new HR Innovation segment, which consists of subsidiary Work Style Lab (WSL), formerly included under the Other segment.
*²Before FY03/17, the company had four consolidated reporting segments: Strategic Consulting Services, Venture Capital, Insurance, and Other. Before FY03/16, Dream Incubator had six segments: Asset Liquidation and Intellectual Rights Investment in addition to the above four segments (the former Consulting segment was renamed Strategic Consulting Services when FY03/17 results were announced). However, in January 2016, the company sold its entire stake in consolidated subsidiary ReVALUE Inc., which operated its Asset Liquidation segment. In addition, the company in June 2015 sold the trademark rights to Tokyo Girls Collection, which was a core asset of the Intellectual Rights Investment segment.
^*3When accounting for investees to which its commitments meet or exceed predetermined levels (stakes of 15% or more, executive dispatch, etc.), the company may apply the equity method or include the investee as a consolidated subsidiary in accordance with accounting standards. Similarly, in accordance with segment disclosure standards, the company is sometimes required to list segment information separately for an investee whose earnings results exceed pre-determined scales. In light of these standards, the Insurance segment was listed separately as of March 31, 2019.

In terms of its business investments (ipet Holdings and two other companies as of end-FY03/21) the company makes investments with the goal of developing investees and not merely to control or consolidate them. The company may, in some cases, book periodic gains or losses from its investees, but even in these cases, it plans to ultimately sell its shares in these companies, as it does for all companies targeted for investment and development. However, at the time of sale, the company comprehensively considers factors including stock market conditions, earnings trends and growth potential of the companies for which it provides support, and the progress of that support. It then makes final decisions with the goal of securing profit from the sale of shares in the investees. As a result of this careful consideration, the company may sell shares relatively shortly after acquiring them, or it may sell them after retaining them for long periods of time.

Sales by segment and composition ratio

(JPYmn)		FY03/18		FY03/19		FY03/20		FY03/21
(JPYmn)		Amount	% of total	Amount	% of total	Amount	% of total	Amount	% of total
Business Production		3,454	18.8%	2,556	12.3%	2,679	11.8%	2,319	8.3%
Incubation		14,964	81.2%	18,192	87.9%	20,088	88.3%	25,495	91.8%
	Venture Capital segment	2,752	14.9%	2,867	13.8%	800	3.5%	1,062	3.8%
	Pet Lifestyle segment	12,212	66.3%	14,876	71.8%	18,317	80.5%	22,859	82.3%
	HR Innovation segment	-	-	-	-	957	4.2%	1,092	3.9%
	Other segment	-	-	448	2.2%	-	-	442	1.6%
Inter-segment transactions		-	-	-43	-0.2%	-12	-0.1%	-38	-0.1%
Consolidated sales		18,418	100.0%	20,705	100.0%	22,755	100.0%	27,776	100.0%

Source: Shared Research based on company data
Note: Professional Services figures for FY03/16 and FY03/17 only include results from the Strategic Consulting segment.

Business segments

Source: Shared Research based on company data

Business Production (formerly Professional Services; 8.3% of total sales in FY03/21)

This segment comprises the strategic consulting business, the core business for the company since its establishment by former employees of Boston Consulting Group (BCG), and DI Asia (merger between the former DI Vietnam and DI Marketing). (Shared Research note: DI Asia was unable to move into the black for full-year FY03/19, so it revised its business portfolio. It transferred its market research business and consumer panel to Macromill, Inc. and one other company in October 2019, and will concentrate its resources on coordinating with the Business Production and Incubation segments.)

In Business Production, the company provides various services in addition to strategic consulting services for major corporations and government entities. The segment, for example, offers companies hands-on support for recruiting partners, creating policies, and driving both internal and external stakeholders. (Dream Incubator provides hands-on support by participating in the management of companies in which it invests.) The segment also provides M&A financial advisory services and assistance in training management candidates.

About 70% of projects have themes focused on creating pillars of client companies’ businesses in five to ten years (business creation and growth strategies): 36% are in business producing (business creation), 37% are in business strategy/growth strategy, and 26% are other project types (all figures are based on respective shares of results from FY03/15–FY03/19).

As mentioned above, DI Asia had been a part of the Professional segment but its market research business and consumer panel were transferred in October 2019. It had been a consolidated subsidiary formed as the result of a merger between Dream Incubator Vietnam Joint Stock Company (DI Vietnam)—a consolidated subsidiary that accounted for a portion of the Strategic Consulting Services segment—and DI Asia Inc. (formerly DI Marketing Co., Ltd.), which was previously included in the Other segment. In an effort to expand its services in Asian regions, the company had merged the two companies and made a subsequent revision to its classification of business categories, including the newly formed DI Asia in its Strategic Consulting Services segment, which was newly classified under the Professional Services segment.

As the group’s first overseas base, the former DI Vietnam has been providing strategic consulting for markets in all ASEAN regions, conducting investment in local companies, and performing incubation services since 2007.

The former DI Marketing was established in Vietnam in 2014 and performed online and strategic research, primarily for Asian markets. DI Asia had about 1.65mn panel members in Southeast Asia as of March 31, 2019. As mentioned above, its market research business and consumer panel were transferred in October 2019.

The company calls consulting practices in Business Production “business producing,” (more in the Business overview section) saying that while conventional management consultants help to solve management and strategy issues, its approach is focused on putting together projects and ensuring execution for projects where the client may know what needs to be done but not how and with whom to do it. Dream Incubator sees its role as that of a producer and uses the analogy with movie production—bringing together the script, the director, the funds, and other components necessary to make it happen. The company not only proposes a project to the client but ensures it does so with all necessary execution components already in place. Dream Incubator then receives a consulting fee for helping to manage the project.

Fee structure

The total fee of a Business Production project is calculated as a sum of monthly fees, based on the number of consultants (called “business producers”) engaged on the project. On average, there are three consultants and one officer (executive officer) involved in the management of the project. The consultant’s fee is based on each consultant’s monthly salary plus the appropriate gross profit margin.

On average Dream Incubator’s consulting projects tend to last four to five months, with longer ones taking up to a year.

Strategic consulting firms usually do not have a sales department. Global consulting firms are often partnerships, where partners pitch for projects. Dream Incubator employs a similar system, whereby a consultant joining the firm as a business producer, can be promoted to manager, and to executive officer. The promoted executive officer will mainly be responsible for bringing new projects, taking advantage of the network and trust built with clients throughout the years.

The business producer and manager level employees are generalists but many will specialize in a particular expertise when promoted to a senior level position.

Expertise and project structure

Dream Incubator provides clients from wide-ranging sectors strategic consulting and hands-on help in business producing on a diversity of themes.

A standard business production project is structured as follows: Create a concept; develop a strategy; find people and organization interested in getting involved; develop structure, define rules and responsibilities; champion the project both inside and outside the firm; execute for results.
Further, the area of expertise is not categorized by industry but is based on themes (for example, environment, energy, and technology). Consulting projects are carried out by teams formed under the leadership of executive officers based on areas of expertise. Thus far, Dream Incubator has undertaken the following roster of projects, working with not only private enterprises but also government and national organizations.

Themes of major projects

Theme	Outline
Assistance for business production	Creation of major projects for the next generation
New business and growth strategy	To design core business in a new field; to draw up a strategy to create a market with a new product
Mapping out marketing and sales strategy	To work out a brand strategy; to advise on strengthening sales capability
R&D and technology strategy	To commercialize next-generation technology; to evaluate business feasibility of technological seeds and to audit strategy
Overseas expansion advisory	To support establishment of R&D centers overseas; to map out strategy for entering the global market
Business vision and medium-term management plan	To set business vision; to advise on drawing up medium-term management plan

Source: Shared Research based on company data

Dream Incubator’s clients

Dream Incubator’s strategic consulting business tends to focus on leading firms. In FY03/19, 14 of its 27 clients (about half) were among the biggest players in their respective industries. Eighteen of these companies—including the aforementioned 14—were among the top three in their sectors. Dream Incubator generated 70.4% of its overall sales from such clients in FY03/19.

Client ranking by recurring profit

Recurring profit	Client' ranking in each industry (no. of companies)
	1st	2nd	3rd	4th and below
JPY500bn and more	5
JPY100–500bn	6	1
JPY50–100bn	2
JPY10–50bn	1	2	1	4
Less than JPY10bn				5
Total number of companies	14	3	1	9
% of sales	70.4%	13.0%	1.2%	15.4%

Source: Shared Research based on company data

M&A advisory

Dream Incubator’s M&A advisory business has been witnessing an active deal flow of cross-border projects in India and other parts of Asia. In addition to identifying local needs for selling companies and businesses, the company, upon request from Japanese corporations, actively trolls for potential candidates for acquisition. Among its notable achievements are its advising of Tosoh Corporation on the acquisition of an Indian company, Lilac Medicare Private Limited, and advising of Takasago Thermal Engineering Co., Ltd. on share purchase of another Indian company, Integrated Cleanroom Technologies Private Limited.

Main cross-border projects

Client	Target company	Country	Field
Takasago Thermal Engineering Co., Ltd.	Integrated Cleanroom Technologies Private Limited	India	Industrial goods (Engineering)
Tosoh Corporation	Lilac Medicare Private Limited	India	Industrial goods (Healthcare)
AIR WATER INC	Ellenbarie Industrial Gases Limited	India	Industrial goods (Chemicals)
JAPAN MATERIAL Co., Ltd.	Aldon Technologies Services Pte. Ltd., ADCT Technologies Pte. Ltd.	Singapore	Industrial goods (B2B services)
Nippon Paint Co., Ltd.	BOLLIG & KEMPER GmbH ＆ CO.KG	Germany, France	Industrial goods (Chemicals)

Source: Shared Research based on company data

Recruiting and retaining talent

Employing and retaining talented staff is an essential characteristic of the consulting business. According to management, Dream Incubator generally ranks as one of top firms that students graduating from top universities in Japan would want to work for, along with the likes of Goldman Sachs, Boston Consulting Group (BCG), and McKinsey & Company. Consequently, the company says it has no trouble hiring promising graduates. Dream Incubator only makes offers to a small number of what it sees as exceptionally talented students. The company hired only 62 graduates over the past 17 years leading up to 2019 (33 from the University of Tokyo, seven from Kyoto University, three from the Tokyo Institute of Technology, five from Waseda University, four from Hitotsubashi University, and three from other institutions).

In addition, Dream Incubator maintains that one of its core strengths is the high staff retention. The company says that since establishment it put a particular emphasis on respecting and nurturing every staff member, and eschewed the “up or out” (advance or leave) type of evaluation system adopted at many global consulting firms.

In order to grow sales in the consulting business, it is necessary to either develop a track record of large-scale consulting projects and raise sales per consultant, or increase the number of consultants. The company is doing both. Thanks to high retention, the number of consultants working at Dream Incubator has been rising steadily. The company maintains that against the backdrop of many international consulting firms finding Japan a difficult market and shrinking or withdrawing, Dream Incubator’s presence and mind share among clients has been growing.

		FY03/11	FY03/12	FY03/13	FY03/14	FY03/15
Consultants (Business Producers)		50	57	65	71	69

Source: Shared Research based on company data

Incubation (91.7% of total sales in FY03/21)

In the Incubation segment, Dream Incubator invests its own principal and principal from a fund to develop venture companies deemed integral to new industries.

When investing, the company determines an investment amount based on the developmental stage, capitalization, and support requirements of the target company, resulting in anywhere from small holdings of less than 5% to large holdings of over 50% (venture capital investment: limited share, mostly supplying risk money; private equity investment: high share, mostly business strategy support).

When Dream Incubator deems it can accelerate the growth of an investment target by providing not just capital injections, but also business support, it acquires a share suited to its management commitment and conducts management support (private equity investment).

Venture Capital segment (3.8% of sales in FY03/21)

The Venture Capital business invests in promising businesses in Japan and overseas. The company generally invests in companies where, as a principle, it can take a controlling interest to have a say in how the business is run. On the other hand, the general discipline is to exit the venture if profitability is not imminent.

Given that the company commits its own capital, Dream Incubator had JPY6.7bn (+5.4% YoY) of investment securities on its balance sheet as of end-FY03/21.

For those investments where the company maintains it has sustainable growth prospects, it would consider making additional investment and sending professional, moving the investee to its “buy-and-hold-indefinitely” business investment segment.

Domestically, Dream Incubator has invested JPY1.7bn (book value) in 26 companies (as of end-FY03/21, excluding post-IPO; only principal target companies with book value of JPY2.0mn or more). The company commented that in Japan, support of venture firms by venture capitalists tends to be very limited as the latter invested in broad, thinly spread portfolios to reduce their own risk. Dream Incubator maintains this to be one reason why so few globally recognized ventures were born in Japan. The company prides itself on not simply allocating risk capital but helping the investees develop business strategies and sending personnel to assist in realizing them. The company aims to nurture promising ventures into leaders of emerging industries through this intensive commitment. As a result, Dream Incubator says it tends to own a higher percentage of each investee compared to the standard Japanese venture capital convention. In select cases, the company may increase the stake to a majority or outright ownership. In the digital media field, the company plans to utilize its network and conduct venture investments in the form of club deals.

Overseas, DI has invested JPY1.5bn (book value) in 24 companies in India, and JPY20mn (book value) in one company in the US (as of end-FY03/21).

Recent track record

	IPO	Stake	Business description
Alue Co., Ltd.	April 2018	n.a.	Training service for working people utilizing HR development data and machine learning technology
ipet Insurance Co., Ltd.	December 2018	56.9%	Medical insurance business for pets
LTS, Inc.	December 2017	16.5%	Development and operation of renewable energy power facilities
Renova, Inc.	February 2017	0.5%	Work style reform support leveraging robotics, AI and BPM
Renet Japan Group, Inc.	December 2016	1.2%	Online recycle business
Mynet Inc.	December 2015	2%	Game services targeting smartphones
Rosetta Corp.	November 2015	7%	Next generation translation using artificial intelligence
Union Community Inc.	July 2014	11%	Fingerprint identification equipment development and sales
DLE Inc.	March 2014	12%	New character development and marketing services
Allied Architects, Inc.	November 2013	17%	Digital marketing using SNS
Sanwa Company Ltd.	September 2013	21%	Online sales of imported construction materials
Photocreate Co., Ltd.	July 2013	12%	Online photo shop
Star Flyer Inc.	December 2011	1.7%	Airline company
eBook Initiative Japan Co., Ltd.	October 2011	5%	Sales of e-books

Source: Shared Research based on company data
Note: Percentage owned at the time of IPO; includes diluted shares

Asia

Dream Incubator, together with ORIX Corporation plans to invest in growing domestic demand sectors in Vietnam, such as consumer goods, foods, healthcare, and retail. The investment vehicle is the DI Asia Industrial Fund (DIAIF), launched in June 2010 with JPY5.0bn in assets under management. The company and ORIX invested JPY1bn each into the fund. The fund’s first investment was in a dairy beverage manufacturer (37.1% stake), and the fund’s second investment was in a medical equipment sales company (31.1%. stake). Consequently, the company exited out of one of its investments during the FY03/13 term, and achieved an internal rate of return (IRR) of approximately 50%.

In FY03/14, DIAIF acquired around 25% in Santedo Corporation as the third investment. Santedo is a holding company that owns a drug wholesaler and a chain of pharmacies in Vietnam. Duy Tan Pharmaceutical Joint Stock Company, the wholesaler of generic pharmaceuticals under Santedo, has exclusive rights to sell products of TEVA Pharmaceutical Industries, Ltd., the world’s biggest maker of generics, in Vietnam. Duy Tan has built a wide distribution network into domestic hospitals and pharmacies. Meanwhile, Pha No Pharmaceutical Joint Stock Company is Vietnam’s largest private-sector pharmacy chain, which operates 22 pharmacies in Ho Chi Minh City.

Santedo plans to use the investment funds from DIAIF to establish and acquire additional pharmacies. DIAIF made its fourth investment in Q2 FY03/15 in Me Sa Asia Pacific Trading Services Company Ltd. (MESA), a major Vietnamese wholesaler of daily necessities and consumer products. With this, the fund’s investment phase ended and, at the time of writing, the fund is generating returns.

Dream Incubator in April 2018 established DI India Digital Investment Fund as a subsidiary enterprise to invest in technology startups in India. The company completed the first round of fundraising, securing a total of JPY1.5bn in committed capital. Investment activities commenced in April 2018.

Pet Lifestyle segment (formerly the Insurance segment; 82.2% of total sales in FY03/21)

The Pet Lifestyle business is centered on ipet Holdings, Inc., a subsidiary established in May 2004.

Number of ipet Holdings’ insurance policies and renewal rates

Source: Shared Research based on company data

The company determined that the demand for “medical insurance for pets” will increase significantly going forward, and acquired roughly 82% of the shares of the company (valued at JPY1.2bn) from Goldman Sachs. It made ipet Holdings a subsidiary in February 2011. Ipet completed an IPO on the Tokyo Stock Exchange Mothers section on April 25, 2018 (at the time of listing, DI’s stake in ipet stood at 58.94%, excluding treasury stock).

The company registered as a small-sum, short-term insurance provider in March 2008, and received a property and casualty insurance business license from the Financial Services Agency in March 2012. Consequently, the company changed the name of Ipet Co., Ltd. to ipet Insurance Co., Ltd.

The market for pet insurance in FY2020 was JPY99.3bn (based on Yano Research Institute estimates included in ipet Holdings’ corporate materials). Pet insurance compensates for medical expense for injured or ill pets when receiving treatment at animal hospitals.

There are 15 companies, including ipet Holdings, operating in the pet insurance industry (four non-life insurance companies and 11 small amount and short-term insurance companies; as of May 2020). The market leader is Anicom, with a 44% market share (55% in FY03/19), followed by ipet Holdings (26.7% share as of end-December 2020 according to DI research). ipet Holdings handled 622,069 policies as of end-FY03/21 (+22.4% YoY), with sales (underwriting revenue) of JPY22.4bn in FY03/21 (+23.7% YoY), for an approximate 20% market share. As of end-December 2020, the number of animal hospitals nationwide that accepted pet insurance was about 9,090 (based on business applications to the Ministry of Agriculture, Forestry and Industry). About half of these, or 5,297 hospitals, accepted ipet Holdings’ pet insurance (as of end-March 2021).

Sales are mostly handled via pet shop agencies and ordinary agencies (911 agencies nationwide: all figures in this paragraph are as of March 2019). The main sales channel is pet shops. Of about 4,000 pet shops nationwide, ipet Holdings sells pet insurance through 1,766 of them (and has concluded agency contracts with 717). Competitor Anicom sells its pet insurance not only at pet shops but also via conventional insurance agents that also handle other forms of nonlife insurance such as financial and auto insurance.

The fee structure depends on the age of the pet. For example, the premium for a kitten is JPY780 yen per month, while the premium for a cat that is three years old is JPY1,020 per month. For small dogs, such as a Chihuahua, the premium is JPY990 per month for a puppy, while the premium for a 3-year-old dog is JPY1,480 per month.

According to a 2015 survey by the Institute of Pet Food Association ( https://petfood.or.jp/data/index.html), pet demand in Japan peaked in 2008, when there were 24.0mn house pets. The number declined to 18.1mn in October 2020 (8.5mn dogs and 9.6mn cats).

According to Fuji Economic Research Institute, pet insurance rates have been making double-digit growth, with the number of policyholders in 2015 jumping 13% YoY to 1.1mn. As a result, the pet insurance subscription rate (the ratio of insurance-covered pets among all pets) in 2015 rose 0.8ppt YoY to 5.4%. Fuji Economic Research Institute attributes the increase to a stronger awareness among pet owners as they keep the pets indoors and spend more time in the same living space. Another factor behind the increase is wider public awareness as is increased media coverage of pet insurance. Since the penetration of pet insurance in Japan is still low compared to Europe and North America, we see ample room for further growth going forward.

In comparing business conditions at ipet Holdings with Anicom, the claims ratio for ipet Holdings is lower than Anicom, while the operating expense ratio for Anicom is lower than for ipet Holdings. Shared Research understands that the claims ratio is due to the negative impact of Anicom’s aggressive expansion plans implemented in the past. In addition, the difference in operating expense ratio may be attributed to a difference in sales volume, and percent of insurance premium collection cost and fees (15.2% for ipet Holdings; 10.0% for Anicom in FY03/21). The amount of new policies (compared to existing policies) is higher for ipet Holdings (over three years through FY03/21, new policies grew by 1.75x at ipet Holdings, versus 1.32x at Anicom).

Performance comparison	FY03/16		FY03/17		FY03/18		FY03/19		FY03/20		FY03/21
(JPYmn)	Ipet	Anicom	Ipet	Anicom	Ipet	Anicom	Ipet	Anicom	Ipet	Anicom	Ipet	Anicom
Underwriting revenue	8,126	26,506	10,067	28,068	12,212	31,290	14,831	34,535	18,115	39,105	22,412	43,312
Loss ratio	36.7%	60.1%	39.9%	58.9%	39.9%	59.2%	42.4%	59.0%	44.3%	57.8%	45.0%	58.4%
Operating expense ratio	49.5%	31.1%	48.0%	32.1%	48.0%	35.2%	46.4%	34.5%	44.5%	37.1%	41.8%	37.7%
Recurring profit margin	3.8%	8.0%	4.6%	11.4%	4.6%	5.7%	2.0%	6.4%	2.6%	5.3%	1.7%	5.7%
Renewal rate	86.5%	88.2%	87.7%	88.2%	89.4%	88.2%	90.1%	87.7%	89.3%	87.2%	89.6%	87.7%
Number of pet shop agencies (stores)</