Nintendo 250412

PREPARED BY BNP PARIBAS SECURITIES ASIA THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX

COMPANY REPORT

EQUITIES RESEARCH

7974 JP

NINTENDO CO JAPAN / SOFTWARE & SERVICES

HOW WE DIFFER FROM THE STREET

BNPP Consensus % Diff

Target Price (JPY) 15,000 11,850 26.6

EPS 2012 (JPY) (171) (452) nm

EPS 2013 (JPY) 644 229 180.8

Positive Neutral Negative

Market Recs 5 13 3

BUY

TARGET

CLOSE

UP/DOWNSIDE

JPY15,000

JPY11,170

+34.3%

INDUSTRY OUTLOOK çè

Looking ahead to Wii U at E3

CHANGE Initiate with BUY; Wii U launch preparations have been thorough

We initiate coverage on Nintendo with a BUY rating, and a JPY15,000 TP.

Wii U is expected to launch at the 2012 year-end shopping season. We

believe Nintendo has made ample preparations in securing and

developing launch titles. We also think competitors will not release next-

generation consoles in 2012, so the Wii U should get off to a good start.

CATALYST Launch titles to be announced at E3

Since Wii U was announced in 2011, major publishers in the US and

Europe have announced plans to participate in the platform; we expect an

increase of FPS titles that are popular in Western nations thanks to Wii

U’s HD features. We believe one important catalyst may be major third-

party titles, which Nintendo has not had in the past.

VALUATION Combination of ROIC-WACC, P/E, P/BV and DCF

In evaluating game companies, due to earnings fluctuations by game

titles, we use a combination of methods, including ROIC-WACC, P/E, P/BV,

and DCF multiples. Our JPY15,000 TP is from ROIC-WACC for FY13 and

FY14. Based on our estimates for FY13 it represents a P/E of 23.3x and a

P/BV of 1.7x; based on FY14 the comparable figures are 13.3x and 1.5x.

KEY CHART Historical trend of P/E and P/BV

Sources: Bloomberg; Company estimates (C);BNP Paribas estimates

0.0

2.0

4.0

6.0

8.0

10.0

0

20

40

60

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(x) (x)P/E (LHS) P/BV (RHS)

INITIATION

Hiroshi Yamashina [email protected]

+81 3 6377 2235

BNP Paribas Securities (Asia) Ltd. research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page.

25 APRIL 2012

KEY STOCK DATA YE Mar (JPY b) 2012E 2012C 2013E 2014E

Revenue 686.1 660.0 867.1 1,070.9

Op profit (26.5) (45.0) 100.5 228.4

Prior op profit 389.7 - 445.8 567.7

Recurring profit (42.7) (95.0) 134.5 245.0

Net profit (24.3) (65.0) 91.2 159.9

EPS (JPY) (171) (508.3) 644 1,129

P/E (x) - - 17.4 9.9

Dividend yield (%) 0.9 0..9 3.1 7.3

EV/EBITDA (x) - - 4.4 1.6

Price/book (x) 1.3 - 1.2 1.2

Net debt/equity (%) (86.0) - (89.1) (91.6)

ROE (%) (1.9) - 7.2 12.1

Share price performance 1 Month 3 Month 12 Month

Absolute (%) (11.8) 3.8 (44.6)

Relative to country (%) (6.1) (2.3) (40.0)

Next results May 2012

Mkt cap (USD m) 19,493

3m avg daily turnover (USD m) 2.05

Free float (%) 68

Major shareholder Hiroshi Yamauchi (10%)

12m high/low (JPY) 20,330/10,100

3m historic vol. (%) 29.6

ADR ticker -

ADR closing price (USD) -

Issued shares (m) 141.7

Sources: Bloomberg; Company estimates (C); BNP Paribas estimates

Environmental Risk Impact Ratio

1.1% Rank in Sector 1/3

(55)

(45)

(35)

(25)

(15)

(5)

5

8,367

10,367

12,367

14,367

16,367

18,367

20,367

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

(%)(JPY) Nintendo Co Rel to TOPIX Index

http://equities.bnpparibas.com/

Nintendo Co

2

RISK EXPERTS

Key Earnings Drivers & Sensitivity

The main drivers of Nintendo’s earnings are the manufacture

and sale of hardware and software for home game equipment

and mobile game equipment; the main factors influencing its

earnings are the game platform life-cycle (generation) and

the presence or lack of hit titles.

Its main costs are manufacturing costs for hardware, and

development costs for software. Its profit margins tend to be

low during the early phase of a game platform cycle.

Nintendo Co and TOPIX Index (3M and 6M Realised-Vol)

Japan sector correlation matrix at

Autos Banks Chemicals

Autos 1.00 0.67

Banks 1.00

Chemicals

Electronic Equipment

Insurance

Metals

Property

Software

TechHardware

Telcos

Source: BNPP Paribas Sector Strategy

The Risk Experts

Our starting point for this page is a recognition of the macro

factors that can have a significant impact on stock

performance, sometimes independently of bottom

With our Risk Expert page, we identify the key

that can impact stock performance.

This analysis enhances the fundamental work laid out in the

rest of this report, giving investors yet another resource to

use in their decision-making process.

0

20

40

60

80

100

120

Jan-09 Jan-10 Jan-11

(%)Nintendo Co - 3M Realised - Vol Nintendo Co

TOPIX Index - 3M Realised - Vol TOPIX Index

Sources: Bloomberg; BNP Paribas

BNP PARIBAS

EXPERTS l Macro BUY UNCHANGED

Key Earnings Drivers & Sensitivity

earnings are the manufacture

and sale of hardware and software for home game equipment

and mobile game equipment; the main factors influencing its

cycle (generation) and

s are manufacturing costs for hardware, and

development costs for software. Its profit margins tend to be

low during the early phase of a game platform cycle.

Year-end 31 Mar ---------------------

Wii U sales (m units)

Diff (%)

Operating profit (JPYb)

Diff (%)

EPS (JPY)

Diff (%)

Source: BNP Paribas estimates

Regression – Nintendo CoJPYUSD

sector correlation matrix at 30 December 2011

Chemicals Electronic Equipment Insurance Metals Property

0.83 0.87 0.67 0.76 0.72

0.75 0.74 0.75 0.71 0.75

1.00 0.91 0.69 0.84 0.80

1.00 0.71 0.82 0.79

1.00 0.67 0.68

1.00 0.78

1.00

Long/Short Chart

Our starting point for this page is a recognition of the macro

factors that can have a significant impact on stock-price

performance, sometimes independently of bottom-up factors.

With our Risk Expert page, we identify the key macro risks

This analysis enhances the fundamental work laid out in the

rest of this report, giving investors yet another resource to

Sources: Bloomberg, BNP Paribas

Jan-12

Nintendo Co - 6M Realised - Vol

TOPIX Index - 6M Realised - Vol

-24.00%

-19.00%

-14.00%

-9.00%

-4.00%

1.00%

6.00%

11.00%

16.00%

-5.00% -3.00% -1.00% 1.00%

Nintendo Co

Nintendo Co = 140079 + -10023081.6129 * JPYUSD CurncyR Square = 0.0844

Regression based on 261 observations of 5 years weekly data. Please refer to Appendix 1 for the explanation of R-square Sources: Bloomberg; BNP Paribas

11.096699

16.096699

21.096699

26.096699

31.096699

36.096699

41.096699

Apr-09 Oct-09 Apr-10

(x) Nintendo Co - TOPIX Index


Hiroshi Yamashina

25 APRIL 2012

NINTENDO CO 7974 JP

--------------------- 2013E ---------------------

Worst Base Best

5.0 8.0 11.0

(37.5) — 37.5

79.2 100.5 121.8

(21.2) — 21.2

492 643 795

(23.6) — 23.6

Nintendo Co to for risk expert only

Software Tech

Hardware Telcos

0.68 0.77 0.61

0.71 0.73 0.65

0.77 0.83 0.70

0.77 0.87 0.66

0.65 0.68 0.58

0.71 0.79 0.63

0.73 0.77 0.64

1.00 0.74 0.65

1.00 0.62

1.00

3.00% 5.00% 7.00% 9.00%

JPY/USD Spot Exchange Rate

10023081.6129 * JPYUSD Curncy

Regression based on 261 observations of 5 years weekly data. Please refer to Appendix 1 for

-2s

-1s

Mean

+1s

+2s

Oct-10 Apr-11 Oct-11 Apr-12

TOPIX Index

Nintendo Co

3

RISK EXPERTS

Principal Activities Operating Activities

Electronic computer manufacturing

Nintendo Co engages in the development, manufacture, and sale of home entertainment

products. Its products include Nintendo Wii, Nintendo DS, Nintendo 3DS, trump cards,

Japanese playing cards, Japanese chess, and I-go. The company was founded on

September 1889 and is headquartered in Kyoto, Japan.

Direct Environment Damage Issues

The direct environmental damage costs are those incurred when

Nintendo Co emits pollutants or uses natural resources as part of its own activities. The five most significant direct impacts are listed below.

Emission Resource (2011) (Tonnes) Source Quantity

Carbon Dioxide TC 214,615

Other (Process Water) TC 11,150,933

Landfill (Non-Hazardous) TC 56,416

Particulates TC

Sum of VOCs TC

Other

Total 11,428,944

Direct Impact Ratio (%) 0.17 Direct Cost / EBITDA

Peer Analysis - Country

Bubble size indicates Market Cap

CAPCOM KONAMI CORP SQUARE ENIX NINTENDO CO

9697 JP 9766 JP 9684 JP

Impact Ratio (%) 0.94 0.78 0.75

Turnover (JPY m) 75,514.4 254,604.0 111,527.4

Market Cap (US $ bn) 4.22 2.23

Year 2009 2009 2009

Impact ratio and turnover of Nintendo Co (7974 JP) against its peer

same country. A higher Impact ratio indicates higher external environment

costs and weaker environment performance.

9766 JP0.78 9684 JP

0.75

.00

.20

.40

.60

.80

1.00

1.20

1.40

Impact Ratio (%

)

BNP PARIBAS

EXPERTS l Environmental

% of Turnover

100.00

engages in the development, manufacture, and sale of home entertainment

products. Its products include Nintendo Wii, Nintendo DS, Nintendo 3DS, trump cards,

go. The company was founded on 23

BUY UNCHANGED

Key Ratios (2011)

Impact Ratio (%) EBITDA Impact Ratio (%)

Direct Impact Ratio (%) Direct Cost / EBITDA (%)

Supply Chain Impact Ratio (%) Cost Ratios (%)

*Impact Ratio = Total Environment Damage Cost/Turnover

Direct Environment Damage Issues Supply Chain Environment Damage Issues

The direct environmental damage costs are those incurred when

emits pollutants or uses natural resources as part of its activities. The five most significant direct impacts are listed below.

The Supply Chain environmental damage costs are those that are incurred

as a result of the activities carried out by five most significant Supply Chain impacts are listed below.

QuantityExternal Cost

(JPY m)

214,615 624.02

11,150,933 460.20

56,416 216.95

91 93.65

487 64.29

6,402 205.22

11,428,944 1,664.33

Direct Cost / EBITDA (%) 1.30

Emission Resource (2011) (Tonnes)

Carbon Dioxide

Other (Process Water)

Particulates

Sulphur Dioxide

Sum of VOCs

Other

Total Supply Chain Impact Ratio (%) 0.94

Peer Analysis - Sector

NINTENDO CO

7974 JP

1.12

961,547.9

19.49

2011

Bubble size indicates Market Cap

PANASONIC CORP

SHARP CORP

6752 JP 6753 JP

Impact Ratio (%) 1.74

Turnover (JPY m) 8,240,214.9 2,864,678.9

Market Cap (US $ bn) 19.22

Year 2011

) against its peers in the

same country. A higher Impact ratio indicates higher external environment

Impact ratio and turnover of Nintendo Co

7974 JP1.12 6752 JP

1.74

.00

.50

1.00

1.50

2.00

2.50

Impact Ratio (%

)

Hiroshi Yamashina

25 APRIL 2012

NINTENDO CO 7974 JP

1.12 8.40

0.17 1.30

0.94 7.09

*Impact Ratio = Total Environment Damage Cost/Turnover

Chain Environment Damage Issues Hiroshi Yamashina

The Supply Chain environmental damage costs are those that are incurred

as a result of the activities carried out by Nintendo Co‘s supply chain. The five most significant Supply Chain impacts are listed below.

Quantity External Cost

(JPY m)

1,265,281 3,678.98

52,516,658 2,167.35

607 622.98

4,878 541.22

2,139 282.54

152,126,538 1,766.92

205,916,102 9,059.98

Supply Chain Cost / EBITDA (%) 7.09

Sector

SHARP CORP NINTENDO CO

6753 JP 7974 JP

1.69 1.12

2,864,678.9 961,547.9

6.90 19.49

2011 2011

Nintendo Co against its regional peers.

6753 JP1.69

7974 JP1.12

Nintendo Co Hiroshi Yamashina

4 BNP PARIBAS 25 APRIL 2012

Summary

We initiate coverage with a BUY rating and a TP of JPY15,000; expectations hinge on Wii U

We initiate coverage on Nintendo with a BUY rating and a JPY15,000 target price. Based on our estimates for FY13, this target price represents a P/E of 23.3x and a P/BV of 1.7x; based on FY14 the comparable figures are 13.3x and 1.5x. Based on the April 24 closing price of JPY11,170, our JPY15,000 target price represents upside potential of 34.3%.

Nintendo’s earnings slumped to an operating loss in FY12 due to the hardware cycle; Wii earnings declined, 3DS prices were cut, and the sharp JPY appreciation hurt earnings. In FY13, we estimates 3DS hardware will reach breakeven, as the company says, and Wii U pricing should be set to allow at least some gross profit, or else the company may be able to cut back on production costs. After the Wii U announcement at E3 last year, the company left itself plenty of time to prepare for the sales launch. From third-party game publishers’ comments, we expect to see a range of major third-party titles, and the chances of a successful start are high. We estimate the company will return to profit in FY13. Assuming Wii U gets off to a good start, we estimates profit will recover further in FY14.

The main near-term catalysts will be the extent to which the company’s earnings guidance incorporates expectations for the Wii U, and major publishers’ E3 announcements of important launch titles. Among potential major third-party titles, Square Enix (9684 JP) has already announced its Dragon Quest X will be available for Wii/Wii U. Other game software companies that have announced intentions to release games for the Wii U include Electronic Arts (EA US), Activision Blizzard (ATVI US) and UBI Soft (UBI FR). Announcements by these publishers may generate surprises that could create upside potential.

We discuss valuation in greater detail below, but we use a combination of methods, including ROIC-WACC, P/E, P/BV, and DCF multiples. Based on ROIC-WACC, we estimate FY13 fair value at JPY13,587 per share, and FY14 at JPY20,357. Our DCF model suggests fair value is JPY14,866. Based on these estimates, and expectations of announcements set to come in the near future, we set a target price of JPY15,000.

We believe downside risks to Nintendo’s share price are limited, thinking about the breakup value of Nintendo. Nintendo has cash per share of JPY7,319 as of the end of March 2012, on our estimates, and strong IPs including Mario, Zelda, and Pokemon.

EXHIBIT 1: Valuation comparisons

BBG code Company Share Local Market ------- P/E ------- ---- EV/EBITDA ---- -- Dividend yield -- -Fiscal year ending-

price* currency cap Y1 Y2 Y1 Y2 Y1 Y2 Y1 Y2

(lcl ccy)

(USD m) (x) (x) (x) (x) (%) (%)

7974 JP Nintendo 11,380 JPY 19,813 n/a 49.7 n/a 14.2 0.88 1.12 Mar-12 Mar-13

6758 JP Sony 1,363 JPY 1,360,280 n/a 22.2 6.3 2.9 1.83 1.83 Mar-12 Mar-13

MSFT US Microsoft 32.42 USD 272,356 11.9 10.6 7.2 6.5 2.38 2.50 Jun-12 Jun-13

AAPL US Apple 572.98 USD 534,229 12.9 11.2 7.4 6.3 0.46 1.93 Sep-12 Sep-13

700 HK TenCent 104,500 HKD 285 9.7 8.4 1.9 1.9 2.68 3.25 Mar-12 Mar-13

ZNGA US Zynga 9.22 USD 6,653 34.8 25.0 11.2 8.3 0.00 0.00 Dec-12 Dec-13

ATVI US Activision Blizzard 12.2 USD 13,699 12.6 11.4 6.0 5.7 0.89 1.04 Dec-12 Dec-13

9697 JP Capcom 1863 JPY 1,520 15.6 10.9 7.1 5.7 2.13 2.20 Mar-12 Mar-13

EA US Electronic Arts 14.93 USD 4,948 17.5 12.8 6.3 5.1 0.00 0.00 Mar-12 Mar-13

9766 JP Konami 2331 JPY 4,139 14.1 12.0 6.1 5.4 2.06 2.29 Mar-12 Mar-13

7832 JP Namco Bandai 1189 JPY 3,192 13.8 12.4 3.7 3.5 2.04 2.11 Mar-12 Mar-13

6460 JP Sega Sammy 1706 JPY 5,485 15.4 9.8 3.9 3.4 2.39 2.46 Mar-12 Mar-13

9684 JP Square Enix 1621 JPY 2,256 26.3 15.3 5.8 4.2 1.84 1.90 Mar-12 Mar-13

*Prices as at 22 April 2012 Sources: Bloomberg consensus estimates; BNP Paribas



Valuation and risk

We set a target price of JPY15,000, based on a combination of ROIC-WACC, P/E, P/BV and DCF

In evaluating game companies, we recognize that the main factor influencing earnings is the presence or lack of hit titles. Based on past trends, we know that at times when expectations run high regarding hit titles, the key focus is on profit growth (excess profit), as shown by P/E and ROIC-WACC, so valuations tend to be at appropriate levels. On the other hand, when hit titles have run their course and earnings peak out, P/BV ratios tend to be a good indicator of where underlying support for the share price lies.

In industries where earnings are highly volatile it is common practice to use a combination of ROE and P/E, or ROE and P/BV to gauge fair value. Based on our observations, we would say ROE is not such a good indicator in the game industry, but we do watch changes in the P/E and P/BV ranges based on the level of ROE.

To facilitate comparisons with other industries, we also make estimates based on DCF, which reflects long-term trends in profitability and assets.

Based on our ROIC-WACC analysis, we estimate Nintendo’s fair value at JPY13,587 per share based on projections for FY12, and at JPY20,357 based on projections for FY13. These values are not that far from the JPY14,866 value resulting from our DCF analysis. Based on this analysis, we set a target price of JPY15,000, closer to the FY13 value, which we think reflects expectations of the near-term trends for Wii U. Based on our estimates for FY13, this target price represents a P/E of 23.3x and a P/BV of 1.7x; based on FY14 the comparable figures are 13.3x and 1.5x. The April 24 closing price of JPY11,170 represents a FY13 P/E of 17.4x, and P/B of 1.24x; for FY14 the comparable figures are 9.9x and 1.15x.

For our ROIC-WACC analysis, we use the formula EV/NOPAT= (1-g/ROIC)/(WACC-g).

EXHIBIT 2: ROIC for FY13 EXHIBIT 3: ROIC for FY14

ROIC (%) 4.79

Invested capital – FY12 (JPY m) 1,258,248

Operating profit – FY13E (JPY m) 100,499

Tax rates (%) 40.0

NOPAT (JPY m) 60,300

ROIC (%) 10.74

Invested capital – FY13E (JPY m) 1,276,316

Operating profit – FY14E (JPY m) 228,377

Tax rates (%) 40.0

NOPAT (JPY m) 137,026



EXHIBIT 4: ROIC-WACC for FY13 EXHIBIT 5: ROIC-WACC for FY14

Theoretical share price (JPY) 13,587

Terminal growth (%) 0.0

Theoretical EV/NOPAT (x) 12.5

Theoretical EV (JPY m) 753,745

Net debt (JPY m) (1,171,076)

Theoretical MV (JPY m) 1,924,821

Issued shares (‘000) 141,669

Theoretical share price (JPY) 20,357


Theoretical EV/NOPAT (x) 12.5

Theoretical EV (JPY m) 1,712,830

Net debt (JPY m) (1,171,076)

Theoretical MV (JPY m) 2,883,906




EXHIBIT 6: Fair value by DCF EXHIBIT 7: Value attribution of DCF

Projected period (years) 12


Terminal value (JPY m) 962,690

PV of terminal value (JPY m) 552,639

PV of cash flow (JPY m) 382,297

Net debt – FY11 (JPY m) (1,171,076)

Equity value (JPY m) 2,106,012


Theoretical fair price (JPY) 14,866



PV of Cash flow26.2%

PV of Terminal value18.2%

Net cash55.6%



EXHIBIT 8: WACC assumptions

WACC (%) 8.0

Risk-free rate (%) 1.5

Beta 1.0

Equity risk premium (%) 6.5

Cost of equity (%) 8.0

Cost of debt (%) 3.0

Debt-to-capital (%) 0.0

Equity-to-capital (%) 100.0


In our ROIC-WACC and DCF calculations, we use a value of 8.0% for WACC (cost of equity 8.0%, debt cost 3%, risk-free rate 1.5%, risk premium 6.5%, beta 1.0). Our DCF analysis uses 12-year earnings projections (individual forecasts for seven years, market growth rate 0% for subsequent five years) and a perpetual growth rate of 0%.

Risks

Risk factors in our DCF, ROIC-WACC and P/E valuations include the possibility that the assumptions behind our earnings forecasts – the competitive environment in the game market, scale of software shipments and network content ARPU – will differ from our expectations. Smartphones and tablets may cause changes in the market for household games or portable games, and the competitive environment for social games may diverge from our expectations, which would cause earnings and valuations to deviate from our current forecasts.

Nintendo’s earnings have been showing fluctuations on foreign exchange rates, as major parts of the business are developed outside Japan. On the balance sheet, too, Nintendo has approximately JPY294b cash and deposits denominated in USD and JPY235b cash and deposits denominated in EUR. The impact of forex fluctuations usually appears in sales and costs and asset evaluation gains and losses.

EXHIBIT 9: JPY/USD sensitivity EXHIBIT 10: JPY/EUR sensitivity

Year-end 31 Mar ------------------------- 2013E -------------------------

Appreciation Base Depreciation

JPY/USD 82.0 83.0 84.0

Diff (%) (1.2) — 1.2

Operating profit (JPY b) 99.9 100.5 101.1

Diff (%) (0.6) — 0.6

EPS (JPY) 612.4 643.7 673.0

Diff (%) (4.7) — 4.7

Year-end 31 Mar ------------------------- 2013E -------------------------

Appreciation Base Depreciation

JPY/EUR 114.0 115.0 116.0

Diff (%) (0.9) — 0.9

Operating profit (JPY b) 99.6 100.5 101.4

Diff (%) (0.9) — 0.9

EPS (JPY) 620.4 643.7 665.1

Diff (%) (3.5) — 3.5





Key points

FY12 results and FY13 guidance

In the first three quarters of FY12, Nintendo had a cumulative operating loss of JPY16.4b. It issued guidance for a JPY45b operating loss for the full fiscal year, implying a JPY28.6b operating loss in 4Q alone, but we think the 4Q loss will actually be about JPY10b, for a FY12 operating loss of about JPY26.5b, as the JPY has weakened beyond the company’s assumptions; the cumulative average rates through 3Q were JPY79.01/USD and JPY110.64/EUR, compared with the company’s assumptions of JPY78.5/USD and JPY107.49/EUR.

In FY13 earnings, we expect 3DS hardware will reach breakeven, and we assume there will be a full line-up of software titles for Wii U at launch time. We project FY13 sales will be JPY867.1b, OP JPY100.5b, and RP JPY134.5b. Our forecasts rest on several assumptions: exchange rates of JPY83/USD and JPY115/EUR, unit sales of 32.5m for 3DS hardware, software sales of 51m units, Wii U unit sales of 8.0m, and software sales of 33.5m units. We imagine the initial Wii U retail price will be around JPY25,000 in Japan, USD250-300 in North America, and EUR200 in Europe.

Assumptions for 3DS and Wii U

The 3DS has sold more quickly than the DS, in terms of cumulative unit sales, thanks to lower prices, in our view. On the other hand, we note that the software tie ratio for the 3DS is lower than for the DS so far, due to a lack of killer titles. Considering the outlook for major titles, the presence of smartphone games, and other factors, we think 3DS hardware unit sales growth will match the DS alone, but we think the software tie ratio will remain at roughly its current level.

We think the company has allotted ample time to prepare for the Wii U launch, so there should be plenty of big software titles available at launch time; we think hardware sales will follow a pattern similar to the fast-selling Wii. Initially, we think the software tie ratio for the Wii U will also be comparable to the Wii, but in the second year, 2014, we expect there will be little improvement, because in the year-end shopping season the Wii U may have to contend with next-generation versions of competing hardware from the Xbox and PlayStation.

EXHIBIT 11: Game sales assumptions

FY1 FY2 FY3 FY4 FY5 FY6

Hardware sell-through (m units) DS 5.3 11.5 23.6 30.3 31.2 27.1

3DS 3.6 14.4 23.5 32.5 25.0 19.0

Wii 5.8 18.6 26.0 20.5 15.1 9.9

WiiU 8.0 17.0 24.0 18.0 12.0 5.0

Hardware accumulated (m units) DS 5.3 16.7 40.3 70.6 101.8 128.9

3DS 3.6 18.0 41.5 74.0 99.0 118.0

Wii 5.8 24.5 50.4 70.9 86.0 95.9

WiiU 8.0 25.0 49.0 67.0 79.0 84.0

Software sell-through (m units) DS 10.5 50.0 123.6 185.6 197.3 151.6

3DS 9.4 35.0 51.0 66.0 64.0 56.5

Wii 28.8 119.6 204.6 191.8 171.3 98.3

WiiU 33.5 72.8 115.8 84.0 56.0 23.0

Software accumulated (m units) DS 10.5 60.4 184.0 369.6 566.9 718.5

3DS 9.4 44.5 95.5 161.5 225.5 282.0

Wii 28.8 119.6 204.6 191.8 171.3 98.3

WiiU 33.5 106.3 222.0 306.0 362.0 385.0

Tie ratio (%) DS 2.0 3.6 4.6 5.2 5.6 5.6

3DS 2.6 2.5 2.3 2.2 2.3 2.4

Wii 4.9 6.1 7.0 7.7 8.3 8.5

WiiU 4.2 4.3 4.5 4.6 4.6 4.6

Notes: 3DS numbers after FY2, and Wii U numbers are BNP Paribas estimates Sources: Nintendo Co; BNP Paribas estimates



Key points at E3

Announcements of additional details on the Wii U, including its launch date, pricing, and launch titles will be key focus points for E3, which is held in the first week of June. Regarding pricing, it was already learned at last year’s E3 that the controller(s) will ship together with the Wii U units, which should make it possible to keep the retail price down, while at the same time averting losses. We believe the launch date will be timed with the year-end shopping season in mind, which means in North America some time before Thanksgiving. The exact date will be a point of great interest.

Regarding the titles that will be available around the time of the launch date, speculation and rumours are rife; among third-party vendors, as of now it is already clear that Square Enix is readying a version of Final Fantasy X for Wii U (also available for Wii), and THQ (THQI US) will release Darksiders II. In addition, UBI Soft, Electronic Arts, Activision Blizzard, and Capcom (9697 JP) have made affirmative, forward-looking comments.

Nintendo itself said at E3 last year that it is developing a new title in the Zelda series; according to some media reports, development chief Shigeru Miyamoto plans to announce a new Mario title as well.

News flow after E3

Nintendo has not exhibited at the Tokyo Game Show for many years, and several game media report Nintendo will not join GamesCom in Germany this year, but will hold consumer events by itself instead. However, third-party game publishers may announce information related to Wii U titles at those events. We should be able to learn the achievements of Nintendo and third-party publishers at those events.

Competing hardware: Microsoft Xbox

Microsoft (MSFT US) has announced it plans to release Halo 4 on 6 November 2012, so we think the chances of a next-generation Xbox (likely named Xbox 720) release in 2012 are very low. Most game-industry media are speculating that the Xbox 720 will go on sale in 2013. Even if the eventual release will be in 2013 or later, an announcement regarding the next-generation equipment could be made at E3 this year. It is our understanding that Microsoft is now pursuing a multiplatform strategy, working to integrate Xbox Live with Windows 8, so that customers can play Xbox games on Windows 8 and even Windows phones. For this reason, we would caution that a next-generation Xbox may not arrive until 2014 or even later.

Competing hardware: Sony PlayStation

Most game-industry media are speculating that Sony’s PlayStation4 (Orbis), like Xbox 720, will be launched in 2013; some, however, believe the PS4 will hit the market before the Xbox 720.

Competing hardware: Smartphones and tablets by Apple and Google

It is our understanding that Nintendo regards mobile games for smartphones as a separate segment from its own products, and therefore not in direct competition. We note, however, that the presence of portable iOS (iPhone, iPad, iPod Touch) and Android devices is increasing, and we regard them as part of the same competitive environment. Tablets, in particular, we think should be seen as competitors to home games, at least to some extent. Consequently, we think the potential scale of sales for 3DS and Wii U software will be smaller than it was for the preceding generation.



Fundamentals

EXHIBIT 12: Revenue breakdown by products

Nintendo’s sales have both a hardware and a software component, and volatility in its sales is closely tied to the game platform generation cycle.

Nintendo’s portable DS console hit the market in 2004, and its Wii home game console was launched in 2006; both these devices hit the peak of their respective cycles in FY09; the period from FY11-FY13 is a platform transition period.

3DS and Wii U will be the dominant devices in FY13 forward, but considering the marketplace changes wrought by smartphones and tablets, we think the next peak will not be as high as the last one.

Sources: Nintendo Co; BNP Paribas estimates

EXHIBIT 13: Revenue breakdown by region

A breakdown by region shows Japan accounts for less than 20% of Nintendo’s sales.

Sales in the US and other regions peaked in FY09 due to the success of the Wii, but have gradually declined since then.

The US market is starting to show the impact of competition from smartphones and tablets, as well as the next-generation Xbox; in Japan, however, tablets are not yet so popular, so revenues in the next cycle may be about the same as in the previous product cycle.


EXHIBIT 14: Cost breakdown

In Nintendo’s cost structure, manufacturing costs account for nearly 60%. When a new platform is launched, the company tends to put priority on increasing sales volume, so it sets the price a bit low, which puts a squeeze on gross margins in hardware.

Although R&D costs vary with the game platform cycle, in the past five years R&D costs have increased to JPY52.6b from JPY37b, or to 5.2% of sales, from 2.2%.


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

(JPY b) Hardware/portable Hardware/home Software/portable Software/home Others

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


(JPY b) Japan Americas RoW

% (20)

% 0

% 20

% 40

% 60

% 80

% 100


(%) CoGS R&D Ads Others Operating profits



Financial statements Nintendo Co

Profit and Loss (JPY b) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

Revenue 1,434.4 1,014.3 686.1 867.1 1,070.9

Cost of sales (incl depreciation) (859.1) (626.4) (514.6) (563.6) (642.6)

Gross profit 575.2 388.0 171.5 303.5 428.4

SG&A (173.2) (164.3) (145.0) (150.0) (150.0)

R&D (45.5) (52.6) (53.0) (53.0) (50.0)

Operating profit 356.6 171.1 (26.5) 100.5 228.4

Interest and dividends received 8.5 6.9 8.2 8.0 8.6

Associates 0.0 0.0 0.0 0.0 0.0

Other non-operating income 2.6 1.7 2.0 2.0 2.0

Interest paid 0.0 0.0 0.0 0.0 0.0

Other non-operating expenses (3.3) (2.1) (4.0) (2.0) (2.0)

Recurring profit 364.1 128.1 (42.7) 134.5 245.0

Extraordinary gains 5.4 0.2 0.1 0.0 0.0

Extraordinary losses (2.3) (0.4) (0.1) 0.0 0.0

Pre-tax profit 367.2 127.9 (42.8) 134.5 245.0

Tax (138.9) (50.3) 18.5 (43.3) (85.1)

Minorities* 0.1 (0.1) 0.0 0.0 0.0

Net profit 228.4 77.6 (24.3) 91.2 159.9

EBITDA (operating profit + depreciation) 363.7 177.9 (19.7) 107.3 235.2

Per share (JPY)

Reported EPS 1,612 548 (171) 644 1,129

DPS 930 450 100 350 810

Growth

Revenue (%) (22.0) (29.3) (32.4) 26.4 23.5

EBITDA (%) (35.4) (51.1) (111.1) (644.5) 119.2

Operating profit (%) (35.8) (52.0) (115.5) (479.7) 127.2

Recurring profit (%) 15.7 (64.8) (133.3) (414.9) 82.2

EPS (%) 57.3 (66.0) (131.2) (476.0) 75.3

Operating performance

Gross margin inc depreciation (%) 40.1 38.2 25.0 35.0 40.0

EBITDA margin (%) 25.4 17.5 (2.9) 12.4 22.0

Operating profit margin (%) 24.9 16.9 (3.9) 11.6 21.3

Net margin (%) 15.7 7.7 (3.5) 10.5 14.9

Effective tax rate (%) 37.8 39.3 - 32.2 34.7

Dividend payout on net profit (%) 57.7 82.1 - 54.4 71.8

Interest cover (x) - 4.0 (2.0) - -

Inventory days 57.2 63.3 59.6 49.7 49.5

Debtor days 33.8 47.8 58.6 40.7 41.1

Creditor days 132.0 139.6 118.7 88.0 96.3

Operating ROIC (%) (2,355.8) 605.2 (33.7) 108.8 371.3

Operating ROIC - WACC (%) - - - - -

ROIC (%) 470.0 147.1 (17.4) 56.7 155.9

ROIC - WACC (%) - - - - -

ROE (%) 17.4 5.9 (1.9) 7.2 12.1

ROA (%) 12.1 7.1 (0.7) 3.8 8.8

*Pre exceptional, pre-goodwill and fully diluted

Revenue By Division (JPY b) 2010A 2011A 2012E 2013E 2014E

Hardware 863.9 610.4 402.2 567.5 703.3

Software 567.7 402.2 282.1 297.8 365.8

Others 2.8 1.7 1.8 1.8 1.8

*Includes associate income for US GAAP Sources: Nintendo Co; BNP Paribas estimates

We estimate gross margin

to improve, thanks to 3DS

hardware breakeven and

pricing of Wii U



Nintendo Co

Cash Flow (JPY b) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

Pre-tax profit* 367.2 127.9 (42.8) 134.5 245.0

Tax paid (138.9) (50.3) 18.5 (43.3) (85.1)

Depreciation 7.1 6.8 6.8 6.8 6.9

Working capital (13.0) (9.1) (33.5) 9.2 (5.1)

Other (2.8) 49.1 22.1 (25.8) (7.8)

Operating cash flow 219.7 124.5 (28.9) 81.4 153.8 Capital expenditure (6.9) (9.5) (7.5) (7.5) (7.5)

Other (7.8) 0.9 0.0 0.0 0.0

Investing cash flow (14.7) (8.6) (7.5) (7.5) (7.5) Free cash flow 205.0 115.8 (36.4) 73.9 146.3 Change in debt 0.0 0.0 0.0 0.0 0.0

Dividends paid (148.8) (113.3) (43.9) (21.3) (49.6)

Net buybacks (0.1) (0.1) 0.0 0.0 0.0

Equity issued 0.1 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0

Financing cash flow (148.7) (113.4) (43.9) (21.3) (49.6) Gross change in cash 56.3 2.4 (80.3) 52.6 96.7 Other adjustments (24.1) (83.7) (8.9) 3.4 21.3 Change in cash 32.2 (81.2) (89.2) 56.0 118.1

Per share (JPY)

Operating cash flow per share 1,550.5 878.5 (204.1) 574.4 1,085.9

FCF per share 1,447.1 817.7 (257.1) 521.5 1,032.9

Balance Sheet (JPY b) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

Cash & equivalents 1,252.3 1,171.1 1,081.8 1,137.8 1,255.9

A/c receivable 130.8 134.9 85.3 107.9 133.2

Inventories 124.7 92.7 75.5 78.0 96.4

Other 83.6 70.0 41.2 52.0 64.3

Current assets 1,591.4 1,468.7 1,283.8 1,375.7 1,549.7 Tangible fixed assets 79.6 80.9 81.6 82.3 82.9 Intangible fixed assets 4.1 5.5 5.5 5.5 5.5 Investments and other assets 85.9 79.2 79.2 79.2 79.2 Total assets 1,761.0 1,634.3 1,450.1 1,542.8 1,717.4 A/c payable 264.6 214.6 120.1 151.7 187.4

Short term debt 0.0 0.0 0.0 0.0 0.0

Other 142.9 118.7 52.5 95.3 139.9

Current liabilities 407.5 333.3 172.5 247.1 327.3 Long term debt 0.0 0.0 0.0 0.0 0.0

Other 16.9 19.1 19.1 19.1 19.1

Long-term liabilities 16.9 19.1 19.1 19.1 19.1 Total liabilities 424.4 352.4 191.7 266.2 346.4 Common equity 1,336.4 1,281.6 1,258.2 1,276.3 1,370.7

Preferred equity 0.0 0.0 0.0 0.0 0.0

Minorities etc 0.2 0.2 0.2 0.2 0.2

Net Assets 1,336.6 1,281.9 1,258.5 1,276.5 1,370.9 Liabilities & net assets 1,761.0 1,634.3 1,450.1 1,542.8 1,717.4 *includes convertibles and preferred stock which is being treated as debt

Per share (JPY)

Book value per share 9,433.3 9,046.7 8,881.6 9,009.1 9,675.5

Tangible book value per share 9,404.3 9,007.6 8,842.5 8,970.0 9,636.4

Financial strength

Net debt/equity (%) (93.7) (91.4) (86.0) (89.1) (91.6)

Net debt/total assets (%) (71.1) (71.7) (74.6) (73.8) (73.1)

Current ratio (x) 3.9 4.4 7.4 5.6 4.7

CF interest cover (x) - 1.7 (3.6) - -

Valuation 2010A 2011A 2012E 2013E 2014E

P/E (x) * 7.0 20.3 neg 17.4 9.9

P/E @ target price (x) * 9.4 27.3 neg 23.3 13.3

Reported P/E (x) 6.9 20.4 neg 17.4 9.9

Dividend yield (%) 8.3 4.0 0.9 3.1 7.3

P/CF (x) 6.8 11.8 346.1 21.9 10.0

P/FCF (x) 7.7 13.7 (43.5) 21.4 10.8

Price/book (x) 1.2 1.2 1.3 1.2 1.2

Price/tangible book (x) 1.2 1.2 1.3 1.2 1.2

EV/EBITDA (x) ** 1.0 2.1 (21.0) 4.4 1.6

EV/EBITDA @ target price (x) ** 2.4 5.1 (46.0) 9.5 3.9

EV/invested capital (x) 3.3 3.2 2.6 2.8 2.4

* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income

* Net profit for US GAAP Sources: Nintendo Co; BNP Paribas estimates

Dividend policy: 33% of

operating profit or 50% of

net profit

Of which JPY294b is USD

denominated, and JPY235b

is EUR denominated



History of change in investment rating and/or target price

Nintendo Co (7974 JP)

Hiroshi Yamashina started covering this stock from 25-Apr-2012 Price and TP are in local currency

Valuation and risks: Key risks to our target price based on DCF, ROIC-WACC and PER are dependent on sales volume and price competition of video game hardware and software, and popularity of network contents (ARPU).


Date Reco TP

12-May-10 BUY 37,500.00

9,090

19,090

29,090

39,090

49,090

59,090

69,090Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12

(JPY) Nintendo Co Target Price



Disclaimers and Disclosures

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RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more.

Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.

* In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

Industry Recommendations Improving (é): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Neutral (çè): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (ê): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months.

Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 24 April 2012)

Total BNP Paribas coverage universe 524 Investment Banking Relationship (%)

Buy 297 Buy 3.70

Hold 168 Hold 1.80

Reduce 59 Reduce 3.40

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.

© 2012 BNP Paribas Group

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