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Nintendo 250412

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  • 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

    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

    Us 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 Nintendos 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

    Sources: Bloomberg; BNP Paribas

    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 Imp

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