Konami Corp.(9766 JP)

Transcription

COMPANY NOTE
Initiating Coverage
10 September 2013
JPN | Technology | Software
UNDERPERFORM
Price target ¥2,000
Price ¥2,238
Price target $20.00
Price $22.76
Casino Catalyst not till Next Year; Initiating
with Underperform
Key Takeaway
The gaming space is changing rapidly. The console gaming market, in its 8th
innings, is shrinking and consolidating. Konami fared poorly in the previous
cycle transition (sales of top games fell 70%). Konami is becoming more of a
casino play, but that catalyst is not until next year. We forecast its console game
sales to fall 30% this year, driving -10% OP (cons +30%). With 5-6% RoE, we
use 1.1x PBR to value it at ¥2,000. Initiate with Underperform rating.
Industry at crossroads, Konami is changing. Technology has always been a change
agent for this industry. Besides a new cycle (next-gen consoles), in the last few years,
the industry has been revolutionized by the mobile-OS app-store business model. Digital
Entertainment drives 50% of Konami's revenues and c. 100% of its OP. It is finding a stronger
position and growth potential in casino machines, where it is gaining share in US, AU
markets.
Console in 8th innings…consolidating. The installed base of next-gen consoles is likely
to fall by 30-50%. As the tie ratio is declining, the total market is shrinking. The top end of
the market will likely consolidate. 30% of its games revenue comes from consoles, and that
has been weakening through the previous cycle. During the Gen 7 cycle, the total sales of
its key games fell c.70% as compared to the Gen 6 cycle, mainly because of weakness in its
soccer game franchise (Pro Evolution Soccer - PES). This segment lacks near-term catalysts
(new title launches) as the next Metal Gear Solid (MGS) launch is next year.
Mobile games – card collection games no more. Part of Konami's mobile-games
revenue belongs to the 1st innings (i.e. browser-based games on feature phones). That is
still c30% of game revenues. This part of the business remains in a decline, but this could
change next year with Konami’s plan to aggressively launch native-app games next FY.
Lacks near-term catalysts, Casino is next year's story. The Japan mobile-gaming
opportunity is huge for a company of Konami’s calibre. While game business is likely to
suppress profitability, casino (machine) business will continue to grow. We expect the next
major catalyst for Konami next year.
Bloomberg TSE: 9766 JP
Bloomberg NYSE: KNM
Financial Summary
Book Value (MM):
Book Value/Share:
Net Debt (MM):
Return on Avg. Equity:
Net Debt/Capital:
Long-Term Debt (MM):
LTD/Cap:
Dividend Yield:
Cash & ST Invest. (MM):
Market Data
52 Week Range:
¥2,984 - ¥1,666
Total Entprs. Value (MM):
¥274.2BN
Market Cap. (MM):
¥310.2BN
Insider Ownership:
32.0%
Institutional Ownership:
45.0%
Shares Out. (MM):
138.6
Float (MM):
99.0
Avg. Daily Vol.:
1,295,156
Atul Goyal, CFA *
Equity Analyst
+65 6551 3965 [email protected]
Valuation/Risks
Ayano Oda §
Equity Associate
At 26x PER FY3/14Jeff and 1.3x PBR it does look expensive (for 4-5% RoE). Our target of
¥2,000 (c. 10% downside) is based on 1.1x PBR FY3/15. Besides the market / industry risk,
upside risk can come from an earlier introduction of the Japan Casino Bill.
JPY
Rev. (MM)
Prev.
2013A
Prev.
2014E
Prev.
2015E
Prev.
2016E
--225,995.0
-- 215,500.0
-- 215,800.0
-- 232,000.0
1.2x
1.3x
1.3x
1.2x
Operating
Profit
-- 21,875.0
-- 19,500.0
-- 20,500.0
-- 22,800.0
Net Profit
-- 13,174.0
-- 11,400.0
-- 11,600.0
-- 12,800.0
ROE
--
BV/Share
-- 1,626.00
-- 1,713.00
-- 1,796.00
-- 1,889.00
1.4x
1.3x
1.2x
1.2x
EV/Rev
7.4%
--
4.9%
--
4.8%
--
* Jefferies Singapore Limited
MCI (P) 035/07/2013
§ Jefferies (Japan) Limited
Price Performance
2,600
5.0%
EPS
FY P/E
+813 5251 6138 [email protected]
2,400
P/B
FY Mar
¥225,999.0
¥1,626
(¥36.0)BN
4.9%
(15.0)%
¥22,600.0
9.0%
1.6%
¥70,000.0
2,200
2,000
--
95.00
23.6x
--
82.00
27.3x
--
84.00
26.6x
--
92.00
24.3x
1,800
JUN-13
JUL-13
AUG-13
SEP-13
Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment
decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 18 to 21
of this report.
EQUITY RESEARCH GLOBAL
Konami Corp. (9766 JP)
9766 JP
Initiating Coverage
[Konami]
10 September 2013
Underperform: Price Target ¥2,000 / $20.0
Target Investment Thesis
Upside Scenario
Downside Scenario
 While game business is likely to suppress
profitability, casino (machine) business will
continue to grow. We believe the next
major catalyst for Konami is next year
 Upside can come from the casino business;
While Japan business will take 3-5 years to
take off, US and AU business is seeing
healthy growth and can double in 3-4 yrs
 Our target price of Y2,000 is based on 1.1x
PBR FY3/15 (for 5-6% ROE).
 A successful game launch on mobilephones can also turnaround the fortunes
on the gaming business rather quickly
 On PER basis as well, at 26x PER FY3/14Jeff
/ 18.4x FY3/14Cons, it appears to be
expensive
 If Konami is able to meet / exceed its
guidance or street forecasts, the stock may
test ¥2,500 levels / $25.0
 Console Game sales fell c. 50% YoY in 1Q;
if this trend continues, the downside
could be much bigger than we forecast
 Meanwhile the SNS business is also
shrinking from last year
 An earnings miss (like last year), and the
stock can test 1.0x PBR levels of ¥1,800 /
$18.0
Long Term Analysis
FY3/13 Revenue split
FY3/13 Revenue split by type of games
OP split by segments
Source: Jefferies, Company data
Peer Group
Group PB ratio
Konami’s PBR over time
Source: Bloomberg, Jefferies estimates
Catalysts
 Launch of Metal Gear Solid 5 expected
next fiscal year
 Legitimization of Casino in Japan
 Market share gain in Casino business in US
and in Australia
 Successful title launches in mobile game
business
Company Description
Konami was founded in 1973 in Osaka by Kagemasa Kozuki (current Chairman of the
board), which originally manufactured amusement machines for arcades. Nearly a third of
the company is owned by the Kozuki family. It expanded into the PC game business in
1982. Today the company operates various businesses including game software, mobile
games, casino business as well as fitness club operations. The main earnings pillars within
their game business are Metal Gear series, sports games (especially soccer and baseball),
and card games.
page 2 of 21
Please see important disclosure information on pages 18 - 21 of this report.
Atul Goyal, CFA, Equity Analyst, +65 6551 3965, [email protected]
THE LONG VIEW
Scenarios
9766 JP
Initiating Coverage
10 September 2013
Konami
The gaming space is changing rapidly. The console gaming market, in its 8th
innings, is shrinking and seeing consolidation. Konami fared poorly in the
previous cycle transition (top games sales fell 70%). Konami is becoming
more of a casino play, but that catalyst is not until next year. We forecast its
console game sales to fall 30% this year, driving -10% OP (cons +30%). With
5-6% RoE, we use 1.1x PBR to value it at ¥2,000. Initiate with Underperform
rating.
Gaming industry is at the crossroads;
Konami will have earnings growth
from casino machines; but gaming
might be a drag
One of the two franchises – PES (a
soccer game) has seen tough
competition and led to an overall
70% decline in sales in the Gen 7
cycle (as compared to Gen 6)
Mobile gaming offers huge growth
opportunities; but first the SNS
related earnings decline will cause a
drag in FY3/14
It lacks near-term catalysts
Japan Casino bill will be sentiment
positive for in CY14
Industry at the crossroads, Konami is changing
Technology has always been a change agent for this industry. Besides a new cycle (nextgen consoles), in the last few years, the industry has been revolutionized by the mobileOS app-store business model. That has led to (a) market expansion, (b) change in
customer needs, (c) resulting change in the business models. Game developers are
repositioning amidst these structural changes. For Konami, Digital Entertainment drives
50% of revenues and c. 100% of OP. Over the previous cycle, Konami has seen the
biggest decline in the game sales of its key titles (-70% as compared to Gen 6 cycle).
However, it is shifting more towards casino machines, where it is rapidly taking share in
US, AU markets.
Console in 8th innings…consolidating
The biggest challenge for game developers is that the installed base of next-gen consoles
(and handhelds) is set to fall by 30-50%. As the tie-ratio is falling, the total market size is
shrinking. The top end of the market will consolidate as it did in previous gen consoles as
well. 30% of its games revenues come from console business, which has been weakening
through the previous cycle. The weakness of its soccer game franchise (PES) has been a
big reason. The next Metal Gear Solid launch (the biggest game title for Konami) will not
be released until next year. This side of the business lacks near-term catalysts.
Mobile games – card collection games no more
Mobile-OS games have grown rapidly. The mobile games market is now bigger than the
handheld market (steady decline). Within that, Japan appears to be by far the biggest
market. Here, small cos (Super-Cell, Gungho etc.) are better positioned than the consoleera companies. Around 30% of Konami’s game revenues are from SNS games, but most
of that is still from browser-based games on feature phones. This remains a drag. FY3/15
could look different with Konami’s plan to aggressively launch native-app games next FY.
Lacks catalysts near term, Casino is next year’s story
Almost all the profits are driven by games but its position is not as strong as that of peers.
That said, the Japan mobile-gaming opportunity is huge for a company of Konami’s
calibre. While game business is likely to suppress profitability, casino (machine) business
will continue to grow. We believe the next major catalyst for Konami is next year.
Valuation and Risks
We initiate with UPF rating and a
target of ¥2,000 (1.1x PBR)
We derive our price target of ¥2,000 based on 1.1x PBR FY3/15 (for 4-5% ROE). On PER
basis as well, at 26x PER FY3/14Jeff / 18.4x FY3/14Cons, it appears to be expensive. Our
earnings forecast of ¥19.5b-Y20.5b OP for the next two years is significantly below
consensus estimates (of ¥28-30b). With c. 10% potential downside to our PT, we initiate
with Underperform.
Besides the market risk (Japan) and the industry risk (gaming by its very nature faces the
biggest risk of hit-and-miss), upside risk to the stock comes from an earlier introduction of
the Japan Casino Bill, or from unexpected success of one of its mobile games.
page 3 of 21
9766 JP
Initiating Coverage
10 September 2013
Overall Business structure: Revenue and Profits
Digital entertainment (Games) is
about half the revenues
Health & Fitness is non-core, in our
view
Games & Systems (casino machines)
is an important growth driver
Exhibit 1: Revenue breakdown
Gaming & Systems
11%
Other 3%
Revenue Split FY3/13
Digital
Entertainment 51%
Health & Fitness
35%
Source: Jefferies, company data, Bloomberg
.
Most of the profits are from games
related business…
Exhibit 2: Konami’s main businesses, as defined on its website
…while most of the revenues and
profits come from Digital
Entertainment business…
Over the next 5-10 years, Gaming &
Systems will also become important
as it secures a higher share in the
casino machines business overseas
Additionally it will also benefit from
the potential launch of Casinos in
Japan
However for now, this business
makes a fairly small contribution to
the bottom-line
Source: Konami website
page 4 of 21
9766 JP
Initiating Coverage
10 September 2013
Most of the profits are from games
related business
Exhibit 3: OP breakdown
Other 0%
OP Split FY3/13
Gaming & Systems
19%
Digital
Entertainment 71%
Health & Fitness
10%
.
Revenues have been steadily
declining but may see some
improvement, esp. from Casino
machines related business
Exhibit 4: Total Group Revenues
350
300
Sales (¥ bn)297
310
280
262
258
266
250
226
216
216
232
200
150
100
50
0
FY3/07
FY3/08
FY3/09
FY3/10
FY3/11
FY3/12
FY3/13 FY3/14 (E)FY3/15 (E)FY3/16 (E)
Source: Jefferies estimates, company data, Bloomberg
Within DE – SNS is expected to
shrink the most, while Consumer
games also face decline with no
major release scheduled this year
Core business: Digital Ent – Games, within that
Exhibit 5: Digital Entertainment revenue split by type of games
Card Games 19%
Consumer Game
32%
Konami’s products
Social Network
Serice 28%
Amusement 21%
.
Source: Company data
page 5 of 21
9766 JP
Initiating Coverage
10 September 2013
Consumer games have been steadily
declining and will fall further, in our
view
Exhibit 6: Consumer Games revenues (part of Digital Entertainment segment)
120
100
Cons.Games
Sales (¥ bn)
97
87
84
80
66
64
60
50
37
40
27
27
20
0
FY3/07
FY3/08
FY3/09
FY3/10
FY3/11
FY3/12
FY3/13
FY3/14 (E) FY3/15 (E)
.
Within the console business (also called Consumer Games, within Konami), the biggest
reliance has been on PS3, XB360 and PSP games. Unfortunately all three are coming to
the end of their life-cycle and are likely to drop further.
Exhibit 7: Consumer Games (on consoles) – Shipment volumes split by platform
Total
3DS
DS
PSV
PSP
PS2
PS3
PS4
Wii
X360
Xbox
Xbox One
GBA
PC
FY3/07
22,500
4,928
3,263
10,620
68
FY3/08
23,330
5,599
3,733
7,932
1,866
FY3/09
26,810
4,290
3,217
4,558
7,507
FY3/10
20,200
3,434
3,434
2,424
4,646
FY3/11
21,940
439
3,510
4,388
1,316
5,924
FY3/12
18,300
1,098
1,830
3,843
915
6,222
FY3/13
13,610
817
408
681
1,769
408
6,533
FY3/15 (E)
9,141
604
107
96
438
99
2,888
1,900
240
1,313
1,418
136
FY3/14 (E)
9,221
710
215
193
876
197
4,814
100
320
1,750
46
405
1,418
360
2,100
1,167
-
4,558
1,877
-
4,444
1,616
-
3,510
2,413
-
1,830
2,196
-
681
2,178
-
585
855
933
804
202
439
366
FY3/12
18,300
FY3/13
13,610
FY3/14 (E)
9,221
FY3/15 (E)
9,141
39
Source: Jefferies estimates, company data
Exhibit 8: Consumer Games (on consoles) – Shipment % by platform
Total
3DS
DS
FY3/07
22,500
FY3/08
23,330
FY3/09
26,810
FY3/10
20,200
FY3/11
21,940
22%
24%
16%
17%
2%
16%
6%
10%
15%
47%
0%
16%
34%
8%
12%
17%
28%
17%
12%
23%
20%
6%
27%
21%
5%
34%
6%
3%
5%
13%
3%
48%
2%
6%
2%
9%
5%
17%
7%
22%
8%
16%
11%
10%
12%
5%
16%
PSV
PSP
PS2
PS3
PS4
Wii
X360
Xbox
Xbox One
GBA
PC
8%
2%
2%
10%
2%
52%
1%
3%
19%
7%
1%
1%
5%
1%
32%
21%
3%
14%
16%
3%
4%
4%
3%
1%
2%
2%
1%
page 6 of 21
9766 JP
Initiating Coverage
10 September 2013
Exhibit 9: Biggest Konami Titles over the years (Metal Gear Solid, Pro-Evolution Soccer, Dance Dance Revolution)
Pos
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
Game
Metal Gear Solid 2: Sons of Liberty
Metal Gear Solid
Metal Gear Solid 4: Guns of the Patriots
Crash Bandicoot: The Wrath of Cortex
Winning Eleven: Pro Evolution Soccer 2007
Metal Gear Solid 3: Snake Eater
Teenage Mutant Ninja Turtles
World Soccer Winning Eleven 9
World Soccer Winning Eleven 8 International
Pro Evolution Soccer 2008
PES 2009: Pro Evolution Soccer
Frogger's Adventures: Temple of the Frog
Yu-Gi-Oh! The Duelists of the Roses
pro evolution soccer 2011
Teenage Mutant Ninja Turtles II: The Arcade Game
Dance Dance Revolution X2
Yu-Gi-Oh: Duel Monsters 4
Dance Dance Revolution Extreme
PES 2009: Pro Evolution Soccer
Yu-Gi-Oh! The Eternal Duelist Soul
Dance Dance Revolution: Hottest Party
Crash Nitro Kart
Metal Gear Solid: Peace Walker
Yu-Gi-Oh! Forbidden Memories
DDRMAX2: Dance Dance Revolution
Pro Evolution Soccer
Dance Dance Revolution X
Crash Bandicoot: The Huge Adventure
Yu-Gi-Oh! Duel Monsters
Silent Hill
Dance Dance Revolution: Hottest Party 2
Teenage Mutant Ninja Turtles III: The Manhattan Project
Crash Bandicoot 2: N-Tranced
Gradius
Dance Dance Revolution (Japan)
Yu-Gi-Oh! The Sacred Cards
Silent Hill 2
Castlevania: Symphony of the Night
Frogger: The Great Quest
Crash Bandicoot: The Wrath of Cortex
Castlevania
World Soccer Winning Eleven 9 (JP & Others sales)
TwinBee
Ganbare Goemon! Karakuri Douchuu
Metal Gear Solid VR Missions
Yu-Gi-Oh! The Sacred Cards (American and Others sales)
Dance Dance Revolution Extreme 2
Metal Gear Solid: Portable Ops
Yu-Gi-Oh! Duel Monsters II: Dark Duel Stories
Platform
PS2
PS
PS3
PS2
PS2
PS2
NES
PS2
PS2
PS2
PS2
PS2
PS2
GBA
PS2
PS3
PS3
NES
PS2
GB
PS3
PS2
PS3
GBA
Wii
PS2
PSP
PS
PS2
PS2
PS2
GBA
GB
PS
PS3
PS2
Wii
NES
GBA
NES
PS
GBA
PS2
PS
PS3
PS2
XB
NES
PSP
NES
NES
Wii
PS
GBA
PS2
PSP
GB
X360
Year
2001
1998
2008
2001
2006
2004
1989
2005
2004
2007
2002
2003
2008
N/A
2001
2010
2009
1990
2009
2000
2011
2004
2008
2001
2007
2003
2010
1999
2003
2001
2008
2002
1998
1999
2007
2009
2008
1991
2003
1986
1999
2002
2001
1997
2012
2001
2002
1986
2005
1986
1986
2008
1999
2002
2005
2006
1999
2007
Genre
Action
Action
Action
Platform
Sports
Action
Platform
Sports
Sports
Sports
Sports
Sports
Sports
Adventure
Misc
Sports
Sports
Action
Simulation
Role-Playing
Sports
Simulation
Sports
Strategy
Simulation
Racing
Action
Role-Playing
Simulation
Sports
Simulation
Platform
Strategy
Adventure
Sports
Sports
Simulation
Action
Platform
Shooter
Simulation
Role-Playing
Action
Platform
Sports
Platform
Platform
Platform
Sports
Shooter
Platform
Sports
Adventure
Role-Playing
Simulation
Action
Strategy
Sports
Global
6.05
6.03
5.79
5.42
4.39
4.23
4.17
4.06
3.85
3.63
2.99
2.9
2.5
2.39
2.38
2.35
2.25
2.23
2.23
2.18
2.14
2.13
2.09
2.07
2.04
1.95
1.93
1.88
1.81
1.75
1.75
1.73
1.61
1.6
1.58
1.57
1.55
1.39
1.36
1.36
1.35
1.3
1.28
1.27
1.24
1.23
1.23
1.23
1.2
1.2
1.2
1.19
1.18
1.16
1.14
1.13
1.1
1.07
Source: Jefferies, vgchartz
page 7 of 21
9766 JP
Initiating Coverage
10 September 2013
Within Consumer games – PS3,
XB360 and PSP account for c. 80% of
total shipments – and all 3 are
previous-gen consoles coming to the
end of their life cycle
Exhibit 10: Games shipment volume split by platforms
PC 1%
FY3/13
% split by Volumes
PS2 3%
X360 16%
Wii 5%
DS 3%
PS3 48%
3DS 6%
PSV 5%
PSP 13%
Source: Jefferies, company data
.
Exhibit 11: Konami Game launches on consoles ahead…
Twin Bee
Ganbare Goemon - Yuki hime Kyuushuutsu emaki
Tokimeki Memorial Girl's Side Triple Pack
Jikkyou Powerful Pro Baseball 2013 (PS3)
Jikkyou Powerful Pro Baseball 2013 (PSP)
Jikkyou Powerful Pro Baseball 2013 (PS Vita)
Metal Gear Solid 5 (MGS5)
Wii U
Wii U
DS
PS3
PSP
PS Vita
PS3, PS4, XB360, X1
Sep-2013
Sep-2013
Sep-2013
Oct-2013
Oct-2013
Oct-2013
TBD
page 8 of 21
9766 JP
Initiating Coverage
10 September 2013
Industry: Console business is challenging
Total installed base of consoles much smaller
The current console gaming cycle is set to be worse than the previous one. We expect the
next-gen consoles (PS4, XBone, Wii-U, 3DS, PS-Vita) to infuse some life, but over the
cycle, industry-wide revenues opportunity from console-gaming is destined to be smaller
(much smaller) than the previous gen (PS3, XB360, Wii, DS, PSP). This is mainly because
of significantly lower numbers (in our forecast) for Wii U, 3DS and PSV.
Exhibit 12: Gen 7 installed base (2006-2013)
500
450
400
Gen 7
Installed base
(mn)
79
Exhibit 13: Gen 8 installed base estimate (2012 onwards)
495
450
400
350
Gen 8
Installed base
(mn)
350
152
300
300
250
250
101
200
18
67
200
150
68
100
50
82
0
259
11
150
82
100
50
500
95
0
PS3
XB360
Wii
DS
PSP
Total
Source: Jefferies estimates, company data, vgchartz
PS4
XB1
WiiU
3DS
PSV
Total
Source: Jefferies estimates, company data, vgchartz
Moreover, with lower tie-ratio (10-15% lower), the total market size for the console
gaming software is expected to be lower than the previous cycle. This will affect most 3rd
party game developers, albeit weak sales of Wii U and 3DS (as compared to previous
platforms) are hurting Nintendo’s bottom-line more than that of others.
Exhibit 14: Overall installed base market share split for Gen 8 consoles
Gen 8 expected share split
Wii U
6%
XB1
39%
PS4
55%
Source: Jefferies estimates
However the overall market may not be immune to the overall downtrend in the demand
for software.
page 9 of 21
9766 JP
Initiating Coverage
10 September 2013
Industry: Mobile-OS games is expanding rapidly
$9.5b of app store revenue (iOS +
Google)
Handheld games revenue is sliding
and is below Google Playstore
revenue, which itself is just about
half that of iOS App-store
iOS and Google Playstore game
revenues seem to be 4-5x that of
dedicated handhelds
Consumers spent c. $9.5b over the last 12 months: Adjusting for the 30% revenue
sharing with the OS owner (Apple / Google), smartphone users (less than 1bn) spent a
whopping $9.5b on apps (‘premium’/‘freemium’ apps) over the last 12 months…
Exhibit 15: Indexed consumer spending on games (iOS 1Q13 indexed to 100)
120
100
1Q13
80
2Q13
60
40
20
0
iOS App Store
Google Play
Gaming-Optimized
Handheld
Source: App Annie
Mobile gaming revenues driven by Asia, and particularly Japan
When it comes to revenues (i.e. consumer spending), Japan is the biggest source of
revenues for developers on Google Playstore (where US is a surprising #3) and #2 for
those on iOS (US is #1).
Exhibit 16: Top countries by Revenue Q2, 2013 – iOS and Android
Rank
1
2
3
4
5
Apple iOS
US
Japan
UK
Australia
China
Google Playstore
Japan
South Korea
US
Germany
UK
Source: App Annie, Jefferies
For details on industry trends, please see the detailed industry report.
page 10 of 21
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Konami’s performance over the last decade
Its OP has averaged around ¥20b and is likely to remain so, until it gets the next big hit in
the mobile OS space.
Exhibit 16: Group Operating Profit
40
39
34
28
28
27
30
41
OP (¥ bn) 41
27
20
10
19
21
FY3/11
50
FY3/10
Group OP has been stagnant around
¥20-21b except for FY3/12 when
Gatcha / SNS related grew rapidly
22
20
21
23
2
0
(10)
(20)
FY3/13
FY3/14 (E)
FY3/15 (E)
FY3/16 (E)
FY3/12
FY3/09
FY3/08
FY3/07
FY3/06
FY3/05
FY3/04
FY3/02
FY3/01
FY3/03
-22
(30)
10%
9%
9%
10%
Exhibit 17: Group Operating Profit Margin
23% OPM(%)
20%
15%
15%
15%
12%
11%
10%
11%
10%
5%
9%
7%
8%
FY3/11
25%
FY3/10
Group OPM has ranged from 7% on
the low end to 15% on the higher
end; we forecast 9-10% for next few
years
1%
0%
-5%
-10%
-9%
FY3/13
FY3/14 (E)
FY3/15 (E)
FY3/16 (E)
13
11
12
13
FY3/13
FY3/14 (E)
FY3/15 (E)
FY3/16 (E)
FY3/12
FY3/09
FY3/08
FY3/07
FY3/06
FY3/05
FY3/04
FY3/03
FY3/02
FY3/01
-15%
.
Exhibit 18: Group Net Profit
22
20
23
NP (¥ bn) 20
14
16
23
18
11
10
13
13
FY3/11
30
FY3/10
Group NP has been hovering around
¥10-15b (except a Gatcha-SNS
related jump in FY3/12)
10
0
(10)
(20)
(30)
-29
FY3/12
FY3/09
FY3/08
FY3/07
FY3/06
FY3/05
FY3/04
FY3/03
FY3/02
FY3/01
(40)
.
page 11 of 21
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Exhibit 19: Group Net Profit Margin
15%
13% NPM(%)
10%
9%
7%
6%
4%
5%
9%
6%
6%
4%
5%
6%
5%
5%
5%
6%
0%
-5%
-10%
FY3/13
FY3/14 (E)
FY3/15 (E)
FY3/16 (E)
FY3/12
FY3/11
FY3/10
FY3/09
FY3/08
FY3/07
FY3/06
FY3/05
FY3/04
FY3/02
FY3/01
FY3/03
-11%
-15%
6.0
4.9
4.8
5.0
.
Exhibit 20: Group RoE
26.6
ROE
16.2
8.3
10
15.5
9.4
8.0
10.1
11.1
5.9
7.1
6.7
FY3/11
20
FY3/10
30
FY3/09
RoE of c. 5% makes it difficult to
justify higher PBR
0
(10)
(20)
-20.3
FY3/13
FY3/14 (E)
FY3/15 (E)
FY3/16 (E)
4.5
4.9
4.8
5.0
FY3/13
FY3/14 (E)
FY3/15 (E)
FY3/16 (E)
FY3/12
FY3/08
FY3/07
FY3/06
FY3/05
FY3/04
FY3/03
FY3/02
FY3/01
(30)
.
Exhibit 21: Group RoA
7.9
ROA
4.7
6
7.9
6.9
7.9
5.6
6.3
3.7
3.6
4
4.6
4.4
FY3/11
8
FY3/10
10
2
0
(2)
(4)
(6)
(8)
(10)
FY3/12
FY3/09
FY3/08
FY3/07
FY3/06
FY3/05
FY3/04
FY3/02
FY3/01
FY3/03
-9.8
(12)
.
page 12 of 21
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10 September 2013
Exhibit 22: Group Inventory
25
20
15
14
18
16
13
24
24
24
23
FY3/10
30
FY3/09
30
Inventory
(¥bn)
FY3/08
35
FY3/07
Inventory is at the higher end of last
decade…but Casino machines
growth could need higher
inventories
26
25
32
25
22
20
15
10
5
FY3/16 (E)
FY3/15 (E)
FY3/14 (E)
FY3/13
FY3/12
FY3/11
FY3/06
FY3/05
FY3/04
FY3/03
FY3/02
FY3/01
0
.
Exhibit 23: Group Inventory days
50
Inventory Days
(#)
45
40
35
30
42.6
31.6
29.8
28.0
25.9
25
23.8
19.2
20
29.9
32.7
46.0 46.5 46.5
36.0
30.4
27.7
21.7
15
10
5
FY3/16 (E)
FY3/15 (E)
FY3/14 (E)
FY3/13
FY3/12
FY3/11
FY3/10
FY3/09
FY3/08
FY3/07
FY3/06
FY3/05
FY3/04
FY3/03
FY3/02
FY3/01
0
.
page 13 of 21
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10 September 2013
Valuations: Earnings estimates have downside risks
Our OP estimates are significantly
below consensus for this year and
next…
No major release (MGS or PES) this
year
Our numbers are significantly below consensus. The main reason why FY3/12 OP was
c.¥40b was that Konami found a sweet spot with its card collection games on SNS.
Exhibit 24: Consensus estimates
Actual
Previous FY
FY3/13
225,995
21,875
13,174
95.0
Sales (¥ bn)
OP (¥ bn)
NP (¥ bn)
EPS (¥)
PER (x)
BVPS (¥)
ROE (%)
PBR (x)
Consensus
Jefferies
Current FY
Next FY Current FY
Next FY
FY3/14
FY3/15
FY3/14
FY3/15
232,285
251,978
215,500
215,800
28,081
37,337
19,500
20,500
16,373
21,862
11,400
11,600
118.1
158.1
82
84
18.4
13.7
26.8
26.3
1,708
1,816
1,713
1,796
6.9
8.7
4.9
4.8
1.3
1.2
1.28
1.22
1,613
5.2
Konami is one of the most expensive
gaming stocks in terms of PER
Exhibit 25: Peer group PER (x) – next year (FY3/15 or CY14)
30.0
26.5
Next Year PER (x)
24.0
25.0
10.6
11.3
11.5
11.2
Nexon
NamcoB
SegaS
Capcom
12.2
13.3
15.5
Cyberage
nt
10.3
Gungho
10.0
9.7
Dena
15.0
15.1
Gree
20.0
16.6
17.7
5.0
Konami
SquareE
EA
Take-Two
Activision
B
Ubisoft
0.0
.
5.0
4.5
Curr year PBR (x)
4.01
4.0
3.22
3.5
3.0
1.18
1.30
1.31
Konami
NamcoB
SquareE
1.5
1.27
Ubisoft
2.0
1.36
1.55
1.61
1.61
Dena
2.5
SegaS
Factoring in potential upside from
Casino business, we use 1.1x PBR to
arrive at our price target of ¥1,950
Exhibit 26: Peer group PBR (x) – this year (FY3/14 or CY14)
Gree
In terms of PBR it is on the lower
end, however its RoE of 4-5% makes
it look expensive at 1.3x PBR
1.86
2.20
2.47
1.0
0.5
Gungho
EA
Cyberage
nt
Take-Two
Activision
B
Nexon
Capcom
0.0
page 14 of 21
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Initiating Coverage
10 September 2013
Excluding brief periods of
exuberance, Konami’s market cap
has ranged between $2.5b to $3.5b
Exhibit 27: Market cap over last decade
7.0
$bn
Konami Market Cap
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Consensus based next-year PER
seems to be range-bound between
10-15x; however, we note that on
our forecasts Konami appears to be
at 26x PER.
Exhibit 28: PER (next year) over last decade – based on consensus
30.0
25.0
20.0
15.0
10.0
5.0
Jul-13
Mar-13
Jul-12
Nov-12
Mar-12
Jul-11
Nov-11
Mar-11
Jul-10
Nov-10
Mar-10
Jul-09
Nov-09
Mar-09
Jul-08
Nov-08
Mar-08
Jul-07
Nov-07
Mar-07
Jul-06
Nov-06
Mar-06
Jul-05
Nov-05
0.0
In PBR terms it has found at a bottom
at 1x PBR and been capped at 1.5x
PBR
Exhibit 29: PBR (current year) over last decade – based on consensus
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
Jul-13
Mar-13
Jul-12
Nov-12
Mar-12
Jul-11
Nov-11
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Jul-08
Mar-08
Nov-07
Jul-07
Mar-07
Nov-06
Jul-06
Mar-06
Jul-05
Nov-05
0.00
page 15 of 21
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Initiating Coverage
10 September 2013
Exhibit 30: Board of Directors and Corporate Auditors (Effective June 27th, 2013)
Representative Director, Chairman
Representative Director,
Director
Director and Senior Corporate
Advisor
Director(External)
Director(External)
Kagemasa Kozuki
Takuya Kozuki
Kimihiko Higashio
Noriaki Yamaguchi
Director(External)
Akira Gemma
Standing Corporate Auditor
Standing Corporate
Auditor(External)
Corporate Auditor(External)
Shinichi Furukawa
Minoru Maruoka
Setsuo Tanaka
Hisamitsu Arai
Tomokazu Godai
Hiroyuki Mizuno
Nobuaki Usui
Representative Director and Chairman of the Board, Mayatec Co., Ltd.
Director, Hiroshima Prefectural Institute of Industrial Science and Technology(*Former
Vice President, Matsushita Electric Industrial Co., Ltd.) *Current Panasonic Corporation
Advisor, Shiseido Co., Ltd. (Former Representative Director and President, Shiseido Co.,
Ltd.)
(Former Administrative Vice Minister, Ministry of Finance; Former Commissioner,
National Tax Agency)
(Former Commissioner-General, National Police Agency)
(Former Vice Minister for International Affairs, Ministry of International Trade and
Industry; Former Commissioner, Japan Patent Office)
Source: Company Data
While 3.4% of total outstanding shares are in the treasury, another 32% of the stock is in
the hands of the Kozumi family. That reduces the float to about 99m shares (68% of total
outstanding).
Exhibit 31: Shareholding structure (type of investors)
Konami
Unclassified
13%
Others
7%
Corporation
18%
Investment
Advisor
36%
Bank
26%
Exhibit 31: Dividend payout history
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
DPS
EPS
48.5
54
54
54
54
54
54
54
54
54
54
32
50
50
164.26
190.91
107.24
-234.58
166.86
87.41
175.86
118.15
133.63
79.3
99.76
96.48
166.23
95.04
Dividend payout
ratio
30.03707
30.12258
50.36469
NA
32.36172
61.61549
31.74113
45.72056
40.42172
66.27663
54.13006
33.68263
30.1191
52.60361
Source: Bloomberg
page 16 of 21
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Initiating Coverage
10 September 2013
Appendix: P&L and Balance Sheet statements
Exhibit 32: P&L statement (¥ mn)
(¥ mn)
Revenue
Cost of Revenue
Gross Profit
SG&A
R&D
D&A
OP
Interest Expense
Forex Losses (Gains)
Net Non-OP
Pretax Income
Income Tax Expense
Income Tax %
Income Before XO Items
Minority Interests
Net Income
O/S Shares
EPS
PER
FY 03/07
280,279
193,506
86,773
58,628
30,807
11,757
28,145
985
0
(545)
27,705
10,919
39%
16,786
575
16,211
137
118
FY 03/08
297,402
205,188
92,214
58,375
32,453
12,069
33,839
1,105
0
(280)
33,014
13,080
40%
19,934
1,589
18,345
137
134
FY 03/09
309,771
223,757
86,014
58,653
31,842
13,731
27,361
1,468
1,641
2,023
22,229
10,715
48%
11,514
640
10,874
133
81
FY 03/10
262,144
188,073
74,071
55,407
31,998
12,899
18,664
1,574
(67)
(21)
17,178
3,600
21%
13,578
264
13,314
133
100
FY 03/11
257,988
193,487
64,501
43,710
31,620
12,388
20,791
1,541
342
(215)
19,123
6,401
33%
12,722
(212)
12,934
136
95
FY 03/12
265,758
174,415
91,343
50,393
33,243
9,798
40,950
1,427
(331)
(224)
40,078
16,941
42%
23,137
125
23,012
139
166
FY 03/13
225,995
152,813
73,182
51,307
35,555
10,513
21,875
1,300
(1,285)
(99)
21,959
8,473
39%
13,486
312
13,174
139
95
23.1
FY 03/14e
215,500
149,349
66,151
46,651
33,473
10,900
19,500
1,208
(895)
(89)
19,276
7,788
40%
11,488
88
11,400
138.6
82
26.8
FY 03/15e
215,800
151,060
64,740
44,240
33,473
10,900
20,500
1,208
0
0
19,292
7,604
39%
11,688
88
11,600
138.6
84
26.3
FY 03/14e
FY 03/15e
Exhibit 33: Balance Sheet (¥ mn)
(¥ mn)
ASSETS
Cash & Near Cash Items
Short-Term Investments
Accounts & Notes Receivable
Inventories
Other Current Assets
Total Current Assets
LT Investments & Receivables
Net Fixed Assets
Gross Fixed Assets
Accumulated Depreciation
Other Long-Term Assets
Total Long-Term Assets
Total Assets
Liabilities & Sh Equity
Accounts Payable
Short-Term Borrowings
Other Short-Term Liabilities
Total Current Liabilities
Long-Term Borrowings
Other Long-Term Liabilities
Total Long-Term Liabilities
Total Liabilities
Total Preferred Equity
Minority Interest
Share Capital & APIC
Retained Earnings
Total Equity
Total Liabilities & Equity
BVPS
PBR
FY 03/07
FY 03/08
FY 03/09
FY 03/10
FY 03/11
FY 03/12
FY 03/13
57,333
0
29,729
24,236
26,963
138,261
701
53,294
91,655
38,361
112,401
166,396
304,657
52,130
0
33,802
24,374
29,773
140,079
659
66,690
110,110
43,420
111,820
179,169
319,248
53,568
0
30,624
23,512
28,971
136,675
560
60,552
99,584
39,032
103,883
164,995
301,670
50,740
0
30,164
23,497
30,161
134,562
226
62,434
108,266
45,832
100,976
163,636
298,198
59,541
0
28,564
25,479
35,350
148,934
140
59,508
106,157
46,649
105,309
164,957
313,891
76,451
0
33,647
22,121
29,746
161,965
429
62,251
115,065
52,814
103,361
166,041
328,006
63,669
0
33,066
26,349
30,399
153,483
440
62,651
121,060
58,409
106,374
169,465
322,948
70,483.8
0
33,154
27,154
31,007
161,799
449
65,157
78,874.8
0
33,200
27,465
31,689
171,229
471
67,763
106,374
171,980
333,779
106,374
174,609
345,838
24,002
23,073
35,391
82,466
42,108
2,724
44,832
127,298
0
2,697
124,612
50,050
177,359
304,657
1,273
20,410
8,115
46,588
75,113
35,613
21,439
57,052
132,165
0
4,324
124,477
58,282
187,083
319,248
1,331
1.65
17,430
3,627
41,329
62,386
37,739
18,006
55,745
118,131
0
4,907
124,489
54,143
183,539
301,670
1,338
1.64
16,138
2,433
34,894
53,465
39,885
15,617
55,502
108,967
0
4,766
124,488
59,977
189,231
298,198
1,382
1.59
19,003
10,783
33,369
63,155
35,516
16,813
52,329
115,484
0
4,493
122,889
71,025
198,407
313,891
1,424
1.54
16,290
9,758
41,842
67,890
29,803
14,593
44,396
112,286
0
262
121,574
93,884
215,720
328,006
1,554
1.42
14,443
11,847
33,222
59,512
22,588
14,849
37,437
96,949
0
574
121,574
103,851
225,999
322,948
1,626
1.35
13,577
11,847
33,222
58,646
22,588
15,146
37,734
96,380
13,733
11,847
33,222
58,802
22,588
15,449
38,037
96,839
574
121,574
115,251
237,399
333,779
1,713
1.28
574
121,574
126,851
248,999
345,838
1,796
1.22
page 17 of 21
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Initiating Coverage
10 September 2013
Company Description
KONAMI Corporation develops and sells consumer video game, Pachinko and arcade game machines, and casino management systems. The
Company also manufactures and sells fitness machines and health products and manages fitness clubs.
Analyst Certification
I, Atul Goyal, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Ayano Oda, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
Registration of non-US analysts: Atul Goyal, CFA is employed by Jefferies Singapore Limited, a non-US affiliate of Jefferies LLC and is not registered/
qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may
not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances
and trading securities held by a research analyst.
Registration of non-US analysts: Ayano Oda is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/
qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may
not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances
and trading securities held by a research analyst.
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives
compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority
of reports are published at irregular intervals as appropriate in the analyst's judgement.
Meanings of Jefferies Ratings
Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.
Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.
Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-month
period.
The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within
a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price
consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform
rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/
or Jefferies policies.
CS - Coverage Suspended. Jefferies has suspended coverage of this company.
NC - Not covered. Jefferies does not cover this company.
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regulations prohibit certain types of communications, including investment recommendations.
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the investment merits of the company are provided.
Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total
return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market
risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,
P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,
and return on equity (ROE) over the next 12 months.
Conviction List Methodology
1. The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research
2. Only stocks with a Buy or Underperform rating are allowed to be included in the recommended list.
3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen
is used to ensure a well-diversified portfolio.
4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis.
5. Once a month, analysts are invited to recommend their best ideas. Analysts’ stock selection can be based on one or more of the following:
non-Consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relative
to the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached their
target price, been downgraded over the course of the month or where a more suitable candidate has been found are removed.
6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list during
the month.
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10 September 2013
7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$.
8. The conviction list is published once a month whilst global equity markets are closed.
9. Transaction fees are not included.
10. All corporate actions are taken into account.
Risk which may impede the achievement of our Price Target
This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the
financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based
upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of
the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and
income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial
and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may
adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such
as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
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10 September 2013
Distribution of Ratings
IB Serv./Past 12 Mos.
Rating
BUY
HOLD
UNDERPERFORM
Count
Percent
Count
Percent
811
755
139
47.57%
44.28%
8.15%
179
119
1
22.07%
15.76%
0.72%
Other Important Disclosures
Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) group
companies:
United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.
United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England and
Wales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)20
7029 8010.
Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; located
at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.
Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,
Singapore 048624, telephone: +65 6551 3950.
Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a member
of the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 5251
6100; facsimile +813 5251 6101.
India: Jefferies India Private Limited, which is licensed by the Securities and Exchange Board of India as a Merchant Banker (INM000011443) and a
Stock Broker with Bombay Stock Exchange Limited (INB011491033) and National Stock Exchange of India Limited (INB231491037) in the Capital Market
Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400 051, India; Tel +91 22 4356 6000.
This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information set
forth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligation
under applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by the
provisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registered
broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of
1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European Economic
Area this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or have
been assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. Jefferies
International Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of which
are available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancy
work. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage any
potential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only by
professional or institutional investors. None of the investments or investment services mentioned or described herein is available to other persons
or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited is
regulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limited
pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert or
institutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connection
with this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65
6551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report is
issued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities and
Futures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation to
this report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC.
PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses,
verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by Jefferies India Private
Limited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning of
the Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject of
this document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or product
disclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authority
under the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securities
and Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under the
Act in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should inform
themselves about and observe any applicable legal requirements in relation to the receipt of this document.
This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion or
estimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligation
page 20 of 21
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10 September 2013
to maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors,
and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned or
described herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or services
to certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons or
under differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term views
expressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This material
does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual
clients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,
seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Past
performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange
rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently of
any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. None
of Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s).
Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior
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This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction
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For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES
© 2013 Jefferies Group LLC
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