DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm 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. 21 April 2017 Asia Pacific/Japan Equity Research Entertainment Software (Video Game (Japan)) Nintendo (7974) Rating NEUTRAL [V] Price (20 Apr 17, ¥) 26,815 Target price (¥) 30,000 Change to TP (%) 12 Market cap (¥ bn) 3,221 (US$ 29.5) Enterprise value (¥ bn) 2,593 Number of shares (mn) 120.1 Free float (%) 70.0 52-week price range 31,770–13,800 Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Keiichi Yoneshima 81 3 4550 9740 [email protected]Hanako Takahashi 81 3 4550 7366 [email protected]INITIATION A strong, new Nintendo: Can it beat market expectations? ■ Initiating at NEUTRAL with ¥30,000 TP: We initiate coverage of Nintendo with an NEUTRAL rating and a ¥30,000 target price (potential return 12%). We believe the company is entering a new phase of robust sales and profit growth, driven by the Nintendo Switch and new smart device game app business. In our view, however, we think the current share price already reflects this favorable outlook. We thus initiate at NEUTRAL. ■ Switch likely to drive profit/sales growth: We believe the Nintendo Switch is strongly positioned as a hybrid home console/handheld device, and thus expect uptake of 49mn units over five years, on par with the Super Nintendo Entertainment System (SNES). Such hardware uptake should drive up sales of game software with high marginal profit ratios (we assume an attach rate of 6x). In view of this, we look for software-business OP to surge to ¥165.8bn in FY3/19 (+450% vs. FY3/16). ■ Smart device apps: Smart-device games using popular IP seem to be taking off. With 2–3 titles planned over the next year, monthly sales of ¥20bn (level with Supercell’s) look achievable, given Nintendo’s ample intellectual property (IP). In FY3/20, we expect sales and OP to grow to ¥230bn and ¥106bn respectively. The nature of Nintendo’s business makes it less susceptible to losses and quiet periods than games operations in the past. This, along with prospects for synergies with game software businesses and other advantages, are likely to lift profits while ensuring greater stability. ■ Catalysts/risks: Catalysts include sales and profit growth driven by rising popularity of the Switch and a profit boost from the smart device game app business. Risks include worse-than-expected Switch sales and a lower attach rate, game app sales doing better (or worse) than expected, game app development delays, competitors launching new game consoles, and rapid yen appreciation or depreciation. Key points to watch for at FY3/17 results include initial FY3/18 guidance, the company’s Switch hardware sales projection, and an update on the development pipeline for game apps. ■ Valuation: Our ¥30,000 TP is from a sum-of-the-parts model based on (1) the game console business, (2) smart device app business, and (3) cash on hand. ■ Shareholder returns: With ample cash on hand, Nintendo is generally targeting a dividend payout ratio of at least 50%. Share price performance The price relative chart measures performance against the TOPIX which closed at 1,472.81 on 20-Apr-2017 On 20-Apr-2017 the spot exchange rate was ¥109.31/US$1 Performance 1M 3M 12M Absolute (%) -1.5 14.3 54.7 Relative (%) 1.3 17.2 47.9 Financial and valuation metrics Year 3/16A 3/17E 3/18E 3/19E Sales (¥ bn) 504.5 416.0 888.9 1,140.8 Operating profit (¥ bn) 32.9 21.0 91.3 196.7 Recurring profit (¥ bn) 28.8 23.3 105.7 211.1 Net income (¥ bn) 16.5 85.5 69.7 141.4 EPS (¥) 137.4 712.0 580.6 1,177.3 IBES Consensus EPS (¥) n.a. 769.9 677.3 1,058.1 EPS growth (%) (61.1) 418.2 (18.5) 102.8 P/E (x) 116.4 37.7 46.2 22.8 Dividend yield (%) 0.9 1.3 1.1 2.2 EV/EBITDA (x) 33.1 86.2 26.0 12.5 P/B (x) 2.0 3.1 3.0 2.9 ROE(%) 1.4 7.2 5.7 11.0 Net debt/equity (%) Net cash Net cash Net cash Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
21 April 2017 Asia Pacific/Japan Equity Research
Entertainment Software (Video Game (Japan))
Nintendo (7974) Rating NEUTRAL [V] Price (20 Apr 17, ¥) 26,815 Target price (¥) 30,000 Change to TP (%) 12 Market cap (¥ bn) 3,221 (US$ 29.5) Enterprise value (¥ bn) 2,593 Number of shares (mn) 120.1 Free float (%) 70.0 52-week price range 31,770–13,800 Target price is for 12 months.
[V] = Stock Considered Volatile (see Disclosure Appendix)
A strong, new Nintendo: Can it beat market expectations? ■ Initiating at NEUTRAL with ¥30,000 TP: We initiate coverage of Nintendo with
an NEUTRAL rating and a ¥30,000 target price (potential return 12%). We believe the company is entering a new phase of robust sales and profit growth, driven by the Nintendo Switch and new smart device game app business. In our view, however, we think the current share price already reflects this favorable outlook. We thus initiate at NEUTRAL.
■ Switch likely to drive profit/sales growth: We believe the Nintendo Switch is strongly positioned as a hybrid home console/handheld device, and thus expect uptake of 49mn units over five years, on par with the Super Nintendo Entertainment System (SNES). Such hardware uptake should drive up sales of game software with high marginal profit ratios (we assume an attach rate of 6x). In view of this, we look for software-business OP to surge to ¥165.8bn in FY3/19 (+450% vs. FY3/16).
■ Smart device apps: Smart-device games using popular IP seem to be taking off. With 2–3 titles planned over the next year, monthly sales of ¥20bn (level with Supercell’s) look achievable, given Nintendo’s ample intellectual property (IP). In FY3/20, we expect sales and OP to grow to ¥230bn and ¥106bn respectively. The nature of Nintendo’s business makes it less susceptible to losses and quiet periods than games operations in the past. This, along with prospects for synergies with game software businesses and other advantages, are likely to lift profits while ensuring greater stability.
■ Catalysts/risks: Catalysts include sales and profit growth driven by rising popularity of the Switch and a profit boost from the smart device game app business. Risks include worse-than-expected Switch sales and a lower attach rate, game app sales doing better (or worse) than expected, game app development delays, competitors launching new game consoles, and rapid yen appreciation or depreciation. Key points to watch for at FY3/17 results include initial FY3/18 guidance, the company’s Switch hardware sales projection, and an update on the development pipeline for game apps.
■ Valuation: Our ¥30,000 TP is from a sum-of-the-parts model based on (1) the game console business, (2) smart device app business, and (3) cash on hand.
■ Shareholder returns: With ample cash on hand, Nintendo is generally targeting a dividend payout ratio of at least 50%.
Share price performance
The price relative chart measures performance against the
Nintendo’s home game consoles have historically been more popular in America and
Europe. For example, overseas sales accounted for 65% of Nintendo 3DS sales, but for
the Wii the figure was 88%.
Figure 49: Handheld 3DS’ domestic
weighting high…
Figure 50: Wii console sales mostly in
Europe/US
Source: Company data, Credit Suisse Source: Company data, Credit Suisse
0102030405060708090
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Microsoft
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Nintendo
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02004006008001,0001,2001,4001,6001,800
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Nintendo Sony Microsoft
Japan
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Japan35%
US34%
EU31%
3DS
Japan12%
US48%
EU40%
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Home game consoles popular in Europe and
the US
21 April 2017
Nintendo (7974) 23
One way to measure “propensity to consume” as it relates to video games is to look at
total consumer spending on video games as a percentage of GDP (Figure 51). We can
further measure “propensity to consume” as it relates to Nintendo games by looking at
total spending on Nintendo games as a percentage of total video game consumption
(Figure 52).
While propensity to consume for video games in general is relatively high in Asia,
Nintendo games have a high propensity to consume in the US, the major game console
market. We see this as solid evidence of Nintendo’s strong brand in the US.
Figure 51: Game expenditure and
propensity to consume
Figure 52: Nintendo propensity to
consume particularly high in the US
Note: Inclination for game consumption comes from an index of game expenditure per GDP Source: IMF, Famitsu game White Paper 2016, Credit Suisse
Note: Nintendo inclination comes from an index Nintendo expenditure per total game expenditure Source: Company data, Credit Suisse estimates
Launch of new game hardware a major boost to game software sales
Nintendo also has strong sales capabilities for in-house developed games. Historically,
around 30% of games that have sold at least a million copies on the Nintendo platform
were Nintendo-developed games. We think that this strong lineup of proprietary titles is
one reason why people choose to purchase a Nintendo console.
A console’s software attach rate measures how many games are sold for every hardware
unit purchased. Historically, attach rates have been around six. Game software titles
generally have high operating leverage, so higher attach rates should boost profits. We will
be keeping a close eye on the Switch’s attach rate during its initial launch phase.
Figure 53: Our model assumes an
attach rate of six for Nintendo Switch
Figure 54: Approx. 30% of Nintendo’s
million-sellers are in-house titles
Note: Single year tie ratio Source: Company data, Credit Suisse estimates
Note: Based on games selling at least one million copies on a Nintendo platform Source: Company data, Credit Suisse estimates
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Share of proprietary million-seller titles
Nintendo brand particularly strong in
the US
Earnings sensitive to attach rates
21 April 2017
Nintendo (7974) 24
In-house titles, key earnings drivers, are already popular
When Nintendo unveiled the Switch on 13 January, it also announced a number of launch
titles, including The Legend of Zelda: Breath of the Wild. A trailer for the new Zelda title
had a 99% approval rating on YouTube as of January.
According to the Famitsu game magazine, the new Zelda title has sold very well since its 3
March launch, with 450,000 copies sold in Japan alone (as of 2 April; 350,000 for the
Switch and 100,000 for the Wii U). Previous Zelda titles have had over 90% of sales come
from overseas, suggesting potential overseas demand for the new Zelda title of 4.5mn
copies. We suspect that hardware production may not be keeping up with demand.
Figure 55: User interest in new
Nintendo Switch titles
Figure 56: High ratings for new titles
in established game series
Note: Compiled by Credit Suisse based on number of YouTube views (as of 24 January 2017) Source: Credit Suisse, YouTube
Note: Compiled by Credit Suisse based on number of YouTube views (as of 24 January 2017) Source: Credit Suisse, YouTube
Figure 57: Average game title sales/overseas ratio by IP
Source: Company data, Credit Suisse estimates
Zelda27%
ARM7%
1-2 Switch
5%
Mario Kart12%
Splatoon 28%
Super Mario
Odyssey41%
70%75%80%85%90%95%100%
05
1015202530
(mn
)
Views Likes
0%10%20%30%40%50%60%70%80%90%100%
02468
101214161820
(mn
un
its)
Overseas Japan Overseas weighting
Zelda trailer receives 99% approval rating
21 April 2017
Nintendo (7974) 25
Software developers should find it easy to develop games for Switch
Game developers have traditionally struggled, both in terms of time and effort, to create
games for Nintendo consoles, which have tended to have Nintendo-specific “quirks.”
However, we understand that Nintendo Switch will support a number of globally popular
middleware game engines, including Unity and Unreal Engine 4. Steady growth in the
Switch install base should naturally lead to further expansion of the game software lineup.
The company has set up Nintendo Developer Portal as a platform for both organizations
and individuals to download tools for developing Nintendo platform games. Acquiring the
necessary development hardware is not that expensive (only around ¥50,000), which
should encourage indie developers and others to develop Nintendo Switch games.
Figure 58: Higher adoption of Nintendo Switch to
boost expectations for an enhanced third-party
software lineup
Figure 59: Major titles for Nintendo Switch
Source: Nintendo Homepage Note (1): Highlighted titles represent in-house software Note (2): The Legend of Zelda: Breath of the Wild also released simultaneously for Wii U Source: Company data, Credit Suisse estimates
Life cycle for hardware runs for about five years
The hardware cycle is unlikely to change substantially over the medium term. That said,
sales cycles tend to be shorter for consoles than handhelds.
It takes about three years for penetration trends to become clear. In contrast with trends
for software, hardware sales are more likely to be concentrated in a product’s third year on
the market rather than its first. This is because a full slate of software titles is typically not
available until year three.
Figure 60: Compared with handheld consoles, campaigns for home game systems tend to be short and
decisive
Note: Shading (from dark to light) represents 20%+, 10%+ and above 5%+ of cumulative sales Source: Company data, Credit Suisse estimates
Release date Title Price Developer
3/3/2017 1-2-Switch ¥4,980 Nintendo
3/3/2017 The Legend of Zelda: Breath of the Wild ¥6,980 Nintendo
3/3/2017 I am Setsuna ¥4,800 SQEX
3/3/2017 Nobunaga's Ambition: Sphere of Influence ¥9,800 KoeiTecmo
3/3/2017 SUPER BOMBERMAN R ¥4,980 KONAMI
3/3/2017 DRAGON QUEST HEROES I-II ¥8,800 SQEX
3/3/2017 Puyopuyo Tetris S ¥4,990 SEGA
3/3/2017 Disgaea: Hour of Darkness ¥6,980 Nippon Ichi Software
3/3/2017 Snipperclips – Cut it out, together! ¥1,667 Nintendo
3/30/2017 Romance of the Three Kingdoms XIII ¥9,800 KoeiTecmo
YoY % chg. In Emerging markets YoY % chg. In Developed markets
Estimate
0
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Game content consumption per device (CY15)
21 April 2017
Nintendo (7974) 30
Figure 74: Smart-device business likely
to see sharp sales and profit growth
Figure 75: Smart device app sales
recognition and DeNA revenue
sharing
Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates
Figure 76: Nintendo-DeNA tie-up
titles: Targeting 2–3 per year
Figure 77: Nintendo’s robust IP
pipeline: Nintendo IP available without
restriction for the DeNA tie-up
Source: Company data, Credit Suisse Source: Company data, Credit Suisse
Figure 78: Significant room, particularly at Nintendo, for content sales per
smartphone; fee levels still considerably low
Note: Figures other than Nintendo based on domestic smartphone volume; Nintendo data based on global volume excluding certain regions Source: Company data, Credit Suisse estimates
Nintendo has said that it would not simply port older console titles to mobile. We think,
however, that this avenue remains a potential long-term option for games that can be
enjoyed even given the limited functionality of smartphones as a gaming device.
Figure 82: Lack of growth in number
of people working in gaming
industry…..
Figure 83: … could be one factor
behind peak-out of domestic
smartphone game market
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 84: With no increase in number
of people working in Japan’s gaming
industry, companies will need to find
ways to raise earnings with existing
number of workers
Figure 85: Porting of Dragon Quest as
a smartphone app; unit price high in
one-time sale model
Note: Console games represent combined total for Nintendo, Square Enix, Konami, Bandai Namco, Capcom, and Koei Tecmo; mobile games represent combined total as shown in Figure 82 Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse, AppAnnie
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21 April 2017
Nintendo (7974) 33
The Switch from a marketing perspective
Dual role as console and portable a strength in
middle-end market
The three main game hardware makers are Nintendo, Sony, and Microsoft. All three are
also game developers, and people often compare hardware to see which products have
higher specs. Looking simply at specs, Nintendo’s hardware lags relative to offerings from
Sony and Microsoft.
Figure 86: Nintendo’s hardware lags peers’ in terms of specs…
Note: Nintendo hardware in red. Source: Company data, Credit Suisse estimates
Figure 87 is an overview of the positioning of various game hardware products. The
Switch is in a unique position in that it is both a console and a portable gaming device.
Competing devices fall into one of four groups: (1) game consoles, (2) PCs,
(3) smartphones and tablets, and (4) handheld game devices. However, if manufacturers
sought to adjust hardware in any one of these groups to make it more like the Switch, they
would probably have to give up some of the advantages inherent to their previous
positioning.
PS4
XboxOne
Switch
WiiU
PSP
3DS
PSV
0.0
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21 April 2017
Nintendo (7974) 34
Figure 87: The Switch’s positioning: High barriers to entry
Source: Company data, Credit Suisse estimates, Famitsu Game Hakusho Note: Values represent the market scale of content for each platform.
A look at the Switch’s potential competition
(1) Consoles
Because the Switch does double duty as a console and a portable game device, the
tradeoff is that Nintendo had to cut some of the higher-spec features commonly featured in
consoles. Similarly, VR and other high-end content is often associated with consoles, but it
will probably be a while before these offerings are adapted to handhelds/portables.
Figure 88: PlayStation VR
Figure 89: The compact Xbox One S is
about 3kg and not very portable
Source: Sony Source: Amazon.co.jp (official Microsoft store)
(2) PCs
PCs are not necessarily the best devices for games because of their keyboards and
various peripherals. While a segment of the market is strongly devoted to PC gaming, this
segment is more likely to be concerned with gameplay rather than portability. Even if PCs
were portable, this segment would probably not find much incentive to make use of this
functionality. Another concern for this segment would be that handheld devices might not
be able to offer the same connectivity options and other features necessary in PC gaming.
PS4, Xbox One
JPY 1.4 trillion
PC
JPY 2.2 trillion
3DS,
PS Vita
JPY 0.7 trillion
Smart Phone Tablet
JPY 3.2 trillion
Switch
・High spec
・Rich content such as VR
・High spec
・General-purpose design
・Compact
・Low priced
・Compact
・Simple design
with few buttons
Game
(specialized)
Game
(general-
purpose)
PortableConsole
(1)
(2) (3)
(4)
21 April 2017
Nintendo (7974) 35
While penetration rates for PCs are high, the percentage of PC users that play PC games
is not. Similarly, the base of PC gamers is known for its stability in terms of scale, so we
doubt the player base would move to a different platform.
(3) Smartphones and tablets
While it would not be that difficult to use smartphones and tablets as consoles, their main
appeal is their smaller size, so the advantages of making a larger smartphones/tablet for
dual console/portable use are unclear. Similarly, the mainstream in smartphones/tablets is
to minimize buttons in favor of touch panel space, so designs optimizing these devices for
gameplay (adding controllers) does not seem likely.
While a number of controllers are on the market that improve the use of smartphones for
gameplay, their designs have yet to win over consumers.
Figure 90: MFi (made for iPhone/iPad)
controllers (¥12,800) Figure 91: Sony’s Xperia PLAY
Source: Apple (website) Note: Gamevice Controller for iPhone 6/6s and iPhone 6/6s Plus
Source: Sony Note: On sale from October 2011
(4) Handhelds
Handheld game devices are potential competitors for the Switch. Handhelds are optimized
for gaming, and with a few tweaks to sizes and specs they could compete with the Switch.
The concern is that this could lead the Switch’s positioning and that of handhelds to
overlap.
At this point, Nintendo’s 3DS has about 80% of the market for handhelds (hardware).
Nintendo has already made the 3DS into one of the key pillars of its business. How the
company positions the 3DS and other handhelds after the launch of the Switch (whether,
for example, it emphasizes synergies with the Switch or whether the Switch cannibalizes
the 3DS user base) will be a major factor determining longer-term earnings.
While it is unclear in some regards how consumers will take to the Switch’s interface,
handhelds are in a clearly superior position with respect to pricing. The Switch sells for
¥29,800, while a new 3DS goes for ¥16,000 and the entry-level 2DS sells for ¥9,800.
These products differ significantly in terms of specs, of course, but we doubt demand for
low-priced gaming will decline substantially. Sony’s PS Vita is the most expensive
handheld (¥18,980), and Sony does not have a low-end model in its lineup. In this sense,
Nintendo is better hedged against risk of cannibalization.
21 April 2017
Nintendo (7974) 36
Figure 92: 3DS dominates the
handheld market
Figure 93: Lower prices still a strength
of handhelds
Source: VG Chartz, Credit Suisse Source: Company data, Credit Suisse
Figure 94: The Nintendo 2DS was
launched in October 2013
Figure 95: 2DS sales since launch
total around 7mn worldwide
Source: (C)Nintendo Source: Company data, Credit Suisse
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21 April 2017
Nintendo (7974) 37
Need to monitor hardware market segmentation
We believe it will take 3−5 years for the Switch to win penetration, then a few more years
to have a clear picture of the state of play with respect to synergies/cannibalization.
Traction for the new system will be a point to watch, as will changes in the positioning of
other hardware options.
Figure 96: Handhelds and the Switch: Three positioning scenarios
Source: Company data, Credit Suisse estimates
Positive scenario: Synergy effects
Base scenario: Differentiation
Negative scenario: Cannibalization
3DS,
PS Vita
Switch
Portable
3DS,
PS VitaSwitch
3DS,
PS VitaSwitch
21 April 2017
Nintendo (7974) 38
Redefining the casual game
Content value the sum of core value and peripheral
value
Defining core value vs. peripheral value
When we purchase an item, we are making a statement about the value we place not just
on the item itself but on its peripheral value. For example, if we purchase a video game, a
direct reason may be "because we think the game will be fun to play", but there may be
other reasons as well, such as “the commercial was interesting” or “all my friends are
playing it” or “I could afford it”. We define core value and peripheral value as follows:
■ Core value: Value attached to the content itself
e.g., for video games, the value of the game as envisioned by the developers,
playability, etc.
■ Peripheral value: Value peripheral to the game itself
e.g., popularity, appealing commercials, pricing, ability to play in small blocks of time
etc.
More ways to enjoy content means fewer shared game experiences?
Users now have almost unimaginable freedom when it comes to choosing how to
consume content. We believe this shift to ‘anytime, anywhere’ is clearly an advantage in
terms of convenience–itself a peripheral value. However, this author’s view is that this has
come at the cost of reduced peripheral value of another kind: sharing the experience with
others.
In the past, for example, people used to talk about the TV shows they had both seen the
previous night. Nowadays it is less common to meet people in person that watched the
exact same show or episode the previous night. Instead, these discussions that used to
happen face to face now take place on online bulletin boards and forums that often allow
users to upload or interact with video or other game-related content.
Figure 97: More avenues to consume content
Source: Credit Suisse estimates
Most important peripheral value for games is sharing the game experience
Focusing purely on games, “the more the merrier”, seems to apply when it comes to the
number of players. Mobile games in particular can jump in popularity thanks to advertising
and promotions, and games that gain in popularity tend to be games that let users play
with or against either real-life friends or against virtual ‘friends’ online (that the gamer may
or may not know in real life).
TV Movies PCGame
consoles
Smartphones,
tabletsBooks
TV
programsMovies Games
Comics,
magazines
Cross-border, multi-device
trend
21 April 2017
Nintendo (7974) 39
Figure 99 maps the level of shared experience based on user base (number of players)
and whether in-game communication is with ‘real’ friends or ‘virtual’ friends. The closer a
game is to the bottom right corner, the more the game can be viewed as a core game,
while games in the upper left are peripheral games.
Figure 98: Core value vs. peripheral
value
Figure 99: Game genre mapping: Core
in bottom right, peripheral in upper
left
Source: Company data, Credit Suisse Source: Credit Suisse
Peripheral value is eventually lost; only core value remains
■ Pokémon Go a good example of a game with enormous peripheral value
We see Pokémon Go as a classic example of a game with enormous peripheral value: a
gaming phenomenon with a broad user base that encouraged real-life interaction. Many
users apparently started playing Pokémon Go because it was really popular or it was fun
playing with friends. In fact, we believe the best evidence of its peripheral value is that the
precipitous fall-off in users as the surge in popularity was followed by an equally rapid fade.
According to media analytics company comScore, the number of Pokémon Go users as of
December 2016 had declined to around 20% of peak users (July 2016).
■ PC games are a good example of core value games
PC games may have a smaller user base, but the popularity comes from allowing users to
share the game’s core value experience with virtual (online) friends. Compared with
mobile games, PC games have smaller, but far more loyal, users bases: PC games lose
users at a much slower rate and are thus more likely to be stable earnings generators.
Peripheral value
Value associated with the content
Core value
Value of the content itself
PC online
Console
Game
Real Friends Virtual Friends
Communication
# o
f p
laye
rs
Large
Small
Peripheral
Core
Mobile game:
Puzzle and Dragons
Monster Strike
White Cat Project
Fire Emblem Heroes
21 April 2017
Nintendo (7974) 40
Figure 100: Pokémon Go rankings Figure 101: PC games are stable earnings
generators
Note: Red line = US rankings, blue line = Japan rankings Source: AppAnnie
Source: Famitsu Game Hakusho 2016
Market value determines peripheral value; core value is what remains
The value placed on content is determined by its peripheral value and core value, but
intuitively we can see that there is obviously an upper limit on peripheral value. For
example, unlimited spending on advertising would not lead to an unlimited increase in a
game’s peripheral value.
Perhaps the easiest way to visualize this is to think about measuring peripheral value first
by looking at market value (i.e., sales). We can then estimate the proportion of market
value accounted for by peripheral value. If we subtract peripheral value from market value,
what is left is core value.
For example, assume we have two games with the same level of sales. However, Game A
has been the subject of intense advertising, while Game B has had almost no advertising
support. If we assume everything else is equal to keep things simple, we can see that in
terms of market value, Game A = Game B, while for peripheral value Game A > Game B
and for core value, Game A < Game B.
Figure 102: Core value defined as difference between market value and
peripheral value
Source: Credit Suisse estimate
0
200
400
600
800
1,000
1,200
1,400
1,600
(JP
Y b
n)
Mobile
Console
PC
Market value ー Peripheral value = Core value
21 April 2017
Nintendo (7974) 41
Monetizing older titles a possibility, but hurdles remain
Is ¥850-plus a reasonable price for a Famicom-era
game?
Nintendo’s Classic Mini launched last year sold every well (although the company has at
least temporarily halted production). Nintendo’s software attach rate of roughly 7x implies
that a user buying the package of 30 titles would play only seven titles. Assuming that the
consumer pays the fixed price of ¥5,980 for the 30-title set but only uses just seven of the
games, the price for each one would amount to ¥850. Even if the user were to play all 30
games, each title would effectively cost ¥200, which we would regard as the price floor for
these retro titles.
Figure 103: Value of older games around ¥200–850 per game
Source: Company data, Credit Suisse estimate
The high resale price quoted for the Classic Mini on some online shops is striking. We
note transactions at a resale price as high as ¥10,000, roughly twice the list price. This
suggests consumers probably regard the ¥5,980 list price as a bargain.
Figure 104: Nintendo Classic Mini’s
first week sales surpass 3DS Figure 105: 30 titles for ¥5,980
Note: Nintendo Classic Mini sales totaled roughly 260,000 units over four days in the first week; 3DS sales were roughly 230,000 over two days in the first week (Japan) Source: (C)Nintendo, Famitsu
Source: Nintendo JP
¥199
¥854
¥0
¥100
¥200
¥300
¥400
¥500
¥600
¥700
¥800
¥900
Attach rate = 30x Attach rate = 7x
Estimated value of older titile
21 April 2017
Nintendo (7974) 42
Ability to download older titles an advantage, but
significant growth unlikely given main age group
Offering the ability to download content is obviously advantageous for older content, since
there is no need to take up physical shelf space. Nintendo is seeing steady growth in
download sales, but download sales are still relatively low compared with sector peers'.
We believe this partially reflects the core age group of Nintendo gamers: a look at user
age group by IP shows that teenagers account for a larger proportion of gamers enjoying
Nintendo IP compared with other companies’ IP. Download sales are a bigger draw for
users old enough to use credit cards; we see little reason for a minor to go out, purchase a
pre-paid card at a retail outlet, then go back home to download the game.
Figure 106: User age by IP: teenage or younger account for 50% of Nintendo users, excluding certain titles
Note: Box highlights Nintendo IP; (*) denotes native application title Source: Credit Suisse, Famitsu Game Hakusho 2016
Figure 107: Games software: Trends
for package and digital versions
Figure 108: Games software: Sales
trend for digital versions
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
0% 20% 40% 60% 80% 100%
Animal Crossing
SUPER MARIO MAKER
Pocket Monsters
Splatoon
The Legend of Zelda: Majora's Mask 3D
Fire Emblem Fates
Yo-kai Watch Busters
Yokai-Watch
LINE Disney TSUM TSUM*
Monster Strike*
PUZZLE & DRAGONS*
Dragon Quest Heroes
Dragon Quest VIII
Colopl RUNE STORY*
Monster Hunter X
METAL GEAR SOLID V
5-9 10-19 20-29 30-39 40-49 50-59
0%
5%
10%
15%
20%
25%
30%
0
50,000
100,000
150,000
200,000
250,000
300,000
FY3/13 FY3/14 FY3/15 FY3/16
(JP
Y m
n)
SW Sales (package)
SW Sales (Digital)
% of digital
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
FY3/13 FY3/14 FY3/15 FY3/16 FY3/17
(JPY
mn)
4Q
3Q
2Q
1Q
21 April 2017
Nintendo (7974) 43
Figure 109: Downloads could increase depending on external conditions, but
storage capacity suggests Switch adoption is unlikely to trigger a trend change
Source: (C)Nintendo, Credit Suisse
21 April 2017
Nintendo (7974) 44
Financial information
Shareholder returns
Dividend policy
Nintendo’s dividend policy is to pay the higher of either 33% of consolidated OP or 50% of
consolidated NP. This generally means a payout ratio of over 50% (except for loss-making
periods). Technically, the company’s dividend policy suggests a dividend of zero for
periods of operating losses although when it posted operating losses in FY3/12–14,
Nintendo deviated from policy and set the annual dividend at ¥100.
Cash position seems reasonable
Nintendo has accumulated ample cash on hand because the nature of its
gaming/entertainment operations makes it vulnerable to sharp earnings fluctuations. We
think the company’s cash position is reasonable, considering the long-term sustainability
of its business and the lengthy preparation periods for each rollout.
Figure 110: No share buybacks lately, but shareholder returns high
Source: Company data, Credit Suisse
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY3
/90
FY3
/91
FY3
/92
FY3
/93
FY3
/94
FY3
/95
FY3
/96
FY3
/97
FY3
/98
FY3
/99
FY3
/00
FY3
/01
FY3
/02
FY3
/03
FY3
/04
FY3
/05
FY3
/06
FY3
/07
FY3
/08
FY3
/09
FY3
/10
FY3
/11
FY3
/12
FY3
/13
FY3
/14
FY3
/15
FY3
/16
FY3
/17
E
FY3
/18
E
FY3
/19
E
FY3
/20
E
FY3
/21
E
(JP
Y b
n)
Cash balance
Sales
21 April 2017
Nintendo (7974) 45
Forex impact
A high overseas component in its business exposes Nintendo to a sizable forex impact.
The high foreign sales ratio makes the impact from forex particularly severe on the
company’s sales and its foreign currency-denominated procurements. Nintendo’s costs
are mainly dollar and yen-based, while sales are mainly distributed among the US dollar,
euro, and yen.
As Nintendo makes its forex translation adjustment for sales on a quarterly basis using
YTD totals, forex impact tends to be stronger the farther it goes into the second half of the
fiscal year.
Using FY3/16 earnings, we estimate a total impact of ¥2.7bn in sales and ¥1.5bn in OP for
each ¥1 swing versus the dollar and the euro.
Figure 111: FY3/16 sales, by currency
Figure 112: FY3/16 procurements, by
currency
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 113: FY3/16 assets, by currency
Source: Company data, Credit Suisse estimates
USD47%
JPY53%
USD20%
EUR8%
JPY72%
21 April 2017
Nintendo (7974) 46
Equity method affiliates
The Pokémon Company and Nintendo
Pocket Monster (or “Pokémon”) is widely viewed as Nintendo’s IP, but in fact, the IP
belongs to The Pokémon Company. Nintendo holds a stake of around 32% in The
Pokémon Company, which qualifies The Pokémon Company as an equity-method
subsidiary. However, funds flow from corporate to equity affiliate as Nintendo, which
handles distribution of game software and toys, pays a license fee to The Pokémon
The Master Trust Bank of Japan, Ltd. (Trust Account) 34,168 2.41
The Bank of New York Mellon SA/NV 10 18,517 1.31
DeNA Co., Ltd. 17,594 1.24
State Street Bank West Client - Treaty 505234 15,400 1.09
State Street Bank and Trust Company 505225 13,168 0.93
Nintendo
directors/
executives
Nintendo
employees
Pokemon 365
Sales/licensing of
Pokemon-related
products 32 - 1 -
Procurement of Nintendo
products and manufacturing
outsourcing -
Warpstar 10
Animation production and
IP rights management 50 - 3 -
Contracted management of
product commercialization
Leasing of
Nintendo owned
properties
PUX 45
Software engine
development and licensing 27 - 1 -
Contracted software
development -
Equipment
leasingName
Capital and
Investment
(¥mn)
Funding
support
Outline of main
businesses
Share of
voting
rights
(%)
Relationship
Directors/executives terms/other
Business relationship
21 April 2017
Nintendo (7974) 64
Companies Mentioned (Price as of 20-Apr-2017) Activision Blizzard, Inc (ATVI.OQ, $49.95) Alphabet (GOOGL.OQ, $860.08) Apple Inc (AAPL.OQ, $142.44) BANDAI NAMCO Holdings Inc. (7832.T, ¥3,215) COLOPL Inc (3668.T, ¥1,018) Capcom (9697.T, ¥2,214) DeNA (2432.T, ¥2,385) Electronic Arts, Inc (EA.OQ, $91.21) GungHo Online (3765.T, ¥250) Koei Tecmo Hldg (3635.T, ¥2,224) Konami (9766.T, ¥4,495) Microsoft (MSFT.OQ, $65.5) Mixi (2121.T, ¥5,670) NetEase.com (NTES.OQ, $266.14) Nintendo (7974.T, ¥26,815, NEUTRAL[V], TP ¥30,000) Sony (6758.T, ¥3,571) Square Enix Holdings (9684.T, ¥3,150) Tencent Holdings (0700.HK, HK$236.6)
Disclosure Appendix
Analyst Certification Hanako Takahashi and Keiichi Yoneshima each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Nintendo (7974.T)
7974.T Closing Price Target Price
Date (¥) (¥) Rating
28-Oct-14 11,100 12,000 N
27-Feb-15 12,780 NR
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
N O T RA T ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings a re based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s tota l return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. a nd Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative att ractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associat ed risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
21 April 2017
Nintendo (7974) 65
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 39% (61% banking clients) Underperform/Sell* 14% (54% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Nintendo (7974.T)
Method: Our ¥30,000 target price for Nintendo is derived from a sum-of-the-parts model based on (1) the game console business, (2) P/E excluding cash of 18x for the smart device app business, and (3) cash on hand. Our DCF model's key inputs include ERP of 6.65% and RFR of 0.1%. We assume a debt/equity ratio of zero, beta of 1.23 (five-year adjusted average) and WACC of 8.28%. While we expect earnings to increase, the market seems to have already priced in substantial growth. Our NEUTRAL rating reflects our outlook for total returns over the next 12 months and comparisons with the rest of our coverage universe.
Risk: Risks for our ¥30,000 target price and NEUTRAL rating for Nintendo include faster (slower) Switch sales and an unexpectedly high (low) software attach rate, earnings from smart device game apps, and rapid yen depreciation (appreciation). The introduction of new hardware poses additional upside risk, while game app development delays could hurt on the downside.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (GOOGL.OQ, AAPL.OQ, ATVI.OQ, EA.OQ, NTES.OQ, 0700.HK, 6758.T, MSFT.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (GOOGL.OQ, AAPL.OQ, ATVI.OQ, MSFT.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (GOOGL.OQ, AAPL.OQ, 0700.HK, 6758.T) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (GOOGL.OQ, MSFT.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (GOOGL.OQ, AAPL.OQ, ATVI.OQ, MSFT.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (GOOGL.OQ, AAPL.OQ, ATVI.OQ, EA.OQ, 3668.T, 2432.T, NTES.OQ, 0700.HK, 6758.T, MSFT.OQ, 2121.T) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (GOOGL.OQ, AAPL.OQ, 0700.HK, 6758.T) within the past 12 months
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Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk.
This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited,
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.