Nintendo - research-doc.credit-suisse.com

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

21 April 2017

Nintendo (7974) 2

Nintendo (7974)

Price (20 Apr 2017): ¥26,815 (upside: 12%); Rating: NEUTRAL [V]; Target Price: ¥30,000; Analyst: Hanako Takahashi

Income statement (¥ bn) 3/16A 3/17E 3/18E 3/19E

Sales 504.5 416.0 888.9 1,140.8 EBITDA 42.0 30.1 100.4 205.8 Operating profit 32.9 21.0 91.3 196.7 Recurring profit 28.8 23.3 105.7 211.1 Extraordinary gain & loss (1.1) 62.5 0.0 0.0 Profit before tax 27.7 85.9 105.7 211.1 Net income 16.5 85.5 69.7 141.4

Cash flow (¥ bn) 3/16A 3/17E 3/18E 3/19E

Operating cash flow 55.2 98.0 30.1 124.6 Depreciation & Amortization 9.1 9.1 9.1 9.1 Investing cash flow (71.7) 32.3 (10.4) (10.4) Capex (3.1) (10.4) (10.4) (10.4) Free cash flow (16.5) 130.3 19.7 114.2 Financing cash flow (3.0) (35.1) (34.9) (70.7) Issuance (retirement) of stock (0.0) 0.0 0.0 0.0 Dividends paid (24.9) (42.8) (34.9) (70.7) Net change in cash (19.5) 95.2 (15.2) 43.5

Balance sheet (¥ bn) 3/16A 3/17E 3/18E 3/19E

Cash & cash equivalents 570.4 665.7 650.5 694.0 Current receivable 38.7 34.2 73.1 93.8 Inventories 40.4 34.3 68.9 80.7 Other current assets 371.5 388.2 388.2 388.2 Current assets 1,021.1 1,122.4 1,180.7 1,256.7 Property, plant & equipment 130.3 134.6 138.8 143.0 Investments - - - - Intangibles 10.0 10.0 10.0 10.0 Other non-current assets 135.5 135.4 135.4 135.4 Total assets 1,296.9 1,402.4 1,464.9 1,545.0 Payables 31.9 27.5 55.1 64.6 Short term debt 0.0 0.0 0.0 0.0 Other current liabilities 66.6 126.1 126.1 126.1 Current liabilities 98.4 153.6 181.2 190.7 Long term debt 37.6 37.5 37.5 37.5 Other non-current liabilities 0.0 0.0 0.0 0.0 Total liabilities 136.0 191.1 218.7 228.2 Shareholders' equity 1,160.8 1,211.2 1,246.1 1,316.8 Minority interests 0.1 0.1 0.1 0.1

Key ratios 3/16A 3/17E 3/18E 3/19E

Growth (%) Sales (8.2) (17.5) 113.7 28.3 Operating profit 32.7 (36.1) 334.8 115.4 EPS (61.1) 418.2 (18.5) 102.8 Margins (%) Gross margin 43.8 39.7 43.5 48.4 EBITDA margin 8.3 7.2 11.3 18.0 OP margin 6.5 5.0 10.3 17.2 DuPont analysis ROE (%) 1.4 7.2 5.7 11.0 Net profit margin (%) 3.3 20.6 7.8 12.4 Sales/Assets 0.4 0.3 0.6 0.7 Assets/Equity 1.1 1.2 1.2 1.2 Credit ratios (%) Equity ratio 89.5 86.4 85.1 85.2 Net D/E ratio Net cash Net cash Net cash Net cash Per share data (¥) Number of shares (mn) 120.1 120.1 120.1 120.1 EPS 137.4 712.0 580.6 1177.3 BPS 8193.6 8549.3 8795.5 9294.6 DPS 150.0 356.0 290.3 588.6 Dividend payout ratio (%) 109.2 50.0 50.0 50.0

Valuation (x) 3/16A 3/17E 3/18E 3/19E

P/E 116.4 37.7 46.2 22.8 P/B 2.0 3.1 3.0 2.9 EV/EBITDA 33.1 86.2 26.0 12.5 Dividend yield (%) 0.9 1.3 1.1 2.2 FCF yield (%) 2.7 2.7 0.6 3.5

Source: Company data, Thomson Reuters, Credit Suisse estimates

21 April 2017

Nintendo (7974) 3

Table of contents

Key charts 5

Executive summary 7

Shrinking market over the last ten years due probably to Wii’s enormous success 7

Dual role as console and portable a strength in middle-end market ........................ 7

Expect boost to earnings from game app business ................................................. 9

Earnings forecasts .................................................................................................. 11

Entering strong profit growth stage; target price calculation based on SOTP ....... 12

Business segment overview 13

Dedicated video game business ............................................................................ 13

Smart devices and IP-related business .................................................................. 17

Other businesses ................................................................................................... 19

Cost structure ......................................................................................................... 19

Investment case: Mobile apps and the Switch both earnings growth drivers 21

Initiating at NEUTRAL with ¥30,000 TP ................................................................. 21

Forecast Nintendo Switch adoption on par with Super Famicom .......................... 21

Nintendo’s smart device application ....................................................................... 29

The Switch from a marketing perspective 33

Dual role as console and portable a strength in middle-end market ...................... 33

Redefining the casual game 38

Content value the sum of core value and peripheral value .................................... 38

Monetizing older titles a possibility, but hurdles remain 41

Is ¥850-plus a reasonable price for a Famicom-era game? .................................. 41

Ability to download older titles an advantage, but significant growth unlikely given

main age group....................................................................................................... 42

Financial information 44

Shareholder returns ................................................................................................ 44

Forex impact ........................................................................................................... 45

Equity method affiliates .......................................................................................... 46

Valuation: Valuations not excessive, but V-shaped recovery already priced in 47

Assessing current valuations using an SOTP model ............................................. 47

Risks ....................................................................................................................... 54

HOLT 55

21 April 2017

Nintendo (7974) 4

Earnings forecasts 57

Company overview 61

Company history..................................................................................................... 61

Board of directors ................................................................................................... 62

Shareholders .......................................................................................................... 63

Company/group status ........................................................................................... 63

21 April 2017

Nintendo (7974) 5

Key charts

Figure 1: Switch and apps likely to propel profit

growth

Figure 2: Forecasting rapid sales and profit growth in

smart device app earnings

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 3: Forecasting profit boost from apps and stronger sales volume

Source: Company data, Credit Suisse estimates

Figure 4: Profit sensitivity analysis: Console sales and software attach rate


30 21

115 166 148

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66 106

-100

-50

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300

FY3/16 FY3/17E FY3/18E FY3/19E FY3/20E

(JP

Y b

n)

Operating ProfitOther

Smard device

Software

Hardware

6 16

70

150

230

1 4 26

66

106

0

50

100

150

200

250

FY16/3 FY17/3E FY18/3E FY19/3E FY20/3E

(JP

Y b

n)

Smart device Sales

Smart device OP

-100,000

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-10,000

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20,000

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FY3/

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FY3/

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3DS NDSGBA GBSwitch Wii-UWii GCN64 SFCFC OP total (RHS)

('000 units) (JPY mn)

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000

2 x 60 60 60 60 60 60 60 60 60 70

3 x 70 80 90 90 100 110 120 120 130 140

4 x 90 100 110 130 140 160 170 190 200 210

5 x 100 120 140 160 180 200 230 250 270 290

6 x 110 140 170 200 220 250 280 310 340 360

7 x 130 160 200 230 270 300 330 370 400 440

8 x 140 180 220 260 310 350 390 430 470 510

9 x 150 200 250 300 350 400 440 490 540 590

10 x 170 220 280 330 390 440 500 550 610 660

11 x 180 240 300 370 430 490 550 610 680 740

Nintendo Switch(3year sales forecast '000)

Att

ach r

ate

FY3/19 OP

(JPY bn)

WiiWiiU

WiiU

Wii

21 April 2017

Nintendo (7974) 6

Figure 5: Game positioning map: As a hybrid console, Switch should give Nintendo a strong midrange

position

Source: Company data, Credit Suisse

Figure 6: TP calculation based on SOTP model


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)

¥570,448 ¥4,749

¥1,523,951 ¥12,686

¥1,515,640 ¥12,617

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Business and cash value Share price breakdown

1) Smart device

2) Game console

3) Cash balance

Divide by total number of

sharesto calculate per-share

Cash balance at end-FY3/16: ¥570bn

Estimated fair value: ¥3.6100tn

Fair value share price: ¥30,051

mn

mn

Ex-cash P/E of 18x applied to FY3/19

operating profit forecast - contribution of smart

devices (¥130.3bn)

Calculated using five-year DCF model.

EV/EBITDA of 16x used for terminal valuemn

21 April 2017

Nintendo (7974) 7

Executive summary

Shrinking market over the last ten years due

probably to Wii’s enormous success

We have little doubt that the market for game consoles is currently shrinking compared

with 2008, a boom period for Wii as well as Nintendo DS. Nintendo, Sony (6758), and

Microsoft are the main players in global game hardware sales. Sales for the three

companies show a sharp decline in volume at Nintendo only. Usually, a hit in the

entertainment business makes it hard to offset a snapback decline. We believe the drop-

off in unit sales since 2008 is due to a snapback decline from Wii’s enormous success and

not to an underlying market contraction.

We think one of the reasons behind the markets’ pessimistic view of the protracted

snapback decline is the overlapping of this period with the emergence of smartphones.

Smartphone adoption started gaining momentum around 2008 with many smartphone-

oriented game titles also being launched at the time. It is quite likely that the smartphone

was a factor in lackluster sales of games hardware, but given the notable differences in

the user interfaces (UI) for consoles and smartphones, we think it is unlikely that the game

business has shifted irreversibly toward smartphones.

Figure 7: No major changes other than

at Nintendo even though most

observers note a contraction

Figure 8: Pessimism fueled by

overlapping of the smartphone’s rise

and the Nintendo console’s fall

Source: VG Chartz, Credit Suisse estimates Source: VG Chartz, Credit Suisse estimates

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 11 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. This situation is likely to protect the Switch’s unique position.

0102030405060708090

100

(mn

un

its)

Microsoft

Sony

Nintendo

Wii goes on

sale

Wii U goes on

sale

02004006008001,0001,2001,4001,6001,800

0

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(mn

un

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nit

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Game hardware

Smartphone (RHS)

Likely to rank in between Wii, a super

hit, and Wii U, a minor hit

The Switch from a marketing perspective

21 April 2017

Nintendo (7974) 8

Figure 9: Nintendo Switch (TV mode) Figure 10: Nintendo Switch (portable mode)

Source: (C)Nintendo Source: (C)Nintendo

Figure 11: The Switch’s positioning: High barriers to entry

Note: Values represent the market scale of content for each platform. Source: Company data, Credit Suisse estimates, Famitsu Game Hakusho

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


・High spec


・Compact

・Low priced

・Compact

・Simple design

with few buttons

Game

(specialized)

Game

(general-

purpose)

PortableConsole

(1)

(2) (3)

(4)

21 April 2017

Nintendo (7974) 9

Figure 12: Assuming 6x software attach

rate

Figure 13: Hardware uptake should fuel

growth in sales of profit-driver titles


Figure 14: Extremely positive reaction

to in-house pipeline Figure 15: Broad Switch uptake should boost other company software lineups

Source: Credit Suisse, YouTube

Source: Nintendo Homepage

Nintendo has set up the Nintendo Developer Portal website for developers, to create a

conducive environment for not only corporate but also individual developers. The Switch

development kits are priced at an affordable ¥50,000, which should enable small-scale

and independent software makers and other parties to launch games.

Nintendo’s previous hardware used the company’s own game engines that required much

time and effort on the part of third-party developers. The Switch however, is apparently

compatible with Unity, Unreal Engine 4 (UE4), and numerous other frameworks that are

used widely around the world. In our view, broad uptake of this hardware should naturally

lead to growth in software lineups.

Expect boost to earnings from game app business

Nintendo entered the smart device game app business with the launch last December of

Super Mario Run. We expect the company to launch two to three titles a year and thus

forecast steady sales and profit growth for the game app business. Our FY3/19 and

FY3/20 forecasts for the business assume monthly sales of around ¥12.5bn and ¥20bn,

respectively. This is higher than peak annual sales at GungHo Online (3765) and Mixi

(2121) (¥16–18bn) and is on par with monthly sales in 2015 at Supercell ($200mn). Given

Nintendo’s wealth of well-known IP and its global drive in game apps, we expect sales to

reach $200mn.

3 x

4 x

5 x

6 x

7 x

8 x

9 x

10 xSW attach rate - Total

-200,000

-100,000

0

100,000

200,000

300,000

400,000

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600,000

OP

(J

PY

mn

)

Other

Smart device

Software

Hardware

70%75%80%85%90%95%100%

05

1015202530

(mn

)

Views Likes

Switch hardware makes software development easy for 3rd-party developers

21 April 2017

Nintendo (7974) 10

Figure 16: Profit sensitivity analysis for the Nintendo Switch and smart device game app businesses


10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000

0 (70) (20) 30 90 140 190 240 300 350 400

10 (20) 30 90 140 190 240 300 350 400 450

20 30 90 140 190 240 300 350 400 450 510

30 90 140 190 240 300 350 400 450 510 560

40 140 190 240 300 350 400 450 510 560 610

50 190 240 300 350 400 450 510 560 610 660

60 240 300 350 400 450 510 560 610 660 720

70 300 350 400 450 510 560 610 660 720 770

80 350 400 460 510 560 610 660 720 770 820

90 400 460 510 560 610 670 720 770 820 880

Ap

ps M

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thly

Sale

s

(JP

Y b

n)

FY3/19 OP

(JPY bn)


WiiU Wii

21 April 2017

Nintendo (7974) 11

Earnings forecasts

Figure 17: Sales volume assumptions


4Q (Jan–Mar) forecasts

OP: ¥5.3bn loss (guidance ¥6.3bn loss, I/B/E/S consensus ¥600mn)

While Switch production volume looks remarkably strong, the new console was only

launched in March, so we think sales will come in only slightly ahead of the company’s

target (which we estimate at about 2mn units).

Switch assumptions: Fourth-quarter sales of 2.2mn units, retail price of ¥29,800, CoGS of

¥23,000

Game assumptions: In its first fiscal year, the Switch only contributed in March, and its

lineup so far is limited, so we assume a 1.5x attach rate.

FY3/17 forecasts

OP: ¥21.0bn (guidance ¥20.0bn, consensus ¥25.4bn)

Our forecast vs. guidance: Nintendo disclosed revised guidance alongside 3Q results, and

we do not expect any major surprises at the 4Q/full-year results release.

Forex assumptions: ¥110/$, ¥120/€ (same as guidance). For FY3/16, we estimate each

¥1/$ and ¥1/€ fluctuation has an annual OP impact of ¥600mn and ¥800mn respectively.

Switch assumptions: Same as for 4Q (2.2mn units), as the console was launched in March

FY3/18 forecasts

OP: ¥91.3bn (consensus ¥99.8bn)

Smart-device app sales: ¥70bn (annual)

Switch sales: sales of 12mn units (annual), software attach rate of 6x

FY3/19 forecasts


Smart-device app sales: ¥150bn (annual)

Nintendo Switch sales: 14.67mn units (annual), software attach rate of 6x

(100万円, %) FY3/05 FY3/06 FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E FY3/20E FY3/17ECoE

Hardware units ('000) 24,580 22,150 34,470 50,670 57,550 47,640 36,210 28,470 23,730 16,310 12,580 10,150 10,400 18,600 20,365 16,732 8,000

Console total 3,930 2,360 6,570 18,770 25,950 20,530 15,080 9,840 7,430 3,940 3,840 3,360 3,000 12,000 14,665 11,732 800

Nintendo Switch - - - - - - - - - - - - 2,200 12,000 14,665 11,732 NA

WiiU - - - - - - - - 3,450 2,720 3,380 3,250 800 - - - 800

Wii 0 0 5,840 18,610 25,950 20,530 15,080 9,840 3,980 1,220 460 110 - - - - -

GC 3,930 2,360 730 160 - - - - - - - - - - - - -

Portable total 20,650 19,790 27,900 31,900 31,600 27,110 21,130 18,630 16,300 12,370 8,740 6,790 7,400 6,600 5,700 5,000 7,200

3DS - - - - - - 3,610 13,530 13,950 12,240 8,740 6,790 7,400 6,600 5,700 5,000 7,200

NDS 5,260 11,460 23,560 30,310 31,180 27,110 17,520 5,100 2,350 130 - - - - - - -

GBA 15,390 8,330 4,340 1,590 420 - - - - - - - - - - - -

Software units ('000) 143,480 142,100 207,720 318,220 402,520 343,400 301,670 199,190 147,020 123,200 98,870 83,210 71,200 111,600 122,190 100,392 69,000

Console total 48,420 32,790 45,640 122,200 204,580 191,810 171,260 102,370 64,030 45,020 36,130 34,690 16,200 72,000 87,990 70,392 14,000


WiiU - - - - - - - - 13,420 18,860 24,400 27,360 14,000 - - - 14,000

Wii - - 28,840 119,610 204,580 191,810 171,260 102,370 50,610 26,160 11,730 7,330 - - - - -

GC 48,420 32,790 16,800 2,590 - - - - - - - - - - - -

Portable total 95,060 109,310 162,080 196,020 197,940 151,590 130,410 96,820 82,990 78,180 62,740 48,520 55,000 39,600 34,200 30,000 55,000

3DS - - - - - - 9,430 36,000 49,610 67,890 62,740 48,520 55,000 39,600 34,200 30,000 55,000

NDS 10,490 49,950 123,550 185,620 197,310 151,590 120,980 60,820 33,380 10,290 - - - - - - -

GBA 84,570 59,360 38,530 10,400 630 - - - - - - - - - - - -

amiibo units ('000) - - - - - - - - - - 10,500 53,600 16,591 19,909 21,900 22,995 NA

Figurine - - - - - - - - - - 10,500 24,700 7,645 9,175 10,092 10,597 NA

Card - - - - - - - - - - - 28,900 8,945 10,735 11,808 12,398 NA

21 April 2017

Nintendo (7974) 12

Entering strong profit growth stage; target price

calculation based on SOTP

Nintendo’s move into the smart device game app business signals a shift in the company’s

traditional business model. We thus derive our TP for Nintendo using a sum-of-the-parts

model based on (1) Nintendo’s game console business, (2) the smart device game app

business, and (3) cash on hand. Valuation multiples based on our TP do not look that

demanding, in our view, and we see ample room for upside as the market prices in future

profit growth.

Figure 18: Forecasting strong profit growth behind Switch, smart device apps


1. Based on a DCF model, we value the smartphone device business at ¥1.5156tn.

2. For the dedicated game console business, we apply an ex-cash P/E. We value the

dedicated game console business at ¥1.524tn.

3. Our valuation also factors in ¥570bn of cash.

Figure 19: Sum-of-the-parts model-based TP calculation


30 21

115 166 148

1 4

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66 106

-100

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FY3/16 FY3/17E FY3/18E FY3/19E FY3/20E

(JP

Y b

n)


Smard device

Software

Hardware

¥570,448 ¥4,749

¥1,523,951 ¥12,686

¥1,515,640 ¥12,617

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


1) Smart device

2) Game console

3) Cash balance






mn

mn



devices (¥130.3bn)



21 April 2017

Nintendo (7974) 13

Business segment overview Nintendo has launched its newest game console, the Nintendo Switch, and has also

moved into smart device game apps. We expect Nintendo will set Switch pricing at a level

that makes it unlikely for the console business to operate at a loss. We also look for steady

profit growth from the smart device game app business. We thus expect a significant

change in Nintendo’s profit structure from FY3/18.

Figure 20: Game software, smart device app business to drive OP growth


Dedicated video game business

Break-even hardware + profitable software business model

Nintendo’s business model is based around establishing a robust installed base of game

consoles to drive game software sales, which is key to recovering profit. Since games

require both the game software and the hardware console, historically the software attach

rate (number of games purchased per console) has consistently been around six. For

sales, the hardware-to-software ratio has also been consistent at around 60/40.

Software is the key to generating profit. Game titles have high operating leverage, which

means even greater contribution to profits once fixed costs are recovered. This trend was

clearly seen from 2007 up to around 2011.

3DS margins eroded following quick price cut

The Nintendo 3DS was first launched in Japan in February 2011 and worldwide the

following month. With an initial price point of ¥25,000, the 3DS was Nintendo’s most

expensive handheld game console. Launch sales were disappointing, and in August—less

than six months after launch—Nintendo announced a drastic price cut to ¥15,000. The

company ultimately sold the initial 3DS at a significant loss, and the hardware business

was deep in the red at the gross profit line in FY3/12. Profitability did improve in FY3/13

owing to cost control efforts and a decline in COGS.

Nintendo has said that the Switch console would be priced to ensure a profit, although we

think the company is referring to gross profit, not operating profit.

30 21

115 166 148

1 4

26

66 106

-100

-50

0

50

100

150

200

250

300

FY3/16 FY3/17E FY3/18E FY3/19E FY3/20E

(JP

Y b

n)


Smart device

Software

Hardware

Console Game

Apps

Hardware will likely run at an operating loss…

…but should generate a gross profit

21 April 2017

Nintendo (7974) 14

Figure 21: Sales driven by hardware, then software Figure 22: Operating line: losses for hardware,

profits for software


Figure 23: Gross profit mostly driven by software Figure 24: Hardware GP: lower margins for home vs

handheld


Figure 25: Sales & profit breakdown: Hardware drives sales, software drives profits


0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Sale

s (

JPY

mn

)

Other

Smard device

Software

Hardware

-200,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

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/

17E

FY3/

18E

FY3/

19E

OP

(J

PY

mn

)

Other

Smart device

Software

Hardware

-200,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

GP

(JP

Y m

n)

Other

Smard device

Software

Hardware

August 20113DS price cut from ¥25,000 to ¥15,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000G

P (

JPY

mn

)

Other (Incl. amiibo)

Console

Handheld

Hardware53%

Software46%

Smart device

1%

Other0%

Sales JPY 505bn (FY3/16)*Company data

Hardware31%

Software66%

Smart device

2%

Other1%

Gross Profit JPY221bn (FY3/16)*CS estimate

Hardware4%

Software91%

Smart device

2%

Other3%

Operating Profit JPY33bn (FY3/16)*CSestimate

21 April 2017

Nintendo (7974) 15

Three types of game software (proprietary, second party, third party)

In addition to (1) proprietary titles (Nintendo games using Nintendo IP), there are also

(2) second party titles, which are marketed by the platform holder (i.e., Nintendo) but

based on another company’s IP, and (3) third party titles, which are marketed and

developed completely by an outside company.

For Nintendo, second party games usually have a lower gross margin (GM) but almost the

same operating margin (OPM), since Nintendo doesn’t incur development or other SG&A

costs. In fact, some of the most popular Nintendo IP characters over the years, such as

Pokémon and Kirby, were not Nintendo originals but in fact developed by second party

studios. Nintendo usually counts these games as proprietary titles in its financial

statements with the second party nature stated in the footnotes.

Figure 26: Proprietary vs. second party and third party software


Console pricing set to break even at GP level

Game consoles generally cost around ¥10,000–30,000—a somewhat steep initial entry

cost for the consumer. Companies generally set console prices near break-even. The

priority for the hardware business is establishing a sufficiently large installed base, so

companies are less likely to focus on generating a profit when they set the console price

point. We further note that historically, handhelds have had price points that generated

higher margins than home consoles.

Proprietary 2nd party 3rd party

IP owner Nintendo not Nintendo not Nintendo

Publisher Nintendo Nintendo not Nintendo

IP example

Mario

the legend of Zelda

Splatoon

Animal Crossing

Pokemon

Kirby

Fire Emblem

Dragon Quest

Final Fantasy

Monster Hunter etc.

Materials

Salesrecorded Gross profit

Materials

Gross profit

Salesrecorded

Materials, royalties

Gross profitSalesrecorded

GPM around 90%

GPM

around 70%GPM

around 60%

21 April 2017

Nintendo (7974) 16

Figure 27: Hardware generates almost

no profit

Figure 28: Earnings structure with

high operating leverage means sales

volumes key to profit growth


Business conditions by region

Nintendo generates about 70% of sales outside of Japan, and currency trends thus have a

significant impact on companywide earnings (see Financial information for details

regarding forex sensitivity). Domestic business margins trend to be relatively stable.

Figure 29: Sales by region

Figure 30: More sales generated

overseas, but domestic margins

higher


Amiibo included in hardware results; GM estimated at around 40%

Amiibo offerings include figures (figurines) and cards. Figurines are doll-like objects with

embedded NFC (near field communication) chips, while amiibo cards are similar in size to

a regular playing card and also have an embedded NFC chip. Given that the NFC chip

itself is quite inexpensive, we estimate that the amiibo distribution channel margin is in line

with general toy margins, at around 50%, with COGS (input costs, etc.) of about 10%.

Amiibo sales hinge on momentum in popular amiibo-compatible games such as Animal

Crossing and Super Smash Bros. The launch of Super Smash Bros. in FY3/15 and Animal

Crossing: Happy Home Designer in FY3/16 each boosted sales of both amiibo toys and

cards. We think amiibo sales have plateaued somewhat in FY3/17, mainly due to the

dearth of new amiibo-friendly games. FY3/18 should see contributions from the expected

launch of Zelda-themed amiibo offerings in June and Super Smash Brothers offerings in

July, but we do not expect any dramatic rebound in overall amiibo sales volumes.

Hardware

Materials

Gross profit

Earnings limited.Some sales could be made at a loss

GPM

around 5% (200)

0

200

400

600

800

1,000

1,200

JPY

(b

n）

SW sales

HW sales

Total OP

Japan27%

America45%

Europe25%

Other3%

Sales breakdown FY3/16

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250

300

350

400

Japan Overseas

(JP

Y b

n)

Sales OPM(RHS)

Still in start-up phase; launch of new titles

using popular IP should boost GP

21 April 2017

Nintendo (7974) 17

Figure 31: amiibo character figures

(¥1,200 each)

Figure 32: amiibo card sales (¥300 for

pack of three)


Figure 33: Roughly 10% GP boost in

FY3/16 amid strong amiibo sales

Figure 34: amiibo use NFC to interact

with supported software for in-game

extras

Source: Company data, Credit Suisse estimates Source: (C)Nintendo

Smart devices and IP-related business

1) Smart device business

Nintendo had traditionally taken a somewhat conservative stance on smart device (mobile)

gaming, but in March 2015 the company announced a capital and business tie-up with

DeNA for mobile and tablet game app development.

The two company presidents, the late Satoru Iwata from Nintendo and DeNA’s Isao

Moriyasu, were both in attendance at the March 2015 joint press conference announcing

the partnership. The deal brought together Nintendo, with its globally popular IP, and

DeNA, with its expertise in web service development, in a collaboration to jointly develop

games for smart devices. The companies also announced that DeNA would develop

Nintendo’s new online membership scheme, “My Nintendo”.

Broadly speaking the partnership primarily involves Nintendo handling front-end game

system development, while DeNA handles the back-end system development and

operation. That said, both companies noted later that the demarcation lines could differ

depending on the game title.

Looking back, we notice that Nintendo’s announcement of its plans for a new gaming

hardware platform (then code-named NX) came at the same time the company was

announcing the DeNA tie-up. At the time, Mr. Iwata commented that he did not want

people to interpret Nintendo’s decision to move into smart device game development as a

sign that the company was pessimistic on the dedicated video game console business.

0%2%4%6%8%10%12%14%

02468

101214

3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

FY3/15 FY3/16 FY3/17

(JP

Y b

n)

GP Estimate total amiibo % of total GP

Figures launched

Card products launched

21 April 2017

Nintendo (7974) 18

As noted above, DeNA is handling the development of Nintendo’s new online membership

platform, My Nintendo. Unlike the smart device business, My Nintendo is being operated

by Nintendo alone. As My Nintendo is an online membership platform, it has minimal

impact on both companies’ earnings.

Figure 35: Smart device app sales

recognition and DeNA revenue

sharing

Figure 36: Nintendo, DeNA ¥22bn

share swap and tie-up (announced 17

March 2015)

Source: Credit Suisse estimates Source: Company data, Credit Suisse

2) IP-related business

Nintendo has leveraged its robust IP portfolio through licensing agreements with third

parties. This is a low-cost business for Nintendo, which recognizes revenue (licensing

fees) from its licensing partners.

For example, last November Nintendo inked an agreement with Universal Parks & Resorts

to bring Nintendo areas to three theme parks in Japan and the US within the next few

years: Universal Studios Japan (USJ), Universal Orlando Resort, and Universal Studios

Hollywood. The USJ project alone entails investment of around ¥50bn, but Nintendo

shoulders none of this. Nintendo expects to recognize licensing fees over time based on

peak performance metrics, rather than as an upfront lump sum.

Figure 37: Nintendo-DeNA tie-up

titles: Targeting 2–3 per year

Figure 38: 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

PF(Apple/Google), 30%

DeNA, 20%

Nintendo, 50%

0% 20% 40% 60% 80% 100%

Sales booked as gross by

Assuming 50% stake in revenue sharing

10%(JPY 22bn)

1.24%(JPY 22bn)

Nintendo DeNA

Release date Title

3/17/2016 Miitomo

12/15/2016 Super Mario Run (iOS)

2/2/2017 Fire emblem Heroes

3/23/2017 Super Mario Run (Android)

FY2017 Animal crossing

012

34

5

67

89

Ave

rag

e s

ell

ing

un

its

pe

r ti

tle

(m

n)

21 April 2017

Nintendo (7974) 19

Other businesses

Nintendo is predominantly associated with video games, but the company actually started

out as a toy and playing card maker, and continues in these fields even up to this day.

These businesses are relatively stable, although the overall contribution to earnings is

minimal.

Figure 39: Playing cards Figure 40:Hanafuda playing cards


New services

While details have not yet been announced, Nintendo has said that the Nintendo Switch

will include a full-featured online subscription service. Traditionally, online multiplayer

gaming was free for users that purchased Nintendo games such as Mario Kart or Splatoon,

but in a 2 February Nikkei article, Nintendo president Tatsumi Kimishima said that Switch

online play would require a paid membership to its new online service, at a cost of around

¥2,000 to ¥3,000 per year. Mr. Kimishima further noted that the service would include

digital download access to classic Nintendo games and a dedicated smartphone chat app.

According to the article, Nintendo’s online membership scheme will likely be cheaper than

the subscriptions charged for similar plans for the Xbox or PS4, which generally cost ¥500

to ¥1,000 per month (annual cost ¥5,000 to ¥12,000).

The official launch of the Nintendo Switch online subscription service is scheduled for

autumn 2017. Users purchasing a Switch console can play on the service for free until it

officially goes live. We have not included any contributions from the online service in our

model.

Cost structure

SG&A cost breakdown assumptions

In general, Nintendo only discloses top-line data, so we need to estimate GP and OP. We

calculate GP by estimating COGS. Then to get OP, we estimate SG&A per segment

(hardware, software, IP-related, etc.), based on each segment’s sales weighting. Even

though we assume that the hardware segment is in the black at the gross profit line, our

model still places the segment is in the red at the operating line after factoring in SG&A

costs. For the smart device app joint venture business with DeNA, our model reflects

platform fees paid to Apple and Google (30%), revenue sharing with DeNA (20%) and

SG&A costs of around 12% of sales from FY3/18. Based on the above we estimate an

OPM of 38% for the smart device game app business.

R&D expenses booked as incurred and not capitalized

Nintendo normally treats all costs related to content development as expenses and

charges these as incurred each fiscal year. It does not capitalize and amortize R&D costs

on the balance sheet. The company’s approach in this regard can be viewed as

conservative.

21 April 2017

Nintendo (7974) 20

Game sector rivals in Japan mostly capitalize content under development and then either

write it off all at one or amortize it piecemeal. This accounting policy enables companies to

match the timing of their sales and cost recognition, but burgeoning cost write-offs at

product launch usually weigh down reported profits and the failure of games to become as

popular as expected leads to impairment risk.

Promotional spend constitutes key cost, but levels kept in check

As earnings volatility is a key attribute in the entertainment business, Nintendo strives to

balance its costs by keeping its promotional spend in check with an annual budget in this

area hovers around 10% of revenues. We note a sharp rise in Nintendo’s key costs,

mostly R&D and wages, during substantial sales growth, but these have usually tracked

steadily thereafter.

Figure 41: Promotional spend budget

at around 10% of sales

Figure 42: Key costs have risen

sharply during substantial sales

growth, but mostly steady recently


Figure 43: Fixed costs at around

¥100bn result in 50% operating

leverage


0%

2%

4%

6%

8%

10%

12%

14%

0

20

40

60

80

100

120

140

FY3

/00

FY3

/02

FY3

/04

FY3

/06

FY3

/08

FY3

/10

FY3

/12

FY3

/14

FY3

/16

FY3

/18

E

(JP

Y b

n)

Ad. Expense % of Sales

0

50

100

150

200

250

(JP

Y b

n)

Employment Capex Advertising

R&D Depreciation

y = 0.4748x - 95644R² = 0.968

-100

100

300

500

700

900

0 1,000 2,000

Gross profit since FY3/08

Linear (Gross profit since FY3/08)(GP, JPY bn)

(Sales, JPY bn)

21 April 2017

Nintendo (7974) 21

Investment case: Mobile apps and the Switch both earnings growth drivers

Initiating at NEUTRAL with ¥30,000 TP

Figure 44: Nintendo (7974) – Earnings summary

Source: Company data, I/B/E/S, Credit Suisse estimates

Forecast Nintendo Switch adoption on par with

Super Famicom

Shrinking market over the last ten years due probably to Wii’s enormous success

We have little doubt that the market for game consoles is currently shrinking compared

with 2008, a boom period for Wii as well as Nintendo DS. Nintendo, Sony, and Microsoft

are the main players in global game hardware sales. Sales for the three companies show

a sharp decline in volume at Nintendo only. Usually, a hit in the entertainment business

makes it hard to offset a snapback decline after a major success. We believe the drop-off

in unit sales since 2008 is due to a snapback decline from Wii’s enormous success and

not to an underlying market contraction.

We think one of the reasons behind the market's pessimistic view of the protracted

snapback decline is the overlapping of this period with the emergence of smartphones.

Smartphone adoption started gaining momentum around 2008, with many smartphone-

oriented game titles also being launched at the time. It is quite likely that the smartphone

was a factor in lackluster sales of games hardware, but given the notable differences in

the UIs for consoles and smartphones, we think it is unlikely that the game business has

shifted irreversibly toward smartphones.

EV

/EBITDADPS P/E

¥26,815 ¥bn YoY (%) ¥bn YoY (%) ¥bn YoY (%) ¥bn YoY (%) ¥ YoY (%) (x) ¥ (x)

FY

Mar-16 A 504.5 -8.2% 32.9 32.7% 28.8 -59.2% 16.5 -60.6% 137.4 -61.1% 33.1 150.0 195.1

Mar-17 CS E (new) 416.0 -17.5% 21.0 -36.1% 23.3 -18.9% 85.5 418.2% 712.0 418.2% 86.9 356.0 37.7

CoE 470.0 -6.8% 20.0 -39.2% 30.0 4.2% 90.0 445.2% 749.2 445.2% NA 380.0 35.8

IBES E 475.4 -5.8% 25.8 -21.4% 57.3 99.2% 90.5 448.2% 769.9 460.3% 73.4 387.7 34.8

Mar-18 CS E (new) 888.9 113.7% 91.3 334.8% 105.7 352.8% 69.7 -18.5% 580.6 -18.5% 26.2 290.3 46.2

IBES E 743.0 56.3% 103.0 298.7% 121.9 112.6% 81.6 -9.9% 677.3 -12.0% 22.7 325.1 39.6

Mar-19 CS E (new) 1,140.8 28.3% 196.7 115.4% 211.1 99.7% 141.4 102.8% 1,177.3 102.8% 12.6 588.6 22.8

IBES E 904.7 21.8% 170.3 65.3% 190.5 56.2% 125.9 54.4% 1,058.1 56.2% 14.2 556.4 25.3

Mar-20 CS E (new) 1,137.6 -0.3% 236.0 20.0% 250.4 18.6% 167.7 18.6% 1,396.3 18.6% 10.2 698.1 19.2

IBES E 1,006.9 11.3% 232.9 36.8% 249.9 31.2% 170.0 35.0% 1,387.8 31.2% 8.4 837.5 19.3

Quarter

Mar-17 Q1 A 62.0 -31.3% -5.1 NM -38.7 NM -24.5 NM

Q2 A 74.8 -34.3% -0.8 NM 7.8 262.4% 62.8 1,874.6%

Q3 A 174.3 -21.3% 32.3 -3.7% 80.0 105.9% 64.7 122.3%

Q4 CS E (new) 104.9 33.2% -5.3 NM -25.8 NM -17.4 NM

CoE 158.9 101.6% -6.3 NM -19.1 NM -13.0 NM

IBES E 161.0 104.3% 0.6 NM -5.2 NM -9.1 NM

EPS20-Apr-17 Sales Operating profit Recurring profit Net profit

Likely to rank in between Wii, a super

hit, and Wii U, a minor hit

21 April 2017

Nintendo (7974) 22

Figure 45: No major changes other

than at Nintendo even though most

observers note a contraction

Figure 46: Pessimism fueled by

overlapping of the smartphone’s rise

and the Nintendo console’s fall

Source: Credit Suisse, VG Chartz Source: Credit Suisse, VG Chartz

Figure 47: Nintendo’s overseas unit

sales responsible for the contraction

in market size

Figure 48: Major home game console

sales mostly in overseas markets

Source: Company data, Credit Suisse estimates Source: Credit Suisse, VG Chartz

Ample demand for Nintendo game consoles

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


0102030405060708090

100

(mn

un

its)

Microsoft

Sony

Nintendo

Wii goes on

sale

Wii U goes on

sale

02004006008001,0001,2001,4001,6001,800

0

20

40

60

80

100

200

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2

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3

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4 3

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20

30

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50

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Nintendo EU

Nintendo US

Nintendo Japan

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nintendo Sony Microsoft

Japan

Europe

USA

Japan35%

US34%

EU31%

3DS

Japan12%

US48%

EU40%

Wii

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

0

2

4

6

8

10

12

14

16

18

20

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Asia US EU

Millio

ns (

JPY

)

Game expenditure Inclination for game consumption

0.00

5.00

10.00

15.00

20.00

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0.000.200.400.600.801.001.201.40

Asia US EUNintendo inclination

Inclination for game consumption

3 x

4 x

5 x

6 x

7 x

8 x

9 x

10 xSW attach rate - Total

33%34%

28%29%32%

25%

30%

34%

41%

32%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

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450

FY3

/07

FY3

/08

FY3

/09

FY3

/10

FY3

/11

FY3

/12

FY3

/13

FY3

/14

FY3

/15

FY3

/16

(mn

un

its)

Total

Of which proprietary million-seller titles

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


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

4/28/2017 MARIO KART 8 DELUXE ¥5,980 Nintendo

5/26/2017 ULTRA STREET FIGHTER II ¥4,990 CAPCOM

6/16/2017 ARMS ¥5,980 Nintendo

7/21/2017 Splatoon 2 ¥5,980 Nintendo

2017 Autumn Fire Emblem Warriors KoeiTecmo

2017 Winter SUPER MARIO ODYSSEY Nintendo

TBU FIFA 18 Electronic Arts

TBU Project OCTPATH TRAVELER SQEX

TBU DRAGONBALL XENOVERSE 2 BandaiNamco

Sales units ('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 FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E 累計

FC 10,970 6,520 10,430 7,990 3,530 1,110 400 80 80 30 50 41,190

SFC 1,440 6,000 13,030 11,060 4,410 5,780 3,300 1,850 1,530 130 48,530

N64 6,110 10,020 7,960 6,490 2,840 500 10 33,930

GC 3,800 5,750 5,030 3,930 2,360 730 160 21,760

Wii 5,840 18,610 25,950 20,530 15,080 9,840 3,980 1,220 460 110 101,620

Wii-U 3,450 2,720 3,380 3,250 800 13,600

Switch 2,200 12,000 14,665 11,732 8,799 49,396

GB 2,840 8,060 10,670 7,800 7,470 5,580 4,160 7,090 11,020 13,550 17,450 18,870 4,690 280 119,530

GBA 1,070 17,090 15,650 17,600 15,390 8,330 4,340 1,590 420 81,480

NDS 5,260 11,460 23,560 30,310 31,180 27,110 17,520 5,100 2,350 130 153,980

3DS 3,610 13,530 13,950 12,240 8,740 6,790 7,400 6,600 5,700 5,000 4,500 88,060

21 April 2017

Nintendo (7974) 26

Figure 61: Historical hardware sales, by console


Expect Switch install base to match that of SNES

A look at cumulative hardware sales for Nintendo and other makers’ consoles shows a

wide range of outcomes, but the general pace of install base growth is actually fairly

consistent.

Our forecast is that cumulative Nintendo Switch sales will reach around 49mn units in the

first five years (through end-FY3/21). Compared to Nintendo’s previous consoles, this

would be slightly better than the SNES (Super Famicom). While 49mn units would pale in

comparison with Wii volume (over 100mn), it should be seen as an undoubted success.

Figure 62: Pace of game hardware

adoption

Figure 63: Pace of build-up in unit

sales

Note: Month-aligned with hardware launch Source: Company data, VG Chartz, Credit Suisse estimates

Note: Month-aligned with hardware launch Source: Company data, VG Chartz, Credit Suisse estimates

Figure 64: Expect Switch to outsell

SNES

Figure 65: Three scenarios for pace of

Switch install base growth


GB, 65

GBA, 82

NDS, 154

3DS, 62

N64, 27 NGC, 22

Wii, 102

Wii U, 13

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Forecast level for Switch

Forecast cumulative sales of 49mn units in

first five years

21 April 2017

Nintendo (7974) 27

Figure 66: Our forecast for cumulative console unit sales as of end-FY3/21


Figure 67: High earnings exposure to the Switch and mobile apps


Figure 68: Console numbers and software attach rate have significant impact on OP


4934

22

102

14

49

120

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020406080

100120140160180

SUPERFamicom

(Super NES)

N64 Game Cube Wii Wii-U Switch Game Boy GAMEBOYADVANCE

NDS 3DS

Console Console Console Console Console Console Portable Portable Portable Portable

(mn

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its)

as of end-FY3/21

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000

0 (70) (20) 30 90 140 190 240 300 350 400

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WiiU Wii

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000

2 x 60 60 60 60 60 60 60 60 60 70

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8 x 140 180 220 260 310 350 390 430 470 510

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10 x 170 220 280 330 390 440 500 550 610 660

11 x 180 240 300 370 430 490 550 610 680 740


Att

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ate

FY3/19 OP

(JPY bn)

WiiWiiU

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21 April 2017

Nintendo (7974) 28

Figure 69: Profit and sales volume forecasts


-100,000

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3DS NDSGBA GBSwitch Wii-UWii GCN64 SFCFC OP total (RHS)

('000 units) (JPY mn)

21 April 2017

Nintendo (7974) 29

Nintendo’s smart device application

Plateau in developed economies’ smartphone uptake; a mature market means potential growth in content consumption

Super Mario Run, Nintendo’s first genuine smartphone game released in December 2016,

drew widespread attention. Users from around the globe played the title, and the game’s

download numbers went on to set a new App Store record. From the standpoint of the

games market, the introduction of a ¥1,200 ($9.90) one-time fee model for playing Super

Mario Run beyond a certain level was a unique innovation. This leads us to believe

Nintendo is not counting on the emergence of high-value customers, but is instead aiming

to spread out its fee model thinner and wider. Nintendo’s internal target for the ratio of fee-

paying Super Mario Run users seemed to have been just above 10%, but in an interview

(2 February Nikkei) President Kimishima stated that the actual ratio of fee-paying users

was in the high single-digits. Moreover, based on his comments that sales of Super Mario

Run in the world's 20 largest economies account for over 90% of the game’s total sales,

we believe that billing was robust in developed markets but somewhat weaker in emerging

markets than the company planned.

Considering Nintendo’s stance not to proactively engage in developing high-value gamers,

we think it is fair to conclude that room for growth in users, the ratio of fee-paying users

represents the real potential of smart devices.

Figure 70: Sharp increase in content

platform following emergence of

smartphones

Figure 71: Time to aim for upside in a

mature market than to look for upside

in wider adoption

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

Figure 72: Unit volume growth

prospects mostly in Asia, but outlook

on content consumption uncertain

Figure 73: More room for growth in

content consumption on smartphones

vs. home video game software

Source: Credit Suisse estimates Source: Company data, VG Chartz, Credit Suisse estimates

0

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Estimate

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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


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

0

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Y b

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PF(Apple/Google), 30%

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Nintendo, 50%

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Sales booked as gross by

Assuming 50% stake in revenue sharing

Release date Title

3/17/2016 Miitomo

12/15/2016 Super Mario Run (iOS)

2/2/2017 Fire emblem Heroes

3/23/2017 Super Mario Run (Android)

FY2017 Animal crossing 012

34

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SQEX

KONAMI

Bandai Namco

GungHo

mixi

CyberAgent

COLOPL

DeNA

GREE

21 April 2017

Nintendo (7974) 31

Figure 79: Domestic publishers in the mobile game market


For package game companies, apps reduce sales volatility

Development over several years is normal in the package game business. However,

companies are now lowering exposure to sales volatility through stable mobile titles.

Furthermore, bolstering of IP often acts as a sales promotion boost for the IP’s games

software.

Figure 80: Square Enix example

Figure 81: Pokémon app launch also

functioning as a means for sales

promotion

Source: Company data, Credit Suisse estimates Source: Famitsu, Credit Suisse estimates Note: Data for Pokémon Omega Ruby and Alpha Sapphire

How Square Enix monetizes older titles

Not too long ago there was almost no overlap between smartphone (mobile) games and

console games, but this is slowly changing. For example, Square Enix has developed

stand-alone, one-time purchase mobile ports of its popular Dragon Quest series,

establishing a new monetization channel for older titles.

In general, mobile games have traditionally needed to offer regular events and other

special in-game campaigns to keep users engaged, requiring a certain number of

employees to continue working on the game. The mobile game market overall continues to

grow, yet there has not been any significant increase in the number of people working in

the mobile gaming industry, which instead is facing chronic staff shortages.

Headcount requirements are less of a burden, however, if console content is converted to

mobile and sold as stand-alone, one-time purchases. We note that the mobile ports of

Dragon Quest sell for around ¥1,800–2,800 per title, which is quite high for older titles.

¥0

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Repeat sales: stable level

Over ¥6bn in global

repeat sales

21 April 2017

Nintendo (7974) 32

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


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

0

1,000

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FY2012 FY2013 FY2014 FY2015

nu

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DeNA

Colopl

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50

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CY13 CY14 CY15 CY16

(JP

Y b

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Major 10 publishers

0

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Console game Mobile game

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

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0 2 4 6 8 10

(GH

z)

CoreLow-end

High-end

Middle-end in terms of specs

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


・High spec


・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

0

10

20

30

40

50

60

70

3DS PSVita

Mill

ion

uni

ts

Selling Price

Nintendo Switch ¥29,980

PS Vita ¥18,980

New 3DS ¥16,000

2DS ¥9,800

2,200

1,550

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2,170

0

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its)

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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


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


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


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


Figure 113: FY3/16 assets, by currency


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

Company under a second-party license arrangement.

Figure 114: Nintendo’s stake in The

Pokémon Company totals 32%

Figure 115: Pokémon Go is a co-

production between Niantic and The

Pokémon Company; impact on

Nintendo limited to equity-method

profits

Source: Company data, Credit Suisse Note: Although Pokémon Go is a smart device game, DeNA is not involved since it is a product of The Pokémon Company Source: ©2017 Niantic, Inc. ©2017 Pokémon. ©1995-2017 Nintendo/Creatures Inc. /GAME FREAK inc.

The Pokémon Company(formerly Pokémon Center Co., Ltd.)

Nintendo Creatures Game Freak

32%

21 April 2017

Nintendo (7974) 47

Valuation: Valuations not excessive, but V-shaped recovery already priced in

Assessing current valuations using an SOTP model

(1) Using DCF to value smart device game app business

We believe the smart device app business should be valued using a DCF model. Unlike

Nintendo’s traditional game console business, the smart device app business should be a

growth business and steady cash generator.

Our DCF model’s key inputs include an equity risk premium of 6.65% and a risk-free rate

of 0.1%. We assume a debt/equity ratio of zero, beta of 1.23 (five-year adjusted average)

and WACC of 8.08%. Our model includes forecasts through FY3/21, for FY3/22 onwards

we derive a terminal value from a forward EV/EBITDA of 16x, referencing our FY3/21

smart device app business EBITDA estimate and the EV/EBITDA average for the three

major global mobile game companies (Nintendo, Tencent, NetEase). Based on the above,

we arrive at a valuation of ¥1.516tn for the smart device game app business.

Figure 116: Smart device game app business valuation estimate of ¥1,516bn

Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimate

DCF Analysis 0.30

(JPY mn)

Assumptions FCF estimates

# of shares 120,129,323 3/17E 3/18E 3/19E 3/20E 3/21E

Net debt (16/3A) (570,448) OP (Smart device business) 3,566 26,449 66,449 106,449 126,449

Exit EV/EBITDA Multiple 16.0x Tax rate 35% 35% 35% 35% 35%

EBIAT 2,318 17,192 43,192 69,192 82,192

WACC Calculation Depreciation & Amortization - - - - -

Risk free rate 0.10% Other non-cash cost - - - - -

Beta (5year, adjusted) 1.23 EBITDA 3,566 26,449 66,449 106,449 126,449

Mkt. Risk Premium 6.65% Net working capital - - - - -

Cost of Equity 8.28% CAPEX - - - - -

Interest rate 1.00% FCF 2,318 17,192 43,192 69,192 82,192

After-tax cost of debt 0.65% Year 1.00 2.00 3.00 4.00 5.00

D/E ratio 0.0x Discount rate 0.92 0.85 0.79 0.73 0.67

WACC 8.28% Present Value 2,141 14,663 34,022 50,335 55,220

(a) Present Value Current - 3/21E 156,380

(b) Terminal Value 1,359,260

(c) Enterprise Value (a) + (b) 1,515,640

(d) Net Debt (3/16A Smart device only) -

(e) Market Value (Smart device only) (c) - (d) 1,515,640

(1) Smart device app business valuation:

¥1.516tn

21 April 2017

Nintendo (7974) 48

Figure 117: Average EV/EBITDAs since Nintendo announced move into mobile gaming in 2015: EV/EBITDA

of 16x warranted for smart device game app business

Source: Thomson Reuters Datastream, Credit Suisse

Figure 118: Nintendo trading near high end of range for major global mobile game companies

Source: Thomson Reuters Datastream, Credit Suisse

Nintendo’s multiples are well above its domestic counterparts, including, for example, the

major packaged software game developers (Bandai Namco, Konami, Square Enix, and

Capcom) or mobile game developers (six companies including Colopl (3668), GungHo

Online, and Mixi). This is likely because of Nintendo’s IP assets and globally competitive

business scale.

19.1 x17.5 x

10.3 x 11.2 x 11.1 x 10.6 x

6.1 x4.3 x

6.5 x4.0 x

5.5 x

0 x

5 x

10 x

15 x

20 x

25 x

Mobilegame(Global)

15.6x

Game software(Global)

11.1x

Game platform8.3x

Game software (Domestic)

5.1x

14.2 x13.0 x

15.9 x

6.3 x

9.9 x10.6 x

17.7 x

0 x

5 x

10 x

15 x

20 x

25 x

30 x

35 x

Feb

-12

May

-12

Au

g-1

2

No

v-1

2

Feb

-13

May

-13

Au

g-1

3

No

v-1

3

Feb

-14

May

-14

Au

g-1

4

No

v-1

4

Feb

-15

May

-15

Au

g-1

5

No

v-1

5

Feb

-16

May

-16

Au

g-1

6

No

v-1

6

Feb

-17

EV/E

BIT

DA

Activision Blizzard ELECTRONIC ARTS TENCENT HOLDINGS

APPLE ALPHABET 'A' NETEASE

Nintendo

No other domestic firm on comparable level

21 April 2017

Nintendo (7974) 49

Figure 119: Trading at high

EV/EBITDA multiple since smart

device app announcement

Figure 120: Mobile game makers

trading at EV/EBITDA of around 5x;

Nintendo trading significantly higher

Source: Thomson Reuters Datastream, Credit Suisse Source: Thomson Reuters Datastream, Credit Suisse

Figure 121: P/E comparison for

domestic game sector

Figure 122: P/E comparison for

overseas game sector


Figure 123: Smart device app

business to be a cash flow generator;

DCF model warranted given stable

earnings outlook

Figure 124: EV/EBITDA trends for

three domestic mobile game makers,

that have peaked out represent

potential level in bear case scenario

Source: Company data, Credit Suisse estimates Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

17.7 x

4.8 x6.6 x

3.9 x4.7 x

0 x

5 x

10 x

15 x

20 x

25 x

30 x

35 x

Feb

-12

Au

g-1

2

Feb

-13

Au

g-1

3

Feb

-14

Au

g-1

4

Feb

-15

Au

g-1

5

Feb

-16

Au

g-1

6

Feb

-17

EV

/EB

ITD

A

Nintendo

BanNam

KONAMI

SQEX

Capcom

Mar 2015 -Announced

collaboration with DeNA

1 x

2 x

3 x

4 x

5 x

6 x

7 x

8 x

9 x

10 x

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Jan

-16

May

-16

Sep

-16

Jan

-17

EV/E

BIT

DA

Colopl GungHo mixi

GREE DeNA Nexon

0 x

20 x

40 x

60 x

80 x

100 x

120 x

Ap

r-1

0

Sep

-10

Feb

-11

Jul-

11

Dec

-11

May

-12

Oct

-12

Mar

-13

Au

g-1

3

Jan

-14

Jun

-14

No

v-1

4

Ap

r-1

5

Sep

-15

Feb

-16

Jul-

16

Dec

-16

NINTENDO

BANDAI NAMCO HDG.

KONAMI HOLDINGS

SQUARE ENIX HOLDINGS

CAPCOM

0 x

20 x

40 x

60 x

80 x

100 x

120 x

Ap

r-1

0

Oct

-10

Ap

r-1

1

Oct

-11

Ap

r-1

2

Oct

-12

Ap

r-1

3

Oct

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

Oct

-15

Ap

r-1

6

Oct

-16

Ap

r-1

7

NINTENDO

ACTIVISION BLIZZARD

ELECTRONIC ARTS

TENCENT HOLDINGS

APPLE

ALPHABET 'A'

0

50

100

150

200

250

(JP

Y b

n)

Smart device Sales

Smart device OP

6.7 2.3

11.8

0 x5 x

10 x15 x20 x25 x30 x35 x40 x45 x50 x

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

EV/E

BIT

DA

GunHo

mixi

Colopl

21 April 2017

Nintendo (7974) 50

(2) Using ex-cash P/E to value game console business

Prior to Nintendo’s move into smart device game apps, Nintendo’s ex-cash P/E (P/E

based on market cap less cash on hand, divided by EPS) was consistently in the 10–20x

range prior to the loss-making years from FY3/12. On the other hand, P/E without

excluding cash was extremely volatile. We believe ex-cash P/E is a viable metric to use in

valuing the game console business.

Our OP forecast for FY3/19, when we expect Nintendo Switch to make the biggest

contribution to profit, is ¥196.7bn. Of this, we expect the smart device game app business

to contribute ¥66.4bn. Applying a tax rate of 35% to the remaining ¥130.3bn results in NP

of ¥86.1bn attributable to the game console business. We think Nintendo will be able to

establish a competitive mid-range position with Nintendo Switch, a hybrid console that can

act as both a dedicated game console and a portable handheld gaming device. We thus

believe a P/E of 18x is warranted. Based on this, we arrive at a valuation of ¥1.5240tn

for the game console business.

Figure 125: Ex-cash P/E of 10–20x

prior to loss-making period

Figure 126: P/E including cash highly

volatile

Source: Company data, the BLOOMBERG PROFESSIONAL™ service

Source: Company data, the BLOOMBERG PROFESSIONAL™ service

(3) Cash on hand based on end-FY3/16 level

Nintendo had a cash balance of around ¥570bn as of end-FY3/16. We believe we need to

add this back in to our model since we used ex-cash P/E when valuing the game console

business. This results in cash per share of roughly ¥4,750.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0x

10x

20x

30x

40x

50x

60x

70x

FY2001

FY2003

FY2005

FY2007

FY2009

FY2011

FY2013

FY2015

(JP

Y b

n)

Ex-cash PER

Sales

20x

10x

38.2 x

0 x

20 x

40 x

60 x

80 x

100 x

120 x

Mar

-07

Feb

-08

Jan

-09

De

c-0

9

No

v-1

0

Oct

-11

Sep

-12

Au

g-1

3

Jul-

14

Jun

-15

May

-16

PER

Nintendo

(2) Game console business valuation:

¥1.5240tn

(3) Adding back in end-FY3/16 cash of ¥570bn

21 April 2017

Nintendo (7974) 51

Figure 127: Adding back in end-FY3/16 cash balance of ¥570.4bn


If we sum (1)–(3) from above, we arrive at a valuation of ¥3.610tn for Nintendo, or ¥30,051

per share. We thus set our initial TP at ¥30,000.

Figure 128: SOTP-based TP calculation


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

¥570,448 ¥4,749

¥1,523,951 ¥12,686

¥1,515,640 ¥12,617

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


1) Smart device

2) Game console

3) Cash balance






mn

mn



devices (¥130.3bn)



Adding (1), (2) and (3) to arrive at TP of

¥30,000

21 April 2017

Nintendo (7974) 52

Comparing our SOTP-based TP of ¥30,000 with consolidated DCF modeling

Our TP of ¥30,000 equates to a terminal value derived from an EV/EBITDA of 16.5x based

on a consolidated DCF model. Nintendo has traded at an average EV/EBITDA of 16.5x

since 2015, so our TP does not appear to be pricing in any excessive premium.

Figure 129: TP calculation based on a consolidated DCF model


Our ¥30,000 TP equates to a consolidated EV/EBITDA of 16.5x and FY3/18 and FY3/19

P/Es of 51x and 25x (average of 38x). This compares to current consensus forecast-based

multiples of 17.7x and 38.2x for the two years, suggesting that our TP does not reflect an

excessive premium.

Nintendo’s share price performance last year was heavily influenced by news flow,

specifically the successive positive stories on topics such as Pokemon Go, Super Mario

Run and Nintendo Switch. Historically speaking, Nintendo’s shares are trading at relatively

high multiples, so intuitively it may feel like Nintendo’s share price is somewhat stretched.

We note, however, that our SOTP model uses multiples based on historical averages for

each business, further evidence to us that our TP has not baked in any excessive

premium.

DCF Analysis 1.75

(JPY mn)

Assumptions FCF estimates

# of shares 120,129,323 3/17E 3/18E 3/19E 3/20E 3/21E

Net debt (16/3A) (570,448) OP 20,997 91,299 196,701 235,971 226,714

Exit EV/EBITDA Multiple 16.5x Tax rate 35% 35% 35% 35% 35%

EBIAT 13,648 59,344 127,855 153,381 147,364

WACC Calculation Depreciation & Amortization 9,100 9,100 9,100 9,100 9,100

Risk free rate 0.10% Other non-cash cost - - - - -

Beta 1.23 EBITDA 30,097 100,399 205,801 245,071 235,814

Mkt. Risk Premium 6.65% Net working capital 6,283 (45,888) (23,022) 662 4,360

Cost of Equity 8.28% CAPEX 10,400 10,400 10,400 10,400 10,400

Interest rate 1.00% FCF 39,431 32,956 124,334 173,543 171,224

After-tax cost of debt 0.65% Year 1.00 2.00 3.00 4.00 5.00

D/E ratio 0.0x Discount rate 0.92 0.85 0.79 0.73 0.67

WACC 8.28% Present Value 36,416 28,109 97,938 126,247 115,036

(a) Present Value Current - 3/21E 403,746

(b) Exit Terminal Value 2,614,101

(c) Enterprise Value (a) + (b) 3,017,847

(d) Net Debt (3/16A) (570,448)

(e) Market Value (c) - (d) 3,588,295

(f) Estimated Fair Value (JPY) (e) / # of shares 29,870

Current TP multiple not based on demanding

multiple

21 April 2017

Nintendo (7974) 53

Figure 130: Average EV/EBITDA since

2014 up sharply, now near 20x

Figure 131: P/E also up sharply,

reaching 100x at one point


P/B not a viable valuation metric under current conditions

Nintendo’s P/B tends to move closely in line with company profit levels. This is likely

because Nintendo’s total net assets remain at around the same level each year. Both our

model and consensus forecasts call for sustained sales and profit growth going forward,

so we do not think P/B would be a viable valuation metric given the expected change in

profit level.

Figure 132: Net asset level largely

unchanged; entering period of sales,

profit growth, which rules out P/B Figure 133: Nintendo P/B


TP assumptions based on three scenarios for Switch install base growth

■ Bull case assumption: Switch install base grows at same pace as the Wii (roughly

80mn units sold by end-FY3/21)

■ Bear case assumption: Switch install base grows at same pace as the Wii U (roughly

13mn units sold by end-FY3/21)

We estimate Nintendo Switch sales under the Bull and Bear scenarios above, then

calculate TPs using the SOTP model outlined previously. We will be keeping a close eye

on initial Switch sales in FY3/17 and sales projections for FY3/18.

17.7 x

0 x

5 x

10 x

15 x

20 x

25 x

30 x

35 x

Feb

-08

Dec

-08

Oct

-09

Au

g-10

Jun

-11

Ap

r-12

Feb

-13

Dec

-13

Oct

-14

Au

g-15

Jun

-16

Apr

-17

EV/E

BIT

DA

Nintendo

20x

7x38.2 x

0 x

20 x

40 x

60 x

80 x

100 x

120 x

Mar

-07

Feb

-08

Jan-

09

Dec

-09

No

v-10

Oct

-11

Sep

-12

Aug

-13

Jul-

14

Jun

-15

May

-16

PER

Nintendo

0 x

1 x

2 x

3 x

4 x

5 x

6 x

7 x

8 x

Apr

-07

Apr

-08

Apr

-09

Apr

-10

Apr

-11

Apr

-12

Apr

-13

Apr

-14

Apr

-15

Apr

-16

PBR

P/B not a good option during period of

sustained profit growth

21 April 2017

Nintendo (7974) 54

Figure 134: TP based on Bull and Bear scenarios for Switch sales

Source: Thomson Reuters Datastream, Credit Suisse estimate

Risks

Upside risks

■ Better-than-expected Nintendo Switch sales or software attach rate

■ Smart device apps business doing better than expected or sharp growth in game app

pipeline

■ Launch of new hardware (many market participants seem to expect Nintendo to

release new hardware such as a Nintendo Switch Mini or a new handheld)

■ Rapid yen depreciation

Downside risks

■ Worse-than-expected Nintendo Switch sales or software attach rate

■ A price cut for the Switch or bundling the Switch with a ‘killer content’ game (games

bundled with hardware are included in unit sales figures but are not recognized as

revenue, so bundling a game with a console is essentially a price cut)

■ Sluggish smart device game app sales or development delays

■ Rapid yen appreciation

¥41,000

¥30,000

¥20,000

¥0

¥10,000

¥20,000

¥30,000

¥40,000

¥50,000

2016 2017 2018

NINTENDOBull caseBase case

Bear case

21 April 2017

Nintendo (7974) 55

HOLT Nintendo’s CFROI

® averaged 11% in the past two decades, but has undulated along with

its product cycle, peaking at 22% in FY3/09, at the height of the Wii console and troughing

at –2.5% in FY3/11, before the launch of the 3DS handheld machine, and then settling at

close to 0% through FY3/16. The swing factor for CFROI (including cash in the

denominator) has been margins and asset turns, both of which have been a function of

changes in revenue with the additional headwind of cash-build driving asset turns to at

least a 20-year low of 0.34x in FY3/16.

Looking forward, our forecasts point to a recovery in CFROI to about 10% by FY3/20

driven by EBITDA margin improvement to 22.5% and top-line growth that is able to

overcome continued balance sheet growth and reach 0.7x. Thereafter, CFROI is forecast

to fall to about 8% on flat margins and low top-line growth of 3% over the medium-term

and assuming no change in capital policy. Maintaining CFROI at this 8% level requires a

more stable and even product cycle than historically evident, something that could be

achieved with contribution from the Smart Device business (games for smartphone).

Figure 135: HOLT CFROI Figure 136: Sales growth

Source: Company data, Credit Suisse estimates, HOLT® Source: Company data, Credit Suisse estimates, HOLT®

Figure 137: EBITDA margins Figure 138: Asset turns

Source: Company data, Credit Suisse estimates, HOLT® Source: Company data, Credit Suisse estimates, HOLT®

-5

0

5

10

15

20

25

1996 1999 2002 2005 2008 2011 2014 2017 2020 2023

CFROI Forecast CFROI Discount Rate

-40

-20

0

20

40

60

80

100

1996 1999 2002 2005 2008 2011 2014 2017 2020 2023

-10

-5

0

5

10

15

20

25

30

35

1996 1999 2002 2005 2008 2011 2014 2017 2020 2023

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1996 1999 2002 2005 2008 2011 2014 2017 2020 2023

21 April 2017

Nintendo (7974) 56

HOLT valuation derived from the above-described scenario, inclusive of the “penalty” for

holding cash, suggests about 30% downside. A similar scenario removing this cash drag

that accounts for about two-thirds of HOLT gross investment (the HOLT calculated

balance sheet), suggests that the shares are closer to fair value as shown at the center of

the matrix below which shows upside/downside from the current share price based on

changes in long-run assumptions.

What this matrix highlights is that in addition to the treatment of cash, to be more

constructive on the stock within the HOLT valuation framework, would require either higher

margins, higher top-line growth, or the combination thereof. For example, there is 26%

upside to the shares if the company can sustain top-line growth of 5% with an EBITDA

margin of 24.5%.

Figure 139: HOLT Ex-Cash Valuation Scenario – Sensitivity Analysis

Source: Company data, Credit Suisse estimates, HOLT®

Sales Growth

JPY -1.0% 1.0% 3.0% 5.0% 7.0%

18.5%

20.5%

26.5% -10% 3% 18% 37% 61%

23%

48%

22.5% -23% -13% 0% 16% 36%

24.5% -16% -5% 9% 26%

EB

ITD

A M

arg

in

-36% -28% -18% -5% 11%

-29% -20% -9% 5%

21 April 2017

Nintendo (7974) 57

Earnings forecasts 4Q (Jan–Mar) FY3/17 forecasts

OP: We forecast an operating loss of ¥5.3bn (guidance: operating loss ¥6.3bn, consensus

OP of ¥0.6bn)

Regarding Nintendo Switch numbers, we understand that sales have been quite brisk, but

given that the new console was only launched in March, we assume sales will come in

only slightly ahead of the company target (roughly 2.0mn).

Nintendo Switch: 4Q sales 2.2mn units, with retail price ¥29,800 and CoGS ¥23,000

Game assumptions: In its first fiscal year, the Switch only contributed in March, and its

lineup so far is limited, so we assume a 1.5x attach rate for the device.

Full-FY3/17 forecasts

OP: ¥21.0bn (guidance ¥20.0bn, consensus ¥25.4bn)

Our forecast vs guidance: Nintendo released revised guidance when it announced

guidance at 3Q results, and we do not expect any major surprises to full-term earnings

when the company announces 4Q results.

Forex assumptions: ¥110/$, ¥120/€ (same as guidance). Regarding forex sensitivity, we

assume a ¥600mn and ¥800mn impact on annual OP from each one-yen move versus the

dollar and euro, respectively.

Nintendo Switch assumptions: Same as our stand-alone 4Q forecast of 2.2mn units,

since the console was launched in March.

FY3/18 forecasts


Smart device app sales: ¥70bn (annual)

Nintendo Switch sales: sales of 12mn units (annual), software attach rate of 6x

FY3/19 forecasts


Smart device app sales: ¥150bn (annual)

Nintendo Switch sales: 14.67mn units (annual), software attach rate of 6x

21 April 2017

Nintendo (7974) 58

Figure 140: Income statement


(Y million) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E FY16CoE

Sales 1,838,622 1,434,365 1,014,345 647,652 635,422 571,726 549,780 504,459 416,045 888,942 1,140,811 1,137,636 1,088,288 470,000

YoY% NA -22% -29% -36% -2% -10% -4% -8% -18% 114% 28% 0% -4% -7%

Cost of sales 1,044,981 859,131 626,379 493,997 495,068 408,506 335,196 283,494 250,721 502,677 589,165 576,041 567,467 NA

COGS 56.8% 59.9% 61.8% 76.3% 77.9% 71.5% 61.0% 56.2% 60.3% 56.5% 51.6% 50.6% 52.1% NA

Gross profit 793,641 575,234 387,966 153,655 140,354 163,220 214,584 220,965 165,325 386,265 551,646 561,595 520,821 NA

SG&A costs 238,378 218,667 216,890 190,975 176,764 209,645 189,814 188,084 144,328 294,966 354,945 325,624 294,107 NA

SG&A / sales 13.0% 15.2% 21.4% 29.5% 27.8% 36.7% 34.5% 37.3% 34.7% 33.2% 31.1% 28.6% 27.0% NA

Operating Profit 555,263 356,567 171,076 -37,320 -36,410 -46,425 24,770 32,881 20,997 91,299 196,701 235,971 226,714 20,000

YoY% NA -36% -52% NA NA NA NA 33% -36% 335% 115% 20% -4% -39%

OP margin% 30.2% 24.9% 16.9% -5.8% -5.7% -8.1% 4.5% 6.5% 5.0% 10.3% 17.2% 20.7% 20.8% 4.3%

Non-operating profit / loss -106,568 7,757 -42,975 -23,543 46,893 52,512 45,760 -4,091 2,344 14,400 14,400 14,400 14,400 10,000

Non-operating profit 32,159 11,082 8,602 9,825 48,485 53,136 46,043 14,550 14,700 14,700 14,700 14,700 14,700 NA

Non-operating loss 138,727 3,325 51,577 33,368 1,592 624 283 18,641 12,356 300 300 300 300 NA

Recurring Profit 448,695 364,324 128,101 -60,863 10,482 6,086 70,530 28,790 23,341 105,699 211,101 250,371 241,114 30,000

YoY% NA -19% -65% NA NA -42% 1059% -59% -19% 353% 100% 19% -4% 4%

RP margin% 24.4% 25.4% 12.6% -9.4% 1.6% 1.1% 12.8% 5.7% 5.6% 11.9% 18.5% 22.0% 22.2% 6.4%

Extraordinary profit -563 3,117 -167 -14 -286 4,843 1,561 -1,075 62,510 0 0 0 0 NA

Pretax profit 448,132 367,442 127,934 -60,877 10,197 10,929 72,091 27,715 85,852 105,699 211,101 250,371 241,114 NA

YoY% NA -18% -65% NA NA 7% 560% -62% 210% 23% 100% 19% -4% NA

Pretax profit margin% 24.4% 25.6% 12.6% -9.4% 1.6% 1.9% 13.1% 5.5% 20.6% 11.9% 18.5% 22.0% 22.2% -

Taxes 169,134 138,895 50,261 -17,659 3,029 34,131 30,228 11,196 305 35,938 69,663 82,622 79,568 NA

Effective tax rate 37.7% 37.8% 39.3% 29.0% 29.7% 312.3% 41.9% 40.4% 0.4% 34.0% 33.0% 33.0% 33.0% -

Net Profit 279,089 228,635 77,621 -43,204 7,099 -23,222 41,843 16,506 85,532 69,748 141,425 167,735 161,533 90,000

YoY% NA -18% -66% NA NA NA NA -61% 418% -18% 103% 19% -4% 445%

NP margin% 15.2% 15.9% 7.7% -6.7% 1.1% -4.1% 7.6% 3.3% 20.6% 7.8% 12.4% 14.7% 14.8% 19.1%

Shares outstanding ('000) 127,885 127,882 127,879 127,878 127,877 118,374 118,372 120,129 120,129 120,129 120,129 120,129 120,129 120,129

EPS (¥) ¥2,182 ¥1,788 ¥607 -¥338 ¥56 -¥196 ¥353 ¥137 ¥712 ¥581 ¥1,177 ¥1,396 ¥1,345 ¥749

BPS (¥) ¥10,152 ¥10,889 ¥10,696 ¥10,048 ¥10,003 ¥9,537 ¥9,804 ¥9,774 ¥10,130 ¥10,420 ¥11,009 ¥11,707 ¥12,379 NA

DPS (¥) ¥1,440 ¥930 ¥450 ¥100 ¥100 ¥100 ¥180 ¥150 ¥356 ¥290 ¥589 ¥698 ¥672 ¥380

21 April 2017

Nintendo (7974) 59

Figure 141: Earnings by segment


Figure 142: Cash flow statement


(Y million, %) FY3/05 FY3/06 FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E FY3/20E FY3/17E

CoE

FX rate

USD 108 113 117 114 101 93 86 79 83 100 110 120 110 110 110 110

EUR 135 138 150 162 143 131 113 109 107 134 139 133 120 120 120 120

Sales (Y mn) 515,292 509,249 966,534 1,672,423 1,838,622 1,434,365 1,014,345 647,652 635,422 571,726 549,780 504,459 416,045 888,942 1,140,811 1,137,636 470,000

YoY% 0% -1% 90% 73% 10% -22% -29% -36% -2% -10% -4% -8% -18% 114% 28% 0% 13%

Hardware 290,376 281,484 584,800 1,076,713 1,159,748 863,866 610,401 387,508 396,347 316,026 293,370 267,630 209,862 456,442 185,998 185,998

YoY% 0% -3% 108% 84% 8% -26% -29% -37% 2% -20% -7% -9% -22% 117% -59% 0%

Handheld 206,697 223,869 374,063 467,226 426,151 380,879 298,653 234,604 227,224 201,767 149,616 113,239 98,378 109,916 124,702 143,489

Console 41,989 24,668 156,478 499,346 617,326 378,462 242,851 116,022 136,852 89,569 105,548 102,404 52,448 286,080 349,614 178,800

Other (Incl. amiibo) 41,690 32,947 54,259 110,141 116,271 104,525 68,897 36,882 32,271 24,690 38,204 51,986 59,036 60,446 61,296 61,756

Software 222,704 225,588 379,578 592,079 675,596 567,724 402,229 258,592 237,539 253,826 255,273 229,517 188,600 360,200 452,400 419,300

YoY% 0% 1% 68% 56% 14% -16% -29% -36% -8% 7% 1% -10% -18% 91% 26% -7%

Smart device 5,734 15,683 70,000 150,000 230,000

YoY% - 174% 346% 114% 53%

Other 2,212 2,177 2,156 3,631 3,278 2,775 1,715 1,552 1,536 1,874 1,137 1,577 1,900 2,300 2,800 3,400

YoY% -12% -2% -1% 68% -10% -15% -38% -10% -1% 22% -39% 39% 20% 21% 22% 21%

CoGS (Y mn) 298,115 294,133 568,722 972,362 1,044,981 859,131 626,379 493,997 495,068 408,506 335,196 283,494 250,721 502,677 589,165 576,041

Hardware 221,317 200,070 416,289 811,978 911,234 619,381 442,490 415,359 359,441 276,436 223,068 166,689 141,019 348,657 385,925 336,111

YoY% - -10% 108% 95% 12% -32% -29% -6% -13% -23% -19% -25% -15% 147% 11% -13%

Handheld 184,684 177,310 267,726 335,822 305,707 236,753 207,495 267,957 203,582 189,024 132,787 81,699 88,800 98,312 110,578 126,233

Console 36,632 22,760 148,563 476,155 605,526 382,628 234,995 147,402 155,859 87,412 90,281 79,760 50,600 248,400 273,209 207,639

Other (Incl. amiibo) 5,230 1,619 1,945 2,138 2,239

Software 76,798 94,063 152,433 160,384 133,747 239,750 183,889 78,638 135,627 132,070 112,128 113,938 101,860 119,020 128,240 124,930

YoY% - 22% 62% 5% -17% 79% -23% -57% 72% -3% -15% 2% -11% 17% 8% -3%

Smart device 2,867 7,842 35,000 75,000 115,000

YoY% 174% 346% 114% 53%

Gross Profit (Y mn) 217,176 215,115 397,812 700,060 793,641 575,234 387,965 153,654 140,354 163,219 214,584 220,965 165,325 386,265 551,646 561,595 NA

Hardware 27,369 48,467 114,252 154,594 132,243 139,960 99,014 -64,733 4,635 14,900 32,096 54,184 11,426 49,284 90,529 89,308

Handheld 22,013 46,559 106,337 131,404 120,444 144,126 91,158 -33,353 23,642 12,743 16,829 31,540 9,578 11,604 14,124 17,256

Console 5,357 1,908 7,915 23,191 11,800 -4,166 7,856 -31,380 -19,007 2,157 15,267 22,644 1,848 37,680 76,405 72,052

amiibo 0 6,720 17,540 5,431 6,515 7,172 7,531

Software 145,906 131,525 227,145 431,695 541,849 327,974 218,340 179,954 101,912 121,756 143,145 115,579 86,740 241,180 324,160 294,370

YoY% - -10% 73% 90% 26% -39% -33% -18% -43% 19% 18% -19% -25% 178% 34% -9%Smart device 2,867 7,842 35,000 75,000 115,000

YoY% - 174% 346% 114% 53%Other 1,756 1,643 1,772 3,168 3,278 2,775 1,715 1,552 1,536 1,874 1,137 1,577 1,900 2,300 2,800 3,400

YoY% - -6% 8% 79% 3% -15% -38% -10% -1% 22% -39% 39% 20% 21% 22% 21%

GPM% 42.1% 42.2% 41.2% 41.9% 43.2% 40.1% 38.2% 23.7% 22.1% 28.5% 39.0% 43.8% 39.7% 43.5% 48.4% 49.4% NA

Hardware 9.4% 17.2% 19.5% 14.4% 11.4% 16.2% 16.2% -16.7% 1.2% 4.7% 10.9% 20.2% 5.4% 10.8% 48.7% 48.0%

Handheld 11% 21% 28% 28% 28% 38% 31% -14% 10% 6% 11% 28% 10% 11% 11% 12%

Console 13% 8% 5% 5% 2% -1% 3% -27% -14% 2% 14% 22% 4% 13% 22% 40%

amiibo 18% 34% 9% 11% 12% 12%

Software 65.5% 58.3% 59.8% 72.9% 80.2% 57.8% 54.3% 69.6% 42.9% 48.0% 56.1% 50.4% 46.0% 67.0% 71.7% 70.2%

Smart device 50.0% 50.0% 50.0% 50.0% 50.0%

Other 79.4% 75.5% 82.2% 87.2% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Operating profit (Y mn) 111,522 90,349 226,024 487,220 555,263 356,567 171,076 -37,320 -36,410 -46,425 24,770 32,881 20,997 91,299 196,701 235,971 20,000

Hardware 9,522 12,450 64,572 127,708 98,153 112,790 37,394 -142,116 -73,351 -76,293 -30,985 1,157 -4,609 -51,970 -37,778 -20,903

Software 100,244 76,256 159,681 356,344 454,257 241,426 132,335 103,702 35,832 28,681 55,011 30,006 20,730 115,110 165,820 147,615

Smart device 762 3,566 26,449 66,449 106,449

Other 1,756 1,643 1,772 3,168 2,853 2,352 1,348 1,094 1,109 1,187 744 989 1,310 1,710 2,210 2,810

OPM% 21.6% 17.7% 23.4% 29.1% 30.2% 24.9% 16.9% -5.8% -5.7% -8.1% 4.5% 6.5% 5.0% 10.3% 17.2% 20.7% 4.3%

Hardware 3.3% 4.4% 11.0% 11.9% 8.5% 13.1% 6.1% -36.7% -18.5% -24.1% -10.6% 0.4% -2.2% -11.4% -20.3% -11.2%

Software 45.0% 33.8% 42.1% 60.2% 67.2% 42.5% 32.9% 40.1% 15.1% 11.3% 21.5% 13.1% 11.0% 32.0% 36.7% 35.2%

Smart device - - - - - - - - - - - 13.3% 22.7% 37.8% 44.3% 46.3%Other 79.4% 75.5% 82.2% 87.2% 87.0% 84.8% 78.6% 70.5% 72.2% 63.3% 65.5% 62.7% 68.9% 74.3% 78.9% 82.6%

Hardware units ('000) 24,580 22,150 34,470 50,670 57,550 47,640 36,210 28,470 23,730 16,310 12,580 10,150 10,400 18,600 20,365 16,732 8,000

Console total 3,930 2,360 6,570 18,770 25,950 20,530 15,080 9,840 7,430 3,940 3,840 3,360 3,000 12,000 14,665 11,732 800


WiiU - - - - - - - - 3,450 2,720 3,380 3,250 800 - - - 800

Wii 0 0 5,840 18,610 25,950 20,530 15,080 9,840 3,980 1,220 460 110 - - - - -

GC 3,930 2,360 730 160 - - - - - - - - - - - - -

Portable total 20,650 19,790 27,900 31,900 31,600 27,110 21,130 18,630 16,300 12,370 8,740 6,790 7,400 6,600 5,700 5,000 7,200

3DS - - - - - - 3,610 13,530 13,950 12,240 8,740 6,790 7,400 6,600 5,700 5,000 7,200

NDS 5,260 11,460 23,560 30,310 31,180 27,110 17,520 5,100 2,350 130 - - - - - - -

GBA 15,390 8,330 4,340 1,590 420 - - - - - - - - - - - -

Software units ('000) 143,480 142,100 207,720 318,220 402,520 343,400 301,670 199,190 147,020 123,200 98,870 83,210 71,200 111,600 122,190 100,392 69,000

Console total 48,420 32,790 45,640 122,200 204,580 191,810 171,260 102,370 64,030 45,020 36,130 34,690 16,200 72,000 87,990 70,392 14,000


WiiU - - - - - - - - 13,420 18,860 24,400 27,360 14,000 - - - 14,000

Wii - - 28,840 119,610 204,580 191,810 171,260 102,370 50,610 26,160 11,730 7,330 - - - - -

GC 48,420 32,790 16,800 2,590 - - - - - - - - - - - -

Portable total 95,060 109,310 162,080 196,020 197,940 151,590 130,410 96,820 82,990 78,180 62,740 48,520 55,000 39,600 34,200 30,000 55,000

3DS - - - - - - 9,430 36,000 49,610 67,890 62,740 48,520 55,000 39,600 34,200 30,000 55,000

NDS 10,490 49,950 123,550 185,620 197,310 151,590 120,980 60,820 33,380 10,290 - - - - - - -

GBA 84,570 59,360 38,530 10,400 630 - - - - - - - - - - - -

amiibo units ('000) - - - - - - - - - - 10,500 53,600 16,591 19,909 21,900 22,995 NA

Figurine - - - - - - - - - - 10,500 24,700 7,645 9,175 10,092 10,597 NA

Card - - - - - - - - - - - 28,900 8,945 10,735 11,808 12,398 NA

(Y million) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E

Cash flow from operating activities (A) 287,800 160,337 78,103 -94,955 -40,390 -23,114 60,293 55,190 98,016 30,060 124,603 174,597 172,094

Net Profit 448,132 367,442 127,934 -60,877 10,197 10,929 72,091 27,715 85,852 105,699 211,101 250,371 241,114

Depreciation 8,102 7,098 6,794 12,523 12,637 9,918 9,011 9,139 9,100 9,100 9,100 9,100 9,100

Cash flow from investing activities (B) -174,363 -12,728 -154,038 -164,392 89,104 -20,084 -105,394 -71,740 32,324 -10,400 -10,400 -10,400 -10,400

Capex -509,217 -568,001 -626,891 -1,368,101 -1,730,716 -1,071,026 -736,367 -1,072,852 -8 0 0 0 0

Others 334,854 555,273 472,853 1,203,709 1,819,820 1,050,942 630,973 1,001,112 32,332 -10,400 -10,400 -10,400 -10,400

Cash flow from investing activities (B) -97,810 -133,847 -102,456 -39,823 -12,873 -127,163 -11,916 -2,996 -35,149 -34,874 -70,712 -83,868 -80,767

-134,137 -102,314 -39,644 -12,801 -12,802 -11,835 -24,929 -42,766 -34,874 -70,712 -83,868 -80,767

Free cash flow (A)+(B) 113,437 147,609 -75,935 -259,347 48,714 -43,198 -45,101 -16,550 130,340 19,660 114,203 164,197 161,694

21 April 2017

Nintendo (7974) 60

Figure 143: Balance sheet


(Y million) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E

Current assets: 1,648,725 1,591,388 1,468,706 1,140,786 1,192,250 1,024,136 1,097,597 1,021,135 1,122,419 1,180,704 1,256,695 1,334,924 1,410,551

Liquidity in hand 1,220,148 1,252,321 1,171,076 958,322 903,301 795,215 915,293 909,340 1,004,597 989,383 1,032,873 1,113,203 1,194,130

Accounts and notes receivable 139,174 131,876 135,689 43,378 45,873 28,754 55,794 38,731 34,200 73,100 93,800 93,500 89,400

Inventories 144,752 124,673 92,712 78,444 178,721 160,801 76,897 40,433 34,300 68,900 80,700 78,900 77,700

Other current assets 144,651 82,518 69,229 60,642 64,355 39,366 49,613 32,631 49,321 49,321 49,321 49,321 49,321

Fixed assets: 162,042 169,598 165,591 227,615 255,628 282,274 255,346 275,766 279,952 284,152 288,352 292,552 296,752

Tangible assets 71,064 79,586 80,864 87,856 86,152 94,190 91,488 87,752 91,952 96,152 100,352 104,552 108,752

Intangible assets 2,169 4,111 5,539 7,706 10,863 12,467 12,430 9,977 10,000 10,000 10,000 10,000 10,000

Investment and other assets 88,807 85,899 79,187 132,052 158,612 175,616 151,426 178,037 178,000 178,000 178,000 178,000 178,000

Total assets 1,810,767 1,760,986 1,634,297 1,368,401 1,447,878 1,306,410 1,352,943 1,296,901 1,402,371 1,464,856 1,545,047 1,627,476 1,707,303

ROA 24.7% 20.9% 7.8% -4.4% 0.7% 0.8% 5.3% 2.1% 6.1% 7.2% 13.7% 15.4% 14.1%

Current liabilities: 540,914 407,537 333,301 155,438 194,475 155,652 144,232 98,437 153,574 181,186 190,664 189,226 188,286

Notes and accounts payable 356,774 264,613 214,646 86,700 107,045 47,665 58,464 31,857 27,476 55,088 64,566 63,128 62,188

Fixed liabilities: 15,921 16,863 19,134 21,937 25,882 32,318 41,155 37,563 37,500 37,500 37,500 37,500 37,500

Total liabilities 556,835 424,401 352,435 177,376 220,358 187,971 185,387 136,001 191,074 218,686 228,164 226,726 225,786

Minority interests 25 174 224 81 131 157 110 124 120 120 120 120 120

Shareholders' equity: 1,253,930 1,336,585 1,281,862 1,191,025 1,227,518 1,118,438 1,167,554 1,160,900 1,211,296 1,246,171 1,316,883 1,400,750 1,481,517

Total liabilities & shareholder's equity 1,810,765 1,760,986 1,634,297 1,368,401 1,447,876 1,306,409 1,352,941 1,296,901 1,402,371 1,464,856 1,545,047 1,627,476 1,707,303

21 April 2017

Nintendo (7974) 61

Company overview

Company history

Figure 144: Company history


Year Month

1947 11

Founded as Marufuku in Imagumano, Higashikawara-cho Higashiyama Ward, Kyoto as a maker/vendor of

playing cards

1949 9 Changed name to Marufuku Co., Ltd.,

1950 3

Changed name to Nintendo Playing Card Co., Ltd. and took over production of presidential-stamp/other cards

from general partnership Yamauchi Nintendo (now Yamauchi)

1951 7 Changed name to Nintendo Playing Card

1952 10

Combined production facilities dispersed throughout Kyoto City into a plant at Fukuine-Kamitakamatsu-cho

Higashiyama Ward, Kyoto (now the Kyoto Research Center)

1959 9 Relocated head office to 60-Banchi, Fukuine-Kamitakamatsu-cho Higashiyama Ward, Kyoto

1961 9 Established Tokyo branch

1962 1 Listed on Osaka Stock Exchange’s (OSE) 2nd Section and Kyoto Stock Exchange

1963 10 Changed name to Nintendo (current name)

1964 4 Established Osaka sales office (now the Osaka Branch)

1968 6 Established Uji plant in Uji City, Kyoto Prefecture (now the Nintendo Service Center)

1970 7 Became a First Section stock on the OSE

1980 4 Established Nintendo of America as an overseas subsidiary in New York State

1982 2

Established Nintendo of America as a new overseas subsidiary in Washington State (currently a consolidated

subsidiary) and merged existing New York subsidiary into it

1983 7 Listed on TSE 1st Section

1983 11 Established new plant in Uji City, Kyoto Prefecture (now the Uji Plant)

1990 2 Established Nintendo of Europe as an overseas subsidiary in Germany (currently a consolidated subsidiary)

1993 2 Established Nintendo of France as an overseas subsidiary in Germany (currently a consolidated subsidiary)

1993 11 Established a new plant in Uji City, Kyoto Prefecture (now the Uji Okubo Plant)

2000 11 Relocated head office to 11-1 Kamitoba-hokotate-cho Minami Ward, Kyoto City

2006 7 Established Nintendo of Korea as an overseas subsidiary (currently a consolidated subsidiary)

21 April 2017

Nintendo (7974) 62

Board of directors

Figure 145: Board of directors


Shares held

Directorate position Job Title Name Year Month Experience (hundreds)

2002 Jan Appointed as Director of Nintendo of America (current position)

2002 Jun Appointed as Director of Nintendo (current position)

2006 May Appointed as Director and Chairman (CEO) of Nintendo of America

2013 JunAppointed as Managing Director; General Manager, Corporate Analysis & Administration Division; and

General Manager, General Affairs Division

2014 Jun In charge of Personnel Division

2015 SepAppointed as Director and President (current position), Appointed as Representative Director (current

position)

1972 Jul Joined Nintendo

2000 Jun Appointed as Director (current position)

2002 May Appointed as Senior Managing Director, Appointed as Representative Director (current position)

2013 Feb General Manager, Integrated Research & Development Division

2015 Sep Appointed as Technology Fellow (current position)

1977 Apr Joined Nintendo

2000 JunAppointed as Director (current position), General Manager, Entertainment Analysis & Development

Division

2002 May Appointed as Senior Managing Director, Appointed as Representative Director (current position)

2015 Sep Appointed as Creative Fellow (current position)


2012 Jul Deputy General Manager, Software Planning & Development Division

2013 Jun Appointed as Director (current position), General Manager, Software Planning & Development Division

2014 Apr In charge of Development Administration & Support Division

2015 Sep General Manager, Entertainment Planning & Development Division (current position)

Supervisor of Business Development Division, Development Administration & Support Division (current

position)

2016 Jun Appointed as Managing Executive Officer (current position)


2012 May Outside Director of “The Pokémon Company” (current position)

2015 Jul General Manager, Corporate Planning Department (current position)

1996 Jun Appointed as Director (current position)

Appointed as Managing Executive Officer (current position)

Supervisor of Corporate Analysis & Administration Division (current position)

1980 Jun Joined Nintendo

2010 May General Manager, Software Planning & Development Administration Department

2014 Mar Deputy General Manager, Human Resources Division

2016 Jun Appointed as Director as Audit & Supervisory Committee Member (current position)

1979 Apr Registered as attorney-at-law

1988 May Registered as patent attorney

1988 Jun Opened Mizutani Law and Patent Office

2003 Jun Appointed as Auditor of Nintendo

2014 Jun Appointed as Director of Nintendo

2016 Jun Appointed as Director (Audit and Supervisory Committee Member) of Nintendo (current position)

1968 Apr Appointed clerk of the Ministry of Finance

2000 Jul Director, Miyazu Tax Office, Osaka Regional Taxation Bureau

2004 Jul Director, Katsuragi Tax Office, Osaka Regional Taxation Bureau

2007 Jul Head of Taxation Department No. 1, Osaka Regional Taxation Bureau

2008 Aug Registered as a certified tax accountant

2008 Sep Opened Yoshimi Mitamura Certified Tax Accountant Office


2016 Jun Appointed as Director (Audit & Supervisory Committee Member) of Nintendo (current position)

1994 Mar Registered as certified public accountant

1999 Jul Opened Umeyama Certified Public Accountant Office

1999 Aug Registered as a certified tax accountant

1999 Oct Opened Umeyama Certified Tax Accountant Office (now Umeyama Certified Tax Accountant LLC)

2005 Nov Appointed as Outside Auditor of KURAUDIA

2009 Jul Appointed as Representative Partner of Umeyama Certified Tax Accountant LLC (current position)

2012 Apr Appointed as Inspector (part-time) of Shiga University of Medical Science (current position)


2015 NovAppointed as Outside Director (Audit & Supervisory Committee Member) of KURAUDIA (current position)

2016 Jun Appointed as Director (Audit & Supervisory Committee Member) of Nintendo (current position)

Director

(Audit & Supervisory

Committee Member)

Katsuhiro Umeyama -

Director


Committee Member)

Naoki Mizutani -

Director


Committee Member)

Yoshimi Mitamura -

Director

Managing Executive Officer

Manager, Corporate Planning

Department

Shuntaro Furukawa 1

Director


Committee Member)

Naoki Noguchi 1

Director

(Representative

Director)

Creative Fellow Shigeru Miyamoto 1

Director

Managing Executive Officer

General Manager,

Entertainment Planning &

Development Division

Shinya Takahashi 1

Director

(Representative

Director)

Technology Fellow Genyo Takeda 2

President/Director

(Representative

Director)

Tatsumi Kimishima 10

21 April 2017

Nintendo (7974) 63

Shareholders

Figure 146: Major shareholders

Note: As of 30 September 2016 Source: Company data, Credit Suisse

Company/group status

Figure 147: Equity-method affiliates


Name

Shareholding

(mn shares)

Share of total

outstanding stock (%)

JP Morgan Chase Bank 380055 170,279 12.02

State Street Bank and Trust Company 87,288 6.16

The Bank of Kyoto, Ltd. 58,802 4.15

Japan Trustee Services Bank, Ltd. (Trust Account) 49,847 3.52

The Nomura Trust and Banking Co., Ltd. (The Bank of Tokyo-

Mitsubishi UFJ, Ltd. Retiree Allowance Trust Account) 47,647 3.36

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.

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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.

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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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As of the date of this report, Credit Suisse makes a market in the following subject companies (AAPL.OQ, 0700.HK, MSFT.OQ). A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (7974.T, GOOGL.OQ, ATVI.OQ, 3668.T, 2432.T, NTES.OQ, 0700.HK, MSFT.OQ, 2121.T) within the past 12 months. Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (7974.T, GOOGL.OQ).

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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.

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