Equity Research

Asia
SMUCu
Ke
Re
Tar
Iss
Ma
52- 4.0
20.
31.
Str
40
12
y INTERNATIONAL
co
get
ued
rke
we
rre 7.8
on8
82
13
90
25.03.2010 VALUE
Da
m
Pri
tSh
ek-
nt INVESTORS
Tri0g– INC.
8M
04.6
Pri
ta
me
ce
are
Ca
ran 31.
Bu
ll.7
ge
ce
SMU
psnda
tio
Ye
90y
0n

Equity Research INTERNATIONAL

n

VALUE INVESTORS
Asia INC.

Glorious
prospects for
Super Mario & • Nintendo maintains a valuable competitive
edge over its rivals by dominating the
Co. in infinite rapidly growing video game market for aged
and female players
battle for • Nintendo is financially healthy and stable
with negligible leverage and low cost of

gaming •
equity
Growth prospects remain positive for
Nintendo due to introduction of new
industry products, and existing products performing
strongly
• Recovering global economy is expected to
boost video gaming industry pushing up
Nintendo’s sales figures and share price

– Equity Valuation of
Nintendo Co., Ltd.

March 25, 2010

Research Analysts

Li Zhi

Zhili2007@business.smu.edu.sg

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Nintendo Co. Ltd Page 2

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Nintendo Co. Ltd Page 3

Equity Research
Asia
25.03.2010
Industry and Sector Analysis
Market for Video Games 2009
Along with every other sector, the video games
sector has harshly been affected by the economic
crisis over the past 2 years. Growth in sales in
video games globally was lethargic, reaching more
than US$66.2 billion in 2009, with just an increase
of only 0.4% over the prior year. On the positive
side, the emerging regions of Asia Pacific, Middle
East and Africa saw sales increase of more than
7% to 21%. In contrast, all other major regions
experienced rough declines in sales in 2009.
Figure 1 underlines the abrupt halt in software as
well as hardware sales in 2009:
Figure 1
Largest Markets for Video Games
Despite the recent sales growth in emerging
markets, the video game industry is still highly
dependent on the developed countries. The fact
that the 10 largest markets accounted for more than
74% of total sales worldwide in 2009 clearly
supports that diagnosis. In fact, the “Big Five”
(US, UK, France, Japan, China) solely accounted
for more than 60% of total global Video Game
sales last year. Consequently the economic setback
has affected these core markets most severely, with
Japan’s real GDP growth rate for instance
dropping from -0.7% in 2008 to -6.4% in 2009. US
real GDP growth fell to -3.15% in 2009, down
from growth of 1.1% in 2008.
Nintendo Co. Ltd
SMU INTERNATIONAL
VALUE INVESTORS INC.
Figure 2 displays the most important markets in
regards to consumption per capita:
Figure 2
Key Trends
One key market issue for the future of the video
games and consoles industry is the challenge of
changing demographics, which has undeniable
implications to the industry structure. The industry
players are beginning to see the aging population
as an opportunity: Financially comfortable baby
boomer grandparents are increasingly targeted to
buy video games for their grandchildren. At the
same time, pioneer video-gamers of the first
generation, mainly 35-40 year olds, continue to
spend their increasing incomes on video games. On
the other end of the spectrum, children are getting
exposed to video games younger, caused by strong
growth in both pre-school and infant games-
subsectors. Additionally, women are broadly
beginning to enjoy video gaming, reflected by
newly introduced “customized” products such as
“Project Runway” by Nintendo and female
advertisement leaders like the “Frag Dolls”, an all-
girl team of gamers recruited by Ubisoft to
promote women in the gaming industry.
Another recently observed trend in the industry are
collaboration strategies among game
manufacturers to lighten the cost-pressure of game
development and open strategically relevant, new
markets. Examples for this tendency are
Nintendo’s cooperation with local TV-networks on
the creation of new characters as well as
Electronics Arts partnership with Hasbro to
develop online version on current Hasbro products.
Page 1
Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Video gaming consoles typically have a life-cycle
of around 5 to 6 years from introduction to retreat.
Generally, after a burst of sales at their initial
adoption, hardware sales tend to slow down over
the years and console manufacturers and software
companies benefit largely from long-term revenues
in game sales.

In the past, Nintendo has been highly successful

with its interactive, natural gesture interface
console “Wii”, which propelled it to the top of
global toy and game manufacturers in the recent
years, capturing an overall market share of almost
10%. Consequently all three dominating leaders in
the video gaming industry – Nintendo, Sony and
Microsoft – are aiming to develop cutting-edge
motion sensor technology for their next generation
consoles. Microsoft is expected to release its long
promised “Project Natal” in the recent future – a
ground-breaking motion sensor console – while
Nintendo announced a follow-up for its “DS”
coming with an innovative 3D control panel by the
end of 2010. Considering the usual product life-
cycles, we are expecting the release of additional
features and devices for Nintendo’s Wii plus a
“next-gen” successor before the end of 2011. Sony
also remains on path to developing new control
schemes for a natural gesture interface for its
games

Besides new control schemes, interactive gaming

will continue to be among the key selling points of
new products. At the same time, success would
rely greatly on the popularity of the characters,
upon which blockbuster games are based on.

Nintendo Co. Ltd Page 1

Equity Research
Asia
25.03.2010
Nintendo Company Analysis
Brief History
Nintendo Co., Ltd. is a multinational corporation
located in Kyoto, Japan. Founded on September
23, 1889 by Fusajiro Yamauchi, it produced
handmade hanafuda (playing) cards. According to
Nintendo's Touch! Generations website, the name
"Nintendo" is translated from Japanese to English,
meaning "Leave Luck to Heaven".
Nintendo developed into a video game company in
the 1970s, becoming one of the most influential in
the industry and Japan's third most valuable listed
company, with a market value of over US$85
billion.
Nintendo is also currently the majority owner of
the Seattle Mariners, a Major League Baseball
team in Seattle, Washington.
Satoru Iwata, president and CEO of Nintendo,
managed to pick up the pace of competition
through the launch of the Wii console in 2006 and
announced further breakthrough releases for the
coming years.
Nintendo Co., Ltd.
Nintendo is one of the leading global market
players for both video hardware, and software
games. Products include Game Boy, Mario,
Donkey Kong, Pokémon and The Legend of Zelda.
Although Nintendo is purely focused on the
production and distribution of hardware and
software for the video games market, it offers a
wide product portfolio ranging from Nintendo
Nintendo Co. Ltd
SMU INTERNATIONAL
VALUE INVESTORS INC.
Game Boy Advance, Game Cube, Nintendo DS
and Nintendo Wii. It also positions itself in the
higher end of market, being one of the innovators
in the video games market operating both in Japan
and abroad.
The Nintendo DS already is becoming the best-
selling portable console ever with 80 million units
sold globally, and is expected to beat the 100
million-unit console record set by Sony's
PlayStation 2.
Nintendo supplies the local market with game
consoles and software manufactured in its three
major Japanese manufacturing plants located in
Uji, Okubo and Ogura.
Nintendo distributes their products through its
subsidiary companies based in North and Latin
America, Western Europe and Australasia, making
it a prominent market leader in the video games
market abroad. Products are sold through mixed
retailers worldwide, as well as Nintendo's flagship
specialty stores.
SWOT Analysis
Strengths
• Nintendo is one of the major innovators in the
market of video games and achieved great success
through launching new products like the Wii
console
• Nintendo was able to expand its customer base by
releasing products that target women and older
customers such as Wii Fit and Big Brain Academy
• Formidable television advertising campaigns
successfully enticed many gamers to choose
Page 1
Equity Research
Asia
25.03.2010
Nintendo game consoles rather than their
competitors
Weaknesses
• Although being above competition in delivering
gaming experience, Nintendo fails to meet up to
date technical standards like graphics.
• Nintendo guards against market saturation and
implemented a rule on five games that a licensee
may produce for a Nintendo system. This
prevented Konami from collaborating with
Nintendo for the development of new game
software due to its strict limitation control. In the
final analysis, this becomes a limiting factor for
Nintendo to expand much wider marketability of
its game consoles.
Opportunities
• The video game industry continued to show
growth, driven by expansion of software sales, a
growing base for the new generation of console
hardware as well as favorable sales of handheld
hardware.
• Nintendo announced the release of a new console
for 2011 with new features that might make an
even bigger customer base accessible.
Threats
• Competing companies like Microsoft and Sony
announced to release new consoles that will have a
similar game play as Nintendo’s Wii combined
with better graphics.
• Strong censorship and restrictions implemented
on new software games developed for Nintendo
consoles frustrate other game developers who may
otherwise have considered collaborating.
Nintendo Co. Ltd
SMU INTERNATIONAL
VALUE INVESTORS INC.
• Piracy is expected to remain an issue for the
games industry and manufacturers are expected to
continue developing and implementing new
strategies to overcome this problem.
• The growth in online and mobile gaming is
expected to remain a potential threat to value sales
growth in the video games sector
Financial Overview
Nintendo has been performing well in the past
years. The growth boost through the Wii console
has been slowing down, and a negative growth is
expected for 2010.
A closer look at the balance sheet shows that
Nintendo is, and has been 100% equity financed.
Further information can be found in the full
company report.
Relative Valuation of Nintendo
Major Competitors
In order to back up and cross-check the DCF-
valuation (FCFE) with a complementary approach
we compiled a relative valuation based on the most
relevant multiples of Nintendo, and other
comparable companies with similar business
activities and characteristics.
Nintendo’s main areas of business can be
summarized as production of video-gaming
consoles, development and distribution of video-
gaming software, and manufacturing of electronic
toys mainly for the Asian market, especially Japan.
For that reason we have identified Microsoft,
producer of the “Xbox” and Sony Computer
Page 1
Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Entertainment with the “Playstation” as Nintendo’s variant market conditions. (See figures below as
main competitors in its core market of gaming well as attaches spread sheets)
consoles. However, since both companies are Peer Group and Multiples for Relative Valuation:
operating in several other industry sectors besides
Name of Forward
video games, a Relative Valuation based only on P/E P/S P/B PEG*
Company P/E
multiples of Nintendo’s top competitors is not
NINTEDO 14,98 12,68 2,44 2,35 0,91
feasible, especially as Microsoft for instance Sony
Corporation 35,13 -81,32 0,44 1,04 -
maintains a significantly higher market
Microsoft 13,48 14,75 4,34 5,77 1,56
capitalization with an approx. $250 Billion. (3.37 Sega Sammy 19,01 - 0,75 1,18 -
Trill. Yen; Sony: 3.16 Trill. Yen). Mattel 12,87 13,99 1,48 1,49 1,66
HappiNet 9,42 10,48 11,67 0,64 -
Peer Group Nihon 32,81 77,31 1,78 1,35 -
Apple 16,57 18,98 4,43 5,79 1,31
Nintendo is also a major developer and distributer
LeapFrog 13,18 21,57 1,23 2,42 0,35
of video gaming software and (electronic) toys. Konami 14,21 18,29 0,84 1,23 0,63
Consequently, other game development companies Electronic Arts 29,81 54,25 1,56 2,12 0,66

and Japan-based toy-producers are regarded as THQ 20,68 52,15 0,47 1,23 0,37
Take- 7,35 -20,65 0,81 1,53 -
Nintendo’s competitors in a reasonable peer-group. Activision
Blizzard 14,45 16,38 3,24 1,29 -
Choosing a Multiple
Navarre 6,44 6,37 - - -

Due to the worldwide financial crisis many Nokia 12,56 14,66 0,90 2,82 0,89
GameStop 8,13 9,34 0,32 1,09 0,62
companies in the video gaming industry were still
suffering from negative earnings in 2009. To avoid * (Cur. PE/One year forward Growth)

any bias in the peer group selection – to exclude Figure 3: Current P/E (x-axis) to one-year Forward
companies with a negative P/E ratio – we chose the Growth (y-axis)
“Expected Price to Earnings Ratio” (forward P/E)
for next year based on analyst forecasts as the most
relevant multiple for our Relative Valuation. As a Figure 3

counter check, we also examined the current Price Relative Valuation regarding three scenarios:
to Sales (P/S) and Price to Book (P/B) ratio, as
Market Price Estimates
well as the Price/Earnings-to-Growth ratio. In Relative Pessimistic Optimistic
order to eliminate extreme statistical outliers and Valuation Based (assume Base (assume 90th
On: median) percentile)
distortion, we have composed a reference group of
16 companies, which reflects Nintendo’s areas of Forward P/E
¥26.245,30 ¥30.538,34 ¥57.274,04
business to derive average industry figures. P/S ¥15.365,23 ¥26.020,41 ¥49.747,37

Based on Nintendo’s results for 2009, the obtained P/B ¥16.764,27 ¥24.575,57 ¥50.652,89
industry averages were calculated a “base value” Valuation According to Multiple

for Nintendo, with 2 additional scenarios for

Nintendo Co. Ltd Page 1

Equity Research
Asia
25.03.2010
Using the P/E ratio and the PEG multiple,
Nintendo currently is clearly undervalued since its
market value is significantly lower than the
resulting base value (27 000 Yen < 30 500 Yen).
Assuming positive conditions for a future scenario,
all multiples computed underline the finding that
Nintendo is undervalued compared to its peers.
Regarding the relevant Forward P/E, a target value
of 35 000 Yen to 45 000 Yen is a reasonable
objective for the share-course.
Figure 4: Displays the expected range of fair
prices for Nintendo according to possible
scenarios (grey: pessimistic, red: optimistic)
Figure 4
Please notice:
The calculations outlined in the previous paragraphs are
based on the data set obtained on 10th of March 2010 from
Google Finance, Marketwatch.com as well as Company
Reports and WebPages. Recent developments on the stock
market strongly indicate that the tendency of our
assessments is correct, as Nintendo’s stock is currently
trading slightly above 31,000 Yen and Multiples and
averages for the entire industry have moved upwards
noticeably.
FCFE Valuation
1. Choice of Model
We examined Nintendo’s Capital structure and
dividend spending habits to determine a model for
valuation. One of the most remarkable
characteristics of Nintendo’s corporate financial
strategy is that it maintains a very low debt-to-
equity structure, a ratio close to zero for many
years. (Total interest expenses on debt amounted to
0 Yen in 2007, 0 Yen in 2008 and only 1 Yen
Nintendo Co. Ltd
SMU INTERNATIONAL
VALUE INVESTORS INC.
(millions) in 2009, indicating that Nintendo
operates with almost no leverage at all. There is no
hint that Nintendo might deviate from this policy
in the near- and mid-future.
Nintendo constantly paid out a certain portion of
its earnings as dividends to shareholders in the past
10 years. However the payout-ratio has been
fluctuating considerably in accordance with
increasing and decreasing annual earnings. On top
of that Nintendo’s cash-payments-to-FCFE ratio
has been far from 1 during the last periods.
Therefore a valuation based on Dividends would
underestimate the value of equity for Nintendo.
Additionally, corporate governance in Japan tends
to be weak, thus dividends therefore do not reflect
the real FCFE.
Historical Cash Flow statements have been
available for a relevant period of time, which - in
combination with an examination of the overall
macroeconomic environment as well as Nintendo’s
current product portfolio – can best be used in a
Free Cash Flow model. Since Nintendo’s level of
debt has been very stable over time we decided to
apply a FCFE model in order to evaluate Nintendo.
Figure 5 illustrates the decisive input-factors
utilized in our FCFE valuation model for
Nintendo. We will further elaborate on the
derivation of the figures in the following parts.
Figure 5
2. Growth Stages and duration of
growth
Looking at Nintendo’s historical growth pattern
over a period of 10 to 15 years, it is obvious that a
Page 2
Equity Research
Asia
25.03.2010
limited number of crucial drivers have mainly
determined Nintendo’s growth. First, Nintendo’s
main products – video gaming hardware and
software – typically can be categorized as
consumer discretionary. Consequently Nintendo’s
growth and its market success are highly
dependent on the general global economic
situation. Since business cycles usually fluctuate in
intervals of three to five years, Nintendo’s
prospects for growth of sales and earnings are
directly liable to these macroeconomic factors.
One of the most essential drivers influencing
Nintendo’s growth clearly is the introduction of
new products, especially “next generation”
consoles and the market appreciation of these
releases. It is no coincidence that earnings were
low and growth rates negative from 2002 to 2004
with Nintendo’s rather unsuccessful “GameCube”
console taking a beating from Sony’s top-selling
“Playstation 2”. In contrast, net income and growth
rates have almost been doubling from year on year
since 2005 due to the introduction and remarkable
market success of Nintendo’s “Wii”.
Taking into account of worldwide economic
downturn in 2009, and that Nintendo’s blockbuster
products “Wii” and handheld console “DS” are
approaching their sales-peak, Nintendo’s sales and
income figures turned down sharply from 2009,
resulting in a negative growth rate. Looking
forward into the future, Nintendo, currently
coming from a relatively low sales and growth
level, has huge potential for increasing growth
rates in the next few years after excessive boom
periods from 2005 to 2008.
Nintendo Co. Ltd
SMU INTERNATIONAL
VALUE INVESTORS INC.
One major, and frequently underestimated factor
when it comes to future growth potential in the
video gaming industry, is the “demographic
progression” – kids acting older than their actual
age – and the increasing number of female and
older-age players grabbing a joystick or a
gamepad. By introducing social- and health-
oriented gaming concepts (e.g. “Wii-fitness”, “Dr.
Kiwashima’s Train Your Brain”), Nintendo has
succeeded opening the market of video games and
attracting large groups of new customers.
Particularly among these recently “acquired”
customers – mainly female or of advanced age –
Nintendo has a unique competitive edge over its
rivals, which might be sustainable for Nintendo for
a few years since its “life-style and family brand-
image” are difficult to duplicate.
Hence, we believe that Nintendo will be able to
benefit from its current market position, and realize
extraordinary growth rates during the upcoming
years, especially when the economy starts to
recover on a global level. To precisely account for
Nintendo’s historically fluctuating growth pattern
and its strong correlation to the success of its
innovations and business cycles, we decided to
apply three particular stages of growth:
1. Extraordinary Growth Rate:
Increasing growth rates are expected in the next
three years as a result of an economical
recovery, and a persistent market expansion into
new areas of business by Nintendo (female and
aged customers) with existing, successful
products (Wii, DS) and promising product
innovations such as the recently announced
“Nintendo 3DS”.
Page 2
Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
To account for the high variability in growth 3.1. Growth Rate for year-end 2009 to year-end
rates and the compounding effect, we have 2010
smoothed out the predicted growth for the next To forecast future growth rates for the expected
three years by applying the Expected extraordinary growth period from 2011 to 2013,
Compound Annual Growth Rate (CAGR) in our we first estimated Nintendo’s past growth rate for
calculations. (Please refer to figure 7 and the the most recent financial year from March 09 to
attached appendixes for further elaboration) March 10. Examining Nintendo’s historical sales
2. Transition: based on quarterly figures since 2003, there is an
Three to four years of decreasing growth rates apparent pattern regarding the proportion of annual
would follow, when the current product sales throughout the four quarters. Generally the 4th
portfolio has exceeded their life-cycles, and quarter is the weakest period of the year after a
when competitors compensate and offset usually very strong 3rd quarter, most probably due
Nintendo’s competitive edge regarding to worldwide festive sales. On average, the 4th
interactive family games and motion-capturing quarter accounted for 18.51 % of annual incomes
(e.g. expected introduction of Microsoft’s over the last few years. Extrapolating Nintendo’s
“Project Natal” for the Xbox by the end of recently released sales figures for the first three
2010). quarters of 2009 we expect total annual revenue of
3. Stable growth rate: 1.45 Bill. Yen, corresponding to a growth rate in
Terminal value is computed with stable growth sales of -21.09 percent, and an expected Net
rate based on the level of global growth rate, Income of 232,751.41 Mill. Yen in 2009.
since Nintendo is an internationally well-
Figure 8 shows the quarterly numbers in sales,
diversified company.
net- and operating income (in million Yen) and the
Figure 6 illustrates the expected growth periods proportion of annual Net sales per quarter:
explained above. For detailed figures please refer
to the attached spreadsheets.
Figure 8

3.2. Forecast of Growth 2011 to 2013

Figure 6 To come up with an adequate rate of growth for

Figure 7: Illustration of smoothed out growth rate Nintendo in the upcoming years, we have decided
for 2011 to 2013 to take into consideration 4 main factors:
a) Historical Results of the Company according
to their usual growth trends
Figure 7 b) The current worldwide economical situation
1. Forecast of Growth c) Prediction on Nintendo’s launch of new
console

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
d) Impact of competitors on Nintendo’s Figure 9 highlights the impressive correlation and
Historical and projected financial puts into perspective the performances of Nintendo
performances in relation with the global economy for the
upcoming years:

a) Historical Results and trends

As observed in the graph below and as explicitly Figure 9

detailed in our 3-stage growth model analysis,
Nintendo’s performances follow a recurrent
pattern. Basing our growth rate estimation on this
first factor leads us to assume the following
forecasts:
– Based on their product launch patterns,
Nintendo’s growth rate should increase
consequently within the next 3 years.
– In 2013, Nintendo’s growth rate should reach
its peak and start decreasing before
experiencing the final stage of stabilization.
a) Worldwide Economic Situation.
Over the years, Nintendo’s sales growth trend has
been highly correlated to the world GDP growth
rate. Nintendo’s performances have therefore
always perfectly matched the world’s economy.
Hence, we have decided to compute Nintendo’s
future growth rate by taking into consideration the
expert forecasts from IMF (International Monetary
Fund), and additional sources on the world
economy for the next 3 years. Based on these
expert analyses regarding the performances of the
worldwide economy, we have attempted to extract
a general trend in order to be accurate and realist in
our calculation. For the next 3 years, our forecasts
for the world GDP real growth rate will be around
3.10% for 2011, 4.00% for 2012 and lastly 4.50%
for the year 2013.
c) Success of Nintendo’s launch of new console
According to various sources and concordent with
Nintendo’s product innovation cycle, the video-
game firm would release an update of the
successful Wii beginning of 2011. The “Wii 2”
would offer both better graphics by providing an
HD resolution and more sensitivity in its captors.
The release would is predicted to bump Nintendo’s
performance as it would respond to the critisim and
complaints of many of its users. Moreover, the
launch of a new Nintendo DS would also be in the
pipeline for 2011.
The juxtaposition of both events would have a
direct positive impact on the firm’s revenue.
However, because those two events represents
simple update of existing products, their impact on
Nintendo’s growth rate would not be as significant
as the one experienced in 2005 (163.35%).
d) Impact of competitors on Nintendo’s historical
and projected financial performances
The release of competing products have always
somewhat affected Nintendo’s trend to a certain
extent. In the last 4 years (since the release of the
“Wii “), the impact of Nintendo’s competitor’s
products on its performances has been rather low,
as Nintendo has succeeded in positioning its
product on a different level of entertainment and
therefore conquering a quite different target

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
market. However, prior to the “Wii” success,
Nintendo’s main competitor, Sony, was 3. Discount Rate for Nintendo
dominating the market with the PlayStation 2,
To determine the value of Nintendo using the
which impacted Nintendo’s finances in the years
FCFE model, the discount rate for future cash
2003, 2004. Therefore based on past experiences,
flows is an important factor. We would examine
we can assume that the future launch of
Nintendo’s costs of capital the cost of equity, since
Microsoft’s “Project Natal” will have a negative
there we use FCFE and there is no debt in
impact on Nintendo’s financial statements.
Nintendo’s books. To figure out the cost of equity,
Figure 9 emphasizes both the historical trends and
three major input factors have to be determined:
the forecast for the next three years in terms of
the risk-free rate, the market risk premium for
new product releases.
Nintendo’s home market Japan, and the respective
beta. The risk free rate for Japan can be derived
e) Growth rate figures from 2011 to 2013
from the yield of a 30-year treasury bond.
Based on the four above factors and on their high
According to Bloomberg the currently 2.34% are a
correlation with Nintendo’s financial performances
good estimate:
we have computed the forecasted rate of growth
for the three upcoming years. While the first figure
of 2011 resembles results of the raw calculation of
the growth rate formula (Expected Growth Rate for
2011 = Equity Reinvestment Rate 2010 * Return
on Equity 2010) 8.14% vs. 6.29%, we observe
some disparities in the computations for the two
remaining years. These latter differences can be
explained through the constant aspect of the Return
on Equity figures (around 18.5% for the three
years). Therefore, we have decided to base our
computations on the factors explained above, as
they tend to be in precise concord with the market Figure 10
reality. The results of our estimation give us a rate
http://www.bloomberg.com/markets/rates/japan.html
of growth of 8.14% for 2011, around 20.00% for
2012, and close to 30% for the year 2013. The 3
The market risk premium is rather difficult to
mentioned rates fall under a fair evaluation of the
define. According to Prof. Damodaran from New
four factors’ evolution over the next 3 years and
York University’s Stern School of Business, 5.40%
are on top of that in perfect accordance with the
are a good estimate as of January 2010. To come
projected growth pattern of the firm.
up with that number, he started with Japan’s

Nintendo Co. Ltd Page 2

Equity Research
Asia
25.03.2010
country rating (from Moody's: www.moodys.com),
and estimated the default spread for its rating
(based upon traded government bonds) over a
default free government bond rate. This became a
measure of the added country risk premium for
Japan. He added this default spread to the
historical risk premium for a mature equity market
(estimated from US historical data) to estimate the
total risk premium.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/dat
afile/ctryprem.html
Lastly, we extracted Nintendo’s beta from
Bloomberg at 0.93. Comparing it with other
sources like Financial Times and Reuters we
believe that this is a reasonable estimate.
Plugging those three numbers in the following
equation, we derive a cost of equity for Nintendo
of 7.35%.
Cost of Equity=Rf+β*Rmrp
4. Adjustments
4.1. Research & Development Expenses
As a major player in the console video game
industry, the bulk of Nintendo’s
reinvestment budget goes into research and
development on research and development to
continue innovating new products for the rapidly
changing technological market with
product life cycles. Due to the conservative
accounting measures that require R&D expenses to
be expensed in the same period of occurrence, the
value of the assets created by research does not
show up on the balance sheet, resulting in
Nintendo Co. Ltd
SMU INTERNATIONAL
VALUE INVESTORS INC.
understating the amount of assets that Nintendo
actually has. To provide a more accurate view of
Nintendo, we have capitalized the research assets,
and adjusted the balance sheets and income
statements accordingly.
Due to the lack of financial information available,
we are only able to perform adjustments to the
years 2007-2009. The assumption made about the
time taken for Nintendo’s research and
development to be converted into commercial
products is 5 years, the average time for Nintendo
to come up with a new product line. Thus, 5 years
is the amortizable life of the research assets. The
respective adjustments and the adjusted financial
statements could be viewed in the appendix. The
graphs below show the effect of the adjustments on
the net income and return on equity for the years
2007-2009.
Net Income Adjustments 2007-2009:
Figure 11
Return on Equity 2007-2009:
Figure 12
annual
4.2. Forecasting Financial Statements
The adjusted earnings growth for 2008 and 2009
are 126.14% and 9.5% respectively, mainly due to
shorter the sales of the Nintendo Wii doubling from 2007
to 2008. Though earnings growth rates is believed
to slow down to 5% according to the recent
economic growth forecast of 5%, Nintendo’s
continuous expansion plan allows the investors to
believe in the optimistic growth momentum.
Page 2
Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Hence, the forecast for the Nintendo’s earnings Cash Flow to Equity compared to Net Income.
growth for 2010-2013 years is adjusted to 13.5% Excluding additional adjustments for amortizations
due to the forecasted release of the 2nd generation and depreciations from the FCFE calculation, the
Nintendo Wii, featuring high definition resolution. picture gets even clearer: Capital expenditures
The forecasted financial statements are attached in increased considerably in boom years like 2007 to
the appendix. The forecast financial statements are 2009 as well.
also adjusted to capitalize on their research and
As mentioned earlier, we anticipate a strong boost
development expenses.
in sales and revenues for Nintendo from 2011 to
Forecast
Forecasted Items Assumptions 2013. Due to 2009 and 2010 being exceptional
Ratios
Income Statement years for the global economy in general,
As per
3-Stage Growth forecasting the Equity Reinvestment Rate by
Revenue assumptions in
Model simply putting last years’ ROE and growth rate in
model
Operating relation is not an appropriate, realistic assumption.
Proportion to Sales 72.00%
Expense
Depreciation/ Proportion to Other Instead, to achieve the predicted increase in sales
30.00%
Amortization Assets
and new product introductions, large capital
Tax Rate Marginal Rate 44.79%
Balance Sheet expenditures and a sharp increase in working
Current Assets Proportion to Sales 101%
Current Liabilities Proportion to Sales 31.00%
capital will be inevitable. To reflect that, we apply
Research Asset Proportion to Sales 8.00% the average of the last 5 years’ Equity
Common Equity Remain Constant $21,700.00
Reinvestment Rate as an estimated input figure for
Treasury Stock Remain Constant $(155,400.00)
the upcoming extraordinary growth periods,
Minority Interest Remain Constant $25.00
Cash & ST Inv. Plug Figure because these years best match the capital needs
Nintendo will experience.
5. Equity Reinvestment Rate:
Figure 13 demonstrates how FCFE and Net
In the past few years, Nintendo’s Equity Income developed over the last five years and
Reinvestment Rate closely followed an explicit underlines the core finding, “high-growth years
pattern, reaching high reinvestment rates in high and equity reinvestments strongly correlate”:
growth periods, up to more than a 100% for
example in 2007. In contrast, requirements for
capital reinvestment have been rather small during Figure 13

years of moderate growth like 2009 amounting to

only 9,56%. As a closer look to the figures unveils,
Nintendo has a distinct need for massive increases
in working capital in high-growth years – change
in working capital for instance ballooned by 380%
from ‘06 to ‘07 – leading to a relatively low Free
6. Stable Growth Inputs:
In the long run, we do not expect Nintendo to
maintain either extraordinary growth rates or
exceptional Returns on Equity figures. Long-term

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
ROE – based on a smoothed out average of past Growth g=ROE*Equity Reinvestment Rate
boom and baisse years since 1999 – is therefore
→ERR=gROE=4.00%11.58%=30.76%
estimated to amount to 11.58 % as soon as
Nintendo reaches its stable growth period. This Regarding prospective, long-term discount rates
number reflects Nintendo’s unique position as one and risk-premiums, the current worldwide national
of Asia’s most prominent companies, taking into debt problems are a major factor from our point of
account that typical ROE figures for the sector, and view.
the industry average, fluctuates around 10 percent,
Please refer to figure 15 for a detailed illustration
a benchmark for Nintendo. Having no negative
of recent developments in terms of national debt in
earnings and a relatively stable size of the
the US and Europe:
company in the past, this supports the approach of
applying the historic 10-year average ROE as an
estimation of stable return on equity.
Figure 15

As Nintendo is operating globally and expanding The urgent debt problems in the USA, Europe and
to emerging markets of late, its long-term growth Japan are likely to cause rising inflation in the
rate will be determined by the growth rate of the upcoming years on a worldwide level. Since
world economy. In accordance with IMF forecasts Federal Reserve (FED) in the US, as well as the
and historical figures from the last 10 years, we European Central Bank (ECB), is predicted to take
assume the GDP of 1st world countries and measures to oppose inflationary tendencies, higher
emerging markets – Nintendo’s main sales-regions risk-free rates are the logical consequence. As a
– to grow with 4.50 percent per year on average. side effect of increased inflation and debt troubles,
Since Nintendo’s business is highly exposed to we expect the country risk premium for Japan as
traditionally low-growth markets such as Japan, its well as the equity risk premium to increase
growth rate will stabilize slightly below world slightly.
economy growth at 4.00 percent from 2017
onwards.
Scenario Analysis
To account for the dynamic nature of the current
Figure 14 illustrates the exposure of Nintendo to
the world markets: economic environment, we have formulated
scenario analyses to account for extreme
conditions on either sides of our base valuation of
Figure 14 Nintendo.
As a consequence of the growth and ROE figures
Bear Bull
explained above, a constant Equity Reinvestment
Rate to Equity of 30.76 percent will be necessary Years of Extraordinary Growth 1 5

in the stable growth period according to the ROE (Extraordinary) 3.27% 32.33%
standard growth formula:

Nintendo Co. Ltd Page 1

Equity Research
Asia
25.03.2010
ROE (Stable) 11.57% 11.57%
Risk Free Rate 6.00% 5.00%
Growth Rate (Extraordinary) 0.93% 18.93%
Growth Rate (Stable) 3.50% 4.50%
1. Valuation in the Bear Scenario
Nintendo’s growth will be adversely affected if the
world economy fails to sustain its recovery. Credit
conditions are still tight in major developed
economies, where the rebound in domestic demand
seems more tentative than self-sustaining.
Moreover, the widely debated prophecy of a world
economic crisis in 2012 is anticipated, with China
being speculated as the next greatest bubble to
burst with massive misallocation of wealth. Taking
into account these factors, we have reduced growth
rates to 0.93% for 1 year of extraordinary growth
stage and 3.50% for the stable stage. Risk free rate
is at 6.00% due to world debt crisis and inflation
causing increased level of interest rates.
2. Valuation in the Bull Scenario
Global production and trade have bounced back
and confidence rebounded strongly on the financial
and real fronts with immense policy support. There
has been stabilization of both money and equity
markets, with tightening of bank lending standards.
If policymakers are able to make astute policy
decisions to sustain recovery, the world economy
can well be on the mend. The spectacular growth
prior to 2007 could be seen again, with Nintendo
enjoying 5 years of extraordinary growth of
18.93% and a stable growth rate of 4.50%. Risk
Nintendo Co. Ltd
SMU INTERNATIONAL
VALUE INVESTORS INC.
free rate is at 5.00% considering a stable boom
scenario.
Taking into account our current stock price of
¥31,900.00, this represents a -15.89%% downside
for the bear scenario and an impressive 39.11%%
upside for the bull case.
Recommendation and Summary
In hindsight, Nintendo has endured a tough time in
the past two years of worldwide meltdown. As a
consumer discretionary company running
operating globally, Nintendo has been affected by
reduced consumer confidence, unemployment and
wage-cuts. Still, Nintendo has maintained a strong
overall position. As the world continues to show
signals of economic recovery, optimism and a
stabilizing equity markets, prospects are nothing
but glorious for Nintendo.
Despite sales of Nintendo’s blockbuster console
“Wii” are clearly slowing down and growth rate
even has turned negative since March 2009, the
outlook for Nintendo is generally positive. In
relative to its rivals, Nintendo maintains a valuable
competitive edge by dominating the rapidly
growing video game market for aged and female
players. In addition, Nintendo has several
promising product innovations coming up such as
the 3D handheld console “3DS” and furthermore in
the pipeline. Besides that, existing products are
performing on a surprisingly stable level.
Looking forward, the results of our estimation give
us a rate of growth of 8.14% for 2011, around
20.00% for 2012, and close to 30% for the year
2013.
Page 1
Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
As a fully equity financed company, Nintendo is
currently in a stable and healthy economic
condition eliminating or lowering risk factors such
as default risk or the probability of bankruptcy. On
the other hand this policy of totally avoiding
leverage limits Nintendo’s Return on Equity and
increases cost of capital. However, since Nintendo
is a highly regarded, low-beta company, fund
raising has never been a problem.

Taking all major factors into consideration –

growth, margins, R&D and discount rates – our
target price for Nintendo is ¥40,824.67. We
therefore recommend a “strong buy” position for
Nintendo. With a current share price of ¥ 31.900 it
is significantly undervalued by 21.86 %.

Furthermore Nintendo’s shares have been trading

at a Forward P/E of 14.98x as of 10th of March
2010, which clearly emphasizes our assessment of
Nintendo. Holding slightly optimistic assumptions,
a share price ranging between ¥35.000 and
¥45.000 is most likely according to Relative
Valuation.

Analyzing the bear scenario – dominated by a

negligible worldwide recovery and exploding debt
and inflation problems – Nintendo’s downside risk
appears to be limited with a projected value of
¥27,527.04 and 15.89 % overvaluation. On the
opposite end of expectations, the bull scenario
shows splendid prospects for the company,
dangling a 39.11 % upside at an anticipated stock
price of ¥52,397.02. Overall, the scenario analysis
apparently reinforces our recommended “strong
buy” position for Nintendo Company Ltd.

Nintendo Co. Ltd Page 2

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Disclosure appendix
Analyst certification

The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject
security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no
part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in
this research report: Li Zhi, Anthony Chan Yu, Ralf Dreischaerf, Neo Siong Sze, Carlos Palacios, Amaury Guillement and
Christoph Schiller

Basis for financial analysis

This report is designed for, and should only be utilized by, institutional and private investors. Furthermore, SMU
INTERNATIONAL Value Investors Inc. believes an investor's decision to make an investment should depend on individual
circumstances such as the investor's existing holdings and other considerations.

SMU INTERNATIONAL Value Investors Inc. believes that investors utilize various disciplines and investment horizons when
making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk
tolerance and other considerations.

SMU INTERNATIONAL Value Investors Inc. believes an investor's decision to buy or sell stock should depend on individual
circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as
well as different systems to describe their recommendations. Investors should carefully read the definitions of the
recommendations used in each research report. In addition, because research reports contain more complete information
concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the
recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Appendix I - Adjustments
Adjusted Income Statement

Forecast
Growth -21,09% 13,93% 13,93% 13,93% 11,45% 8,97% 6,48% 4,00%
Year Ended 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net Sales or Revenues 966.534,00 1.672.423,00 1.838.622,00 1.450.785,46 1.652.943,32 1.883.270,61 2.145.692,57 2.391.391,11 2.605.831,61 2.774.783,14 2.885.774,46
Cost of Goods Sold 565.399,00 968.403,00 1.040.274,00 870.471,28 991.765,99 1.129.962,37 1.287.415,54 1.434.834,66 1.563.498,97 1.664.869,88 1.731.464,68
Gross Margin 401.135,00 704.020,00 798.348,00 580.314,18 661.177,33 753.308,25 858.277,03 956.556,44 1.042.332,64 1.109.913,25 1.154.309,78
Depreciation, Depletion & Amortization 25.633,20 31.214,80 36.434,20 35.242,56 36.995,03 42.150,05 48.023,40 54.715,16 60.980,47 66.448,71 70.756,97
Selling, General & Admin Expenses 131.418,00 172.436,00 192.772,00 145.078,55 165.294,33 188.327,06 214.569,26 239.139,11 260.583,16 277.478,31 288.577,45
Operating Expenses – Total 722.450,20 1.172.053,80 1.269.480,20 180.321,11 202.289,36 230.477,12 262.592,66 293.854,27 321.563,63 343.927,02 359.334,42
Operating Income 244.083,80 500.369,20 569.141,80 399.993,08 458.887,97 522.831,13 595.684,37 662.702,17 720.769,01 765.986,23 794.975,37
Non-Operating Interest Income 33.987,00 44.158,00 30.181,00 21.761,78 24.794,15 28.249,06 32.185,39 35.870,87 39.087,47 41.621,75 43.286,62
Earnings Before Interest And Taxes
278.070,80 544.527,20 599.322,80 421.754,86 483.682,12 551.080,19 627.869,76 698.573,04 759.856,48 807.607,98 838.261,99
(EBIT)
Interest Expense On Debt 0,00 0,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00
Pretax Income 278.070,80 544.527,20 599.321,80 421.755,86 483.683,12 551.081,19 627.870,76 698.574,04 759.857,48 807.608,98 838.262,99
IncomeTaxes 115.348,00 176.532,00 169.134,00 188.904,45 216.641,67 246.829,26 281.223,31 312.891,31 340.340,17 361.728,06 375.457,99
Minority Interest -37,00 -99,00 -91,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00
Net Income Before Extra Items/Preferred
162.685,80 367.896,20 430.096,80 232.751,41 266.941,45 304.151,92 346.547,45 385.582,73 419.417,32 445.780,92 462.704,99
Div
Extr Items & Gain(Loss) Sale of Assets 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00
Net Income Before Preferred Dividends 162.685,80 367.896,20 430.096,80 232.751,41 266.941,45 304.151,92 346.547,45 385.582,73 419.417,32 445.780,92 462.704,99
Preferred Dividend Requirements 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00
Net Income Available to Common 162.685,80 367.896,20 430.096,80 232.751,41 266.941,45 304.151,92 346.547,45 385.582,73 419.417,32 445.780,92 462.704,99
EPS 1.271,89 2.876,54 3.363,12 1.819,99 2.087,33 2.378,30 2.709,81 3.015,04 3.279,61 3.485,76 3.618,09

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Adjusted Balance Sheet

Year-ended 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Assets
Cash And ST Investments 1.220.060,00 1.414.491,00 1.408.634,00 1.483.567,53 1.629.851,43 1.796.526,21 1.986.433,20 2.229.910,57 2.504.816,31 2.807.572,01 3.132.652,11
Receivables (Net) 87.780,00 145.611,00 135.149,00 121.571,39 138.511,61 157.812,33 179.802,49 200.391,28 218.360,74 232.518,36 241.819,09
Total Inventories 88.609,00 104.842,00 144.752,00 112.723,26 128.430,54 146.326,53 166.716,22 185.806,53 202.468,14 215.595,36 224.219,17
Other Current Assets 140.116,00 144.060,00 148.676,00 150.866,56 171.888,86 195.840,50 223.129,65 248.679,73 270.979,31 288.548,50 300.090,44
Current Assets - Total 1.536.565,00 1.809.004,00 1.837.211,00 1.868.728,74 2.068.682,45 2.296.505,58 2.556.081,56 2.864.788,10 3.196.624,50 3.544.234,23 3.898.780,82
Other Assets 16.498,00 3.209,00 6.687,00 7.253,93 8.264,72 9.416,35 10.728,46 11.956,96 13.029,16 13.873,92 14.428,87
Research Asset 97.633,40 96.909,40 110.788,20 116.062,84 132.235,47 150.661,65 171.655,41 191.311,29 208.466,53 221.982,65 230.861,96
Total Assets 1.650.696,40 1.909.122,40 1.954.686,20 1.992.045,50 2.209.182,63 2.456.583,58 2.738.465,43 3.068.056,35 3.418.120,19 3.780.090,79 4.144.071,65

Liabilities
Accounts Payable 301.080,00 335.820,00 356.774,00 290.157,09 330.588,66 376.654,12 429.138,51 478.278,22 521.166,32 554.956,63 577.154,89
ST Debt & Current Portion of LT Debt 0,00 0,00 9,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00
Income Taxes Payable 90.013,00 112.450,00 83.551,00 72.539,27 82.647,17 94.163,53 107.284,63 119.569,56 130.291,58 138.739,16 144.288,72
Other Current Liabilities 75.564,00 117.104,00 98.650,00 87.047,13 99.176,60 112.996,24 128.741,55 143.483,47 156.349,90 166.486,99 173.146,47
Current Liabilities - Total 466.657,00 565.374,00 538.984,00 449.743,49 512.412,43 583.813,89 665.164,70 741.331,24 807.807,80 860.182,77 894.590,08
Long Term Debt 0,00 786,00 15,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00
Other Liabilities 698,00 3,00 5.660,00 7.253,93 8.264,72 9.416,35 10.728,46 11.956,96 13.029,16 13.873,92 14.428,87
Total Liabilities 467.355,00 566.163,00 544.659,00 456.997,42 520.677,15 593.230,24 675.893,16 753.288,20 820.836,96 874.056,69 909.018,96

Shareholders' Equity
Minority Interest 138,00 98,00 25,00 25,00 25,00 25,00 25,00 25,00 25,00 25,00 25,00
Preferred Stock 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00
Common Equity 21.791,00 21.705,00 21.651,00 21.700,00 21.700,00 21.700,00 21.700,00 21.700,00 21.700,00 21.700,00 21.700,00
Retained Earnings 1.220.295,00 1.380.431,00 1.432.959,00 1.552.660,25 1.689.945,02 1.846.366,69 2.024.591,86 2.257.131,86 2.522.491,70 2.817.726,45 3.137.865,74
Treasury -156516 -156184 -155396 -155.400,00 -155.400,00 -155.400,00 -155.400,00 -155.400,00 -155.400,00 -155.400,00 -155.400,00
Adjustment for Research Asset 97.633,40 96.909,40 110.788,20 116.062,84 132.235,47 150.661,65 171.655,41 191.311,29 208.466,53 221.982,65 230.861,96
Total Equity 1.183.341,40 1.342.959,40 1.410.027,20 1.535.048,08 1.688.505,48 1.863.353,34 2.062.572,27 2.314.768,15 2.597.283,23 2.906.034,10 3.235.052,70
Total Liabilities & Shareholders'
1.650.696,40 1.909.122,40 1.954.686,20 1.992.045,50 2.209.182,63 2.456.583,58 2.738.465,43 3.068.056,35 3.418.120,19 3.780.090,79 4.144.071,65
Equity

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Appendix II – FCFE Input figures

Adjusted Equity Reinvestment Rate

2010 (forecast) 2009 2008 2007 2006 2005

Net Income ¥232.751,41 ¥430.096,80 ¥367.896,20 ¥162.685,80 ¥98.378,00 ¥87.416,00

Current Assets ¥1.837.211,00 ¥1.809.004,00 ¥1.536.565,00 ¥1.018.730,00 ¥993.891,00

Current Liabilities ¥538.984,00 ¥565.374,00 ¥466.657,00 ¥182.274,00 ¥205.449,00
- Change in Working Capital ¥54.597,00 ¥173.722,00 ¥233.452,00 ¥48.014,00 ¥10.928,00

- CAPEX ¥22.956,00 ¥7.992,00 ¥6.144,00 ¥4.139,00 ¥2.061,00

- Acquisitions ¥0,00 ¥0,00 ¥0,00 ¥0,00 ¥0,00
+ Amortization Depreciation ¥36.434,20 ¥31.214,80 ¥25.633,20 ¥3.591,00 ¥2.931,00
- Net capital expenditure -¥13.478,20 -¥23.222,80 -¥19.489,20 ¥548,00 -¥870,00

= FCFE ¥119.701,25 ¥388.978,00 ¥217.397,00 -¥51.277,00 ¥49.816,00 ¥77.358,00

Dividend Pay-outs ¥227.458,00 ¥97.110,00 ¥49.857,00 ¥34.943,00 ¥18.455,00

Cash to stockholder to FCFE ratio 58,48% 44,67% -97,23% 70,14% 23,86%

Note: Payout ratio is not stable over time. Therefore a valuation based on Dividends would underestimate the value of equity for Nintendo. Additionally Corporate Governance in Japan tends to be weak and
dividends therefore do not reflect the real FCFE, which is why we chose a FCFE model.

Equity reinvestment rate = 9,56% 40,91% 131,52% 49,36% 11,51%

(Net Income - FCFE)/Net Income

Average Equity reinvestment rate 48,57%

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Growth Rate 09 to 10 – Quarterly Sales, Net- and Operating Income Figures

1st 03 2nd 03 3rd 03 4th 03 1st 04 2nd 04 3rd 04 4th 04 1st 05 2nd 05 3rd 05 4th 05 1st 06 2nd 06 3rd 06 4th 06
Net Income (accumulated per year) 11450 2885 34545 67267 22635 46445 67757 87416 14115 56824 92185 98378 15551 94676 131916 174290
Net Income 11450 -8565 31660 32722 22635 23810 21312 19659 14115 42709 35361 6193 15551 79125 37240 42374
Net Sales (accumulated per year) 83821 211382 439489 504135 82153 188009 439589 515292 70684 176364 412339 509249 130919 298817 712589 966534
Net Sales 83821 127561 228107 64646 82153 105856 251580 75703 70684 105680 235975 96910 130919 167898 413772 253945
Operating Income (accumulated) 7245 28771 102627 100120 17467 40013 102627 111522 3754 19613 82783 90349 28802 67111 167633 226024
Operating Income 7245 21526 73856 -2507 17467 22546 62614 8895 3754 15859 63170 7566 28802 38309 100522 58391
Proportion of Annual Income 17,02% -12,73% 47,07% 48,64% 25,89% 27,24% 24,38% 22,49% 14,35% 43,41% 35,94% 6,30% 8,92% 45,40% 21,37% 24,31%
Proportion of Net Sales 16,63% 25,30% 45,25% 12,82% 15,94% 20,54% 48,82% 14,69% 13,88% 20,75% 46,34% 19,03% 13,55% 17,37% 42,81% 26,27%
Proportion of Operating Income 7,24% 21,50% 73,77% -2,50% 15,66% 20,22% 56,14% 7,98% 4,15% 17,55% 69,92% 8,37% 12,74% 16,95% 44,47% 25,83%

1st 07 2nd 07 3rd 07 4th 07 1st 08 2nd 08 3rd 08 4th 08 1st 09 2nd 09 3rd 09 4th 09
Net Income (accumulated per year) 80251 132421 258929 257342 107267 144828 212524 279089 42316 69492 192601 243272,95
Net Income 80251 52170 126508 -1587 107267 37561 67696 66565 42316 27176 123109 50671,954
1450785,4
Net Sales (accumulated per year) 340439 694803 1316434 1672423 423380 836879 1526348 1838622 253498 548058 1182177 6
Net Sales 340439 354364 621631 355989 423380 413499 689469 312274 253498 294560 634119 268608,46
Operating Income (accumulated) 90631 188784 394036 487220 119192 252183 501330 555263 40401 104360 296656 334901,09
Operating Income 90631 98153 205252 93184 119192 132991 249147 53933 40401 63959 192296 38245,09
Proportion of Annual Income 31,18% 20,27% 49,16% -0,62% 38,43% 13,46% 24,26% 23,85% 17,39% 11,17% 50,61% 20,83%
Proportion of Net Sales 20,36% 21,19% 37,17% 21,29% 23,03% 22,49% 37,50% 16,98% 17,47% 20,30% 43,71% 18,51%
Proportion of Operating Income 18,60% 20,15% 42,13% 19,13% 21,47% 23,95% 44,87% 9,71% 12,06% 19,10% 57,42% 11,42%

Average share of income in 4th 20,83

quarter %
18,51 Expected sales growth rate 2009
Average Net Sales in 4th quarter % to 2010
Average Operating Income 4th 11,42 -21,09%

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
quarter %

Forecast of Growth Rates 2011 to 2013

Current IMF-Forecast
Year: 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

World GDP Real Growth Rate (%) 2,70% 3,80% 4,90% 4,70% 5,30% 5,20% 3,10% 2,70% 3,10% 4,00% 4,50%

Net Sales Growth Rate -9,14% 2,12% 0,11% -1,20% 89,77% 73,20% 9,94% -21,09% 8,02% 20,00% 30,00%

Net Sales 503,75 514,41 514,99 508,83 965,61 1672,42 1838,62 1450,79 1567,10 1880,52 2444,68

Net Income Growth rate -36,81% -50,65% 163,35% 12,54% 77,16% 47,65% 8,45% -16,60% 14,69% 13,94% 13,94%

Net Income 67,27 33,19 87,42 98,38 174,29 257,34 279,09 232,75 266,94 304,15 346,55

Average. Growth Rate (2011-13): 19,34% Av. Growth Nint.: 19,34% 19,34% 19,34%

Compound Annual Growth Rate

13,93% CAGR Nintendo: 13,93% 13,93% 13,93%
CAGR (2010-13):

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Stable Growth Input Figures

Expected terminal growth 4,00%

2010 (exp.) 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Return on Invested Capital 22,46% 22,06% 16,79% 10,38% 9,65%

Return on Equity 18,56% 22,47% 23,14% 17,70% 10,37% 9,65% 3,73% 7,55% 11,38% 11,57% 7,40% 12,25%

Arithmetic Average ROE (as Proxy for future) 12,98%

Geometric Average ROE (as Proxy for future) 11,57%

Reinvestment Rate to Equity: 30,81%

(Terminal growth/ROE)

Note:
Historic Average growth applicable since there were no negative earnings and relatively stable size of the company in the past

Appendix III – Valuation

FCFE Valuation (1/2)
Extraordinary Stable
History Growth Transition Growth
(¥ in millions except for per share 2017
data) 2010 2011 to 2013 2014 2015 2016 Onwards
3 2 1

Company Data:

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Historical beta 0,89 0,92 0,95 0,97 1
Adjusted beta 0,93 0,95 0,96 0,98 1,00
Value of cash (including short term
investments and marketable ¥1.408.634,0
securities) 0
Share price (11 March 2010) ¥31.900,00
Shares outstanding (in millions) 127,885
¥4.079.522,6
Value of equity 0

Discount Rate calculation:

Beta of operating assets 0,93 0,96 0,98 0,99 1,00
Risk-free rate 2,34% 5,00%
Japan Country Premium 0,90% 1,00%
Additional risk premium 4,50% 5,00%
Cost of equity 7,34% 8,26% 9,17% 10,09% 11,00%

Cash Flow calculation:

Duration (years) 3 1 1 1
(Expected Compound Annual)
Growth Rate for period -16,60% 13,93% 11,45% 8,97% 6,48% 4,00%
Return on Equity 18,56% 28,69% 28,85% 24,41% 19,20% 11,57%
Reinvestment rate 48,57% 48,57% 39,69% 36,73% 33,77% 30,81%
Cost of equity 7,34% 8,3% 9,17% 10,09% 11,00%
Tax rate 37,74% 39% 40% 40% 40,69%
Adjusted Net income in previous ¥344.236,2
year ¥430.096,80 ¥232.751,41 7 ¥383.654,01 ¥418.056,98 ¥445.162,09
Adjusted Net Income in current ¥383.654,0
year ¥232.751,41 ¥265.183,86 1 ¥418.056,98 ¥445.162,09 ¥462.968,57
FCFE in current year (based on
Adj Net Income and Reinvestment ¥231.376,8
rate) ¥119.701,25 ¥136.380,86 1 ¥264.499,18 ¥294.824,91 ¥320.321,65
PV of future Free Cash Flows to ¥172.793,1
Equity ¥461.468,95 4 ¥223.796,38 ¥245.313,14

Net income in first year of stable

growth ¥462.968,57

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Terminal value (no change in tax ¥4.576.023,6
rate) 1
¥4.359.343,0
Terminal value (change in tax rate) 6
¥2.708.846,3
PV of cash flows in stable growth 1

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

FCFE Valuation (2/2)

Value of operating assets ¥3.812.217,92

Value of cash and ST marketable
securities ¥1.408.634,00
Value of equity ¥5.220.851,92

Shares outstanding (in millions) 127,885

Share price ¥40.824,67
Over/undervalued by 21,86%

Recommendation strong buy

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Relative Valuation (1/3)

Dataset obtained on 10th of March 2010

Name of Company Forward P/E P/E P/S P/B Beta

NINTEDO 14,94 12,46 2,40 2,27 0,89
Sony Corporation 35,13 -81,32 0,44 1,04 1,44
Microsoft 13,48 14,75 4,34 5,77 0,98
Sega Sammy 19,01 - 0,75 1,18 0,87
Mattel 12,87 13,99 1,48 1,49 1,15
HappiNet Corporation 9,42 10,48 11,67 0,64 0,45
Nihon 32,81 77,31 1,78 1,35 0,71
Peer-Group Apple 16,57 18,98 4,43 5,79 1,57
(Entertainmen LeapFrog 13,18 21,57 1,23 2,42 2,17
t-Electronics Konami 14,21 18,29 0,84 1,23 1,10
and Video
Games) Electronic Arts Inc. 29,81 54,25 1,56 2,12 1,30
THQ 20,68 52,15 0,47 1,23 2,26
Take-Two Interactive 7,35 -20,65 0,81 1,53 1,24
Activision Blizzard 14,45 16,38 3,24 1,29 0,64
Navarre Corporation 6,44 6,37 - - 1,75
Nokia 12,56 14,66 0,90 2,82 1,42
GameStop 8,13 9,34 0,32 1,09 0,96

Minimum 6,44 -81,32 0,32 0,64 0,45

Median 14,21 14,71 1,35 1,42 1,15
Maximum 35,13 77,31 11,67 5,79 2,26
Mean 16,53 14,94 2,29 2,08 1,23
Std. Deviation 858,71% 3421,28% 282,34% 155,51% 50,29%
90th percentile 31,00989501 53,2 4,385 4,295 1,918

(¥ in millions of YEN)
Forecast Earnings 2010 ¥232.751,41
Forecast Sales 2010 ¥1.450.785,46

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Current Book Value ¥1.535.048,08
Common Stock Outstanding ¥127,88

Forecast Earnings per share ¥1.820,08

Forecast Sales per share ¥11.344,90
Forecast Book Value per share ¥12.003,82
Current Share Price ¥27.200,00

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Relative Valuation (2/3)

Market Price Estimates

Pessimistic Optimistic
Relative Valuation Based On Base
(assume median) (assume 90th percentile)
Forward
P/E ¥25.863,29 ¥30.089,88 ¥56.440,39
P/S ¥15.365,23 ¥25.991,04 ¥49.747,37
P/B ¥17.063,30 ¥24.953,70 ¥51.556,39

P/E ¥26.764,23 ¥27.188,27 ¥96.828,08

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Relative Valuation (3/3)

PEG
Projected Growth EPS Next EPS Cur.
Name of Company (Cur. PE/1 year Forward P/E P/E
(10-11) FY FY
forward Growth)
NINTEDO 0,86 14,98 14,69% 2087,33 12,68 1819,99
Microsoft 1,56 13,48 9,45% 2,20 14,75 2,01
Mattel 1,66 12,87 8,43% 1,80 13,99 1,66
Konami 0,63 14,21 28,97% 1,38 18,29 1,07
Electronic Arts Inc. 0,66 29,81 82,35% 0,62 54,25 0,34
THQ 0,37 20,68 141,67% 0,29 52,15 0,12
Activision Blizzard 1,18 14,45 13,89% 0,82 16,38 0,72
Navarre Corporation - 6,44 0,00% 0,32 6,37 0,32
Nokia 0,89 12,56 16,50% 1,20 14,66 1,03
LeapFrog 0,35 13,18 62,07% 0,47 21,57 0,29
Apple 1,31 16,57 14,52% 13,41 18,98 11,71
GameStop 0,62 8,13 15,04% 2,60 9,34 2,26

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Appendix IV – Diagrams
Figure 1
Figure 1 underlines the abrupt halt in software as well as hardware sales in 2009:

Figure 16

Figure 2
Figure 2 displays the most important markets in regards to consumption per capita:

Figure 17

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Figure 3
Figure 3: Current P/E (x-axis) to one-year Forward Growth (y-axis)

Figure 18

Figure 4

Figure 4: Displays the expected range of fair prices for Nintendo according to possible scenarios (grey:
pessimistic, red: optimistic)

Figure 19

Nintendo Co. Ltd Page 3

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Figure 5
Figure 5 illustrates the decisive input-factors utilized in our FCFE valuation model for Nintendo. We will
further elaborate on the derivation of the figures in the following parts.

Figure 20

Figure 6
Figure 6 illustrates the expected growth periods explained above. For detailed figures please refer to the
attached spreadsheets.

Figure 21

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Figure 7
Figure 7: Illustration of smoothed out growth rate for 2011 to 2013

Figure 22

Figure 8
Figure 8 shows the quarterly numbers in sales, net- and operating income (in million Yen) and the
proportion of annual Net sales per quarter:

Figure 23

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.

Figure 9
Figure 9 highlights the impressive correlation and puts into perspective the performances of Nintendo in
relation with the global economy for the upcoming years:

Figure 24

Figure 10
According to Bloomberg the currently 2.34% are a good estimate:

Figure 25

http://www.bloomberg.com/markets/rates/japan.html

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Figure 11
Net Income Adjustments 2007-2009:

Figure 26

Figure 12
Return on Equity 2007-2009:

Figure 27

Figure 13
Figure 13 demonstrates how FCFE and Net Income developed over the last five years and underlines the
core finding, “high-growth years and equity reinvestments strongly correlate”:

Figure 28

Figure 14
Figure 14 illustrates the exposure of Nintendo to the world markets:

Figure 29

Nintendo Co. Ltd Page 1

Equity Research
Asia
SMU INTERNATIONAL
25.03.2010 VALUE INVESTORS INC.
Figure 15
Please refer to figure 15 for a detailed illustration of recent developments in terms of national debt in the
US and Europe:

Nintendo Co. Ltd Page 1