Happinet / 7552

COVERAGE INITIATED ON: 2014.03.06 LAST UPDATE: 2021.03.26

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. Happinet / 7552 RCoverage LAST UPDATE: 2021.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Key financial data ------3 Recent updates ------4 Highlights ------4 Trends and outlook ------6 Business ------20 Description ------20 Strengths and weaknesses ------29 Market and value chain ------30 Strategy ------33 Historical performance ------35 Historical financial statements ------35 Other information ------47 History ------47 News and topics ------48 Major shareholders (as of end-March 2020) ------50 Profile ------51

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Happinet / 7552 RCoverage LAST UPDATE: 2021.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Key financial data

Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Est. Sales 190,891 198,021 176,757 206,867 217,232 187,274 174,059 197,607 240,398 233,347 250,000 YoY -1.7% 3.7% -10.7% 17.0% 5.0% -13.8% -7.1% 13.5% 21.7% -2.9% 7.1% Gross profit 22,326 25,007 22,501 24,039 26,152 21,997 21,971 22,880 25,193 23,540 YoY -0.6% 12.0% -10.0% 6.8% 8.8% -15.9% -0.1% 4.1% 10.1% -6.6% GPM 11.7% 12.6% 12.7% 11.6% 12.0% 11.7% 12.6% 11.6% 10.5% 10.1% Operating profit 2,855 4,855 2,973 3,888 5,056 3,450 3,698 4,806 4,540 2,572 4,300 YoY 22.7% 70.1% -38.8% 30.8% 30.0% -31.8% 7.2% 30.0% -5.5% -43.3% 67.2% OPM 1.5% 2.5% 1.7% 1.9% 2.3% 1.8% 2.1% 2.4% 1.9% 1.1% 1.7% Recurring profit 3,013 5,032 3,081 3,917 5,124 3,497 3,479 4,701 4,383 2,413 4,300 YoY 19.9% 67.0% -38.8% 27.1% 30.8% -31.8% -0.5% 35.1% -6.8% -44.9% 78.2% RPM 1.6% 2.5% 1.7% 1.9% 2.4% 1.9% 2.0% 2.4% 1.8% 1.0% 1.7%

Ne t in c o me attributable to owners of the parent 1,376 2,458 2,011 2,466 4,049 2,359 2,040 4,031 2,735 1,224 2,700 YoY 16.7% 78.6% -18.2% 22.6% 64.2% -41.7% -13.5% 97.6% -32.2% -55.2% 120.5% Net margin 0.7% 1.2% 1.1% 1.2% 1.9% 1.3% 1.2% 2.0% 1.1% 0.5% 1.1% Per share data (JPY) Shares issued (year-end; '000) 12,025 24,050 24,050 24,050 24,050 24,050 24,050 24,050 24,050 24,050 EPS 61.3 109.7 89.8 109.4 178.9 104.1 92.3 185.3 125.4 55.9 123.4 EPS (fully diluted) - 109.6 89.6 108.1 176.2 102.2 90.4 181.1 122.5 54.6 Dividend per share 15.00 27.50 22.50 24.75 28.50 30.00 35.00 40.00 50.00 50.00 50.00 Book value per share 883.7 972.1 1,036.2 1,128.3 1,293.0 1,364.8 1,464.8 1,659.3 1,712.1 1,713.8 Balance sheet (JPYmn) Cash and cash equivalents 8,220 12,359 10,155 9,996 15,867 11,412 11,605 11,458 17,447 14,410 Total current assets 41,039 48,269 47,930 47,025 52,449 44,905 48,975 60,484 59,072 55,086 Tangible fixed assets 1,555 1,392 1,110 1,342 688 753 777 758 810 813 Investments and other assets 2,780 2,946 2,976 5,065 5,900 10,047 10,579 11,614 12,438 12,266 Total fixed assets 7,468 6,054 5,072 6,854 7,443 11,887 12,361 14,838 15,850 15,668 Total assets 48,507 54,323 53,003 53,879 59,893 56,793 61,337 75,323 74,923 70,754 Notes and accounts payable 20,204 23,042 22,672 20,099 20,118 18,282 21,550 27,785 25,589 22,188 Short-term debt ------Total current liabilities 25,837 29,617 26,883 25,036 26,957 21,817 25,188 34,354 32,575 27,996 Long-term debt ------Total fixed liabilities 2,867 2,909 2,829 3,148 3,355 3,621 3,837 4,269 4,364 4,578 Total liabilities 28,704 32,527 29,713 28,185 30,312 25,438 29,026 38,624 36,939 32,575 Net assets 19,802 21,795 23,289 25,694 29,580 31,355 32,311 36,698 37,983 38,178 Total interest-bearing debt ------Cash flow statement (JPYmn) Cash flows from operating activities 5,083 4,609 -1,505 2,547 6,658 978 3,055 4,453 7,940 -1,056 Cash flows from investing activities -315 -50 -108 -87 -158 -4,752 -1,107 -3,837 -948 -1,047 Cash flows from financing activities -2,852 -421 -588 -2,618 -628 -677 -1,754 -762 -1,001 -1,111 Financial ratios ROA (RP-based) 6.2% 9.8% 5.7% 7.3% 9.0% 6.0% 5.9% 6.9% 5.8% 3.3% ROE 7.1% 11.8% 8.9% 10.1% 14.8% 7.8% 6.5% 11.3% 7.4% 3.3% Equity ratio 40.8% 40.1% 43.9% 47.7% 49.4% 55.2% 52.7% 48.7% 50.7% 54.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Per share data adjusted for the 2-for-1 stock split on December 1, 2011. Per share data is retroactively restated. Note: Net income attributable to owners of the parent from before FY03/15 refers to net income.

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Happinet / 7552 RCoverage LAST UPDATE: 2021.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Recent updates

Highlights On March 26, 2021, Shared Research updated the report following interviews with Happinet Corporation.

On February 9, 2021, the company announced earnings results for Q3 FY03/21; see the results section for details.

On the same day, the company announced revisions to its earnings forecast.

Revised earnings forecast for full-year FY03/21

▷ Sales: JPY250.0bn (previous forecast: JPY240.0bn) ▷ Operating profit: JPY4.3bn (JPY3.7bn) ▷ Recurring profit: JPY4.3bn (JPY3.5bn) ▷ Net income*: JPY2.7bn (JPY2.1bn) ▷ EPS: JPY123.35 (JPY95.94)

*Net income attributable to owners of the parent

Reasons for revision Sales and profits were revised up, because Kimetsu no Yaiba-related toys were big sellers in the Toys segment, while Nintendo Switch-related products sold well in the Videogames segment. The company also focused on maintaining optimal inventory levels to reduce inventory valuation losses.

On the same day, the company announced a company split (simplified absorption-type split) in the visual manufacturing section and an absorption-type merger between wholly owned subsidiaries (simple merger).

Effective April 1, 2021 (planned), the company will reorganize its organizational structure. Its video manufacturing section will be split from the company and inherited by Happinet Phantom Studio. Further, Happinet Phantom Studio (succeeding company) will absorb the company’s wholly owned subsidiary Phantom Film Co., Ltd.

Purpose of the integration The aim is to operate an end-to-end business from film planning and production to distribution and rights and package sales in Japan and overseas, by integrating the company’s visual manufacturing section, which has worked on Japanese films and anime, and Phantom Film, which distributes, plans, produces, and promotes Western and Japanese films.

Overview of the succeeding company

▷ Company name: Happinet Phantom Studio ▷ Established: January 2021 ▷ Business: Planning, production, distribution, and promotion of films, and planning, production, and sale of film and music software ▷ Capital: JPY10mn ▷ Major shareholders and ownership ratio: 100% owned by Happinet Co., Ltd.

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Happinet / 7552 RCoverage LAST UPDATE: 2021.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Overview of the absorbed company (Phantom Film Co., Ltd.)

▷ Business: Import, distribution, and promotion of foreign-language films, and planning, production, distribution, and promotion of Japanese films ▷ Major shareholders and ownership ratio: 100% owned by Happinet Co., Ltd.

▷ FY09/20 results: Sales JPY1.1bn, operating loss JPY657mn, recurring loss JPY643mn, net loss JPY443mn

On January 13, 2021, the company announced its plan to integrate its visual manufacturing section, and the establishment of a new company to enable such integration.

The company decided to integrate its visual manufacturing section, and to establish a new company to enable such integration. The company plans for the integration to proceed as follows, subject to approval at a meeting of its Board of Directors that will take place in February 2021: the company’s video manufacturing section will be split from the company and inherited by a new company, which will also absorb the company subsidiary Phantom Film Co., Ltd.

Purpose of the integration The aim is to operate an end-to-end business from film planning and production to distribution and rights and package sales in Japan and overseas, by integrating the company’s visual manufacturing section, which has worked on Japanese films and anime, and Phantom Film, which distributes, plans, produces, and promotes Western and Japanese films.

Integration method A new company, Happinet Phantom Studio, will be established in January 2021 as a wholly owned subsidiary of the company. In April 2021, the company plans to split off its visual manufacturing section for the new company to inherit, and the new company will absorb company subsidiary Phantom Film.

Overview of the new company (planned)

▷ Company name: Happinet Phantom Studio ▷ Business: Planning, production, distribution, and promotion of films, and planning, production, and sale of film and music software. ▷ Capital: JPY10mn ▷ Major shareholders and ownership ratio: 100% owned by Happinet Co., Ltd.

For previous releases and developments, please refer to the News and topics section.

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Happinet / 7552 RCoverage LAST UPDATE: 2021.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Trends and outlook

Quarterly trends and results

Cumulative FY 03/ 20 FY 03/ 21 FY 03/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4% of Est. FY Es t . Sales 46,257 103,014 181,590 233,347 50,499 111,340 200,927 80.4% 250,000 YoY -2.1% -1.5% -5.1% -2.9% 9.2% 8.1% 10.6% 7.1% Gross profit 5,496 11,747 18,842 23,540 5,241 11,888 20,608 YoY 1.2% 0.2% -7.6% -6.6% -4.7% 1.2% 9.4% GPM 11.9% 11.4% 10.4% 10.1% 10.4% 10.7% 10.3% SG&A expenses 4,921 10,141 15,816 20,967 4,790 9,940 16,317 YoY 5.5% 3.4% 2.0% 1.5% -2.7% -2.0% 3.2% SG&A ratio 10.6% 9.8% 8.7% 9.0% 9.5% 8.9% 8.1% Operating profit 575 1,605 3,025 2,572 450 1,948 4,290 99.8% 4,300 YoY -25.0% -16.4% -38.0% -43.3% -21.7% 21.4% 41.8% 67.2% OPM 1.2% 1.6% 1.7% 1.1% 0.9% 1.8% 2.1% 1.7% Recurring profit 573 1,571 2,974 2,413 483 2,023 4,354 101.3% 4,300 YoY -23.9% -15.2% -37.9% -44.9% -15.7% 28.8% 46.4% 78.2% RPM 1.2% 1.5% 1.6% 1.0% 1.0% 1.8% 2.2% 1.7%

Net income attributable to owners of the parent 137 763 1,710 1,224 285 1,260 2,751 101.9% 2,700 YoY -68.5% -30.8% -43.7% -55.2% 107.9% 65.0% 60.8% 120.5% Net margin 0.3% 0.7% 0.9% 0.5% 0.6% 1.1% 1.4% 1.1% Quarterly FY 03/ 20 FY 03/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Sales 46,257 56,757 78,576 51,757 50,499 60,841 89,587 YoY -2.1% -1.0% -9.4% 5.3% 9.2% 7.2% 14.0% Gross profit 5,496 6,251 7,095 4,698 5,241 6,647 8,720 YoY 1.2% -0.7% -18.1% -2.2% -4.7% 6.3% 22.9% GPM 11.9% 11.0% 9.0% 9.1% 10.4% 10.9% 9.7% SG&A expenses 4,921 5,220 5,675 5,151 4,790 5,150 6,377 YoY 5.5% 1.5% -0.4% 0.1% -2.7% -1.3% 12.4% SG&A ratio 10.6% 9.2% 7.2% 10.0% 9.5% 8.5% 7.1% Operating profit 575 1,030 1,420 -453 450 1,498 2,342 YoY -25.0% -10.7% -52.0% - -21.7% 45.4% 64.9% OPM 1.2% 1.8% 1.8% - 0.9% 2.5% 2.6% Recurring profit 573 998 1,403 -561 483 1,540 2,331 YoY -24.0% -9.0% -52.2% - -15.7% 54.3% 66.1% RPM 1.2% 1.8% 1.8% - 1.0% 2.5% 2.6%

Net income attributable to owners of the parent 137 626 947 -486 285 975 1,491 YoY -68.5% -6.3% -51.1% - 107.9% 55.8% 57.4% Net margin 0.3% 1.1% 1.2% - 0.6% 1.6% 1.7% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Three-month quarterly figures are calculated as the cumulative figures minus the previous quarter’s cumulative figures.

Seasonality: The Toys business typically accounts for 30% of annual sales and 40% of operating profit. Retail toy sales peak in the weeks leading up to Christmas, thus the company’s sales and operating profit are highest in Q3 which includes December.

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Happinet / 7552 RCoverage LAST UPDATE: 2021.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Breakdown of SG&A expenses Cumulative FY03/20 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 SG&A expenses 4,921 10,141 15,816 20,967 4,790 9,940 16,317 YoY 5.5% 3.4% 2.0% 1.5% -2.7% -2.0% 3.2% Logistics expenses 1,001 2,130 3,558 4,505 973 2,147 3,839 YoY 9.4% 7.5% 3.4% 3.3% -2.8% 0.8% 7.9% Personnel expenses 2,103 4,207 6,477 8,677 2,079 4,207 6,821 YoY 2.0% -0.9% -1.8% -2.9% -1.1% 0.0% 5.3% Depreciation 125 278 432 589 149 335 545 YoY 13.5% 25.3% 28.7% 28.0% 19.3% 20.4% 26.0% Amortization of goodwill 33 66 100 133 39 72 106 YoY - - - - 16.9% 8.5% 5.6% Quarterly FY03/20 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 SG&A expenses 4,921 5,220 5,675 5,151 4,790 5,150 6,377 YoY 5.5% 1.5% -0.4% 0.1% -2.7% -1.3% 12.4% Logistics expenses 1,001 1,129 1,428 947 973 1,174 1,692 YoY 9.4% 5.8% -2.1% 3.0% -2.8% 4.0% 18.5% Personnel expenses 2,103 2,104 2,270 2,200 2,079 2,128 2,614 YoY 2.0% -3.7% -3.4% -6.0% -1.1% 1.1% 15.2% Depreciation 125 153 154 157 149 186 210 YoY 13.5% 36.6% 35.1% 26.6% 19.3% 21.6% 36.4% Amortization of goodwill 33 33 33 33 39 33 34 YoY - - - - 16.9% 0.0% 3.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Three-month quarterly figures are calculated as the cumulative figures minus the previous quarter’s cumulative figures.

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Happinet / 7552 RCoverage LAST UPDATE: 2021.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Performance by segment Segments (cumulative) FY 03/ 20 FY 03/ 21 FY 03/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4% of Est. FY Es t . Total sales 46,257 103,014 181,590 233,347 50,499 111,340 200,927 80.4% 250,000 YoY -2.1% -1.5% -5.1% -2.9% 9.2% 8.1% 10.6% 7.1% Toys 16,362 36,785 64,048 79,060 17,493 39,818 72,641 82.5% 88,000 YoY 25.5% 15.9% 3.9% 2.7% 6.9% 8.2% 13.4% 11.3% Visual and Music 17,829 34,921 53,702 71,618 13,368 30,611 49,153 75.6% 65,000 YoY -12.1% -18.6% -15.5% -12.4% -25.0% -12.3% -8.5% -9.2% Videogames 7,462 21,227 49,168 63,136 16,856 33,404 66,257 82.8% 80,000 YoY -20.5% 5.6% -4.3% 2.4% 125.9% 57.4% 34.8% 26.7% Amusement 4,601 10,079 14,671 19,532 2,781 7,505 12,874 75.7% 17,000 YoY 1.6% 2.5% 0.0% -2.3% -39.6% -25.5% -12.2% -13.0% Segment profit 575 1,605 3,025 2,572 450 1,948 4,290 99.8% 4,300 YoY -25.0% -16.4% -38.0% -43.3% -21.7% 21.4% 41.8% 67.2% Toys 254 709 1,544 1,065 456 1,174 2,818 100.6% 2,800 YoY -0.2% -12.2% -38.1% -47.3% 79.5% 65.5% 82.5% 162.9% Visual and Music 278 559 581 533 198 495 603 113.8% 530 YoY -21.7% -26.3% -47.5% -51.4% -28.5% -11.3% 3.8% -0.6% Videogames 18 173 743 840 236 596 1,326 92.7% 1,430 YoY -81.8% -18.3% -29.3% -19.1% - 243.2% 78.5% 70.2% Amusement 330 790 1,134 1,475 -137 286 527 62.7% 840 YoY -9.0% 3.7% -6.1% -14.4% - -63.8% -53.5% -43.1% Adjustments -306 -627 -977 -1,342 -304 -604 -985 - -1,300 Segments (quarterly) FY 03/ 20 FY 03/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Total sales 46,257 56,757 78,576 51,757 50,499 60,841 89,587 YoY -2.1% -1.0% -9.4% 5.3% 9.2% 7.2% 14.0% Toys 16,362 20,423 27,263 15,012 17,493 22,325 32,823 YoY 25.5% 9.2% -8.9% -2.1% 6.9% 9.3% 20.4% Visual and Music 17,829 17,092 18,781 17,916 13,368 17,243 18,542 YoY -12.1% -24.4% -9.1% -1.5% -25.0% 0.9% -1.3% Videogames 7,462 13,765 27,941 13,968 16,856 16,548 32,853 YoY -20.5% 28.4% -10.6% 35.7% 125.9% 20.2% 17.6% Amusement 4,601 5,478 4,592 4,861 2,781 4,724 5,369 YoY 1.6% 3.2% -4.9% -8.6% -39.6% -13.8% 16.9% Segment profit 575 1,030 1,420 -453 450 1,498 2,342 YoY -25.0% -10.7% -52.0% - -21.7% 45.4% 64.9% Toys 254 455 835 -479 456 718 1,644 YoY -0.2% -17.9% -50.5% - 79.5% 57.8% 96.9% Visual and Music 278 281 22 -48 198 297 108 YoY -21.7% -30.4% -93.7% - -28.5% 5.7% 390.9% Videogames 18 155 570 97 236 360 730 YoY -81.8% 40.9% -32.1% - - 132.3% 28.1% Amusement 330 460 344 341 -137 423 241 YoY -9.0% 15.0% -22.9% -33.9% - -8.0% -29.9% Adjustments -306 -321 -350 -365 -304 -300 -381 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Three-month quarterly figures are calculated as the cumulative figures minus the previous quarter’s cumulative figures.

Toys segment Cumulative FY03/20 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Total sales 16,362 36,785 64,048 79,060 17,493 39,818 72,641 YoY 25.5% 15.9% 3.9% 2.7% 6.9% 8.2% 13.4% BANDAI, BANDAI SPIRITS 8,900 21,600 37,600 45,300 8,800 21,800 41,600 YoY 22.5% 14.0% -0.3% -4.9% -0.6% 0.8% 10.6% % of total 54.7% 59.0% 58.7% 57.4% 50.8% 54.9% 57.3% TAKARA TOMY 1,600 3,800 6,000 7,400 1,400 3,000 5,300 YoY -7.5% -4.9% -15.9% -15.9% -7.5% -20.4% -11.6% % of total 9.9% 10.5% 9.5% 9.4% 8.6% 7.7% 7.4% Happinet original 400 900 1,400 1,500 200 400 700 YoY -6.8% -0.1% -6.8% -21.1% -37.0% -53.1% -50.9% % of total 2.5% 2.7% 2.3% 1.9% 1.5% 1.2% 1.0% Other 5,300 10,200 18,800 24,700 6,800 14,400 24,900 YoY 52.2% 33.8% 24.8% 33.4% 27.2% 40.9% 32.1% % of total 32.9% 27.8% 29.5% 31.3% 39.1% 36.2% 34.3% Segment profit 254 709 1,544 1,065 456 1,174 2,818 YoY -0.2% -12.2% -38.1% -47.3% 79.5% 65.5% 82.5% Segment profit margin 1.6% 1.9% 2.4% 1.3% 2.6% 2.9% 3.9% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Some sales categorizations have been modified from FY03/19 due to the April 2018 startup of BANDAI SPIRITS CO., LTD.

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Happinet / 7552 RCoverage LAST UPDATE: 2021.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Visual and Music segment Cumulative FY03/20 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Total sales 17,829 34,921 53,702 71,618 13,368 30,611 49,153 YoY -12.1% -18.6% -15.5% -12.4% -25.0% -12.3% -8.5% Visual 10,000 20,200 32,500 43,500 10,000 19,900 29,500 YoY -16.7% -22.8% -16.4% -3.3% 0.3% -1.9% -9.0% % of total 56.1% 58.1% 60.5% 60.8% 75.0% 65.0% 60.2% Wholesale 8,900 18,100 29,000 39,100 8,700 17,600 25,700 YoY -20.5% -26.8% -20.6% -3.7% -1.4% -2.5% -11.4% % of total 49.9% 51.9% 54.0% 54.7% 65.7% 57.7% 52.3% Manufacturers 1,100 2,100 3,400 4,300 1,200 2,200 3,800 YoY 35.1% 44.0% 50.2% 0.3% 13.4% 2.8% 10.9% % of total 6.2% 6.2% 6.5% 6.1% 9.3% 7.3% 7.9% Music 7,800 14,600 21,100 28,000 3,300 10,700 19,500 YoY -5.5% -12.0% -14.2% -23.6% -57.3% -26.8% -7.7% % of total 43.9% 41.9% 39.5% 39.2% 25.0% 35.0% 39.8% Segment profit 278 559 581 533 198 495 603 YoY -21.7% -26.3% -47.5% -51.4% -28.5% -11.3% 3.8% Segment profit margin 1.6% 1.6% 1.1% 0.7% 1.5% 1.6% 1.2% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Videogames segment Cumulative FY03/20 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Total sales 7,462 21,227 49,168 63,136 16,856 33,404 66,257 YoY -20.5% 5.6% -4.3% 2.4% 125.9% 57.4% 34.8% Nintendo products 6,500 19,000 45,300 58,300 15,400 30,900 60,800 YoY -10.1% 15.5% 1.3% 10.5% 134.9% 62.5% 34.3% % of total 87.8% 89.6% 92.2% 92.4% 91.3% 92.6% 91.8% SIE products 700 1,600 3,000 3,800 1,000 1,800 4,000 YoY -63.3% -49.3% -47.2% -50.3% 51.1% 8.4% 36.6% % of total 9.7% 7.9% 6.1% 6.0% 6.5% 5.4% 6.2% Others 100 500 800 900 300 600 1,300 YoY 41.9% 55.7% -11.5% -16.0% 96.3% 27.3% 55.3% % of total 2.5% 2.5% 1.7% 1.6% 2.2% 2.0% 2.0% Segment profit 18 173 743 840 236 596 1,326 YoY -81.8% -18.3% -29.3% -19.1% - 243.2% 78.5% Segment profit margin 0.2% 0.8% 1.5% 1.3% 1.4% 1.8% 2.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: SIE is Sony Interactive Entertainment Inc.

Amusement segment Cumulative FY 03/ 20 FY 03/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Total sales 4,601 10,079 14,671 19,532 2,781 7,505 12,874 YoY 1.6% 2.5% 0.0% -2.3% -39.6% -25.5% -12.2% Capsule toys 2,600 6,100 9,000 11,900 2,000 5,100 8,600 YoY 6.2% 11.3% 6.8% 3.9% -23.9% -16.0% -4.6% % of total 58.0% 60.7% 61.6% 61.2% 73.0% 68.5% 67.0% Card games 1,400 2,900 4,000 5,400 400 1,400 2,300 YoY -10.0% -14.4% -14.8% -15.5% -71.1% -51.3% -42.6% % of total 32.0% 28.9% 27.5% 28.1% 15.3% 18.9% 18.0% Other 400 1,000 1,500 2,000 300 900 1,900 YoY 20.9% 12.2% 9.0% 5.6% -29.3% -9.8% 20.8% % of total 10.0% 10.4% 10.9% 10.7% 11.7% 12.6% 15.0% Segment profit 330 790 1,134 1,475 -137 286 527 YoY -9.0% 3.7% -6.1% -14.5% - -63.8% -53.5% Segment profit margin 7.2% 7.8% 7.7% 7.6% -4.9% 3.8% 4.1% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Cumulative Q3 FY03/21 results

▷ Sales: JPY200.9bn (+10.6% YoY) ▷ Operating profit: JPY4.3bn (+41.8% YoY) ▷ Recurring profit: JPY4.4bn (+46.4% YoY) ▷ Net income*: JPY2.8bn (+60.8% YoY)

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*Net income attributable to owners of the parent

▷ The YoY rise in sales was driven by hit product sales under the Toys and Videogames segments, and the added sales from the company’s entry into the model toy wholesaling business in November 2019. ▷ On the earnings front, the company reported gross profit of JPY20.6bn, up 9.4% YoY versus the 10.6% rise in sales. This represented a gross profit margin of 10.3%, basically flat versus 10.4% in cumulative Q3 FY03/20, weak results at the high-margin Amusement segment having offset the boost from smaller losses on inventory disposal YoY. At JPY984mn, losses on disposal of inventory were below year-earlier losses of JPY1.5bn, due mainly to reduced purchasing by the company under its Toys business as toy manufacturers themselves scaled back production in the wake of the pandemic. ▷ The gains at both the operating profit and recurring profit levels reflect the relatively slow growth in SG&A spending, which at JPY16.3bn rose 3.2% YoY and yet was smaller than gross profit growth. There was an increase in logistics costs accompanying the rise in sales. Breaking down SG&A spending, logistics-related costs accounted for JPY3.9bn (up 7.9% YoY), personnel-related costs JPY6.8bn (up 5.3% YoY), depreciation JPY545mn (up 26.0% YoY), and goodwill amortization JPY106mn (up 5.6% YoY). ▷ Net income attributable to owners of the parent was up YoY thanks to the growth in recurring profit. Another factor contributing to profit growth is that extraordinary losses in cumulative Q3 FY03/20 came to JPY294mn as the company booked

JPY288mn in charges in connection with the celebration of the 50-year anniversary of the company’s founding, whereas in cumulative Q3 FY03/21, extraordinary losses stood at just JPY25mn on the booking of fixed asset retirement losses.

Along with its release of cumulative Q3 results on February 9, 2021, the company also issued an upwardly revised forecast for the full year, raising its estimate for full-year consolidated sales by JPY10.0bn, operating profit by JPY600mn, recurring profit by JPY800mn, and net income attributable to owners of the parent by JPY600mn. By way of explanation, the company said sales were running ahead of expectations at its Toys business, the thanks here going to hit products such as those connected with the popular anime Kimetsu no Yaiba (Demon Slayer). Strong sales of Nintendo Switch-related products at its Videogames business also contributed. On top of the better-than-expected sales, the company said earnings were further aided by the decline in inventory valuation losses versus the previous year.

Compared with its upwardly revised forecast, results for cumulative Q3 in FY03/21 has left the company with 80.4% of its full-year target for sales (versus 77.8% in cumulative Q3 in FY03/20), 99.8% for operating profit (versus 117.6%), 101.3% for recurring profit (versus 123.2%), and 101.9% for net income attributable to owners of the parent (versus 139.7%).

Breakdown of results by segment:

Toys segment

▷ Sales: JPY72.6bn (+13.4% YoY) ▷ Segment profit: JPY2.8bn (+82.5% YoY)

The top-line gains were driven by a combination of brisk sales of products for convenience stores and hit products such as Kimetsu no Yaiba-related sword toy Kimetsu no Yaiba DX Nichirintou from Bandai, and Happinet’s move into the model toy wholesaling business with its acquisition of Irisawa Corp. (now a wholly owned subsidiary) in November 2019. The rise in segment profit reflected sales growth coupled with ongoing efforts to improve inventory control and the resulting decline in inventory valuation losses. At Irisawa, which was first included in Happinet’s consolidated results in Q4 FY03/20 (January–March 2020), the company reported sales for cumulative Q3 FY03/21 of roughly JPY3.6bn and indicated that Irisawa finished the period in the black at the profit level.

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Sales by manufacturer

▷ Bandai/BANDAI SPIRITS products: JPY41.6bn (+10.6% YoY), or 57.3% of segment sales (versus 58.7% in cumulative Q3 FY03/20) ▷ Takara Tomy products: JPY5.3bn (-11.6% YoY); 7.4% of segment sales (versus 9.5%) ▷ Happinet original products: JPY700mn (-50.9% YoY); 1.0% of segment sales (versus 2.3%) ▷ Products from other manufacturers: JPY24.9bn (+32.1% YoY); 34.3% of segment sales (versus 29.5%)

The segment saw robust sales of Bandai/BANDAI SPIRITS products such as Kimetsu no Yaiba DX Nichirintou and Ichiban Kuji. The company said the increase in sales of products from other manufacturers during cumulative Q3 in FY03/21 was driven primarily by the addition of Irisawa to the Happinet group in November 2019, which meant Irisawa started making a full quarter’s contribution to consolidated results in Q4 FY03/20 (January–March 2020). The company noted that the toy wholesaling business of Irisawa handles some Bandai and BANDAI SPIRITS products, but most of Irisawa’s sales are derived from sales of products made by other manufacturers.

Segment profit The rise in segment profit was driven largely by rising sales and smaller losses on inventory disposal; in the three-month period of Q3 (October–December 2020), the segment also benefited from a more profitable sales mix, which together with the rise in sales and smaller losses on disposal of inventory gave the segment an operating profit margin of 5.0%, up 1.9pp YoY.

(Reference) Bandai Namco Holdings Inc. results For cumulative Q3 FY03/21, the Toys and Hobby segment of Bandai Namco Holdings Inc. reported sales of JPY221.0bn, up 9.9% YoY. According to Bandai Namco’s results report, it had strong sales in its adult-oriented products such as the plastic models and figurines in its Mobile Suit Gundam series. Legacy IP products such as the KAMEN RIDER series, and various peripheral products utilizing new IP were also popular.

(Reference) Takara Tomy results For cumulative Q3 FY03/21, Takara Tomy reported domestic sales of JPY89.9bn, down 20.2% YoY. The weak sales reflected a number of different factors other than the generally depressed consumer sentiment in the wake of the pandemic, including cancelations/delays of previously scheduled movie debuts and other events, and the sharp drop in sales to overseas tourists visiting Japan, which together weighed heavily on the sales at its various retail outlets (such as Kiddy Land and Takara Tomy Plarail Shops) and also hurt its event business, which among other things handles special expositions of Tomica and Plarail toys.

Visual and Music segment

▷ Sales: JPY49.2bn (-8.5% YoY) ▷ Segment profit: JPY603mn (+3.8% YoY)

The market has started to recover in Q2 (July–September 2020) from the slump stemming from event cancellations and delayed release of new albums and movies, but sales were down YoY. Sales of the new Arashi album This is Arashi and older content packaged with video were brisk thanks to stay-at-home demand, but not sufficient to compensate for the downturn in Q1 (April– July 2020). However, segment profit rose YoY due to SG&A expense cuts.

Sales by field

▷ Visual field: JPY29.5bn (-9.0% YoY)  Wholesale business: JPY25.7bn (-11.4% YoY)  Manufacturing business: JPY3.8bn (+10.9% YoY) ▷ Music field: JPY19.5bn (-7.7% YoY)

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In the visual wholesale section, sales were down YoY, hurt by ongoing delays in the release of new packaged products in the wake of the pandemic. Sales grew in the visual manufacturing section thanks to strong sales of self-produced movies such as Romance Doll and Mother to video streaming services. In the music section, the company reported robust sales of the new STRAY SHEEP album from popular singer Kenshi Yonezu since its release in Q2, on top of which it said it has also seen brisk sales of the new This is Arashi album since its release in Q3. Despite the strong sales in Q2 and Q3, sales for cumulative Q3 FY03/21 still fell YoY owing to the small number of new releases during Q1.

Segment profit The decline in segment sales notwithstanding, the company was still able to report higher earnings YoY thanks to cuts in SG&A spending.

Videogames segment

▷ Sales: JPY66.3bn (+34.8% YoY) ▷ Segment profit: JPY1.3bn (+78.5% YoY)

The double-digit increase in sales at the Videogames segment was driven in large part by sales of Nintendo products, which at JPY60.8bn were up 34.3% YoY. Sales of products from Sony Interactive Entertainment were similarly strong but smaller, finishing up 36.6% YoY at JPY4.0bn. More specifically, the company attributed the gains at the segment to the Nintendo Switch hardware and related game software (including Animal Crossing: New Horizons and Ring Fit Adventure), which was in especially high demand as people refrained from going out amid the pandemic, generating strong sales. Adding further to segment sales during the period were sales of the newly released PlayStation 5 console.

On the profit front, higher sales pushed up segment profit YoY.

Amusement segment

▷ Sales: JPY12.9bn (-12.2% YoY) ▷ Segment profit: JPY527mn (-53.5% YoY)

Sales and profit were down YoY despite brisk sales of Kimetsu no Yaiba-related capsule toys in Q3, because this was not enough to compensate for weak earnings in Q1 affected by temporary closures and shortened operating hours of commercial facilities and falling demand from foreign tourists.

By product type, the segment reported capsule toy sales of JPY8.6bn (-4.6% YoY), card game sales of JPY2.3bn (-42.6% YoY), and other product sales of JPY1.9bn (+20.8% YoY). The increase in other product sales was driven in large part by sales of capsule toy vending machines and card game cabinets, and trading cards other than Data Carddass cards.

Card game sales consist of sales derived from Data Carddass cards. Data Carddass is a series of arcade game machines developed by Bandai, which allows users to play games using the data stored on Data Carddass cards with special bar codes. Trading card sales (excluding sales of Data Carddass cards) are recorded under other product sales when they are sold through vending machines.

Hurt by the drop in sales, segment profit was down YoY. Although having run at a loss during Q1 due to the aforementioned closure or shortened business hours of shopping centers, as restrictions on businesses were relaxed, the segment moved back into the black in Q2 and stayed there. Segment sales for cumulative Q3 in FY03/21 were down JPY1.8bn YoY but this precipitated just JPY607mn decline in segment profit, as the Amusement segment has relatively high marginal ratio.

In Q3 on a standalone basis, the Amusement segment reported sales of JPY5.4bn (+16.9% YoY) and segment profit of JPY241mn (-29.9% YoY). The double-digit increase in segment sales in Q3 was driven largely by strong performance from products related

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to the popular anime Kimetsu no Yaiba and other products mentioned previously. The drop in segment profit reflected added spending on the opening of new directly managed stores carrying capsule toys.

For details on previous quarterly and annual results, please refer to the Historical performance section.

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Company forecast for FY03/21

FY 03/ 20 FY 03/ 21 (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Est. FY Est. Sales 103,014 130,333 233,347 111,340 138,660 250,000 YoY -1.5% -4.0% -2.9% 8.1% 6.4% 7.1% Cost of sales 91,267 118,540 209,807 99,451 Gross profit 11,747 11,793 23,540 11,888 GPM 11.4% 9.0% 10.1% 10.7% SG&A expenses 10,141 10,826 20,967 9,940 SG&A ratio 9.8% 8.3% 9.0% 8.9% Operating profit 1,605 967 2,572 1,948 2,352 4,300 YoY -16.4% -63.1% -43.3% 21.4% 143.2% 67.2% OPM 1.6% 0.7% 1.1% 1.8% 1.7% 1.7% Recurring profit 1,571 842 2,413 2,023 2,277 4,300 YoY -15.2% -66.7% -44.9% 28.8% 170.4% 78.2% RPM 1.5% 0.6% 1.0% 1.8% 1.6% 1.7% Ne t in c o me attributable to owners of the parent 763 461 1,224 1,260 1,440 2,700 YoY -30.8% -71.8% -55.2% 65.0% 212.3% 120.5% Net margin 0.7% 0.4% 0.5% 1.1% 1.0% 1.1% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Forecasts by segment FY 03/ 20 FY 03/ 21 (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Est. FY Est. Sales 103,014 130,333 233,347 111,340 138,660 250,000 YoY -1.5% -4.0% -2.9% 8.1% 6.4% 7.1% Toys 36,785 42,275 79,060 39,818 48,182 88,000 YoY 15.9% -6.6% 2.7% 8.2% 13.9% 11.3% Visual and Music 34,921 36,697 71,618 30,611 34,389 65,000 YoY -18.6% -5.6% -12.4% -12.3% -6.2% -9.2% Videogames 21,227 41,909 63,136 33,404 46,596 80,000 YoY 5.6% 0.9% 2.4% 57.4% 11.1% 26.7% Amusement 10,079 9,453 19,532 7,505 9,495 17,000 YoY 2.5% -6.8% -2.3% -25.5% 0.4% -13.0% Segment profit 1,605 967 2,572 1,948 2,352 4,300 YoY -16.4% -63.1% -43.3% 21.4% 143.2% 67.2% Toys 709 356 1,065 1,174 1,626 2,800 YoY -12.2% -70.7% -47.3% 65.5% 356.7% 162.9% OPM 1.9% 0.8% 1.3% 2.9% 3.4% 3.2% Visual and Music 559 -26 533 495 35 530 YoY -26.3% - -51.4% -11.3% - -0.6% OPM 1.6% -0.1% 0.7% 1.6% 0.1% 0.8% Videogames 173 667 840 596 834 1,430 YoY -18.3% -19.2% -19.1% 243.2% 25.0% 70.2% OPM 0.8% 1.6% 1.3% 1.8% 1.8% 1.8% Amusement 790 685 1,475 286 554 840 YoY 3.7% -28.8% -14.5% -63.8% -19.1% -43.1% OPM 7.8% 7.2% 7.6% 3.8% 5.8% 4.9% Adjustments -627 -715 -1,342 -604 -696 -1,300 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Happinet revised its full-year forecast for FY03/21 in February 2021. The revised forecast calls for sales of JPY250.0bn (+7.1% YoY), operating profit of JPY4.3bn (+67.2% YoY), recurring profit of JPY4.3bn (+78.2% YoY), and net income attributable to owners of the parent of JPY2.7bn (+120.5% YoY).

Versus the previous forecast, sales were revised up by JPY10.0bn, operating profit by JPY600mn, recurring profit by JPY800mn, and net income by JPY600mn.

Sales and profits were revised up, because Kimetsu no Yaiba-related toys were big sellers in the Toys segment while Nintendo Switch-related products sold well in the Videogames segment. The company also focused on maintaining optimal inventory levels to reduce inventory valuation losses.

Breakdown of company forecast for FY03/21 by segment:

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Toys segment At the Toys segment, the company projects full-year sales of JPY88.0bn (+11.3% YoY) and segment profit of JPY2.8bn (+162.9% YoY), the double-digit gains reflecting strong sales of Ichiban Kuji, Demon Slayer: Kimetsu no Yaiba, and related merchandise. Another factor contributing to profit growth is the fact that while the segment booked JPY1.5bn in inventory disposal losses in FY03/20, inventory losses will be lower in FY03/21 as the segment has maintained appropriate inventory levels.

The company will implement the following initiatives in the Toys segment.

▷ Grow sales of hobby merchandise by leveraging the distribution networks of Happinet and Irisawa Corp., shares in which it acquired in November 2019. ▷ Hone up on sales promotion and planning abilities for convenience store merchandise to boost sales and get more stores to carry Happinet merchandise. ▷ Work to expand Happinet’s merchandise lineup and customer base by cultivating new suppliers and new sales channels.

Popular toy products distributed by Happinet includes “Kimetsu no Yaiba DX Nichirintou,” a Demon Slayer: Kimetsu no Yaiba toy (MSRP: JPY5,800), “Kimetsu Tamagotchi” (MSRP: JPY2,300 excluding tax), a collaboration with Demon Slayer: Kimetsu no Yaiba (Demon Slayer: Kimetsu no Yaiba is a popular comic series that has sold over 100mn copies to date), and “the General-Purpose Egg-Type Battle Weapon Evatchi” (MSRP: JPY2,300 excluding tax), a collaboration with the Evangelion animated series.

The latter two toys are versions of Tamagotchi, a portable pet game launched by Bandai in 1996.

Acquisition of Irisawa (now a wholly owned subsidiary) In November 2019, Happinet bought shares in hobby-related product company Irisawa Corp., making it a wholly owned subsidiary, with the aim of entering the model toy wholesale business. In the field of hobby products, Happinet previously only dealt in plastic models from BANDAI SPIRITS. Having Irisawa under its umbrella will enable it to handle other brands of plastic models, hobby RC products, and model railways. The company said that the wholesale hobby product market was worth about JPY80bn, and Irisawa had a market share of roughly 8% and the company 9%, so the acquisition will give it a market share of about 17%.

Irisawa reported annual sales of JPY5.4bn and operating profit of JPY38mn in FY01/19. In Q4 FY03/20 (January–March 2020), Happinet added Irisawa Corp. to consolidation, which contributed JPY1.9bn to sales in the quarter (five months’ worth of results from Irisawa was included), but in FY03/21 Irisawa will contribute to the entire fiscal year.

Visual and Music segment At the Visual and Music segment, the company projects full-year sales of JPY65.0bn (-9.2% YoY) and segment profit of JPY530mn (-0.6% YoY). While anticipating a decrease in sales and profit versus FY03/20, the company expects the profit decline to be less than the sales decline due to the YoY reduction in video investment losses under the video manufacturing business.

Company initiatives undertaken at the Visual and Music segment during FY03/21:

▷ Aim to expand market share and streamline operations in the distribution business. ▷ Enhance functions for greater profitability in the manufacturing business.

Promising merchandise includes the DVD and Blu-Ray box sets of the hit television series Hanzawa Naoki 2020 released in January 2021.

Videogames segment At the Videogames segment, the company projects full-year sales of JPY80.0bn (+26.7% YoY) and segment profit of JPY1.4bn (+70.2% YoY), sales and profit gains here being projected based on the strength of cumulative Q3 sales of Nintendo Switch

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hardware and related game software, which included popular titles such as Animal Crossing: New Horizons (released in March 2020) and Ring Fit Adventure (released October 2019). The forecast assumes Q4 sales and segment profit will both finish on par with the year-earlier level.

Company initiatives undertaken at the Videogames segment during FY03/21:

▷ Take steps to create hit products among Happinet’s own line of original games, and undertake new endeavors as a manufacturer though alliances with other companies. ▷ Work to maximize sales in the distribution business by collaborating with manufacturers and retailers to enhance sales promotions and other campaigns.

Promising merchandise distributed by Happinet include the under-mentioned Jack Jeanne, Brigandine: Lunasia Senki, as well as the new PlayStation5 (MSRP: JPY49,980), which was launched in November 2020. There is also the March 2021 scheduled release of Monster Hunter Rise (for Nintendo Switch, MSRP: JPY7,990), the latest installment in the Monster Hunter series, which was sold over 64mn units to date. It should be noted that the company says it has not factored Jack Jeanne into its FY03/21 forecasts.

Equity-method affiliate Broccoli Co., Ltd. plans to launch Jack Jeanne for Nintendo Switch in March 2021 Equity-method affiliate Broccoli Co., Ltd. plans to launch Jack Jeanne for Nintendo Switch in March 2021, with Happinet to handle exclusive distribution. The world setting, character design, illustration, and scenario writing for Jack Jeanne will all be handled by Sui Ishida, author of the Tokyo Ghoul comic series, which was sold over 44mn copies to date. MSRP is JPY7,800.

Brigandine: Lunasia Senki, original game software for Nintendo Switch released in Q1 FY03/21 The company launched its original game software Brigandine: Lunasia Senki for Nintendo Switch on June 25, 2020, followed by a PlayStation4 version on December 10. The game is a remake of Brigandine: Grand Edition, which Happinet released in 2000. Recommended retail price for the regular version is JPY7,200 (excluding tax).

Amusement segment At the Amusement segment, the company projects full-year sales of JPY17.0bn (-13.0% YoY) and a segment profit of JPY840mn (-43.1% YoY), the declines here being projected based on the weak results reported for cumulative Q3 FY03/21, when segment sales and earnings were hit hard by the pandemic and the accompanying business restrictions, including temporary closures and shortened operating hours at shopping malls and other commercial buildings, and falling demand from foreign tourists. With still no sign of a recovery in foreign tourist traffic to Japan, the company’s forecast assumes Q4 results will also come in short of year-ago levels.

Company initiatives undertaken at the Amusement segment during FY03/21:

▷ Build new approaches to sales, such as capsule toy shops ▷ Work to develop and install vending machines that are adaptable to a variety of price ranges. ▷ Use IT to streamline operations and cut down on slow-moving inventory.

Promising merchandise to be distributed by Happinet includes a line of capsule toys based on Demon Slayer: Kimetsu no Yaiba coinciding with the October 2020 release of the movie Demon Slayer: Kimetsu no Yaiba the Movie: Mugen Train, the theatrical version of the comic Demon Slayer: Kimetsu no Yaiba.

Dividends For its dividend forecast, the company announced that it plans to maintain a stable total annual dividend of JPY50.0 per share, setting its year-end dividend separately according to its basic policy on profit distribution, which aims for a 40% payout ratio.

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Medium-term outlook

On September 23, 2020, Happinet announced its FY03/21 earnings forecast. The company thinks delays to the implementation of strategies and changes in the business environment, including as a result of the spread of COVID-19, make achievement of the sales target of JPY230.0bn and recurring profit target of JPY5.6bn in the three-year medium-term business plan launched in FY03/19 rather difficult. While making no changes in principle to its basic policies and strategies, the company is focused on responding flexibly to changes in the operating environment.

The following section highlights medium-term plan targets prior to the announcement of the company’s FY03/21 earnings forecast.

Medium-term plan In May 2018 Happinet unveiled its eighth medium-term business plan for FY03/19 to FY03/21. The company will in principle continue the policies of the seventh medium-term business plan and aim for improved profits through the wholesale business for music and visual products it took over from Seikodo in FY03/18 and cost reduction as it integrates logistics and systems.

Eighth medium-term business plan targets 8th medium-term plan FY03/18 FY03/19 FY03/20 (JPYmn) Act. Act. Act. Sales 197,607 240,398 233,347 YoY 13.5% 21.7% -2.9% Operating profit 4,806 4,540 2,572 YoY 30.0% -5.5% -43.3% OPM 2.4%1.9%1.1% Recurring profit 4,701 4,383 2,413 YoY 30.0% -6.8% -44.9% RPM 2.4%1.8%1.0% Source: Shared Research based on company data

Initiatives for eighth medium-term business plan Toys segment According to the company, the market environment during the eighth medium-term business plan will continue to be harsh as the number of toy stores decreases due to the rise in e-commerce and the shrinking child population. In this environment, the company will strengthen its relationships with manufacturers, including Bandai Namco, as an intermediary distributer. The company plans to compile expertise regarding product lineups and sales displays unique to the company and aims to achieve an overwhelmingly favorable position as an intermediary distributer of toys in the long term. As a manufacturer, the company plans to enhance its lineup of original products.

In FY03/20, the company acquired stock in Irisawa Corp. to expand its market share in hobby merchandise.

Acquisition of Irisawa (making it a subsidiary) In November 2019, Happinet bought shares in hobby-related product company Irisawa Corp., making it a wholly owned subsidiary, with the aim of entering the model toy wholesale business. In the field of hobby products, Happinet previously only dealt in plastic models from BANDAI SPIRITS. Having Irisawa under its umbrella will enable it to handle other brands of plastic models, hobby RC products, and model railways. The company said that the wholesale hobby product market was worth about JPY80bn, and Irisawa had a market share of roughly 8% and the company 9%, so the acquisition will give it a market share of about 17%.

Irisawa reported annual sales of JPY5.4bn and operating profit of JPY38mn for FY01/19.

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Visual and Music segment The company aims to expand its distribution market share by strengthening its manufacturing business and integrating systems and logistics with the business it took over from Seikodo.

Business succession from Seikodo Co., Ltd. In FY03/18, subsidiary Seikodo Marketing (currently Happinet Media Marketing Corporation), which succeeded the music and visual products wholesale business of Seikodo Co., Ltd., which had 17% domestic market share in intermediate distribution of video of music merchandise. In FY03/20 and beyond, Happinet expects further earnings contributions from cost reductions and the integration of logistics and systems. Goodwill from the business succession was JPY658mn at end-FY03/18 with an amortization period of five years.

According to the company, the following were the market shares of intermediary distributors for domestic visual and music products in FY03/18: Seikodo 17%, Happinet 11%, others 13% (including 10% market share of companies which only distribute for parent companies) while 59% of distribution was a direct transaction with manufacturers. By taking over the business of Seikodo, the company share would rise to 28%. Excluding the 59% share of direct transactions with manufacturers and the 10% share of companies which only distribute for parent companies, the company in essence holds exclusive control over the market.

Business figures and financial condition of Seikodo (at the time of succession) (JPYmn) FY06/15 FY06/16 FY06/17 Sales 58,520 55,061 53,327 Operating profit -103 -55 -123 Recurring profit -219 -190 -257 Net income -252 -216 -1,471 Source: Shared Research based on company data

Turning to the integration of logistics and systems, subsidiary Seikodo Marketing succeeded a portion of Happinet’s rights and obligations regarding its wholesale business for packaged visual and music products. It also changed its name from Seikodo Marketing to Happinet Media Marketing Corporation. As a result of the succession, the company group will provide services closely fitted to the market, enhance shared use of distribution functions, systems, etc., and strengthen its nationwide distribution net.

In FY03/20, the company says it made progress integrating its logistics systems and offices with the former Seikodo, which has delivered cost-cutting effects.

Strengthen manufacturing business In the manufacturing business, the company plans to strengthen its productions by focusing on Japanese films, which have seen a higher percentage of hits thanks to compiled expertise, and animated works, which are capable of expanding into multiple product areas, including toys and games.

Videogame segment The company will propose and execute optimized support strategies for each sales channel in order to maximize the sale of the Nintendo Switch. It will also optimize distribution and services by cooperating with Nintendo Sales Inc. The company aims to improve profitability by expanding sales of its gaming peripheral products and exclusively distributed products, which are more profitable.

The company launched its original game software Brigandine: Lunasia Senki for Nintendo Switch on June 25, 2020. The game is a remake of Brigandine: Grand Edition, which Happinet released in 2000. Recommended retail price for the regular version is JPY7,200 (excluding tax).

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Amusement segment In this segment, the company aims to strengthen and expand its business foundation by evolving its operational style and generating demand by planning and developing products and tapping into new locations as well as making use of IT

In order to generate demand, the company aims to expand its machine locations to new industries and formats, in addition to making the locations at public transportation hubs (service areas, airports, etc.) it established during the seventh medium-term business plan permanent. The company will continue to focus on installing machines in concert and event halls, in addition to developing products which can reach non-traditional consumer segments including the housewife and female office worker demographics as well as foreign tourists.

In order to evolve its operational style, the company will continue initiatives to improve efficiency by introducing IT to gain an understanding of timings for replacing products, which had conventionally been done physically through human efforts.

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Business

Description

Happinet is a leading intermediary distributor for toys, DVDs, CDs and videogames. The company buys goods from makers and distributes to retailers, managing inventories and handling orders/shipments. Segments comprise Toys (33.8% of FY03/20 sales), Visual and Music (30.7%), Videogames (27.1%), and Amusement (8.4%).

The group is a major distributor for toys, DVDs, CDs, and holds about 60% market share for capsule toy machine operation and sales, according to the company.

Segment sales and profit FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Total sales 190,891 198,021 176,757 206,867 217,232 187,274 174,059 197,607 240,398 233,347 YoY -1.7% 3.7% -10.7% 17.0% 5.0% -13.8% -7.1% 13.5% 21.7% -2.9% Toys 69,104 77,313 74,660 76,821 93,270 76,874 73,725 71,403 77,004 79,060 YoY 5.3% 11.9% -3.4% 2.9% 21.4% -17.6% -4.1% -3.2% 7.8% 2.7% % of total sales 36.2% 39.0% 42.2% 37.1% 42.9% 41.0% 42.4% 36.1% 32.0% 33.8% Visual and Music 57,759 55,719 44,810 42,955 43,372 38,367 34,890 42,466 81,762 71,618 YoY -14.9% -3.5% -19.6% -4.1% 1.0% -11.5% -9.1% 21.7% 92.5% -12.4% % of total sales 30.3% 28.1% 25.4% 20.8% 20.0% 20.5% 20.0% 21.5% 34.0% 30.7% Videogames 46,447 42,704 36,839 63,609 56,448 50,009 44,793 63,107 61,648 63,136 YoY 4.7% -8.1% -13.7% 72.7% -11.3% -11.4% -10.4% 40.9% -2.3% 2.4% % of total sales 24.3% 21.6% 20.8% 30.7% 26.0% 26.7% 25.7% 31.9% 25.7% 27.1% Amusement 17,579 22,282 20,447 23,481 24,140 22,023 20,649 20,630 19,983 19,532 YoY 7.3% 26.8% -8.2% 14.8% 2.8% -8.8% -6.2% -0.1% -3.1% -2.3% % of total sales 9.2% 11.3% 11.6% 11.4% 11.1% 11.8% 11.9% 10.5% 8.3% 8.4% Segment profit 2,855 4,855 2,973 3,888 5,056 3,450 3,698 4,806 4,540 2,572 YoY 22.7% 70.0% -38.8% 30.8% 30.0% -31.8% 7.2% 30.0% -5.5% -43.3% Toys 2,321 3,009 2,055 2,710 4,279 2,848 3,044 2,467 2,021 1,065 YoY 24.4% 29.6% -31.7% 31.8% 57.9% -33.4% 6.9% -19.0% -18.1% -47.3% Segment profit margin3.4%3.9%2.8%3.5%4.6%3.7%4.1%3.5%2.6%1.3% % of segment profit 55.8% 48.6% 47.7% 52.6% 65.5% 57.9% 59.4% 39.7% 34.4% 27.2% Visual and Music -656 448 309 307 202 466 418 882 1,096 533 YoY - - -31.0% -0.7% -34.3% 130.7% -10.3% 110.9% 24.3% -51.4% Segment profit margin - 0.8% 0.7% 0.7% 0.5% 1.2% 1.2% 2.1% 1.3% 0.7% % of segment profit -15.8% 7.2% 7.2% 6.0% 3.1% 9.5% 8.2% 14.2% 18.6% 13.6% Videogames 1,156 936 678 79 254 -43 384 1,180 1,038 840 YoY 11.7% -19.0% -27.6% -88.2% 217.9% - - 207.0% -12.0% -19.1% Segment profit margin 2.5% 2.2% 1.8% 0.1% 0.4% - 0.9% 1.9% 1.7% 1.3% % of segment profit 27.8% 15.1% 15.7% 1.5% 3.9% -0.9% 7.5% 19.0% 17.7% 21.5% Amusement 1,340 1,801 1,265 2,053 1,796 1,652 1,281 1,678 1,724 1,475 YoY 146.3% 34.4% -29.8% 62.4% -12.5% -8.0% -22.5% 31.0% 2.7% -14.4% Segment profit margin7.6%8.1%6.2%8.7%7.4%7.5%6.2%8.1%8.6%7.6% % of segment profit 32.2% 29.1% 29.4% 39.9% 27.5% 33.6% 25.0% 27.0% 29.3% 37.7% Adjustments -1,307 -1,341 -1,335 -1,263 -1,475 -1,473 -1,430 -1,402 -1,340 -1,342 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: % of segment profit comparisons are made using operating profit before adjustments.

Toys (33.8% of FY03/20 consolidated sales; 27.2% of operating profit [before adjustments])

In this segment, Happinet generates earnings buying products (toys) from toy makers and selling them to retailers.

It buys goods from big toy makers like Bandai and Tomy and sells them to toy retailers, large consumer electronics stores and retail chains, and major online retailers. Major toy manufacturers are shown in the following table. Happinet handles about 90% of Bandai’s toy distribution in Japan, Japan’s largest toy manufacturer.

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Toys: main manufacturers FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Act. Sales 69,104 77,313 74,660 76,821 93,270 76,874 73,725 71,403 77,004 79,060 YoY 5.3% 11.9% -3.4% 2.9% 21.4% -17.6% -4.1% -3.2% 7.8% 2.7% Bandai 37,400 42,300 38,800 40,700 55,400 41,900 37,600 36,500 47,700 45,300 YoY 14.4% 13.1% -8.3% 5.0% 35.8% -24.2% -10.4% -3.0% 30.7% -4.9% % of sales 54.1% 54.7% 52.0% 53.1% 59.4% 54.6% 51.0% 51.1% 62.0% 57.4% TAKARA TOMY 7,000 6,300 5,300 4,200 4,100 4,900 7,000 7,300 8,800 7,400 YoY 40.0% -10.0% -15.9% -21.6% -1.6% 20.4% 41.6% 4.0% 20.2% -15.9% % of sales 10.1% 8.1% 7.1% 5.5% 4.5% 6.5% 9.6% 10.3% 11.5% 9.4% Happinet original 1,400 2,200 2,500 2,000 1,900 1,500 1,700 1,600 1,900 1,500 YoY 0.0% 57.1% 13.6% -17.7% -8.1% -16.3% 10.6% -6.8% 17.6% -21.1% % of sales 2.0% 2.8% 3.3% 2.7% 2.0% 2.1% 2.4% 2.3% 2.5% 1.9% Other 23,100 26,400 27,900 29,700 31,800 28,200 27,200 25,900 18,500 24,700 YoY 25.5% 14.3% 5.7% 6.5% 6.9% -11.1% -3.6% -5.0% -28.5% 33.4% % of sales 33.5% 34.1% 37.4% 38.7% 34.1% 36.8% 37.0% 36.3% 24.0% 31.3% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: From FY03/11, other makers are included in the others segment. Note: Some sales categorizations have been modified from FY03/19 due to the April 2018 startup of BANDAI SPIRITS CO., LTD.

Intermediate distribution of toys Japan’s toy market centers on fads, rather than long-selling, staple products. Goods featuring characters from TV animation series tend to have a one-year sales cycle with products refreshed when a new series begins. Popularity drops and sales falter for products whose TV programs have finished.

Also, toy manufacturers often make use of overseas factories, particularly in China. These toys are different in nature from automobiles or consumer electronics, which usually remain in production for an extended period of time. Toymakers must adjust their production based on demand forecasts and produce items within a limited time frame. It takes about three months from when toys are manufactured until they are ready to be sold by retailers, due to strict procedures for managing and checking quality—after all, these are products that will be used by children.

As an intermediary distributor, Happinet not only routes orders between toy makers and retailers, but also adds value by forecasting demand and absorbing inventory risk when goods remain unsold. By trading with intermediary distributors, toy makers are able to reduce their inventory of finished products and retailers can avoid carrying inventory other than store inventory, thus mitigating the risk of inventory disposal losses.

Toy distribution flow Toy distribution breaks down as follows:

▷ Happinet and toymakers agree on order quantities three months prior to the release of new products. ▷ On product launch, toymakers deliver toys to the company, which in turn delivers them to retailers that shoulder inventory risk. ▷ The company holds inventories worth roughly two weeks of sales and partially distributes them in response to additional orders from retailers. Here, the company bears the inventory risk.

For toys, annual inventory disposal is 1–2% of annual sales. Annual inventory write-off amounts are trending lower, however. This positive trend is due to the company’s heightened efforts to maintain inventory levels to match product sales. The company is also working more closely with retailers, providing product-specific sales data to help forecast trends. In addition to controlling store inventories, this information helps to drive sales promotions, and keeping a lid on inventory disposal levels is indispensable in improving the company’s profit ratio.

The company carries out disposal of slow-moving inventory as required, but differences in the accuracy of predictions give corresponding variations in losses on disposal of inventory, and fluctuations of 1% in GPM.

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Toy earnings FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Act. Sales 69,104 77,313 74,660 76,821 93,270 76,874 73,725 71,403 77,004 79,060 YoY 5.3% 11.9% -3.4% 2.9% 21.4% -17.6% -4.1% -3.2% 7.8% 2.7% Segment profit 2,321 3,009 2,055 2,710 4,279 2,848 3,044 2,467 2,021 1,065 YoY 24.5% 29.6% -31.7% 31.9% 57.9% -33.4% 6.9% -19.0% -18.1% -47.3% Segment profit margin3.4%3.9%2.8%3.5%4.6%3.7%4.1%3.5%2.6%1.3% Disposal 1,100 1,300 1,300 1,000 1,600 1,800 700 1,300 1,800 1,500 % of sales 1.6% 1.7% 1.7% 1.3% 1.7% 2.3% 0.9% 1.8% 2.3% 1.9% Inventory 2,200 2,300 2,400 2,400 2,300 2,200 2,700 2,900 2,900 2,700 Inventory turnover 31.3 33.6 30.7 31.0 38.7 33.6 29.6 25.1 26.3 27.9 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Positioning of Happinet as intermediary toy distributor According to Happinet, it is a major intermediary distributor of toys, holding a 30% market share. The company’s rise to prominence as the largest intermediary distributor of toys began in the 1990s with the relaxation of the Large Scale Retail Store Law. Distributors began to need advanced information and logistics systems in order to keep up with the growing size of retailers. Happinet rose to meet the needs of the changing business environment, and further increased its share through M&A activity. Additionally, Shared Research notes that growth in toy sales by Bandai Co., Ltd., a subsidiary of Bandai Namco Holdings (TSE1: 7832) that holds 26.7% of Happinet stock has led Happinet to become the largest company in the industry.

Shared Research understands that Bandai—a group company and one of Happinet’s main toy suppliers—specializes in making products and accessories that feature characters from popular TV animations. Bandai has leveraged these character goods to increase its domestic toy sales.

Bandai’s character goods portfolio: Leading toy characters with the highest sales rankings at Bandai are those from the Super Sentai, Kamen Rider, and PreCure series. Toei or Toei Animation makes these series; TV Asahi broadcasts them on Sundays. Program sponsor Bandai merchandises related toys. This system has a long history; the Super Sentai series, the longest-running of the trio, started with Himitsu Sentai Gorenger in 1975. The 44th series, Mashin Sentai Kiramager, aired in 2020.

In the 30-minute Super Sentai program, a team of three to nine people use special items to become superheroes wearing helmets and color-coded jumpsuits, and fight bad guys or monsters. In each episode the enemy, once defeated, is reborn as a giant monster and the heroes ride a giant robot to destroy it.

Each year a TV series starts in March and a movie version is launched in August. New characters and items are added during the year based on interest in the TV program, and Bandai merchandises all the transforming items, weapons, and robots. All super hero toys are ready for Christmas when sales peak.

Bandai Sales by Character (Domestic Toy and Hobby) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYbn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Act. Youkai Watch - - - 14 552 308 93 - - - Mobile Suit Gundam 134 156 165 184 229 258 264 262 325 357 Kamen Rider 230 283 271 223 206 157 204 248 273 285 Super Sentai 92 130 96 144 113 78 88 91 60 60 Anpanman 86 96 100 103 81 94 106 109 115 94 Precure series 125 107 106 98 65 66 75 81 101 83 Dragon Ball 27 44 48 64 58 116 103 142 204 207 Aikatsu! - - 15 130 86 26 26 23 19 16 Ultraman 28 18 20 32 26 27 31 43 44 43 Source: Shared Research based on Bandai Namco Holdings’ materials

Visual and Music (30.7% FY03/20 consolidated sales; 13.6% of operating profit [before adjustments])

This segment comprises the visual wholesale section (54.7% of segment sales in FY03/20), the visual manufacturing section (6.1%), and the music section (39.2%). In FY03/18, the company assumed the music and visual product wholesale business of Seikodo Co., Ltd. following a company split. In FY03/20, 60% of domestic video and music distribution consisted of direct

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transactions with manufacturers and 40% was through intermediaries. Of intermediate distribution, the company says its group had 29% market share (13% on its own and 16% by the former Seikodo).

Visual and Music earnings FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Act. Sales 57,759 55,719 44,810 42,955 43,372 38,367 34,890 42,466 81,762 71,618 YoY -14.9% -3.5% -19.6% -4.1% 1.0% -11.5% -9.1% 21.7% 92.5% -12.4% Visual 40,300 39,600 31,500 31,600 33,000 29,500 26,700 32,500 45,000 43,500 YoY -5.2% -1.7% -20.3% 0.1% 4.4% -10.4% -9.5% 21.7% 38.4% -3.3% % of sales 69.8% 71.1% 70.5% 73.6% 76.1% 77.1% 76.6% 76.6% 55.1% 60.8% Wholesale 34,400 33,600 25,900 25,200 26,000 24,800 22,200 28,000 40,600 39,100 YoY -6.5% -2.3% -22.8% -2.7% 3.3% -4.9% -10.2% 26.1% 44.9% -3.7% % of sales 59.6% 60.3% 58.0% 58.8% 60.2% 64.7% 63.8% 66.1% 49.8% 54.7% Manufacturers 5,800 5,900 5,600 6,300 6,900 4,700 4,400 4,400 4,300 4,300 YoY 1.8% 1.7% -5.1% 13.3% 8.7% -31.2% -5.8% -0.1% -2.7% 0.3% % of sales 10.0% 10.6% 12.5% 14.8% 15.9% 12.4% 12.8% 10.5% 5.3% 6.1% Music 17,400 16,100 13,200 11,300 10,300 8,700 8,100 9,900 36,700 28,000 YoY -31.0% -7.5% -18.0% -14.3% -8.5% -15.3% -7.7% 21.8% 269.9% -23.6% % of sales 30.1% 28.9% 29.5% 26.4% 23.9% 22.9% 23.4% 23.4% 44.9% 39.2% Segment profit -656 448 309 307 202 466 418 882 1,096 533 YoY -359.3% -168.3% -31.0% -0.6% -34.2% 130.7% -10.3% 111.0% 24.3% -51.4% Segment profit margin -1.1% 0.8% 0.7% 0.7% 0.5% 1.2% 1.2% 2.1% 1.3% 0.7% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Visual wholesale section Happinet generates earnings from buying DVDs from content manufacturers and selling them to retailers. According to the company, orders from retailers take about a week to be delivered. This means intermediary distributors like itself mainly focus on routing orders between content manufacturers and retailers and handling shipping, and therefore seldom need to hold substantial inventories compared with toy wholesaling. However, GPM is slimmer than in toy wholesaling.

The company buys products from all major content makers. The company distributes products to major online retailers and consumer electronics chains.

Visual manufacturing section Happinet invests in movie production partnerships, thus obtaining videogram rights or rights concerning existing videograms and then makes and sells the DVD products. Income hinges on the amount and ratio of investment in partnerships, box-office proceeds, DVD sales volumes, and videogram royalties.

Videogram is a Japanese legal term, used to refer to visual media (movies and TV programs) on a certain format (e.g., VHS, DVD) and its packaging. Videogram rights here refer to the rights to manufacture, release, and sell this media.

The movie industry and movie production partnerships handle production, distribution, exhibition, and secondary use (renting/selling/distributing movie content to consumers following releases to movie theaters).

DVD content makers obtain videogram rights to movies by investing in production partnerships or by purchasing the rights from their holders.

When investing in production partnerships, they receive box-office proceeds in proportion to the amount invested in the production partnership, as well as videogram rights.

▷ Box-office proceeds: Box-office profits are defined as proceeds—i.e., number of viewers multiplied by ticket prices—less expenses (cinema operators and distributors, production, and advertising). According to the company, production costs, investment stake, and box-office proceeds differ substantially from movie to movie.

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▷ Videogram rights: In addition to receiving box-office proceeds in proportion to the amount invested, DVD content makers may also obtain corresponding videogram rights based on the relevant investment agreement with the production partnership, and accordingly sell DVDs and generate sales and profit commensurate with sales volume. Another way to obtain videogram rights is from copyright holders, such as production partnerships. This can be done either by paying for the rights, or by paying a minimum guarantee (MG). According to the company, videogram royalties differ widely by movie, so it is difficult to calculate an average profitability for videogram rights.

Music wholesale section In the music section, Happinet gains earnings from buying CDs from music content makers and selling them to retailers. As in its visual wholesale section, the company does not shoulder much risk of inventory disposal losses in this section. Therefore, GPM is lower than in the toy wholesaling business.

The company buys goods from big music software manufacturers and distributes them to online shops and consumer electronics chains.

Japan’s resale price maintenance system (recommended retail price)—as established by Japanese copyright law—means the manufacturers are able to force retailers to observe a certain retail price for music software. As product discounting does not occur, the distribution of music media differs from that of visual media. Although in both cases companies are effectively purchasing stock, for music media a limit is set for a proportion of the sales that may be returned, and the seller sometimes ends up accepting these returns.

The proportion of sales that may be returned differs between the manufacturer and the distributor, and between the distributor and the retailer. Therefore, the distributor must accept some inventory risk in cases where there is more leeway for the retailer to return stock to the distributor, than for the distributor to return it to the manufacturer.

Music CDs: resale price maintenance: A maker or supplier of music imposes selling prices on wholesalers and retailers who abide by this. The resale maintenance system of music software (such as CDs) is approved as an exception to the Antimonopoly Act which normally prohibits such conduct as unfair trading practices.

In this segment, the company established Happinet Live Entertainment LLC (Now Happinet Live Emotion LLC) in February 2016 jointly with Yokocho Planning Co. Ltd., which specializes in live event planning and operations. The company began event and live performance operations and sales of related merchandise in the idol music market. As a result, many manufacturers that had previously conducted such events themselves are now approaching Happinet, asking the company to handle both distribution and these events for them.

Videogames (27.1% of FY03/20 consolidated sales; 21.5% of operating profit [before adjustments])

Happinet generates profits by buying videogame consoles and game software from manufacturers and distributing these to shops. This segment has the lowest GPM of all the company’s businesses, which stems from the company bearing little inventory risk due to short order placement/delivery times.

Focus on Nintendo game-related products Happinet buys products from Nintendo Sales Inc., a subsidiary of Nintendo Co., Ltd. (TSE1: 7974), Sony Interactive Entertainment Inc. (a subsidiary of Sony Corporation [TSE1: 6758]), and Microsoft Corp. It is the only wholesaler handling all consumer game consoles available in Japan. The sales mix of Nintendo products increased following the acquisition of Toys Union—a distributor of Nintendo products—in FY03/14. In FY03/20, Nintendo products accounted for approximately 92.4% of sales, with Sony Interactive Entertainment Inc. products next, at about 6.0%. The company distributes products to major online retailers and consumer electronics chains.

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Shared Research estimates the company’s share of Nintendo’s game-related sales at around 25%, making it the second largest distributor of Nintendo products. The company is virtually the sole distributor of Sony Interactive Entertainment Inc. videogames, and has an exclusive distribution agreement in Japan with Microsoft.

Videogame sales breakdown FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY 03/ 20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. (JPYmn) Act. Sales 46,447 42,704 36,839 63,609 56,448 50,009 44,793 63,107 61,648 Sales 63,136 YoY 4.7% -8.1% -13.7% 72.7% -11.3% -11.4% -10.4% 40.9% -2.3% YoY 2.4% Nintendo (console) 4,700 3,200 4,400 10,700 9,000 12,300 8,600 36,800 48,000 Nint e nd o YoY -26.6% -31.9% 37.5% 142.4% -15.3% 36.6% -30.1% 327.9% 30.4% Nitendo Switch-related 57,300 % of sales 10.1% 7.5% 11.9% 16.9% 16.2% 24.9% 19.2% 58.3% 77.9% YoY - Nintendo (mobile) 9,900 10,400 14,200 40,300 35,600 26,700 22,600 14,000 2,900 % of sales 90.8% YoY -3.9% 5.1% 36.7% 182.8% -8.3% -27.5% -15.4% -38.1% -79.3% Other (3DS, other) 100 % of sales 21.3% 24.4% 38.7% 63.4% 65.5% 53.6% 50.5% 22.2% 4.7% YoY - Nintendo (other) - - - - - 1,200 2,300 2,900 1,600 % of sales 0.2% YoY ------91.7% 26.1% -44.0% Other 700 % of sales - - - - - 2.4% 5.1% 4.6% 3.2% YoY - PlayStation (console) 6,000 6,800 5,300 4,800 3,100 3,400 5,700 5,900 6,400 % of sales 1.1% YoY -13.0% 13.3% -22.1% -9.1% -34.8% 11.3% 67.6% 3.5% 8.5% SIE % of sales 12.9% 15.9% 14.4% 7.6% 5.6% 7.0% 12.7% 9.3% 10.4% PlayStation-related 3,800 PlayStation (mobile) 11,600 12,200 7,100 4,700 4,300 4,400 4,000 2,200 900 YoY - YoY 45.0% 5.2% -41.8% -33.1% -9.4% 3.0% -9.1% -45.0% -59.1% % of sales 6.0% % of sales 25.0% 28.6% 19.3% 7.5% 7.7% 8.9% 8.9% 3.5% 1.5% Segment profit 1,156 936 678 79 254 -43 384 1,180 1,038 Segment profit 840 YoY 11.7% -19.0% -27.6% -88.3% 221.5% - - 207.0% -12.0% YoY -19.1% Segment profit margin 2.5% 2.2% 1.8% 0.1% 0.4% - 0.9% 1.9% 1.7% Segment profit margin 1.3% Inventory write-off - 100 100 800 300 500 100 90 100 Inventory write-off 80 % of sales - 0.2% 0.3% 1.3% 0.5% 1.0% 0.2% 0.1% 0.2% % of sales 0.1% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. In FY03/20, the company revised its categorization of merchandise-specific sales in the Videogame segment. Nintendo Switch related sales include both Nintendo Switch and the portable Nintendo Switch Lite. Play Station related sales include both Play Station 4 and the portable PS Vita.

Also develops original game software The segment is undertaking the development of its own original game software as well. It has produced game software for girls, launched the original brand “Asakusa Studio,” and developed products for the “Steam” PC game sales platform. It also launched its original game software Brigandine: Lunasia Senki for Nintendo Switch on June 25, 2020. In the future, the company intends to keep pushing forward with development of original game software.

Steam is a digital rights management (DRM) and game download sales platform for PC games operated by US-based Valve Corporation. Its monthly active users exceed 95mn (64mn users for Xbox Live, over 103mn users for PlayStation).

The company entered video gaming in 1994 and expanded sales by acquiring distributors.

Amusement (8.4% of FY03/20 consolidated sales; 37.7% of operating profit [before adjustments])

The company’s amusement business includes toy vending machine operations and card game operations.

Amusement sales breakdown FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Act. Sales 17,579 22,282 20,447 23,481 24,140 22,023 20,649 20,630 19,983 19,532 YoY 7.3% 26.8% -8.2% 14.8% 2.8% -8.8% -6.2% -0.1% -3.1% -2.3% Capsule toys - - - - 10,100 10,300 9,400 10,900 11,500 11,900 YoY - - - - - 2.0% -8.7% 15.2% 5.5% 3.9% % of sales - - - - 42.1% 47.1% 45.8% 52.9% 57.6% 61.2% Card games - - - - 10,500 9,300 9,100 8,000 6,400 5,400 YoY ------11.4% -2.2% -11.7% -19.7% -15.5% % of sales - - - - 43.6% 42.3% 44.4% 39.2% 32.5% 28.1% Other - - - - 3,400 2,300 2,000 1,600 1,900 2,000 YoY ------32.4% -13.0% -19.1% 21.2% 5.6% % of sales - - - - 14.3% 10.6% 9.8% 7.9% 9.9% 10.7% Segment profit 1,340 1,801 1,265 2,053 1,796 1,652 1,281 1,678 1,724 1,475 YoY 146.3% 34.4% -29.8% 62.3% -12.5% -8.0% -22.5% 31.0% 2.7% -14.5% Segment profit margin7.6%8.1%6.2%8.7%7.4%7.5%6.2%8.1%8.6%7.6% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

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Toy vending machine section The company installs vending machines at major retail and electronics stores, public transport-related facilities such as stations and airports, and shopping malls, from which it sells capsule toys. It purchases vending machines from Bandai. This format is close to the retail industry, and therefore has the highest GPM of all the company’s businesses. From FY03/18, the company continued to expand sales and profit by securing favorable locations for capsule toys and pulling out of unprofitable locations.

Capsule toys retail at between JPY100-JPY500 (including tax). The vending machines work thus: a capsule toy comes out when the customer inserts coins and turns the crank in the middle of the machine. The toys are varied, ranging from scale models of animation characters and animal figures, to mobile phone accessories. There is an element of entertainment in the fact that, although the vending machines are themed, the customer does not know the contents of the capsule.

As of March 2020, the company had about 4,500 locations and 180,000 machines nationwide.

Capsule-toy vending machines

Source: Company data

In November 2007, Happinet acquired the two leading operators of toy vending machines in the industry, Sunlink Co., Ltd. and The Apple Corporation. Then, after merging the amusement businesses of these companies with its own in October 2008, the company established Happinet Vending Service Corporation—a consolidated subsidiary that then continued running this business.

According to Happinet, the three companies—Happinet, Sunlink, and The Apple Corporation—together had vending machines at around 8,600 locations nationwide in 2007, but nearly half of these locations were unable to turn a profit. When operating toy vending machines, staff members still need to visit machine sites to monitor sales, refill capsules, and collect the money. The company must therefore allocate labor according to the number of machines at sites and the frequency of visits. There were many unprofitable areas where sales did not cover fixed costs.

After integration, Happinet scrapped and streamlined unprofitable sites and business offices, reducing the number of sites to 4,800 from 8,600. The amusement arm reported an operating profit in FY03/10.

Digital card game section The company operates card game machines based on popular anime characters, in major retail and electronics stores. As in the toy vending machine section, GPM is high for the digital card game section because it is close to retail.

To play on a digital card game machine, a customer inserts JPY100 (includes tax) and the machine ejects an IC card, on which an animation character is shown and electronic data (offensive and defensive abilities, and a special move, in the case of a battle game) is printed in transparent ink. The game unfolds on an LCD, affected by input from a panel that reads the data on the cards. The cards themselves are also collectors’ items.

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The company buys and leases digital card game machines from Bandai, which also supplies the cards. As of March 2020, the company operates 13,000 digital card games at approximately 1,700 locations nationwide.

Card game machine

Source: Company data

Group companies

Happinet Group includes Happinet Corp and six consolidated subsidiaries. In particular, Happinet Marketing Corporation, Happinet Media Marketing Corporation, and Maxgames Corporation have a big impact on consolidated performance, each accounting for more than 10% of group sales.

In November 2015, the company entered into a capital and business alliance with Broccoli Co., Ltd., including the underwriting of new Broccoli shares issued through a third-party allocation, making Broccoli an equity-method affiliate as of December 2015.

In March 2018, the company took over the music and visual products wholesale business of Seikodo Co., Ltd., making it a 100% owned subsidiary (company name: Seikodo Marketing Corporation; currently Happinet Media Marketing Corporation).

In FY03/20, the company made Irisawa Corp, which has approximately 8% market share in hobby merchandise wholesaling, a subsidiary to help expand its market share in the field of hobbies.

Consolidated subsidiaries Happinet Marketing Corp. (100% owned) The company distributes a wide range of products nationwide, including Bandai products. FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Act. Act. Act. Act. Act. Sales 34,217 32,715 30,873 30,748 29,643 YYoY -10.9% -4.4% -5.6% -0.4% -3.6% Recurring profit 989 1,047 768 894 528 YYoY -48.4% 5.9% -26.6% 16.4% -40.9% Net income 633 681 495 583 325 YYoY -45.6% 7.6% -27.3% 17.8% -44.3% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Irisawa Corp. (100% owned) Wholesaler of hobby-related products, acquired by Happinet in FY03/20. Prior to being acquired by Happinet, reported sales of JPY5.4bn and an operating profit of JPY38mn for FY01/19.

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Happinet Media Marketing Corporation (100% owned; previously Seikodo Marketing) Happinet Media Marketing Corporation is an intermediate distributor formed from the merger of the wholesale arm of Seikodo Co., Ltd., and Happinet’s Visual and Music segment. Seikodo had 16% market share (as of FY03/19) in intermediate distribution of domestic visual and music products. After taking over Happinet’s Visual and Music segment in April 2019, Happinet Media Marketing reported FY03/20 sales of JPY70.0bn (+36.9% YoY), recurring profit of JPY816mn (-4.2% YoY), and net income of JPY467mn (-7.1% YoY).

In FY03/19, Seikodo Marketing posted sales of JPY51.1bn, recurring profit of JPY852bn, and net income of JPY503mn.

Maxgames Corporation (100% owned) Sells videogame consoles and videogames. FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Act. Act. Act. Act. Act. Sales 41,546 34,670 54,582 54,294 59,294 YoY -4.8% -16.6% 57.4% -0.5% 9.2% Recurring profit 199 179 1,227 1,116 1,178 YoY -35.6% -10.1% 585.5% -9.0% 5.6% Net income 120 92 889 782 805 YoY -26.8% -23.3% 866.3% -12.0% 2.9% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Happinet Vending Service Corporation (100% owned) Operates toy vending machines.

Happinet Logistics Service Corporation (100% owned) Handles logistics business for group companies.

Equity-method affiliates Broccoli Co., Ltd. (25.15% ownership) Plans and produces content (anime, games, music, video, card games), and plans, produces and sells character goods.

FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Sales 4,372 6,786 6,256 6,429 5,692 5,410 5,975 6,479 YoY - 55.2% -7.8% 2.8% -11.5% -5.0% 10.4% 8.4% Recurring profit 833 2,150 1,484 989 728 594 834 703 YoY - 158.1% -31.0% -33.4% -26.4% -18.4% 40.4% -15.7% Net income 877 1,908 904 622 479 405 550 378 YoY - 117.6% -52.6% -31.2% -23.0% -15.5% 35.8% -31.2% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Strengths and weaknesses

Strengths

◤ Business diversification leading to stable earnings. Shared Research understands that faddish toy demand makes for big fluctuations in sales. If a distributor is dependent on a particular manufacturer its earnings will be greatly affected by the sales of that manufacturer’s products. But Happinet trades with many domestic toy manufacturers, and does not depend solely on Bandai as a supplier. Furthermore, the company has diversified into other fields like videogames, movies, and music. Thus, its profits may be described as stable.

◤ Solid relationship with Bandai. Shared Research thinks that Bandai will continue to have a stable domestic toy business. This belief is based on the broad, intergenerational popularity of its products—mainly its character toys portfolio—and its capabilities in developing new character toys. Bandai Namco Holdings Inc., Bandai’s parent company, is Happinet’s largest shareholder with a 26.7% stake, and Happinet distributes about 90% of Bandai toys sold in Japan (company estimate). We assume the company will continue to enjoy the benefits of doing business with Bandai.

Weaknesses

◤ Limited scope to add value, create profit opportunities. Happinet is chiefly an intermediary distributor, buying from manufacturers and selling to retailers. Hence there is little scope to add value by adapting products. Thus, the company must accept low gross profit margins, particularly in its visual media and music and videogames businesses. We see limited potential for it to lift sales under its own steam through new products and store openings.

◤ Scant track record developing original products. Happinet aims to unlock new opportunities for profit by developing non-distribution businesses—mainly rolling out original products. Yet Shared Research understands that the company has scant track record of developing products in-house, especially toys, and it has few distinctive products. For the copyright-holders of popular animations and the like, an incentive exists to pursue merchandising deals with established toy makers where success is more likely. Given this, Shared Research thinks that as a debutant, the company may struggle to land toy merchandising rights for popular characters.

◤ Shrinking markets. Shared Research thinks that Happinet’s markets will shrink over the medium and long term. Toys sales will suffer from Japan’s aging population while sales of visual media and music will be pummeled by online distribution. The company’s large market shares in these types of product mean that it is unlikely to be able to escape the impact of these changes on its sales.

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Market and value chain

Overview Japan’s toy market According to the Statistics Bureau (population statistics), the number of people in Japan aged 0–14 decreased from 17.0mn in 2009 to 15.2mn in 2019 (average annual decline of 1.1%). The market for ten types of toys went from JPY542.8bn in 2010 to an estimated JPY522.5bn in 2019, for an average annual decline of 0.4%. During this timeframe, sales peaked at JPY563.4bn in 2011 before falling to JPY446.1bn in 2012 and have been trending higher since then.

Dividing the domestic toy market (as defined below) by the number of children ages 0–14, we find spending per head increasing from JPY32,230 in 2010 to JPY34,350 in 2019 (up by an average of 0.7% per year).

According to the company, toy prices are trending upward due to the addition of new features, such as electronic parts. Increasing prices mean the toys market still provides stable opportunities for profits.

Domestic toy market and population

Domestic toy market and population 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Market of 10 toy items (JPYbn) 542.8 563.4 446.1 447.6 490.5 499.8 515.9 508.1 541.8 522.5 Population at ages of 0–14 ('000) 16,839 16,705 16,548 16,390 16,233 15,945 15,780 15,592 15,414 15,210 Average purchase price of 10 toy items (JPY) 32,230 33,730 26,960 27,310 30,220 31,350 32,690 32,590 35,150 34,350 Note: The ten toy items are games (excluding videogame-related), card games, trading card games, jigsaw puzzles, high-tech trendy toys, characters for boys, toys for boys, toys for girls, stuffed toys, education toys (excluding automobile related products such as strollers, child seats, and tricycles), and seasonal products. Source: Shared Research based on data from the Japan Toy Association, National Institute of Population and Social Security Research (IPSS), and the Statistics Bureau’s population statistics.

The IPSS predicts that the population of children in Japan (0-14 years old) will have decreased to 13.4mn by 2029, due to declining birth rates and the shift toward late marriage. With a rate of decline averaging 1.3% per year since 2019, this would mean potential purchasers of toys were decreasing faster than the rate of decline between 2010 and 2018, when the number fell by an average of 1.1% annually.

Shared Research thinks the toys market will shrink as Japan’s aging population leads to a decreasing target demographic for toys. However, Shared Research also thinks that the rate of this shrinkage will remain slow as long as toy manufacturers continue to raise toy prices by adding value to their products.

Japan’s visual media market The visual media market (cell and rental markets excluding paid video distribution) continues to contract, shrinking at an average annual rate of 5.6% between 2009 and 2019.

Video software market

Video software market (JPYbn) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total 574.1 530.7 502.1 480.2 461.5 439.0 417.5 400.2 370.3 364.8 323.5 YoY -8.9% -7.6% -5.4% -4.4% -3.9% -4.9% -4.9% -4.1% -7.5% -1.5% -11.3% Software for sale 267.4 263.5 247.9 241.3 243.1 228.7 223.4 217.1 204.4 210.6 197.6 YoY -5.6% -1.5% -5.9% -2.7% 0.7% -5.9% -2.3% -2.8% -5.8% 3.0% -6.2% Software for rental 306.7 267.2 254.2 238.9 218.4 210.3 194.1 183.1 165.9 154.2 125.9 YoY -11.6% -12.9% -4.9% -6.0% -8.6% -3.7% -7.7% -5.7% -9.4% -7.1% -18.4% Source: Shared Research based on Japan Video Association Note: Figures may differ from company materials due to differences in rounding methods.

Shared Research believes the market has been shrinking because of a drop in the number of software purchasers. According to a report released by the Japan Video Software Association, purchases of video software have been falling, although there has not been a significant decline in the average number of discs purchased by each customer. The average amount spent by each customer has been in a downtrend since 2016, declining at an average of 10.4% annually between 2016 and 2019.

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Video software purchasing ratio, average number of discs purchased, average spending

Video software purchasing survey 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Purchase rate (%) 21.2 21.6 19.3 16.3 18.2 16.7 18.2 17.1 15.8 15.9 Average total purchases (titles) 5.5 3.9 3.8 5.0 4.2 4.2 3.9 4.0 3.9 3.9 Average total spend (JPY) 23,370 15,706 14,720 18,004 17,745 19,370 18,827 17,456 15,792 13,560 Source: Shared Research based on Japan Video Association Note; Purchase Rate: the percentage of total respondents that had purchased video software. The total number of respondents differs per year.

The spread of pay-video distribution hurts sales of visual media. According to the Digital Content Association of Japan, the domestic market of pay-video (video on demand) distribution expanded from JPY76.2bn in 2010 to JPY277.0bn in 2019.

Video on Demand (VOD) market

Video on Demand (VOD) market 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 VOD market (JPYbn) 76.2 82.6 101.6 123.0 125.5 141.0 163.6 185.0 220.0 277.0 YoY - 8.4% 23.0% 21.1% 2.0% 12.4% 16.0% 13.1% 18.9% 25.9% Source: Shared Research based on Digital Content Association of Japan

Shared Research forecasts that the visual media market will continue to decline in the face of free online video, the spread of pay-video distribution and the expected fall in the number of people aged 15-64 (the main buyers). Importantly, the National Institute of Population and Social Security Research estimates that the number of people aged 15 to 64 will decrease by 0.7% a year from 74.6mn in 2019 to 69.5mn in 2029.

Music content The paid music distribution market is on a downward trend after peaking in 2007 in both volume and value terms.

Record production and paid distribution music

Record production and paid music dist ribut ion 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total (JPYbn) 311.0 283.7 282.0 240.2 230.1 229.7 230.6 231.2 222.1 223.4 YoY -8.7% -8.8% -0.6% -14.8% -4.2% -0.2% 0.4% 0.3% -3.9% 0.6% Music software sales value 225.0 211.7 227.7 198.5 186.4 182.6 177.7 173.9 157.6 152.8 (excl. music video) YoY -9.9% -5.9% 7.6% -12.8% -6.1% -2.0% -2.7% -2.1% -9.4% -3.0% Paid distribution of music 86.0 72.0 54.3 41.7 43.7 47.1 52.9 57.3 64.5 70.6 YoY -5.5% -16.3% -24.5% -23.2% 4.8% 7.8% 12.3% 8.3% 12.6% 9.5% Total (mn) 651.5 567.3 489.9 407.0 369.0 348.0 320.0 300.0 272.0 248.6 YoY -4.5% -12.9% -13.6% -16.9% -9.3% -5.7% -8.0% -6.3% -9.3% -8.6% Music software sales volume 210.0 200.0 218.0 191.0 172.0 170.0 161.0 154.0 139.0 134.3 (excl. music video) YoY -1.9% -4.8% 9.0% -12.4% -9.9% -1.2% -5.3% -4.3% -9.7% -3.4% Paid distribution of music 441.5 367.3 271.9 216.0 197.0 178.0 159.0 146.0 133.0 114.2 YoY -5.7% -16.8% -26.0% -20.5% -8.8% -9.6% -10.7% -8.2% -8.9% -14.1% Source: Shared Research based on "The Recording Industry of Japan" by the Recording Industry Association of Japan

According to the Recording Industry Association of Japan’s survey of music media users, the percentage of the population who pay for music content peaked at 52.5% in 2010, and declined to 32.6% in 2016. Since then, the percentage began to rise again, and in 2017, the percentage of university students and working adults in their twenties who pay for music content rose to 40.6%. Reasons for purchasing music included valuing ownership of music, the appeal of special goods received with purchases, and lack of free alternatives to listen to the music. The figure has trended around 40% since 2017, and in 2019, the percentage of the population who pay for music content declined 0.4pp YoY to 38.6%.

Shared Research expects that—as with visual media—the music content market will continue to decline over the long term given free distribution sites and a falling number of buyers.

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Japan’s game market Nintendo launched the Family Computer System (later released as the Nintendo Entertainment System (NES) in America) in 1983, and the overall market for home videogame consoles peaked at JPY760bn in 1997. The market, spearheaded by Nintendo and Sony Computer Entertainment, remained on a downtrend through 2005, dancing to the beat of new consoles and major game releases. Between 2005 and 2007 the market recovered given new portable game consoles including Nintendo’s Wii and Sony’s PlayStation 3. The market thereafter has been anemic. In 2017, hardware shipments rose 51.9% YoY on solid momentum for the Nintendo Switch following its launch in March 2017.

Shipments of Domestic Home Videogame Consoles

(JPYbn) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total shipment value 425.8 402.8 395.8 409.5 373.4 330.2 314.7 386.7 350.6 333.0 YoY -6.2% -5.4% -1.7% 3.5% -8.8% -11.6% -4.7% 22.9% -9.3% -5.0% Software 259.1 237.9 220.2 253.7 235.6 194.9 188.0 194.2 179.6 165.7 YoY 2.6% -8.2% -7.4% 15.2% -7.1% -17.3% -3.5% 3.3% -7.5% -7.7% Hardware 166.7 164.9 175.6 155.8 137.8 135.3 126.7 192.4 171.0 167.3 YoY -17.3% -1.1% 6.5% -11.3% -11.6% -1.8% -6.4% 51.9% -11.1% -2.2% Source: Shared Research based on CESA data

The game market is now impacted by the popularity of smartphones and online (including social media) games in tandem with new consoles. Since 2010 online gaming has mushroomed yet the game console market remains in the doldrums. The package game software market is likely to contract due to migration to smartphones and online gaming. Yes, game consoles may be a sunset sector but some sunsets last a long time. Bedrock demand should stay firm given key advantages: low price next to smartphones and PCs, internet access is not needed, software borrowing/lending is possible, and software once bought is free to use (online gaming requires ongoing payments).

Japanese capsule toy market Uptrend. The size of the capsule toy market has hovered between JPY25bn and JPY35bn for the past 10 years. In 2007 Happinet scrapped unprofitable machines and thereafter the market enjoyed a gradual uptrend. The company said demand is solid but dependent on providing popular products. Kamen Rider toys buoyed 2011 sales.

(JPYbn) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total market (value) 28.5 24.9 25.9 30.1 27.0 27.8 31.9 31.1 27.7 31.9 YoY -6.6% -12.6% 4.2% 16.0% -10.3% 3.0% 14.7% -2.5% -10.9% 15.2% Source: Shared Research based on Japan Toy Association

Competition

Limited competition. Happinet said that it and Kawada are among the major distributors operating nationwide with a variety of toy manufacturers, and that it is the only company handling a range of products from toys to visual and music products. Kawada distributes original products like block toys and educational toys, with diablock and nanoblock toys being the most famous. For FY05/19 Kawada reported annual sales of JPY25.2bn (per Kawada’s website), compared to JPY25.1bn in FY05/18. Happinet sells much more volume than Kawada and their products are different, so they are not competitors.

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Strategy

The company’s strategy is two-pronged. First, increasing sales by grabbing market share even though the overall pie will continue to get smaller as society ages; and second, increasing sales and profitability by selling more products that have been developed in-house.

Market share expansion Shared Research predicts that the main markets for the products dealt with by the company—toys, videogames, visual media, and music—will contract given Japan’s ageing society and the spread of Internet transactions. The spread of download sales for visual and music software, as well as sites which offer free visuals have in fact been impacting the contraction of the market for software packages.

The contracting market for the company’s products is not something that is welcome for its short-term results. However, as reorganization has been underway for intermediate distribution since the late 1990s, the company has continued to expand its sales capacity through acquisitions (see “Historical performance”). Shared Research believes that as reorganization proceeds among intermediary distributors specializing in visual and musical software and videogames, there will be significant room for the company to expand its transactions.

Moreover, the company has indicated that in its eighth medium-term plan which takes effect from FY03/19, one of its basic strategies is to explore new businesses, such as hobby areas like plastic models which are not toys, as well as game production, music concerts, and event planning for its amusement segment. Under this basic strategy, in FY03/20, the company made Irisawa Corp, which has approximately 8% market share in hobby merchandise wholesaling, a subsidiary to help expand its market share in the field of hobbies. Originally, the only hobby merchandise Happinet handled was BANDAI SPIRITS plastic models, around 9% market share in hobby merchandise wholesaling. By making Irisawa a subsidiary, the company group will now have approximately 17% market share of the hobby merchandise wholesaling market, which is worth approximately JPY80bn.

Visual and Music: scope for expansion Happinet said that direct transactions between visual/music content makers and retailers were 60% of overall distribution of visual media and music as FY03/19. Shared Research thinks that the curtailment of content sold at bricks and mortar stores may cause visual and music software makers to shift part of their sales promotion and distribution operations to intermediary distributors like Happinet in the future. Shared Research believes this shift will provide opportunities for Happinet to expand its transactions and sales in the medium and long term.

In March 2018, Happinet took over the wholesale business for music and visual products from Seikodo Co., Ltd. following a company split. According to the company, in FY03/20, 60% of domestic video and music distribution consisted of direct transactions with manufacturers and 40% was through intermediaries. Of intermediate distribution, the company says its group had 29% market share (13% on its own and 16% by the former Seikodo). Excluding the 10% share of companies which only distribute for parent companies, the company in essence holds exclusive control over the market.

Videogames: also scope for expansion The company consolidated Toys Union (currently Maxgames Corporation) as a subsidiary in July 2013. According to the company, this acquisition means its share of the Nintendo-related market was 25%, making it the second largest distributor of Nintendo-related products.

Nintendo Sales is the largest distributor of Nintendo products. In January 2016, Nintendo acquired 70.0% of JESNET (FY07/15 sales of JPY57.1bn), making it a consolidated subsidiary. Nintendo also acquired the videogame wholesale business of AJIOKA Co Ltd (FY06/16 sales of JPY38.7bn). JESNET was renamed Nintendo Sales in April 2017.

Nintendo Sales and Happinet have a combined domestic market share of almost 100% for Nintendo products. According to Happinet, the company plans to form a partnership with Nintendo Sales.

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Originally developed products: increased sales The company aims to expand sales of original products developed in-house and exclusive products which offer high rates of profitability.

In its eighth medium-term plan starting in FY03/19, the company plans to maintain the policies of its seventh medium-term plan to improve profitability by focusing on markets where it has an advantage related to its internally developed products.

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Historical performance

Historical financial statements 1H FY03/21 results

▷ Sales: JPY111.3bn (+8.1% YoY) ▷ Operating profit: JPY1.9bn (+21.4% YoY) ▷ Recurring profit: JPY2.0bn (+28.8% YoY) ▷ Net income*: JPY1.3bn (+65.0% YoY)

*Net income attributable to owners of the parent

▷ The top-line gains during the period were driven by strong sales at the company’s Videogames segment and its entry into the model toy wholesaling business in November 2019. ▷ In terms of profits, the GPM dipped to 10.7% (-0.7pp YoY), but the effect of increased sales resulted in gross profit of JPY11.9bn (+1.2%). The drop in GPM is attributable to sluggish performance in the Amusement segment, which has relatively

high GPMs. However, inventory disposal losses came to JPY331mn (vs. JPY584mn in 1H FY03/20). The reason for this is that the company made fewer purchases, as manufacturers have curtailed production amid the COVID-19 pandemic. ▷ Operating profit and recurring profit increased YoY thanks to higher gross profit and a reduced SG&A expenses, which came to JPY9.9bn (-2.0% YoY). Making Irisawa Co., Ltd. a subsidiary in November 2019 acted to drive up SG&A expenses by approximately JPY200mn, while sales promotion expenses decreased by about JPY400mn. SG&A expenses broke down to logistics costs of JPY2.1bn (+0.8% YoY), payroll costs of JPY4.2bn (flat YoY), depreciation of JPY335mn (+20.4% YoY), and

goodwill amortization of JPY72mn (+8.5% YoY). ▷ Net income attributable to owners of the parent was up YoY thanks to the growth in recurring profit. Another factor contributing to profit growth is that extraordinary losses in 1H FY03/20 came to JPY287mn as the company booked JPY282mn

in charges in connection with the company’s celebration of the 50-year anniversary of Happinet’s founding, whereas in 1H FY03/21, extraordinary losses came to just JPY25mn, mostly from JPY24mn in fixed asset retirement losses.

In September 2020, the company announced forecasts for cumulative Q2 (1H) and full-year FY03/21. At the start of FY03/21, company forecast was undetermined since the outbreak of COVID-19 and the resulting market unpredictability at the outset of the fiscal year made it difficult to form rational calculations. The forecasts released in September are based on available information under the assumption that the economy will gradually pick up again.

1H sales came to 101.2% of the company’s 1H FY03/21 forecast, operating profit 121.8%, recurring profit 134.9%, and net income attributable to owners of the parent 140.0%. Operating profit, recurring profit, and net income exceeded the company’s 1H forecast thanks to strong performance by the Toys and Video Games segments.

The company left its FY03/21 full-year forecast unchanged since the Christmas and year-end/new year shopping season, which is the most critical shopping season for Happinet, remained unpredictable as of November 2020.

Following is the breakdown of results by segment.

Toys

▷ Sales: JPY39.8bn (+8.2% YoY) ▷ Segment profit: JPY1.2bn (+65.5% YoY).

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The top-line gains were driven by a combination of solid growth in sales of products (such as Ichiban Kuji and Demon Slayer: Kimetsu No Yaiba-related toys from BANDAI SPIRITS) through convenience stores, and Happinet’s move into the model toy wholesaling business with its acquisition of Irisawa Corp. (now a wholly owned subsidiary). The strong jump in segment profit reflected its successful efforts to improve inventory control and the resulting decline in inventory writedowns versus the same six-month period the previous year. To be precise, the company indicated that Irisawa booked sales of approximately JPY2.4bn in 1H, and posted a profit.

Sales by manufacturer

▷ Bandai/BANDAI SPIRITS products: JPY21.8bn (+0.8% YoY), representing 54.9% of segment sales (versus 59.0% in 1H FY03/20) ▷ Takara Tomy products: JPY3.0bn (-20.4% YoY); 7.7% of segment sales (versus 10.5%) ▷ Happinet original products: JPY400mn (-53.1% YoY); 1.2% of segment sales (versus 2.7%) ▷ Products from other manufacturers: JPY14.4bn (+40.9% YoY); 36.2% of segment sales (versus 27.8%)

The decline in sales of Bandai/BANDAI SPIRITS products reflected weak sales of mainstay character goods, which effectively offset the solid growth in popular BANDAI SPIRITS products such as Ichiban Kuji. In Ichiban Kuji, Demon Slayer: Kimetsu No Yaiba and Twisted Wonderland-related merchandise sold well. The company says the outsized jump in sales of products from other manufacturers in 1H was driven primarily by the addition of Irisawa to the Happinet group last November, which meant Irisawa started making a full quarter’s contribution to consolidated results in Q4 FY03/20 (January–March 2020). The company noted that the toy wholesaling business of Irisawa handles some Bandai and BANDAI SPIRITS products, but most of Irisawa’s sales are derived from sales of products made by other manufacturers.

Segment profit Profits were up YoY thanks to the effects of sales growth as well as the aforementioned drop in inventory disposal losses., which came to JPY220mn, (vs. JPY450mn in 1H FY03/20).

(Reference) Bandai Namco Holdings Inc. results For 1H FY03/21, the Toys and Hobby segment of Bandai Namco Holdings Inc. reported sales of JPY128.9bn, up 0.6% YoY. According to Bandai Namco’s results report, it had strong sales in its adult-oriented products such as the plastic models and figurines in its Mobile Suit Gundam series. It had healthy sales over its own e-commerce site, while its strengthening of collaboration with other companies’ e-commerce sites and the use of online promotional events paid off. Legacy IP products such as the KAMEN RIDER series, and various peripheral products utilizing new IP were also popular. Sales of prizes, digital card products, and other products featured at amusement facilities were hit by the temporary closure of those facilities in wake of the COVID-19 pandemic.

(Reference) Takara Tomy results For 1H FY03/21, Takara Tomy reported domestic sales of JPY53.4bn, down 24.9% YoY. The impact of the COVID-19 pandemic took a toll on earnings in the retailing, events, and capsule toy dispenser businesses. Takara Tomy’s toys business benefitted from healthy sales of some products were up due to rising demand from young adults living at home with their parents, as well the ongoing rise in online purchases.

Visual and Music

▷ Sales: JPY30.6bn (-12.3% YoY) ▷ Segment profit: JPY495mn (-11.3% YoY).

Sales and profit were both down in 1H. Sales and profit were actually up YoY in Q2 (July-September 2020), but not enough to compensate for the sales and profit declines in Q1 (April-June 2020).

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▷ Q1 saw double-digit YoY declines in sales and profit as the stay-at-home advisory from the Japanese government accelerated the move to online streaming services and delayed the company’s release of new albums and movies. ▷ In Q2, sales and profit at the segment came in above year-ago levels thanks to strong sales from a few big hits, including the newly released STRAY SHEEP album from Kenshi Yonezu and sales of special boxed sets featuring the popular animated characters from PRINCESS CONNECT! Re: Dive, for which the company holds exclusive distribution rights.

Sales by field

▷ Visual field: JPY19.9bn (-1.9% YoY)  Wholesale business: JPY17.6bn (-2.5% YoY)  Manufacturing business: JPY2.2bn (+2.8% YoY) ▷ Music field: JPY10.7bn (-26.8% YoY)

In visual products field, in spite of solid sales of PRINCESS CONNECT! Re: Dive (which is distributed exclusively by Happinet), wholesaling operations saw sales decline YoY, mainly due to the nonrecurrence of boost from physical (boxed) sales such as the movie Bohemian Rhapsody, which benefitted earnings in 1H FY03/20. On the manufacturing side, the gains reflected sales from the distribution of its popular self-produced movie Romance Doll. On the music side, Q2 saw brisk sales of singer Kenshi Yonezu’s album STRAY SHEEP, but sales were nevertheless down since there were essentially no new music releases in Q1, while 1H a year ago also benefitted from greatest hits album by the popular group Arashi.

Segment profit Segment profit declined YoY as gross profit was dragged down by lower sales and higher inventory disposal losses, which came to JPY50mn (versus JPY20mn a year ago).

Videogames

▷ Sales: JPY33.4bn (+57.4% YoY) ▷ Segment profit: JPY596mn (+243.2% YoY).

Sales and profit were up thanks to strong sales of Nintendo's game console "Nintendo Switch" and related software.

By manufacturer, the company reported 1H sales of Nintendo products of some JPY30.9bn (+62.5% YoY), and 1H sales of Sony Interactive Entertainment products of JPY1.8bn (+8.4% YoY). The strong double-digit gains at the Videogames segment were driven by a surge in buying of game hardware (such as the Nintendo Switch), game software (such as Animal Crossing: New Horizons), and original game accessories as more people stuck close to home in the wake of the pandemic.

On the profit front, higher sales pushed up segment profit YoY. Segment sales were up by JPY12.2bn YoY, but because margins on videogame hardware are low relative to game software, the increase in segment profit was only JPY423mn.

Amusement

▷ Sales: JPY7.5bn (-25.5% YoY) ▷ Segment profit: JPY286mn (-63.8% YoY).

The market environment has been improving in stages, with the easing of stay-at-home requests as well as temporary closures and shortened operating hours of commercial facilities, Happinet’s main business partners. But the gains in Q2 were not enough to offset the shortfalls in Q1. Lower YoY sales and profit were also caused by falling demand from foreign tourists. 1H sales broke down to capsule toy sales of JPY5.1bn (-16.0% YoY) and card game sales of JPY1.4bn (-51.3%).

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Profit was down due to the drop in sales. The segment booked a loss for Q1 due to the aforementioned closure or shortened business hours of shopping centers, was swung back into the black in Q2 as the situation eased down. Sales in 1H fell by JPY2.6bn YoY, but segment profit was down JPY504mn since the Amusement segment has relatively high marginal profit rates.

Other: Acquisition of shares in Phantom Film Co., Ltd. (making it a subsidiary) In September 2020, the company announced the acquisition of shares in Phantom Film Co., Ltd. (making it a subsidiary). Phantom Film Co., Ltd. distributes, plans, produces, and promotes Western and Japanese films, and has worked on several hit films. Happinet says that, by acquiring Phantom Film’s expertise in distribution, it plans to operate an end-to-end business from film planning through package sales. The acquisition was implemented in October 2020, and Happinet plans to include the subsidiary’s earnings in its consolidated FY03/22 results. The company has not disclosed the acquisition price.

Phantom Film’s performance (JPYmn) FY09/17 FY09/18 FY09/19 Sales 983 1,613 963 Operating profit 19 30 17 Recurring profit 10 18 8 Net income 8 7 3 Net assets 113 121 125 Total assets 1,383 1,344 1,256

Q1 FY03/21 results

▷ Sales: JPY50.5bn (+9.2% YoY) ▷ Operating profit: JPY450mn (-21.7% YoY) ▷ Recurring profit: JPY483mn (-15.7% YoY) ▷ Net income*: JPY285mn (+107.9% YoY)

*Net income attributable to owners of the parent

The top-line gains reported for Q1 FY03/21 (April–June 2020) were driven by a combination of solid growth in sales in the Videogames segment and the company’s acquisition of a model toy wholesaling business in November last year.

On the earnings front, gross profit finished the quarter down, falling 4.7% YoY to JPY5.2bn. The Q1 gross profit margin of 10.4% was down from 11.9% in the same quarter last year, hurt by falling sales in the high-margin Amusement segment and JPY92mn in inventory write-offs (versus JPY76mn in write-offs in Q1 FY03/20).

At the operating and recurring profit levels, the decline in earnings was further aggravated by sticky SG&A expenses, which at JPY4.8bn were down only 2.7% YoY versus the 4.7% decline in gross profit. The breakdown of SG&A expenses shows logistics-related costs coming in at JPY973mn (-2.8% YoY), personnel-related costs coming in at JPY2.1bn (-1.1% YoY), and goodwill amortization coming in at JPY39mn (+16.9% YoY).

The rise in net income reflected the dropout of JPY280mn in extraordinary costs booked in the same quarter last year in connection with the celebration of the 50-year anniversary of the company’s founding and the absence of any new extraordinary charges in Q1 FY03/21.

Toys The Toys segment reported Q1 sales of JPY17.5bn (+6.9% YoY) and a segment profit of JPY456mn (+79.5% YoY). The top-line gains were driven by the company’s acquisition of Irisawa Corp. and its model toy wholesaling business in November last year and solid growth in sales of products through convenience stores. To be precise, the company indicated that the addition of Irisawa to the group last November added JPY1.2bn to consolidated sales in Q1 FY03/21, but its contribution to earnings was negligible.

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Q1 sales by manufacturer

▷ Bandai/BANDAI SPIRITS products: JPY8.8bn (-0.6% YoY), representing 50.8% of segment sales (versus 54.7% in Q1 FY03/19) ▷ Takara Tomy products: JPY1.4bn (-7.5% YoY); 8.6% of segment sales (versus 9.9% in Q1 FY03/19) ▷ Happinet original products: JPY200mn (-37.0% YoY); 1.5% of segment sales (versus 2.5% in Q1 FY03/19) ▷ Products from other manufacturers: JPY6.8bn (+27.2% YoY); 39.1% of segment sales (versus 32.9% in Q1 FY03/19)

The decline in sales of Bandai/BANDAI SPIRITS products reflected weak sales of mainstay character goods, which effectively offset the solid growth in popular BANDAI SPIRITS products such as Ichiban Kuji. The outsized jump in sales of products from other manufacturers was driven primarily by the addition of Irisawa to the Happinet group last November, which meant Irisawa started making a full quarter’s contribution to consolidated results in Q4 FY03/20 (January–March 2020). The company noted that the toy wholesaling business of Irisawa handles some Bandai and BANDAI SPIRITS products, but most of Irisawa’s sales are derived from sales of products made by other manufacturers.

On the earnings front, the outsized jump in segment profit was driven in part by the top-line gains but the main driver was the reduction in advertising/promotional spending and other SG&A spending.

(Reference) Bandai Namco Holdings Inc. results For Q1 FY03/21, the Toys and Hobby segment of Bandai Namco Holdings Inc. reported sales of JPY54.4bn, down 4.3% versus the same quarter last year. According to Bandai Namco’s Q1 results report, the decline in sales at its Toys and Hobby segment was driven by falling sales of prizes, digital card products, and other products that are handled by amusement facilities, whose operations were shut down or otherwise restricted in the wake of the pandemic. On the plus side, Bandai Namco reported that it saw continued strong sales of sales of its adult-oriented products such as the plastic models and figurines in its Mobile Suit Gundam series, legacy IP products such as the KAMEN RIDER series, and various peripheral products utilizing new IP.

(Reference) Takara Tomy results For Q1 FY03/21, Takara Tomy reported domestic sales of JPY23.1bn, down 24.3% versus the same quarter last year. Takara Tomy attributed the double-digit decline in domestic sales to widespread impact of the pandemic, which not only kept people staying close to home but also led to the temporary closures/shortened operating hours at retail stores, delays in the openings of new movies (to which its products are tied), cancellations/delays of promotional events, and a sharp decline in tourism-related demand. Takara Tomy said sales of some products were up due to rising demand from young adults living at home with their parents and increased buying by consumers online, but this was far from enough to offset the downturn in sales elsewhere.

Visual and Music The Visual and Music segment reported Q1 sales of JPY13.4bn (-25.0% YoY) and a segment profit of JPY198mn (-28.5% YoY). The company attributed the drop in sales to sharp downturn in the packaged product market as a whole in the wake of the pandemic, which kept people sticking close to home and prompted more to use online streaming services. The segment reported a few bright spots during the quarter, including packaged products tied the Disney movie Frozen II, but this was far from enough to offset the downturn in sales elsewhere.

Sales by field

▷ Visual field: JPY10.0bn (+0.3% YoY)  Wholesale business: JPY8.7bn (-1.4% YoY)  Manufacturing business: JPY1.2bn (+13.4% YoY) ▷ Music field: JPY3.3bn (-57.3% YoY)

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In visual products field, the decline in sales from wholesaling operations was attributed mainly to the dropout of the sales of packaged products tied to the movie Bohemian Rhapsody booked during the same quarter last year. On the manufacturing side, the gains reflected sales from the distribution of its popular self-produced movie Romance Doll. On the music side, the sharp drop in sales reflected the near total lack of new releases and the cancelation of promotional events, as well as tough comparisons with the same quarter last year, when sales got a big boost from hit albums, such as a greatest hits album by the popular group Arashi.

On the earnings front, the 28.5% YoY drop in segment profit closely tracked the 25.0% drop in sales and the resulting decline in gross profit.

Videogames The Videogames segment reported Q1 sales of JPY16.9bn (+125.9% YoY) and a segment profit of JPY235mn (versus profit of JPY18mn in Q1 FY03/20). The company attributed the strong top-line gains to the influx of demand from the stay-at-home crowd in the wake of the pandemic, which gave a huge lift to entire video game hardware and software market.

By manufacturer, the company reported Q1 sales of Nintendo products of some JPY15.4bn (+134.9% YoY), and Q1 sales of Sony Interactive Entertainment products of JPY1.0bn (+51.1% YoY). Particularly strong sellers on the Nintendo side included Nintendo Switch hardware and related software titles such as the popular Animal Crossing: New Horizons. Software titles for Sony’s PlayStation 4 were also strong sellers.

On the earnings front, earnings were up sharply versus the same quarter last year but the JPY218bn YoY increase in segment profit trailed far behind the JPY9.4bn jump in sales because most of increase in segment sales came from sales of videogame hardware, where margins are low relative to game software.

Amusement The Amusement segment reported Q1 sales of JPY2.8bn (-39.6% YoY) and a segment loss of JPY137mn (versus profit of JPY330mn in Q1 FY03/20). The pandemic weighed heavily on sales at the Amusement segment as most people stuck close to home and many of the commercial buildings where the company’s products are sold either shortened operating hours or closed temporarily, on top of which there was a huge drop in tourism-related demand. More specifically, the company reported capsule toy sales of some JPY2.0bn (-23.9% YoY) and card game sales of only JPY400mn (-71.1% YoY).

On the earnings front, the JPY137mn loss reported for the quarter represents a JPY467mn decline in segment profit versus the same quarter last year. The segment’s high marginal profit margin meant the hit to earnings from the JPY1.8bn YoY drop in sales was especially large, especially in the case of the decline in high-margin card game sales. Further aggravating the losses, the segment also booked inventory valuation losses of JPY25mn on slow-moving inventories.

Full-year FY03/20 results

▷ Sales: JPY233.3bn (-2.9% YoY) ▷ Operating profit: JPY2.6bn (-43.3% YoY) ▷ Recurring profit: JPY2.4bn (-44.9% YoY) ▷ Net income*: JPY1.2bn (-55.2% YoY)

*Net income attributable to owners of the parent

▷ Consolidated sales were down YoY as higher sales in the Toys segment were offset by double-digit decline in sales in the Visual and Music segment. ▷ Gross profit of JPY23.5bn was down 6.6% YoY, hurt by lower sales and a lower GPM, which at 10.1% was down 0.4pp YoY. Inventory disposal losses came to JPY2.1bn (compared to JPY2.5bn in FY03/19), but sales of relatively high-margin merchandise were sluggish, notably in the Toys segment.

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▷ At the operating profit level and below, the decline in earnings reflected the drop in gross profit coupled with rising SG&A expenses. At JPY21.0bn, SG&A expenses were up 1.5% YoY, driven by a combination of rising distribution costs and increases in depreciation charges following the startup of part of the company’s new core system.

The company had announced a downward revision to its full-year forecast in January 2020, cutting its projection for full-year consolidated sales by JPY20.0bn, operating profit by JPY2.3bn, recurring profit by JPY2.3bn, and net income by JPY1.5bn. Explaining the downward revision, the company said that in addition to weaker-than-expected performance in all areas during the nine-month period through Q3, it booked valuation losses on slow-moving inventories.

Sales came to 106.1% of the company’s revised FY03/20 forecast, operating profit 95.3%, recurring profit 96.5%, and net income attributable to owners of the parent 94.2%. Sales exceeded forecast thanks to solid performance by Ichiban Kuji items and other convenience store merchandise as well as the Animal Crossing: New Horizons Nintendo Switch game software. At the profit level, sale of relatively high-margin merchandise, particularly in the Toys segment, fell short of the company’s anticipations, and consequently, operating, recurring, and net profit all fell short of company forecasts.

Earnings by segment were as follows.

Toys In the Toys segment, sales rose 2.7% YoY to JPY79.1bn while segment profit fell 47.3% YoY to JPY1.1bn.

Sales rose YoY due to the company’s entry into the model toy wholesale business through the purchase of shares of Irisawa Corp. (making it a subsidiary) in November 2019, and also due to robust performances by BANDAI SPIRITS’ Ichiban Kuji and other products sold through convenience stores. Profit fell YoY due to weak sales of high margin products and higher SG&A expenses including logistics costs and depreciation expenses.

Sales by manufacturer

▷ Bandai and BANDAI SPIRITS products: JPY45.3bn (-4.9% YoY), representing 57.4% of segment sales (versus 62.0% in FY03/19) ▷ Takara Tomy products: JPY7.4bn (-15.9% YoY); 9.4% of segment sales (versus 11.5% in FY03/19) ▷ Happinet original products: JPY1.5bn (-21.1% YoY); 1.9% of segment sales (versus 2.5% in FY03/19) ▷ Products from other manufacturers: JPY24.7bn (+33.4% YoY); 31.3% of segment sales (versus 24.0% in FY03/19)

In Bandai products and BANDAI SPIRITS, Ichiban Kuji products (from BANDAI SPIRITS) were strong sellers, but sales of the mainstay character goods were weak. Sales of products from other manufacturers, such as Pokémon Company, accounted for a larger portion of segment sales versus FY03/19. In Q4 FY03/20 (January–March 2020), the company added Irisawa Corp. to consolidation, which contributed JPY1.9bn to sales in the quarter. Irisawa’s sales are mostly to “other manufacturers”, but the company says they also include Bandai and BANDAI SPIRITS products.

Segment profit Despite the rise in sales and the reduction in inventory disposal losses to JPY1.5bn (down from JPY1.8bn in FY03/19), segment profit was down due to a lower gross profit margin caused by changes to the product mix as well as an increase in SG&A expenses. The increase in SG&A expenses was due to depreciation charges of JPY339mn (+35.0% YoY) following the startup of the new core system in the Toys segment, as well as higher logistics costs accompanying brisk sales of convenience store merchandise.

(Reference) Bandai Namco Holdings Inc. results For FY03/20, the Toys and Hobby segment of Bandai Namco Holdings Inc. reported sales of JPY253.7bn, an increase of 4.5% over FY03/19. According to disclosures from Bandai Namco, sales of its adult-oriented products in the Mobile Suit Gundam series,

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including plastic models and collector figures (which accounted for 40% of the segment’s sales in FY03/20), were strong, as were sales of mainstay IP-related toys and peripheral products, such as the Kamen Rider, Super Sentai, and One Piece series.

(Reference) Takara Tomy results For FY03/20, Takara Tomy’s Japan segment reported sales of JPY138.9bn, down 6.6% versus FY03/19. Disclosures from Takara Tomy show strong sales of not only its mainstay Tomica merchandise line, but also strong sales of merchandise featuring characters from the animated movie Toy Story 4 and Frozen II. The Beyblade Burst product line, on the other hand, reported lower sales. The Rika-chan doll had brisk sales in FY03/18 and FY03/19 after celebrating its 50th anniversary in 2017, but experienced fallback in FY03/20.

Acquisition of Irisawa (making it a subsidiary) In November 2019, Happinet bought shares in hobby-related product company Irisawa Corp., making it a wholly owned subsidiary, with the aim of entering the model toy wholesale business. In the field of hobby products, Happinet previously only dealt in plastic models from BANDAI SPIRITS. Having Irisawa under its umbrella will enable it to handle other brands of plastic models, hobby RC products, and model railways. The company said that the wholesale hobby product market was worth about JPY80bn, and Irisawa had a market share of roughly 8% and the company 9%, so the acquisition will give it a market share of about 17%.

Irisawa reported annual sales of JPY5.4bn and operating profit of JPY38mn in FY01/19. Happinet added the new subsidiary to consolidated results starting in Q4 FY03/20 (January–March 2020), including five months’ worth of results from Irisawa, which contributed approximately JPY1.9bn to sales in Q4. Also, in Q4, the company recorded a JPY59mn extraordinary gain from negative goodwill associated with the acquisition of Irisawa.

Visual and Music In the Visual and Music segment, sales fell 12.4% YoY to JPY71.6bn and segment profit fell 51.4% YoY to JPY533mn.

Both sales and profit fell YoY. While the efficiency and productivity improvement were achieved in the wholesale section due to logistics outsourcing and other initiatives, the package market became a harsher environment compared to FY03/19. In the visual manufacturing section, performance of movie production partnerships in which the company invested was weak, resulting in investment losses.

Sales by field

▷ Visual field: JPY43.5bn (-43.3% YoY)  Wholesale business: JPY39.1bn (-3.7% YoY)

 Manufacturing business: JPY4.3bn (+0.3% YoY) ▷ Music field: JPY28.0bn (-23.6% YoY)

In the visual field wholesale business and music field, sales were down due to the absence of major contributions from the Namie Amuro’s concert video (Namie Amuro Final Tour 2018: Finally) which added greatly to sales during FY03/19. At its manufacturing business, sales for cumulative Q3 FY03/20 were up YoY thanks to strong sales of the drama Tonbo (where Happinet has exclusive distribution rights) and Manaria Friends (an anime series the company has invested), but Q4 sales fell 55.0% YoY to JPY900mn, resulting in generally flat sales for the full year. In Q4 FY03/19 (January–March 2019) the company partially recorded distributions on the jointly managed film Nichinichi Kore Kojitsu (which opened in October 2018 and had box office receipts of approximately JPY1.3bn), but in Q4 FY03/20, movies financed by the company did not perform as well.

Segment profit The drop in segment profit reflected the downturn in sales and the resulting drop in gross profit, which was only partially offset by lower inventory disposal losses of JPY100mn (down from JPY300mn in FY03/19) and cost-savings stemming from the integration of distribution systems and office space with its former subsidiary Seikodo. Another factor contributing to profit

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decline was the recording of losses on movie investments in the manufacturing business due to poor performance by movies financed by Happinet.

Videogames In the Videogames segment, sales rose 2.4% YoY to JPY63.1bn while segment profit fell 19.1% YoY to JPY840mn.

Sales rose YoY. Nintendo Switch hardware sold well, as did software titles, including Pokémon Sword, Pokémon Shield, and Animal Crossing: New Horizons.

Breaking down sales by maker, the videogames segment reported Nintendo products sales of JPY58.3bn (+10.5% YoY) and Sony Interactive Entertainment product sales of JPY3.8bn (-50.3% YoY). Strong sellers among the Nintendo products included Nintendo Switch Lite (portable game machine) and the upgraded Nintendo Switch, which can now operate off batteries, and associated software.

On the earnings front, in spite of the reduction in inventory disposal losses to JPY80mn (down from JPY100mn in FY03/19), profit was weak due to a lack of hit merchandise among relatively high-margin exclusively distributed software as well as an increase in spending on advertising for original game titles.

Plans to launch original game software in Q1 FY03/21 The company plans to launch its original game software Brigandine: Lunasia Senki for Nintendo Switch in 1H FY03/21. The game is a remake of Brigandine: Grand Edition, which Happinet released in 2000. According to the company, it sold roughly 200,000 copies of Brigandine: Grand Edition, and aims at worldwide sales of 200,000 for Brigandine: Lunasia Senki as well. Recommended retail price for the regular version is JPY7,200 (excluding tax).

Amusement In the Amusement segment, sales declined 2.3% YoY to JPY19.5bn and segment profit dropped 14.5% YoY to JPY1.5bn.

Sales declined YoY. Capsule toy sales came to JPY11.9bn (+3.9% YoY) and card game sales came to JPY5.4bn (-15.5% YoY). Capsule toys performed well due to the positive effects of increased installation of vending machines in high-visibility locations such as large commercial facilities. However, sales of card games were weak. Profit fell YoY as the company recorded JPY200mn valuation losses on slow-moving inventories (compared to JPY100mn in FY03/19).

Cumulative Q3 FY03/20 results

▷ Sales: JPY181.6bn (-5.1% YoY) ▷ Operating profit: JPY3.0bn (-38.0% YoY) ▷ Recurring profit: JPY3.0bn (-37.9% YoY) ▷ Net income*: JPY1.7bn (-43.7% YoY)

*Net income attributable to owners of the parent

▷ Consolidated sales were down versus the same nine-month period in FY03/19 as higher sales at the Toys segment were offset by lower sales at the Visual and Music segment and the Videogames segment ▷ Gross profit of JPY18.8bn was down 7.6% YoY, hurt by lower sales and a lower GPM, which at 10.3% was down 0.3pp versus the same nine-month period in FY03/19. Most of the hit to the GPM came from the Toys segment, where the company booked JPY1.5bn in inventory valuation losses (versus JPY1.2bn in valuation losses during the same period in FY03/19). ▷ At the operating profit level and below, the decline in earnings reflected the drop in gross profit coupled with rising SG&A expenses. At JPY15.8bn, SG&A expenses were up 2.0% versus the same nine-month period in FY03/19, driven by a

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combination of rising distribution costs and increases in depreciation charges following the startup of part of the company’s new core system.

The company had announced a downward revision to its full-year forecast in January 2020, cutting its projection for full-year consolidated sales by JPY20.0bn, operating profit by JPY2.3bn, recurring profit by JPY2.3bn, and net income by JPY1.5bn. Explaining the downward revision, the company said that in addition to weaker-than-expected performance in all areas during the nine-month period through Q3, it booked valuation losses on slow-moving inventories.

Compared with the company’s downwardly revised forecast for the full year, results for the nine-month period through Q3 have left the company with 82.5% of its full-year target for sales (versus 79.6% at this time the previous year), 112.0% of its full-year target for operating profit (versus 107.5%), 119.0% of its full-year target for recurring profit (versus 109.2%), and 131.5% of its full-year target for net income (versus 111.1%). Note: The company’s sales and earnings tend to be weighted towards the October-December quarter (Q3) and it usually runs a loss in the January-March quarter (Q4).

Toys Sales were up and earnings were down at the Toys segment, with sales for the nine-month period through Q3 rising 3.9% YoY to JPY64.0bn and segment profit falling 38.1% YoY to JPY1.5bn.

The top-line gains were driven by strong sales of Ichiban Kuji products from BANDAI SPIRITS, and products for convenience stores such as trading cards Pokémon Card Game. Earnings finished down as a result of inventory valuation losses.

Sales by manufacturer

▷ Bandai and BANDAI SPIRITS products: JPY37.6bn (-0.3% YoY), representing 58.7% of segment sales (versus 61.2% during the same nine-month period in FY03/19) ▷ Takara Tomy products: JPY6.0bn (-15.9% YoY); 9.5% of segment sales (versus 11.7% in the same period in FY03/19) ▷ Happinet original products: JPY1.4bn (-6.8% YoY); 2.3% of segment sales (versus 2.6% in the same period in FY03/19) ▷ Products from other manufacturers: JPY18.8bn (+24.8% YoY); 29.5% of segment sales (versus 24.5% in the same period in FY03/19)

In Bandai products and BANDAI SPIRITS, Ichiban Kuji products (from BANDAI SPIRITS) were strong sellers, but sales of the mainstay character goods were weak. Sales of products from other manufacturers, such as Pokémon Company, accounted for a larger portion of segment sales versus the same nine-month period in FY03/19.

Segment profit Despite the rise in sales, segment profit was down on inventory valuation losses and changes to the product mix. Inventory valuation losses came to some JPY1.3bn versus JPY930mn during the same nine-month period in FY03/19.

(Reference) Bandai Namco Holdings Inc. results For the nine-month period through Q3 FY03/20, the Toys and Hobby segment of Bandai Namco Holdings Inc. reported sales of JPY201.0bn, an increase of 9.3% over the same period in FY03/19 According to disclosures from Bandai Namco, sales of its adult-oriented products in the Mobile Suit Gundam series, including plastic models and collector figures, were strong, as were sales of mainstay IP-related toys and peripheral products, such as the Dragon Ball, Super Sentai, and One Piece series.

(Reference) Takara Tomy results For the nine-month period through Q3 FY03/20, Takara Tomy’s Japan segment reported sales of JPY112.6bn, down 5.7% versus the same period in FY03/19. Disclosures from Takara Tomy show strong sales of not only its mainstay Tomica and L.O.L. Surprise! merchandise lines, but also strong sales of merchandise featuring characters from the animated movie Toy Story 4. Product lines reporting lower sales included Beyblade Burst and Duel Masters.

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Acquisition of Irisawa (making it a subsidiary) In November 2019, Happinet bought shares in hobby-related product company Irisawa Corp., making it a wholly owned subsidiary, with the aim of entering the model toy wholesale business. In the field of hobby products, Happinet previously only dealt in plastic models from BANDAI SPIRITS. Having Irisawa under its umbrella will enable it to handle other brands of plastic models, hobby RC products, and model railways. The company said that the wholesale hobby product market was worth about JPY80bn, and Irisawa had a market share of roughly 8% and the company 9%, so the acquisition will give it a market share of about 17%.

Irisawa reported annual sales of JPY5.4bn and operating profit of JPY38mn for FY01/19. Happinet said that it would add the new subsidiary to consolidated results starting in Q4, including five months’ worth of results from Irisawa when reporting consolidated results for Q4 and full year. The company noted that there was no goodwill associated with the acquisition of Irisawa.

Visual and Music For the nine-month period through Q3 FY03/20, the Visual and Music segment reported lower sales and lower earnings, with sales of JPY53.7bn down 15.5% YoY and segment profit of JPY581mn down 47.5% YoY.

Lacking any hit products on par with the success of the previous year’s popular Namie Amuro concert video (Namie Amuro Final Tour 2018: Finally), YoY comparisons were difficult from the start. Adding further to the difficulties was a tough packaged video market and weak performance of joint-production ventures in the visual manufacturing section.

Sales by field

▷ Visual field: JPY32.5bn (-16.4% YoY)  Wholesale business: JPY29.0bn (-20.6% YoY)

 Manufacturing business: JPY3.4bn (+50.2% YoY) ▷ Music field: JPY21.1bn (-14.2% YoY)

In the visual field wholesale business and music field, sales were down due to the absence of major contributions from the Namie Amuro’s concert video (Namie Amuro Final Tour 2018: Finally) which added greatly to sales during the same period in FY03/19. At its manufacturing business, sales were up thanks to strong package video sales of the drama Tonbo (where Happinet has exclusive distribution rights) and Manaria Friends (an anime series the company has invested).

Segment profit The drop in segment profit reflected the downturn in sales and the resulting drop in gross profit, which was only partially offset by cost-savings stemming from the integration of distribution systems and office space with its former subsidiary Seikodo.

On a quarter-by-quarter basis, the segment reported a Q1 operating profit of JPY278mn (-21.7% YoY) and a Q2 operating profit of JPY281mn (-30.4% YoY). The Q3 operating profit of only JPY22mn was down 93.7% YoY, reflecting a decline in box office revenues on pictures in which the company had invested and losses at the visual manufacturing section.

Videogames At the Videogames segment, sales fell 4.3% YoY to JPY49.2bn and segment profit fell 29.3% YoY to JPY743mn.

Segment sales finished the nine-month period down as strong sales of Nintendo Switch products and hit products in other areas, such as Pokémon Sword and Pokémon Shield, failed to fully offset weak sales of other game hardware and software.

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Breaking down sales by maker, the videogames segment reported Nintendo products sales of JPY45.3bn (+1.3% YoY) and Sony Interactive Entertain product sales of JPY3.0bn (-47.2% YoY). Strong sellers among the Nintendo products included Nintendo Switch Lite (portable game machine) and the upgraded Nintendo Switch, which can now operate off batteries.

On the earnings front, the decline was further aggravated by increased promotional spending for original game titles.

Plans to launch original game software in Q1 FY03/21 The company plans to launch its original game software Brigandine: Lunasia Senki for Nintendo Switch in 1H FY03/21. The game is a remake of Brigandine: Grand Edition, which Happinet released in 2000. According to the company, it sold roughly 200,000 copies of Brigandine: Grand Edition, and aims at worldwide sales of 200,000 for Brigandine: Lunasia Senki as well. Recommended retail price for the regular version is JPY7,200 (excluding tax).

Amusement At the Amusement segment, sales were flat at JPY14.7bn and segment profit dropped 6.1% YoY to JPY1.1bn.

Overall segment sales were flat versus the same nine-month period in FY03/19, with capsule toy sales of JPY9.0bn up 6.8% YoY and card game sales of JPY4.0bn down 14.8% YoY. The rise in capsule toy sales was driven by a combination of special sales events and the development of new sales locations. The decline in card game sales reflected a dearth of new hit products. On the earnings front, the drop in segment earnings reflected valuation losses booked in connection with slow-moving inventories.

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Other information

History

In 1991 Toys“R”Us entered Japan. At that time small toy stores were key outlets for toys in Japan, with distributors serving retailers. Yet Toys“R”Us with its strong selling power started direct transactions with toy makers. Bandai continued to do business with big toy stores and small/medium-sized shops through wholesalers. Yet at the same time it did business with Toys"R"Us and big retailers through Happinet.

Toys"R"Us introduced open pricing to Japan’s retail industry. In the early 1990s many retailers set prices according to the wishes of makers. Toys"R"Us thus introduced competition and a price war began. The upshot: toy makers and retailers slashed distribution costs with a lot of intermediary business migrating to big distributors.

In the 1990s the toy wholesale industry saw a shakeout amid post-bubble sluggish consumption, direct makers/shop transactions, and big distributors controlling the market in the wake of the Toys"R"Us incursion. Happinet bought small/medium-sized distributors as they hit hard times, and expanded business with non-Bandai players.

From the mid-1990s, the company achieved earnings growth by distributing non-toy products, including videogames and DVDs.

1969 Incorporated as Tosho Ltd (Tosho becomes a stock company in 1972). 1972 Starts full-scale transactions with Popy (now Bandai). 1991 Company name changes to Happinet Corp with absorption of Dairin Corp and Seiko Corp (integration of Bandai-affiliated toy distributors). 1994 Bandai buys more Happinet shares; Happinet joins the Bandai group. Happinet begins distributing PlayStation game consoles and starts distributing videogames. 1994 Acquires Taiyo Gangu Shokai, Aichi Prefecture. 1995 Acquires Hiranaka, Hokkaido. 1999 Buys shares in Beam Entertainment Corp, advancing into DVD distribution business. 2001 Buys shares in Toyokuni Corp, Shizuoka Prefecture. 2002 Happinet JP Corp takes over the operations of Matsui Sakae Toys, a toy wholesaler in Osaka. 2006 Buys shares in Mori Toys, a wholesaler of Nintendo products in Osaka. 2007 Buys shares in Sunlink and The Apple Corporation. 2009 Buys shares in Wint Corp, the second largest intermediary distributor of visual media and music, advancing into CD wholesaling. 2013 Buys shares in Toys Union Co Ltd, a Nintendo distributor. 2014 Merges Happinet PM 2014 Toys Union Co., Ltd. and Mori Games Co., Ltd. merged; renamed Maxgames Corporation (presently a consolidated subsidiary) 2015 Creates capital business alliance with Broccoli Co., Ltd. (now an equity-method affiliate) 2018 Takes over wholesale business for music and visual products from Seikodo Co., Ltd. following company split 2019 Buys shares in Irisawa, a company that handles model toys

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News and topics November 2020 On November 12, 2020, the company also announced that it had changed the timing of the start of its ninth medium-term business plan from FY03/22 to FY03/23.

The company has been working to implement various initiatives set forth under its eight medium-term plan, the three-year plan put into effect in FY03/19. Meanwhile, needs of consumers and other elements of its operating environment have changed due to the impact of the COVID-19 pandemic on related industries, and the outlook is still clouded by uncertainty. As a result, the company decided to set FY03/22 as the year in which it would focus on strengthening its management infrastructure in advance of the creation of its ninth medium-term plan, which it now plans to put into effect in FY03/23. The company will release its ninth medium-term plan once it becomes ready for public disclosure.

September 2020 On September 29, 2020, the company announced the acquisition of shares in Phantom Film Co., Ltd. (making it a subsidiary).

Purpose of the stock acquisition The company has been working to expand related functions in the Visual and Music segment, to expand its operations in the production business as the market changes with the rising prominence of streaming services and the like.

Phantom Film Co., Ltd. distributes, plans, produces, and promotes Western and Japanese films, and has worked on several hit products. Happinet has worked on Japanese films and anime, but expects that Phantom Film’s expertise will be an asset going forward, as the company expands its production business. The company plans to expand its business by bringing Phantom Films into its group, and to operate an end-to-end business from film planning and production to distribution and rights and package sales in Japan and overseas.

Overview of the subsidiary to be transferred

▷ Company name: Phantom Film Co., Ltd ▷ Business: The import, distribution, and promotion of foreign language films; the distribution and promotion of Japanese films; the planning and production of Japanese films; the management and promotion of actors and talent.

Phantom Film’s performance (JPYmn) FY09/17 FY09/18 FY09/19 Sales 983 1,613 963 Operating profit 19 30 17 Recurring profit 10 18 8 Net income 8 7 3 Net assets 113 121 125 Total assets 1,383 1,344 1,256

Counterpart in the share transfer, acquisition price, and ownership status prior to and after the acquisition

▷ Counterpart and acquisition price: Not disclosed, pursuant to the provisions of the share transfer agreement ▷ Number of shares held prior to the share transfer: 0 shares (0.0% of voting rights) ▷ Number of shares held after the transfer: 220 shares (100.0% of voting rights)

Schedule

▷ Contract date: September 29, 2020 ▷ Planned share transfer date: October 1, 2020

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Future outlook The company expects the acquisition to contribute to earnings growth in the medium- to long-term, although its impact on FY03/21 earnings performance will be marginal.

On September 23, 2020, the company announced 1H and full-year FY03/21 earnings forecasts.

1H FY03/21 earnings forecast

▷ Sales: JPY110.0bn (1H FY03/20 result: JPY103.0bn) ▷ Operating profit: JPY1.6bn (JPY1.6bn) ▷ Recurring profit: JPY1.5bn (JPY1.6bn) ▷ Net income*: JPY900mn (JPY763mn) *Net income attributable to owners of the parent.

FY03/21 earnings forecast

▷ Sales: JPY240.0bn (FY03/20 result: JPY233.3bn) ▷ Operating profit: JPY3.7bn (JPY2.6bn) ▷ Recurring profit: JPY3.5bn (JPY2.4bn) ▷ Net income: JPY2.1bn (JPY1.2bn) ▷ EPS: JPY95.94 (JPY55.93)

Reasoning behind the forecasts The company previously indicated that it was refraining from issuing FY03/21 earnings forecast due to limitations on making reasonable estimates given uncertainties in regard to market trends amid the COVID-19 pandemic. However, the company has now released its earnings forecast that assumes a gradual resumption in economic activity based on currently available information.

For 1H FY03/21, the company forecasts a YoY increase in sales on the back of favorable performance in the Videogames segment, especially for Nintendo Switch products thanks to stay-at-home demand amid the pandemic, and the positive effects from the company’s full-fledged entry into model toy wholesale business following its November 2019 purchase of shares in Irisawa Corp. (made it a subsidiary). On the other hand, the company expects operating profit and recurring profit to decline YoY amid a slump in the relatively high profit margin Amusement segment due to a decline in inbound demand and consumers refraining from going out. The company forecasts a YoY increase in net income attributable to owners of the parent in reaction to extraordinary losses booked in 1H FY03/20 in line with expenses incurred in celebration of the 50th anniversary of the company’s founding.

In its full-year earnings forecast, the company assumes trends in place through 1H will continue throughout the year, with the Amusement segment staging a gradual recovery. The company intends to maintain an appropriate level of inventory, reduce inventory disposals, and build a low-cost structure through operational improvements. Based on these initiatives, the company expects full-year FY03/21 sales and profits to grow YoY.

The three-year medium-term business plan launched in FY03/19 targets FY03/21 sales of JPY230.0bn and recurring profit of JPY5.6bn. However, the company thinks it will be difficult to achieve those targets given changes in the business environment, including as a result of the spread of COVID-19, and delays in the implementation of management strategies. While making no changes in principle to its basic policies and strategies, the company is focused on responding flexibly to changes in the operating environment.

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Major shareholders (as of end-March 2020)

Shares held Shareholding Top shareholders ('000) ratio Namco Bandai Holdings Inc. 5,883 26.7% The Master Trust Bank of Japan, Ltd. (Trust account) 854 3.9% SMBC Trust Bank Ltd. (Sumitomo Mitsui Banking Corporation, Retirement 676 3.1% benefit trust account) Yasuhiko Idaira 513 2.3% Government of Norway 388 1.8% Japan Trustee Services Bank, Ltd. (Trust account) 332 1.5% The Bank of New York Mellon 140040 312 1.4% BNY GCM CLIENT ACCOUNT JPRD AC ISG（FE-AC） 306 1.4% Hiroshi Kawai 300 1.4% The Bank of New York Mellon 140044 260 1.2% SUM 9,824 44.7% Source: Shared Research based on company data Note: Excluding 2,025,000 shares of treasury stock As of March 31, 2019

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Profile

Company Head office Komagata CA Bldg., Happinet Corp 2-4-5, Komagata, Taito-ku, Tokyo, Japan 111-0043 Phone Exchange listing +81-3-3847-0521 Tokyo Stock Exchange 1st Section Established Listed on June 7, 1969 August 29, 1997 Website Fiscal year-end https://www.happinet.co.jp/english/ March IR web https://www.happinet.co.jp/english/ir/index.html

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