and factory / 7035

COVERAGE INITIATED ON: 2019.04.12 LAST UPDATE: 2020.03.26

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. and factory/7035 RCoverage LAST UPDATE: 2020.03.26 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.

Executive summary ------3 Key financial data ------5 Recent updates ------6 Highlights ------6 Trends and outlook ------7 Quarterly trends and results ------7 Q1 FY08/20 results ------9 Business ------15 Business description ------15 Segment overview and business model ------17 Smartphone Apps business (in FY08/19, 45.7% of sales, 74.3% of operating profit) ------17 IoT business (in FY08/19, 41.7% of sales and 22.8% of operating profit) ------24 Other businesses (8.4% of sales in FY08/19) ------28 Market and value chain------29 E-book industry ------29 Online game industry ------31 IoT industry ------32 Internet advertising market ------33 Real estate industry ------35 Competitors ------36 Strengths and weaknesses ------39 Historical results and financial statements ------41 Income statement ------41 Balance sheet ------43 Cash flow statement ------44 Historical performance ------45 Full-year FY08/19 results ------45 Q3 FY08/19 results ------46 1H FY08/19 results ------48 Q1 FY08/19 results ------49 Other information ------51 Mission ------51 News and topics ------52 Corporate governance and top management ------56 Dividend policy ------57 Major shareholders ------57 Employees ------58 Profile ------59

02/60 and factory/7035 RCoverage LAST UPDATE: 2020.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Executive summary

Business overview

◤ A startup company with businesses in two areas, smartphone apps and IoT. Established in September 2014, and factory has already achieved a significant level of growth and profitability. In FY08/19, sales were JPY3.9bn, operating profit was JPY512mn, and the operating profit margin was 13.1%. CAGR for sales in the four years through FY08/19 was 143%. The company moved into the black on an operating basis in the second year after its establishment, and CAGR for operating profit was 145% in the three years through FY08/19. The company listed on the Mothers market of the Tokyo Stock Exchange in the fourth year after its establishment.

◤ As of August 31, 2019, in the Smartphone Apps business (in FY08/19, 45.7% of sales and 75.5% of operating profit) the company developed and offered entertainment-oriented apps, such as manga apps and gamer-forum apps (online message boards for players of social media games). The company has developed free-to-use manga apps with Square Enix and large publishers such as Hakusensha, Shueisha, and Shogakukan. and factory develops gamer-forum apps mostly in house. In manga apps, the company obtains revenue by charging e-comic download fees (rental fees). These apps also draw advertising revenue based on the number of clicks made on banner ads placed through ad networks. Gamer-forum apps also take in advertising revenue (affiliate revenues and revenue from clicks on ad network-based banner ads). Monthly active users (MAUs) in Q1 FY08/20 numbered approximately 6.68mn, mainly young people. (In manga apps, the company has roughly 6.41mn MAUs, ranking it first in the industry despite its late entry. In gamer-forum apps, MAUs number around 270,000). Average revenue per user, or ARPU, after revenue sharing is approximately JPY29 for manga apps and JPY78 for gamer-forum apps.

◤ In the IoT business (in FY08/19, 52.5% of sales and 24.5% of operating profit), the company plans, develops, and operates the &AND HOSTEL brand of smart hostels, where visitors can experience services made possible by IoT. In this segment, the company also provides IoT solutions for lodging facilities, including innto (a property management system) and tabii (a tablet-based service). &AND HOSTEL (11 locations planned as of November 30, 2019) breaks down into two business categories. The first category encompasses planning and developing &AND HOSTEL facilities on property owned by other parties. The second category involves acquiring property, planning and developing &AND HOSTEL facilities, and selling them to investors. In the first instance, the company receives planning- and development-related compensation through consulting, real estate brokerage, and other means. In the second, it earns gains on the sale of real estate. In both cases, the company manages the hostels and receives compensation from hostel owners in return. Outside of the hostel business, innto (installed at 295 locations as of end-November 2019) revenue comes from proceeds from sales and system maintenance and operation fees, which are shared with business partner Almex. tabii (3,713 tablets in operation) also draws advertising revenue for the company.

◤ Many companies are involved in smartphone apps. Shared Research believes that the overlap between the Smartphone Apps business and the IoT business is what sets and factory apart. In the IoT business, the company takes advantage of expertise in UI/UX technology* and data analysis and monetization methods it accumulated through the Smartphone Apps business to innovate in real estate and other domains that are slow to deploy technology.

*A user interface (UI) refers to all information the user sees, such as designs, fonts, and external appearance. The user experience (UX) describes the feelings and sensations the user gains through a product or service.

Chairman Takamasa Ohara and other members of the management team are young, with most of them born in the 1980s; the average age of the company’s employees is 31. (The company had 90 employees as of August 31, 2019.) Viewing its youthful vitality as an advantage, the company prides itself on having a flexible and strategic culture of open innovation that is unfettered by past traditions.

Trends and outlook

◤ For FY08/20, the company forecasts sales of JPY6.0bn (+53.2% YoY), operating profit of JPY580mn (+13.2% YoY), recurring profit of JPY560mn (+15.7% YoY), and net income of JPY390mn (+18.9% YoY). The company forecasts JPY1.0bn in

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advertising expenses in the Smartphone Apps business (double the amount of FY08/19), and expects sales in manga apps to increase dramatically. As in FY08/19, the company recognizes 2H as the part of the year when it takes in the most revenue.

◤ In FY08/19, and factory reported sales of JPY3.9bn (+104.4% YoY), operating profit of JPY512mn (+40.3% YoY), recurring profit of JPY484mn (+34.2% YoY), and net income of JPY328mn (+25.8% YoY). Compared with the company’s forecast, sales came in 1.2% above plan, operating profit 0.3% above plan, recurring profit 4.0% below plan, and net income 6.6% below plan.

◤ The company does not disclose its medium-term management plans, but does stress its focus on achieving growth and profitability. In addition to achieving growth in existing areas that form the core of the Smartphone Apps business (such as establishing an undisputed leadership position in the manga apps category by increasing the number of partners and boosting MAUs), the company plans to set the stage for building new businesses. The company has started new initiatives in the fields of game-walkthrough apps and fortune-telling apps, and plans to expand the services it provides to create new sources of revenue. In the IoT business, and factory aims to strengthen alliances with partner companies and concentrate on categories where technology rollout is lagging (such as lodging facilities and housing), expanding its business to encompass offices, commercial property, schools, and healthcare facilities.

Strengths and weaknesses Strengths

▷ Provides a manga app-related one-stop service and is capable of making improvements more quickly than competing companies ▷ Has secure relationships (including capital and business alliances) with publishers who hold intellectual property and are strong in terms of manga ▷ Provides a wide variety of manga app types and has established a structure that minimizes the risk of cannibalization between different manga apps

Weaknesses

▷ Most intellectual property is owned by business partners ▷ Susceptible to impact from external environmental changes because most of its profit comes from the development and operation of manga apps ▷ Subject to impact from market conditions because it will retain real estate until its development of smart hostels ends

04/60 and factory/7035 RCoverage LAST UPDATE: 2020.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Key financial data

Income statement FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 (JPYmn) Parent Cons. Parent Parent Parent Par. Est. Sales 112 372 689 1,916 3,917 5,999 YoY - 231.9% 85.2% 178.3% 104.4% 53.2% Gross profit - 166 506 1,114 1,567 YoY - - 204.4% 120.0% 40.7% GPM - 44.7% 73.5% 58.1% 40.0% Operating profit -40 35 224 365 512 580 YoY - - 543.8% 63.2% 40.3% 13.2% OPM - 9.3% 32.5% 19.1% 13.1% 9.7% Recurring profit -42 37 223 361 484 560 YoY - - 500.8% 61.5% 34.2% 15.7% RPM - 10.0% 32.4% 18.8% 12.4% 9.3% Net income -43 -6 174 261 328 390 YoY - - - 49.9% 25.8% 18.9% Net margin - - 25.3% 13.6% 8.4% 6.5% Per share data (JPY) Shares issued (year-end; '000) 8,421.0 8,421.0 8,421.0 8,421.0 9,494.6 EPS -5.2 -0.8 20.7 30.9 34.8 41.1 EPS (fully diluted) - - - - 33.3 - Dividend per share ------Book value per share 3.0 2.2 22.9 53.8 189.4 Balance sheet (JPYmn) Cash and cash equivalents - 79 172 672 1,353 Total current assets - 193 480 1,126 2,453 Tangible fixed assets - 1 48 74 77 Investments and other assets - 26 33 103 381 Intangible fixed assets - 0 32 41 130 Total assets - 220 594 1,323 3,040 Accounts payable - 21 13 63 98 Short-term debt - 80 97 136 404 Total current liabilities - 159 262 653 1,095 Long-term debt - 27 140 216 147 Total fixed liabilities - 27 140 216 147 Total liabilities - 185 401 870 1,242 Net assets - 220 594 1,323 3,040 Total interest-bearing debt - 107 237 352 551 Cash flow statement (JPYmn) Cash flows from operating activities - 36 46 516 -115 Cash flows from investing activities - -27 -94 -131 -416 Cash flows from financing activities - 22 130 116 1,211 Financial ratios ROA (RP-based) - 33.9% 54.9% 37.7% 22.2% ROE - -18.9% 164.7% 80.7% 29.1% Equity ratio 18.6% 15.6% 32.4% 34.3% 59.1% Source: Shared Research based on company data; per-share data has been adjusted for stock splits. Note: The YoY comparison in the consolidated results for FY08/16 is based on the simple calculation versus non-consolidated results for FY08/15. The YoY comparison in the non-consolidated results for FY08/17 is based on the simple calculation versus consolidated results for FY08/16.

05/60 and factory/7035 RCoverage LAST UPDATE: 2020.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Recent updates Highlights

On March 26 2020, and factory, inc. announced its response to the spread of COVID-19 and the effects on the company.

In regard to the novel coronavirus outbreak, the company noted it did not see the need to revise its forecasts for FY08/20 results (out October 11, 2019) at this time. The company’s explanations regarding each business is outlined below.

Smartphone Apps business Following school closures in response to the coronavirus epidemic, the company began offering some of the manga works available through its manga apps for free. The development of a new manga app scheduled for release during FY08/20 is proceeding smoothly, so the company does not see the outbreak impacting its earnings on this front at this time.

IoT business Some of the &AND HOSTELs operated by the company are experiencing cancellations and lower YoY occupancy rates. However, the drop in earnings related to the operation of these facilities will only have a minor effect on earnings, says the company. Additionally, the sale of its in-house developed &AND HOSTEL properties is progressing as planned. As such, the company determined there was no apparent need to revise its full-year FY08/20 forecast at this time. The company will make prompt disclosure should any changes that have a significant impact on its business results transpire.

On February 19, 2020, Shared Research updated the report following interviews with the company.

On February 7, 2020, the company announced it received approval from the Tokyo Stock Exchange to upgrade the listing of its shares to the First Section.

As of February 14, 2020, the listing of the company’s shares will change from the Mothers market to the First Section of the Tokyo Stock Exchange.

On January 14, 2020, the company announced earnings results for Q1 FY08/20; see the results section for details.

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

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Trends and outlook

Quarterly trends and results

Cumulative FY08/18 FY08/19 FY 08/ 20 FY08/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1% of FY FY Est. Sales 255 612 1,014 1,916 470 995 1,531 3,917 802 13.4% 5,999 YoY 45.7% 84.3% 109.0% 178.3% 84.1% 62.6% 51.1% 104.4% 70.9% 53.2% Gross profit - - 729 1,114 261 586 889 1,567 466 YoY - - - 120.0% - - 22.0% 40.7% 78.3% GPM - - 71.9% 58.1% 55.6% 58.8% 58.1% 40.0% 58.1% SG&A expenses 141 336 520 748 219 483 734 1,054 429 YoY 193.8% 253.7% 202.2% 165.0% 55.2% 43.6% 41.2% 40.9% 95.9% SG&A ratio 55.3% 54.9% 51.3% 39.1% 46.6% 48.5% 47.9% 26.9% 53.4% Operating profit 46 122 209 365 42 103 155 512 37 6.4%580 YoY -48.9% -21.8% 13.2% 63.2% -7.8% -15.6% -25.7% 40.3% -12.3% 13.2% OPM 18.0% 19.9% 20.7% 19.1% 9.0% 10.3% 10.2% 13.1% 4.6% 9.7% Recurring profit - - 206 361 37 82 131 484 37 6.5%560 YoY - - - 61.5% - - -36.4% 34.2% -1.6% 15.7% RPM - - 20.3% 18.8% 7.9% 8.2% 8.6% 12.4% 4.6% 9.3% Net income - - 134 261 25 55 89 328 20 5.1%390 YoY - - - 49.9% - - -33.7% 25.8% -20.9% 18.9% Net margin - - 13.2% 13.6% 5.3% 5.6% 5.8% 8.4% 2.5% 6.5% Quart erly FY08/ 18 FY08/19 FY08/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Sales 255 357 402 903 470 526 536 2,386 802

YoY 45.7% 127.4% 162.4% 343.3% 84.1% 47.2% 33.5% 164.3% 70.9% Gross profit - - 729 384 261 324 304 677 466

YoY - - - -24.1% - - -58.3% 76.2% 78.3%

GPM - - 181.6% 42.6% 55.6% 61.7% 56.7% 28.4% 58.1% SG&A expenses 141 195 184 228 219 264 251 320 429

YoY 193.8% 314.9% 138.7% 106.9% 55.2% 35.3% 36.7% 40.2% 95.9%

SG&A ratio 55.3% 54.6% 45.8% 25.3% 46.6% 50.2% 46.9% 13.4% 53.4% Operating profit 46 76 87 156 42 61 52 357 37

YoY -48.9% 15.2% 201.2% 302.2% -7.8% -20.3% -39.9% 129.0% -12.3%

OPM 18.0% 21.3% 21.8% 17.3% 9.0% 11.5% 9.8% 15.0% 4.6% Recurring profit - - 206 155 37 44 49 353 37

YoY - - - -30.7% - - -76.1% 128.0% -1.6%

RPM - - 51.3% 17.2% 7.9% 8.5% 9.2% 14.8% 4.6% Net income - - 134 127 25 30 34 239 20

YoY - - - -27.1% - - -75.0% 88.7% -20.9% Net margin - - 33.3% 14.0% 5.3% 5.7% 6.3% 10.0% 2.5% Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

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Cumulative FY 08/ 18 FY 08/ 19 FY08/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Total sales 255 612 1,014 1,916 470 995 1,531 3,917 802 YoY 45.7% 84.3% 109.0% 178.3% 84.1% 62.6% 51.1% 104.4% 70.9% Smartphone Apps 203 466 758 1,099 394 814 1,229 1,789 650 YoY 23.0% 51.8% 72.7% 82.0% 94.1% 74.7% 62.1% 62.8% 64.9% Composition 79.6% 76.1% 74.8% 57.4% 83.9% 81.8% 80.3% 45.7% 81.0% Gamer-forum apps 103 231 326 429 61 101 148 199 63 YoY -23.1% -5.3% 0.3% 1.9% -40.8% -56.3% -54.6% -53.6% 3.3% Composition 40.4% 37.7% 32.2% 22.4% 13.0% 10.2% 9.7% 5.1% 7.9% Manga apps 61 153 287 466 211 504 839 1,216 415 YoY - 7550.0% 1693.8% 813.7% 245.9% 229.4% 192.3% 160.9% 96.7% Composition 23.9% 25.0% 28.3% 24.3% 44.9% 50.7% 54.8% 31.0% 51.7% Other manga-related apps - - 27 42 73 123 123 223 140 YoY ------355.6%431.0%91.8% Composition - - 2.7% 2.2% 15.5% 12.4% 8.0% 5.7% 17.4% Other 3982119163498611915132 YoY 25.8% 34.4% 21.4% 23.5% 25.6% 4.9% 0.0% -7.4% -34.7% Composition 15.3% 13.4% 11.7% 8.5% 10.4% 8.6% 7.8% 3.9% 4.0% IoT 38 134 240 800 66 152 251 2,056 124 YoY 3700.0% 1118.2% 757.5% 1179.6% 74.0% 13.1% 4.4% 157.0% 86.8% Composition 14.9% 21.9% 23.7% 41.7% 14.1% 15.2% 16.4% 52.5% 15.4% Other 14272917929527229 YoY 55.6% 92.9% 61.1% -22.8% -33.5% 8.6% 78.3% 320.4% 212.4% Composition 5.5% 4.4% 2.9% 0.9% 2.0% 2.9% 3.4% 1.8% 3.6% Operating profit 46 122 209 365 42 103 155 512 37 YoY -48.9% -21.8% 13.2% 63.2% -7.8% -15.6% -25.7% 40.3% -12.3% OPM 18.0% 19.9% 20.7% 19.1% 9.0% 10.3% 10.2% 13.1% 4.6% Smartphone Apps 93 193 303 480 124 264 390 600 128 YoY -25.6% -12.3% -1.5% 21.7% 33.8% 36.5% 28.7% 25.0% 3.2% Composition 108.1% 85.8% 81.4% 77.0% 123.3% 115.3% 112.4% 75.5% 112.1% OPM 45.8% 41.4% 40.0% 43.6% 31.6% 32.4% 31.8% 33.5% 19.8% IoT -73269142-24-35-43194-14 YoY ------36.7%- Composition -8.1% 14.2% 18.6% 22.8% -23.3% -15.3% -12.4% 24.5% -12.1% OPM - 23.9% 28.9% 17.8% -35.6% -23.1% -17.2% 9.5% -11.2% Other, company-wide expenses -40 -103 -163 -256 -59 -126 -192 -282 -77 YoY ------Composition ------Quarterly FY 08/ 18 FY 08/ 19 FY08/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Total sales 255 357 401 903 470 526 536 2,386 802 YoY 45.7% 127.4% 162.1% 344.8% 84.1% 47.2% 33.7% 164.2% 70.9% Smartphone Apps 203 263 293 341 394 420 415 560 650 YoY 23.0% 85.2% 122.0% 106.7% 94.1% 59.7% 41.5% 64.4% 64.9% Composition 79.6% 73.7% 73.1% 37.8% 83.9% 79.9% 77.3% 23.5% 81.0% Gamer-forum apps 103128951036140475163 YoY -23.1% 16.4% 17.3% 7.3% -40.8% -68.8% -50.5% -50.5% 3.3% Composition 40.4% 35.9% 23.7% 11.4% 13.0% 7.6% 8.8% 2.1% 7.9% Manga apps 61 92 134 179 211 293 335 377 415 YoY - 4500.0% 857.1% 411.4% 245.9% 218.5% 150.0% 110.6% 96.7% Composition 23.9% 25.8% 33.4% 19.8% 44.9% 55.8% 62.5% 15.8% 51.7% Other manga-related apps - - 27 15 73 50 0 100 140 YoY ------566.7%91.8% Composition - - 6.7% 1.7% 15.5% 9.5% - 4.2% 17.4% Other 394337444937333232 YoY 25.8% 43.3% - 29.4% 25.6% -14.0% -10.8% -27.3% -34.7% Composition 15.3% 12.0% 9.2% 4.9% 10.4% 7.0% 6.2% 1.3% 4.0% IoT 38 96 106 560 66 85 99 1,805 124 YoY 3700.0% 860.0% 523.5% 1500.0% 74.0% -11.0% -6.5% 222.3% 86.8% Composition 14.9% 26.9% 26.4% 62.0% 14.1% 16.3% 18.5% 75.7% 15.4% Other 141322920222029 YoY 55.6% - -50.0% -33.3% -33.5% 53.8% 1,019.4% 894.2% 212.4% Composition 5.5% 2.1% 0.5% 0.2% 2.0% 3.8% 4.2% 0.8% 3.6% Operating profit 46 76 87 156 42 61 52 357 37 YoY -48.9% 15.2% 200.0% 300.0% -7.8% -20.3% -39.7% 128.8% -12.3% Smartphone Apps 93 100 110 176 124 139 127 209 128 YoY -25.6% 5.3% 25.0% 102.3% 33.8% 39.0% 15.2% 19.0% 3.2% Composition 108.1% 71.9% 74.8% 70.7% 123.3% 109.0% 106.9% 46.9% 112.1% OPM 45.8% 38.0% 37.5% 51.6% 31.6% 33.1% 30.5% 37.4% 19.8% IoT -7393773-24-12 -8238-14 YoY - 3800.0% - - - -129.5% -122.0% 225.5% -41.3% Composition -8.1% 28.1% 25.2% 29.3% -23.3% -9.0% -6.9% 53.1% -12.1% OPM - 40.6% 34.9% 13.0% - -13.5% -8.2% 13.2% -11.2% Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods. Starting in Q1 FY08/19, the “Other, corporate” row under “Operating profit” will be renamed “Other” (and will no longer include companywide expenses).

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FY 08/ 18 FY08/19 FY08/20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 MA U (mn) Smartphone apps 2.00 2.20 2.57 2.85 3.30 4.01 4.60 5.61 6.68 YoY 239.0% 150.0% 152.0% 115.9% 65.0% 82.3% 79.0% 96.8% 102.4% Gamer-forum apps 0.92 0.70 0.53 0.47 0.51 0.39 0.30 0.29 0.27 YoY 55.9% 0.0% -25.4% -29.9% -44.6% -44.3% -43.4% -38.3% -47.1% Composition 46.0% 31.8% 20.6% 16.5% 15.5% 9.7% 6.5% 5.2% 4.0% Manga apps 1.08 1.50 2.04 2.38 2.79 3.62 4.30 5.32 6.41 YoY - 733.3% 558.1% 266.2% 158.3% 141.3% 110.8% 123.5% 129.7% Composition 54.0% 68.2% 79.4% 83.5% 84.5% 90.3% 93.5% 94.8% 96.0% ARPU (Monthly sales / MAU; JPY) Gamer-forum apps 37 61 60 73 40 34 52 59 78 YoY -50.7% 16.4% 57.1% 52.9% 6.8% -43.9% -12.6% -19.8% 95.1% Composition 14.6% 10.0% 5.9% 3.8% 8.5% 3.4% 3.4% 1.5% 9.7% Manga apps 19 20 26 27 34 32 26 24 29 YoY - 452.0% 74.8% 51.4% 80.2% 54.5% -1.3% -13.1% -14.9% Composition 7.4%3.3%2.6%1.4%7.2%3.2%1.7%0.6%3.6% Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

Q1 FY08/20 results Overview

◤ In Q1 FY08/20, the company reported sales of JPY802mn (+70.9% YoY), operating profit of JPY37mn (-12.3% YoY), recurring profit of JPY37mn (-1.6% YoY), and net income of JPY20mn (-20.9% YoY).

◤ Sales came in at 13.4% of full-year FY08/20 forecasts, operating profit 6.4%, recurring profit 6.5%, and net income 5.1%. Q1 sales came in at 97.8% of the forecast for the quarter and operating profit at 97.9%, mostly in line with projections. The company invested JPY267mn in advertising expenses, which was an increase of more than double YoY (the figure for Q1 FY08/19 was JPY116mn).

◤ Sales of JPY802mn were up 70.9% YoY, with the Smartphone Apps business reporting sales of JPY650mn (+64.9% YoY), IoT business sales of JPY124mn (+86.8% YoY), and Other businesses sales of JPY29mn (+212.4% YoY). The Smartphone Apps business accounted for 81.0% of sales, the IoT business 15.4%, and Other businesses 3.6%.

◤ Operating profit of JPY37mn was down 12.3% YoY, with the Smartphone Apps business reporting an operating profit of JPY128mn (+3.2% YoY), the IoT business an operating loss of JPY14mn (operating loss of JPY14mn in Q1 FY08/19), and the Other businesses an operating profit of JPY7mn.

Results by business Smartphone Apps business In Q1 FY08/20, the Smartphone Apps business reported sales of JPY650mn (+64.9% YoY) and an operating profit of JPY128mn (+3.2% YoY). The gains were driven by strong growth at existing apps such as Manga UP! (jointly developed with Square Enix Co., Ltd.), Manga Park (jointly developed with Hakusensha, Inc.), and Manga Mee (jointly developed with Shueisha Inc.), where a combination of new series launches and aggressive advertising and promotion led to increases in monthly active users (MAUs). Extending the availability of popular content, new manga additions, and improved average revenue per user (ARPU) also contributed to growth. MAU has been increasing steadily since the release in August, 2019, of Sunday Webry, a manga app jointly developed with Shogakukan Inc. The company also received revenues related to the development of new manga app Meccha Comics, in a new partnership with Amutus Corporation formed in October, 2019, and manga app Manga TOP, jointly developed with Nihon Bungeisha Co., Ltd. and released on November, 2019. Quarterly average MAU of and factory’s manga apps grew 123.5% YoY to 6.41mn users.

IoT business In Q1 FY08/19, the IoT business reported sales of JPY124mn (+86.8% YoY) and an operating loss of JPY14mn (operating loss of JPY14mn in Q1 FY08/19). The top-line gains were driven by revenues linked to the progress on ongoing planning and development work for its mainstay &AND HOSTEL brand of smart hostels (lodging facilities offering experiences made possible through IoT) and consulting and real estate brokerage fees related to the development of hostel-type lodging facilities. With the

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opening of &AND HOSTEL KURAMAE WEST, &AND SHINSAIBASHI EAST, and &AND HOSTEL MINAMISENJU, the company brought the total number of &AND HOSTEL brand lodging facilities in operation to 11. The company also brought the number of facilities using its innto (lodging management system) up to 295 as of end-Q1 FY08/20 (an increase of 63 facilities from end-FY08/19), and the number of lodging facilities using its tabii (a guest room tablet service) up to 3,713 (an increase of 860 from end-FY08/19) with the help of stronger relations with partner companies (such as H.I.S. Hotel Holdings and TEPCO Energy Partners), expansion of its sales teams, and active development efforts to create new functions aimed at boosting operating efficiency and increasing added-value. At the same time, the company made active investment, including spending to support the openings of new &AND HOSTEL facilities and the expansion of its innto and tabii services.

▷ The company closed one &AND HOSTEL facility when its fixed-term lease expired and indicates that this was in accordance with its plans. It booked impairment loss of JPY6mn in connection with the closing.

▷ The company states that strengthened collaboration with TEPCO Energy Partners contributed greatly to the increase in lodging facilities using tabii. Collaboration is steadily progressing because TEPCO Energy Partners can offer value beyond its prices by providing other products with electrical power as a set.

Other businesses In Q1 FY08/20, the Other businesses reported sales of JPY29mn (+212.4% YoY) and an operating profit of JPY7mn. The major of the earnings under this segment come from the company’s internet advertising agency services.

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

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Full-year company forecast for FY08/20

FY08/18 FY08/19 FY08/20 (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Act. FY Act. FY Est. Sales 612 1,304 1,916 995 2,922 3,917 5,999 YoY - - 178.3% 62.6% 124.0% 104.4% 53.2% Cost of sales 154 649 803 410 1,941 2,350 na Gross profit 458 656 1,114 586 981 1,567 - GPM 74.8% 50.3% 58.1% 58.8% 33.6% 40.0% - SG&A expenses 336 412 748 483 572 1,054 na SG&A ratio 54.9% 31.6% 39.1% 48.5% 19.6% 26.9% - Operating profit 122 243 365 103 409 512 580 YoY - - 63.2% -15.6% 68.3% 40.3% 13.2% OPM 19.9% 18.6% 19.1% 10.3% 14.0% 13.1% 9.7% Recurring profit na na 361 82 403 484 560 YoY - - 61.5% - - 34.2% 15.7% RPM - - 18.8% 8.2% 13.8% 12.4% 9.3% Net income na na 261 55 273 328 390 YoY - - 49.9% - - 25.8% 18.9% Net margin - - 13.6% 5.6% 9.3% 8.4% 6.5% Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

Overview For FY08/20, the company forecasts sales of JPY6.0bn (+53.2% YoY), operating profit of JPY580mn (+13.2% YoY), recurring profit of JPY560mn (+15.7% YoY), and net income of JPY390mn (+18.9% YoY).

▷ The company anticipates continued growth and profitability. It plans to build on this momentum and fix its sights on long-term growth. ▷ The company forecasts JPY1.0bn in marginal profit (gross profit combined with development and personnel expenses). ▷ Regarding expenses, the company forecasts a JPY528mn increase in advertising expenses, a JPY339mn increase in personnel expenses (including development and personnel expenses), a JPY54mn increase in temporary expenditures related to transferring the head office (an increase in depreciation expenses due to depreciation from the current head office up until the

point of the move), and a JPY31mn increase in other expenses. The company also plans to accelerate hiring and expand office space to increase the size of its business. ▷ The company plans to spend JPY1.0bn on advertising over the year, with a somewhat stronger focus on 1H.

Earnings forecasts by quarter As in FY08/19, the company recognizes 2H as the part of the year when it takes in the most revenue.

▷ Sales forecasts by quarter are JPY820mn for Q1, JPY875mn for Q2, JPY958mn for Q3, and JPY3.3mn for Q4. The company expects to sell real estate in the IoT business in Q4. ▷ Operating profit forecasts by quarter are JPY37mn for Q1, JPY52mn for Q2, JPY141mn for Q3, and JPY348mn for Q4.

Company outlook by business Smartphone Apps business

▷ The company is looking for continued growth at existing manga apps and also has plans to release a number of new manga apps. ▷ The company believes it has built a foundation for growth over the two-plus years that have elapsed since 2017. During this time, the company strengthened its app development structure by establishing Marketing Unit. It also formed solid partnerships with publishers. The company anticipates that it will benefit from a tailwind of market expansion, and it plans to

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increase advertising spending because the effects of advertising are becoming more acute. The company estimates an advertising budget of JPY1.0bn (double that of FY08/19). Every month the company invests a fixed portion of the previous month’s app profit, and it intends to raise this fixed portion to prioritize growth. The company expects the increased advertising spending will lead to a large increase in MAU. The company also expects ARPU to remain high. ▷ The company employs a team consisting of producers, designers, and engineers for each of its apps. With the establishment of Marketing Unit, however, it switched to a system that makes it easier to accumulate marketing expertise. ▷ Outside of manga apps, and factory is also planning forays in new areas in the entertainment field. The company aims to expand its service offerings, looking for its self-developed physic-reading app “uraura” and its co-developed smartphone game app FFBE Digital Ultimania (developed together with Square Enix), both of which were rolled out during 2019, and other new apps to become new sources of revenues.

IoT business

▷ The company will continue to promote business development in accommodation and housing. In FY08/20, the company launched a new housing-related service. ▷ At the IoT business, and factory is looking for continued steady growth in earnings from the planning and development of &AND HOSTEL lodging facilities. ▷ The company is promoting the adoption of technology in the lodging business by making active investments in innto (a reservation management system) and tabii (guest room tablet service). It aims to boost earnings by expanding its service offerings. The company will begin monetizing ads at tabii. ▷ The company will jointly develop a tenant management system for real estate companies and a communication app connecting tenants and managers through a business alliance agreement with Sumasapo Co., Ltd.

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Medium-term outlook

Aiming to achieve growth and profitability, accelerate investment recovery The company does not publicize its medium-term management plan, but its primary mission in the stock market is to “achieve growth and profitability.” In the short-term, the company says it aims to accelerate growth by maintaining its investment-recovery cycle. It will focus on achieving further growth in FY08/20, with its sights fixed on the long-term.

Companywide strategy In the Smartphone Apps business, the company aims to expand its platform by growing in existing categories (gamer-forum apps for players of social media games and manga apps) and moving into new ones. In the IoT business, and factory plans to strengthen its alliances with partner companies to step up the adoption of technology in areas where it is lacking. Currently, the company is concentrating on lodging facilities and housing; it plans to expand its activities to include offices, commercial property, schools, and healthcare facilities.

Growth strategy in the Smartphone Apps business Solid partnerships built on capital and business alliances In July 2019, the company entered a capital and business alliance with Square Enix, resulting in Square Enix owning 4% of and factory shares. In October 2019, the company entered another capital and business alliance with three publishers, Shueisha, Shogakukan, and Hakusensha, resulting in them each holding 2% of shares. The company is building stronger relationships with publishers through these alliances. It will promote business growth through more extensive collaboration with other companies.

Establish a dominant leadership position in the manga apps industry In 2017, the company began offering two manga apps: Manga UP!, which was developed jointly with Square Enix Co., Ltd. (TSE1: 9684), and Manga Park with Hakusensha, Inc. In November 2018, the company launched a third manga app, Manga Mee, which it developed with Shueisha Inc. In December 2018, it began distributing Comic every, a free manga app it developed in collaboration with Beaglee Inc. (TSE1: 3981). and factory is planning to operate similar apps with other publishers. In August 2019, the company completely overhauled Sunday Webry through a business tie-up with Shogakukan. In FY08/20, the company plans to add three new apps: Mecha Comic’s Mainichi Rensai (Amutus), Young Jump! (Shueisha), and Manga TOP (Nihon Bungeisha). It plans to continue increasing the number of its apps.

According to the November 2019 edition of Nielsen Mobile Netview (data concerning and factory was calculated by the company), six apps that and factory operates (Manga UP!, Manga Park, Manga Mee, Comic every, Sunday Webry, and Manga TOP) generated 6.41mn MAUs together in November 2019, ranking the company first in Japan. By generating additional MAUs from new manga apps, the company plans to achieve an undisputed industry leadership position. (See the “Business overview” section.)

Establishing a No. 1 MAU position by operating numerous manga apps

Source: Shared Research based on Nielsen Mobile Netview (figure concerning and factory calculated by the company), November 2019, and totals calculated by the company Note: As of January 2020 Apps from Amutus Corporation and Shueisha Inc. are scheduled for future release.

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Growth strategy in the IoT business Leverage &AND HOSTEL to move into new businesses The company is considering the launch of a business that combines IoT and AI by making use of guest-related user data collected through its lodging-related businesses: &AND HOSTEL (a smart hostel brand designed to evoke a futuristic sensation as lodgers experience IoT), innto (a property management service for simple lodging facilities), and tabii (service based around in-room tablet devices). As real estate is not its core business, the company explains that the real reason for increasing the number of &AND HOSTEL location is to generate more customer data that can be monetized in diverse ways. The goal of and factory’s IoT business is to generate business value by introducing technology into areas where it is currently lagging and making those industries more convenient as a result.

Lodging facilities are currently the core focus of and factory’s IoT business, but the company also intends to take the IoT business into housing and other fields. Given the broad-ranging nature of real estate, the company thinks business opportunities abound for bringing more technology into offices, food and beverage establishments, and educational facilities. Food and beverage establishments, for example, might take advantage of IoT to accept advance orders or move away from cash payments. Using the internet or smartphones to register customers would facilitate a shift from paper to virtual currencies and other payment methods. By moving aggressively into fields where it thinks it can add value, and factory intends to change the nature of those fields and make them more efficient.

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Business Business description and factory is a startup company with businesses in two areas: Smartphone Apps*1 and IoT*2. In the Smartphone Apps business, the company explores and leverages the business potential of smartphones. In the IoT business, the company seeks to apply UI/UX technologies*3 accumulated in the Smartphone Apps business, along with expertise in data analysis and monetization methods. As a result, and factory aims to prompt innovation in areas where technology adoption is currently lagging, such as real estate, housing, and healthcare. In FY08/19, sales were JPY3.9bn, operating profit was JPY512mn, and the operating profit margin was 13.1%.

*1 Software that can be downloaded on a smartphone and used to access games, bulletin boards, social networking sites, email, calendars, and music players. This software uses smartphone operating systems, typically Android or iOS. *2 Short for the Internet of Things, IoT describes the concept of physical items being connected over the internet. IoT may refer to new services that make this concept a reality, to a business model, or to elemental technologies. Some industry pundits believe that the ability to connect a wide range of items over the internet, collect resulting data, and analyze and make use of this data will make the provision of innovative, high-value-added functions and services possible. *3 A user interface (UI) refers to all information the user sees, such as designs, fonts, and external appearances. The user experience (UX) describes the feelings and sensations the user experiences through a product or service.

As of August 31, 2019, the Smartphone Apps business (in FY08/19, 45.7% of sales and 75.5% of operating profit) focused on manga apps the company developed with large publishers, and the development and provision of entertainment-oriented apps, such as gamer-forum apps (details to follow). In the IoT business, (52.5% of sales and 24.5% of operating profit) the company plans, develops, and operates the &AND HOSTEL brand of smart hostels that allows visitors to experience IoT devices*4. In this segment, the company also provides IoT solutions for lodging facilities, including innto (a property management system) and tabii (a tablet-based service for lodging facilities).

*4 A device that can be connected to the internet. The 2017 White Paper on Information and Communications in Japan describes an IoT device as “a device that has a unique IP address and can be connected to the internet. Such electronic devices are broad in scope, ranging from devices used as sensor network terminals to devices with computing functions.” Worldwide, the number of IoT devices is expected to grow from an estimated 17.3 billion in 2017 to more than 30.0 billion in 2020.

Established in September 2014, the company is already achieving both growth and profitability. In the four years through FY08/19, sales grew at a CAGR of 143%. The company became profitable in its second year, and CAGR for operating profit over the three years through FY08/19 was 145%. In its fourth year, the company listed on the Mothers market of the Tokyo Stock Exchange (listing date: September 6, 2018).

Sales and operating profit

(JPYmn) Saikyo series apps (JPYmn) 7,000 Manga 1,200.0 Other manga 5,999 6,000 Others in the Smartphone Apps segment 1,000.0 IoT Other 5,000 800.0 Total sales Operating profit (RHS) 580 3,916 4,000 600.0

365 512 3,000 400.0 224 2,000 1,916 200.0 35 -40 1,000 688 0.0 372 112 0 -200.0 FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 Est.

Source: Shared Research based on company data Note: Figures for FY08/16 are consolidated. Other years are non-consolidated.

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Breakdown of sales and operating profit* Two core businesses

(JPYmn) - Outer circle: Sales - Inner circle: Operating profit 72 2% 13 2% 194 24% FY08/19 Sales 3,916 600 1,789 74% 46% 2,056 52%

Source: Company data Smartphone Apps IoT Other

Source: Shared Research based on company data *Operating profit above refers to the sum of segment profits and does not include companywide expenses (JPY257mn in FY08/18). UI/UX design capabilities a basis for expansion into other areas of business The Smartphone Apps business has been the core of the company since its establishment in September 2014. By developing smartphone apps, the company has accumulated in-house expertise in UI/UX design. UI/UX design is important because of the role it plays in the “conversion” of smartphone users (persuading users to tap on ads on their smartphone screens, register as members, send inquiries, or buy products). UI/UX design expertise enables the company to develop apps for the IoT business and generate synergies that go beyond the boundaries of the two businesses.

Both businesses offer services that provide value through experience gained by operating smartphone apps and devices. and factory thinks the value of services is determined by their operability, and by the benefits and experience they deliver; in other words, the UI/UX design. As UI/UX design capabilities indicate the ability to predict and fulfill user needs from user perspectives, and factory thinks these abilities are important across all aspects of business, not just when developing apps and devices.

The Smartphone Apps business has thus spawned a number of others. UI/UX design (business) expertise has helped make the company’s new business initiatives profitable.

A flexible, strategic, open, and innovative corporate culture, unfettered by hidebound tradition The company’s 90 employees (as of August 31, 2019) are young (average age of 31) and led by a youthful management team. Three board members were born in the 1980s, including Takamasa Ohara (chairman and representative director, born in 1984), Rinji Aoki (president and representative director and born in 1983 and in charge of the Smartphone Apps business), and Yuki Umemoto (born in 1980 and in charge of the IoT business). More than half of employees are engineers and designers, with producers and administrators making up the remainder. The company forms small teams to work on each app title, allocating the staff needed to handle all aspects of app production. Within these units, the company pursues a plan-do-check-act (PDCA) cycle, progressing from planning to development, operation, analysis, improvement, marketing, and then back to planning. The company handles all processes in-house for each unit.

The company takes advantage of the youth of its staff to foster a flexible and strategic culture of open innovation. In the Smartphone Apps business, the company collaborates with numerous large publishers. In the IoT business, and factory collaborates with NTT Docomo (TSE1: 9437) and the city of Yokohama in the Homes of the Future Project. The company explains that many of its diverse collaborative relationships with partner companies were the result of proposals from those companies. Shared Research understands that and factory’s UI/UX design capabilities and corporate culture are important reasons for such collaboration.

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Segment overview and business model

Smartphone Apps business (in FY08/19, 45.7% of sales, 74.3% of operating profit)

Smartphone Apps FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 Sales and profit (JPYmn) Act. Act. Act. Act. Act. Sales na na 604 1,099 1,789 YoY - - - 82.0% 62.8% % of total sales - - 87.7% 57.4% 45.7% Gamer-forum apps na na 421 429 199 YoY - - - 1.9% -53.6% % of total sales - - 61.1% 22.4% 11.1% Manga apps na na 51 466 1,216 YoY - - - 813.7% 160.9% % of total sales - - 7.4% 24.3% 68.0% Other manga-related apps na na - 42 223 YoY ----431.0% % of total sales - - - 2.2% 12.5% Other na na 132 163 151 YoY - - - 23.5% -7.4% % of total sales - - 19.2% 8.5% 8.4% Operating profit na na 394 480 600 YoY - - - 21.7% 25.0% % of total OP - - 108.6% 77.0% 74.3% OPM - - 65.2% 43.6% 33.5% MAU (mn) - 0.26 1.32 2.85 5.61 YoY - - 407.7% 115.9% 96.8% Gamer-forum apps - 0.26 0.67 0.47 0.29 YoY - - 157.7% -29.9% -38.3% % of total MAU - 100.0% 50.8% 16.5% 5.2% Manga apps - - 0.65 2.38 5.32 YoY - - - 266.2% 123.5% % of total MAU - 0.0% 49.2% 83.5% 94.8% Source: Shared Research based on company data Note: Monthly active users (MAUs) are as of Q4 of each fiscal year.

Overview The Smartphone Apps business has two main drivers: the &AND COMICS service that provides manga apps developed in collaboration with large publishers. These apps include Manga UP!, Manga Park, Manga Mee, and Comic every, and the &AND APPS service offering gamer-forum apps for multiplayer social media games*5, such as the Saikyo Series. In FY08/19, manga apps accounted for 68.0% of sales in the Smartphone Apps business, gamer-forum apps 11.1%, and other apps 8.4%. Manga apps generate revenue from both advertising and in-app fees, while advertising is the revenue source for gamer-forum apps.

*5 Multiplayer: the ability to play social media games with other users. and factory’s gamer-forum apps offer an online message board where mobile gamers can recruit co-players and exchange tips and tricks that help them advance their play within specific games.

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Service categories & AND COMICS & AND APPS

Source: Company data

Organization of the Smartphone Apps business Sell Distribute in-app ads Sell ad spaces ad spaces

Provide servicesProvide services Receive ad fees Receive ad fees

Ad fees Provide Provide Operate Consulting Sell Sell services services apps services ad spaces ad spaces and factory and Provide Customers (users) Customers materials Ad agencies, other Customers (advertisers) Customers Platform operators Platform Partners Partners

Distribute Receive Receive Receive profits consulting ad fees ad fees fees Source: Shared Research based on company data

Manga apps (&AND COMICS) and factory offers a number of smartphone manga apps developed with other companies: Manga UP!, developed with Square Enix Co., Ltd. (TSE1: 9684); Manga Park, developed with Hakusensha, Inc.; Manga Mee, developed with Shueisha Inc.; and Sunday Webry, developed by Shogakukan. The company provides these apps to smartphone users via distribution platforms such as the App Store (operated by Apple Inc.) and Google Play (operated by Google Inc.).

Since the apps are developed in cooperation with publishers, only content from these publishers is included, unlike general bookstore apps. On the other hand, these apps are characterized by their strength in targeting users and enticing them with each publisher’s unique content. The company’s idea is to control a number of manga apps, each with their own unique characteristics.

Other manga apps typically charge users per comic viewed (around JPY300–400 per title). By comparison, the manga apps and factory provides are basically free to read, in one-story units or chapters. (When not free, they are around JPY20 per story.) The strength of the company’s manga apps lies in its knowledge of how to boost MAU and ARPU, such as through mixing past well-known titles and original works, ending manga installments at cliff hangers to encourage continued reading, mixing free and paid-for manga, and the level and method of charging.

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Unlike companies simply focused on app development, and factory has in-house capabilities in planning, development, operations, analysis, improvement, and marketing. As such, it is able to provide a one-stop service to publishers, through which it can bring plans to fruition in a short amount of time. Manga apps (including “other manga-related apps”) accounted for 68.0% of sales in FY08/19.

Business model for manga apps The company receives both advertising revenue (obtained through ad networks*6 when users click on in-app advertising banners displayed placed through ad networks*6) and fee revenue (download fees from the sale of e-comics) from the manga apps it develops and provides.

*6 An ad network is an arrangement in which multiple advertising media (such as websites, social media, blogs, etc.) are bundled together to create an ad distribution network. It allows advertisers to place ads across multiple publishers without having to deal with each publisher individually

The company’s main costs are expenses paid to app developers and advertising expenses associated with attracting new users. In some instances, in order to attract new users, the company will pay advertising expenses equivalent to 100% of the preceding month’s income from the manga apps listed below for a specified period while keeping an eye on various key performance indicators (KPIs). The KPIs the company watches are cost per install (CPI), organic user acquisition rate (influx of users who discover the app due to its ranking), and various factors related to MAU and ARPU (retention rate, charging rate, ad price, charging rate-to-sales and advertising-to-sales ratios).

For Q1 FY08/20, MAUs numbered approximately 6.41mn people (+129.7% YoY). Despite being a latecomer to the business, launching manga apps first in January 2017, the company says its research shows it ranks first in the industry in terms of MAUs. (See the “Medium-term outlook” section.) ARPU during that period (revenue per month per MAU: based on the company’s share of net revenue after deducting platform fees and the share for publishers) was JPY29 (-14.9% YoY).

In November 2018, the company began collaborating with Shueisha, launching a manga app called Manga Mee. Shueisha is a venerated member of Japan’s comics culture, having first published Ribon (a manga for young girls) in 1955. In December 2018, and factory began operating a manga app with Beaglee Inc. (TSE1: 3981), the leading Japanese e-comics distributor*7, in terms of performance. In August 2019, the company completely overhauled Sunday Webry through a business tie-up with Shogakusha. It plans to collaborate with other companies as well. The company aims to add three manga apps in FY08/20: Mecha Comic’s Mainichi Rensai (Amutus), Young Jump! (Shueisha), and Manga TOP (Nihon Bungeisha).

*7 Member numbers exceeded 1.5mn in September 2018. The following month, cumulative downloads exceeded 900mn comics (book-length volumes).

The company’s manga apps publish a large volume of original manga content that is not published anywhere else. This makes it relatively difficult for pirating sites to negatively influence their MAU and ARPU.

Manga app ARPU typically rises to a certain level, but is difficult to increase beyond that level. Consequently, increases in MAU are important in terms of securing sales growth. As of January 2020, the company offers manga apps that are unique from one another (in terms of genre and reader attributes), thereby establishing a structure that minimizes the risk of cannibalization between different manga apps. Accordingly, new manga app releases are leading to increases in MAU.

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and factory’s manga apps

Square Enix Holdings Partner Hakusensha Shueisha Beeglee Inc. Shogakukan Nihonbungeisha Co., Ltd. (TSE1: 9684) (Unlisted) (Unlisted) (TSE1: 3981) (unlisted) (unlisted) App operated Manga UP! Manga Park Manga Mee Comic every Sunday Web Every Manga Top (release date) (Jan. 2017) (Aug. 2017) (Nov. 2018) (Dec. 2018) (Aug. 2019) (Nov. 2019) Main lineup Monthly Shonen Gangan Hana to Yume RIBON Over 15,000 episodes at the Weekly Shonen Sunday Manga Goraku (Boys' comics) (Girls comics) (Girls comics) time of release (Boys' comics) (Youth comics) Monthly Big Ganga LaLa Margaret (one of the biggest among free Get The Sun! Comic Heaven (Youth comics) (Girls comics) (Girls comics) comic apps) (Boys' comics) (Youth comics) Monthly Gangan Joker MELODY BETSUMA Gekkan Sunday GX Web Goraku (Youth comics) (Girls comics) (Girls comics) (Youth comics) (Youth comics) Young Gangan Young Animal Cocohana (Youth comics) (Youth comics) (Comics for female adults) Monthly Gfantasy Le Paradis Cookie (Women and youth comics) (Romance comics) (Girls comics)

+ original content + original content + original content + original content + original content + original content Source: Shared Research based on company data

ARPU by quarter for manga apps

Source: Shared Research based on company data Note: Figures are indexed with ARPU for Manga UP! in March 2017 set at a value of “100.” ARPU figures for dates after March 2017 indicate simple averages for multiple apps, excluding apps that were released less than one month prior.

MAUs by quarter

(mn people) Gamer-forum apps Manga apps 6.00 5.61

5.00 4.60 4.01 4.00 3.30 2.85 3.00 2.57 5.32 2.20 2.00 4.30 3.62 2.00 2.79 1.32 2.38 1.08 1.50 2.04 0.88 1.02 1.00 0.59 0.31 0.65 0.26 0.25 0.25 0.26 0.18 0.92 0.59 0.70 0.71 0.67 0.70 0.53 0.47 0.51 0.00 0.26 0.25 0.25 0.26 0.39 0.30 0.29 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY08/16 FY08/17 FY08/18 FY08/19

Source: Shared Research based on company data Note: MAU figures are average values for each quarter.

Manga apps business environment The paper-based manga market has continued to shrink, but in recent years, growth of the e-manga market has exceeded the rate of contraction of the paper-based manga market, and in a broad sense, the manga market as a whole is growing. In general, all players in the e-manga market are benefitting from growth of the e-manga market, but in the case of and factory, growth in MAU of its apps is outstripping average growth of the market.

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Manga is generally read for leisure, so it is in competition with other forms of entertainment for leisure time. With the spread of smartphones, though, manga can now be enjoyed even when time is short, and the company has been devising methods to encourage use of its apps even for a short period of time, such as by further dividing up manga apps instalments.

Manga UP!: A smartphone manga app developed with Square Enix Co., Ltd. and launched on January 7, 2017. In addition to content from the manga magazine Gangan, the app distributes original Manga UP! content.

Features:

◤ Square Enix’s popular manga lineup: Serial publication of the company’s manga magazines, such as Monthly Shonen Gangan for boys, Young Gangan for young men, and Monthly Gangan JOKER, as well as original works and other companies’ titles. Usually contains more than 100 works and is updated daily.

◤ Free to use: Under this consumption pattern, users are allocated “manga points” (MPs), which indicate how much content they may view free-of-charge. The balance is automatically refilled to a maximum of 80 MPs twice each day, at 8:00 am and 8:00 pm. (Generally, 20 MPs are required to view one chapter, so a user could view up to eight chapters per day for free.) In addition to MPs, users can earn MP+ points or buy Cs (coins)*8. MP+ points are obtained when users view commercial content, respond to surveys, or register and apply for affiliated companies’ services. The number of MP+ points that can be accrued is unlimited. Coins are used to make in-app purchases. An equivalent number of any of these types of points (20 MPs, 20 MP+ points, or 20 Cs) is needed to view one chapter, and exhausted points are subtracted in the same order (MPs first, then MP+ points, then and Cs). Some leading titles require MP+ points or Cs (cannot be viewed with MPs).

*8120 coins = JPY120; 240 coins (plus 10 MP+ for free) = JPY240; 360 coins (plus 20 MP+ for free) = JPY360

Manga Park: A smartphone manga app developed with Hakusensha, Inc. (a Shueisha Inc. affiliate) and launched on August 2, 2017. For the first time in the history of manga apps, Manga Park offers audio content performed by voice actors.

Features:

◤ Hakusensha’s popular manga lineup: In addition to content from the manga magazines Young Animal*, for young men, and Hana to Yume, for girls, the app distributes original Manga Park content.

◤ Free to use: Under this consumption system, users are allocated FREE Coins, which indicate how much content they may view free-of-charge. The balance is automatically refilled to a maximum of 80 coins twice each day, at 6:00 am and 9:00 pm. (Generally, 20 coins are required to view one chapter, so a user could view up to eight chapter per day for free.) In addition to FREE Coins, Bonus Coins and, simply, Coins are available. Bonus coins can be obtained by registering for other company services or installing certain apps, while Coins*9 are points that can be bought and used for in-app purchases. An equivalent number of any of these types of coins (20 FREE Coins, 20 Bonus Coins, or 20 Coins) is needed to view one chapter, and spent coins are subtracted in the same order (FREE Coins first, then Bonus Coins, and then Coins). Some leading titles require Bonus Coins or Coins (cannot be viewed with FREE Coins).

*9120 coins = JPY120; 240 coins = JPY240; 360 coins = JPY360

◤ Other content: In addition to manga, the app offers audio content performed by voice actors and videos of pop idols.

Manga Mee: The company developed this free manga app together with Shueisha Inc. and launched it on November 1, 2018. This app provides Shueisha’s titles for girls and young women, including magazines Ribon, Margaret, Bessatsu Margaret, Cocohana, Cookie, The Margaret, and Monthly office YOU. The app also enables users to view original content and popular completed works that change daily. A number of projects are underway on the app to freshen up content, such as a special fan comic using the Chibi Maruko-chan character and a project that involves re-releasing past manga in color versions. The company has even created a new prize for popular new content.

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Features:

◤ Shueisha’s popular manga catalog: Shueisha is one of Japan’s longest-selling comic publishers, having launched Ribon more than 60 years ago, in 1955. Users of the app have access to this catalog, which included some 90 works at the time the app was launched.

◤ Free to use: Content is distributed per chapter rather than per volume. The app adopts a “wait-to-read” formula, in which free app users need to wait 23 hours until they are issued a ticket to read the next installment. Users can also purchase coins that enable them to continue reading as much as they wish.

◤ Magazine subscription: Subscribers get access to the online editions of manga magazines, which are available on the app the day the print editions go on sale. Readers can avoid the hassle of carrying around printed magazines or forgetting to purchase the material.

◤ UI design: Two types of manga readers are available, allowing users to read horizontally or vertically.

Comic every: On December 19, 2018, and factory launched Comic every, a free manga app, in collaboration with Beaglee Inc. (TSE1: 3981), Japan’s leading company in e-comics, in terms of performance. The company explains that the new manga app will incorporate and factory’s expertise in app operation and UI/UX design and Beaglee’s ability to source extensive content. The app will be aimed at creating an “individualized manga experience” for each user, providing a service that goes beyond generation and gender.

Features:

◤ At the time of its release, Comic every already offered more than 15,000 manga titles, one of the largest collections among free manga apps. It also distributes original content from Beaglee for free. Moving forward, and factory also plans on offering original manga exclusive to Comic every.

◤ Free to use: Content is distributed per chapter rather than per volume. The app adopts a “wait-to-read” formula, in which free app users need to wait three hours until they are issued a ticket to read the next chapter. Users can recover one of these free tickets for every three hours spent waiting and can possess a maximum of four tickets at once. A user can enjoy a maximum of eight chapters in one day if he or she does not forget to use these free tickets when they become available.

Sunday Webry: On August 2019, the company completely overhauled Sunday Webry through a business tie-up with Shogakukan and now operates the app. The app carries manga from three publications (Weekly Shonen Sunday, Gessan, and Monthly Sunday Gene-X) in addition to original content.

Features:

◤ Free to use: Users can use three types of items to gain access to manga: tickets, coins, and points. It costs one ticket to view one chapter of manga. Tickets (and viewable manga works) refresh every 23 hours. All works can be viewed for the cost of one ticket per chapter. Users can also purchase individual volumes of manga that contain multiple chapters.

◤ Users can read popular manga serialized in publications such as Weekly Shonen Sunday, in addition to exclusive Sunday Webry originals. Users also have the option of subscribing to Weekly Shonen Sunday, Gessan, and Monthly Sunday Gene-X.

Manga TOP: A smartphone manga app developed through collaboration with Nihon Bungeisha Co., Ltd. and launched in November 2019. Manga TOP carries popular titles, including Manga Goraku, Comic Heaven, and Web Goraku.

Features:

◤ Basically free to use: Grants points that are worth three story units at 7:00 AM, 12:00 PM, and 9:00 PM, allowing users to read manga while commuting, taking lunch breaks, and eating dinner. Users can read more manga by viewing advertisements.

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◤ Offers a large amount of content for relatively older males, including titles of the horror, suspense, and outlaw genres.

Business policy and strategy In the Smartphone Apps business, one of the company’s business policies is to create businesses by investing management resources in areas of growth within the smartphone apps market. Currently, the company is focusing on online forum apps for multiplayer games and manga apps, as it sees smartphone game apps (market size as of FY2018 valued at JPY1.1tn according to the Yano Research Institute) and manga apps (market size as of FY2018 valued at JPY282.6bn) as growth areas. (See the “Market and value chain” section.) Although the market for smartphone games is large, games require huge amounts of money and time to develop, and competition to attract users is fierce. Consequently, creating major hit titles is no easy task. As chances of failure are high, rather than developing smartphone game apps itself, the company’s strategy is to generate stable earnings by providing online forums for popular multiplayer game apps (offered by other companies) through which users can acquire tips and recruit co-players.

As with game apps, the company’s strategy in manga apps is to form alliances with large publishers rather than aggressively develop and launch original titles that could either be very successful or very unsuccessful. and factory works with large publishers, providing the popular titles they own. The two sides share the development and promotional risks. The company plans to continue developing and releasing more manga apps under this model.

Collaboration with multiple large publishers The value chain for e-comics includes the author, production company, publisher, e-comics agent, and e-comics store. (See the “Market and value chain.”) and factory has adopted a strategy of working with multiple large publishers: Square Enix Co., Ltd. (TSE1: 9684), Hakusensha, Inc. (an affiliate of Shueisha Inc.), Shueisha Inc., and Shogakukan. The company collaborates with these publishers to develop manga apps for smartphones, operating a separate app for each publisher. For this reason, and factory differs from many e-comics stores in that it does not need to source individual content via agents.

Distribution infrastructure As of January 2020, the company outsources the development and operation of manga app servers to Link-U inc. (TSE Mothers: 4446). Link-U provides original servers that are uniquely designed for individual services. The company uses servers from Link-U because it collaborated with Link-U when launching joint manga app development with Square Enix. Publishers do not direct the company in how it constructs its distribution infrastructure. Rather, the company mostly considers these decisions independently.

Gamer-forum apps for social media games (&AND APPS) The company’s Saikyo Series (a series of gamer-forum apps) provides online forums for popular social media games run by other companies through which app users can recruit co-players and discuss tips and tricks to advance their play. and factory distributes the Saikyo Series via Apple Inc.’s App Store and Google Inc.’s Google Play. Key apps in this series are [Saikyo] Multiplayer Gamer Forum for Granblue Fantasy, [Saikyo] Multiplayer Gamer Forum for Puzzle & Dragons, [Saikyo] Multiplayer Gamer Forum for Monster Strike, and [Saikyo] Multiplayer Gamer Forum for White Cat Project. The company offers a different app for each game, which provides opportunities for users to actively exchange opinions. In FY08/19, this category generated 11.1% of sales.

Business model for the Saikyo Series The Saikyo Series generates revenue through advertising, which comes in two forms.

◤ Affiliate*10 revenues generated through purchases of in-app items*11 via and factory’s apps (Note: Apple discontinued its affiliate program for apps and in-app content on iOS and Mac in October 2018; see below for more information)

◤ Revenue generated when app users click on advertising banners placed through ad networks

*10 An arrangement through which an advertiser’s products or services are offered through third-party apps or sites. The companies managing these apps or sites receive compensation (advertising revenue) if the user purchases the products or services advertised after tapping the advertisements on screen.

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*11 Items that can be added to a user account to enhance player characteristics by, for example, speeding recovery or increasing power. Some items create advantages or can help users progress in the game and still others are tools of convenience.

In Q1 of FY08/20, MAUs numbered approximately 270,000 people (-47.1% YoY). In the same period, ARPU (average revenue per user; monthly advertising revenue per MAU) was JPY78 (+95.1% YoY). Principal costs were app development expenses and costs for attracting new users (advertising expense).

Starting into official apps The company has developed and operates the Saikyo Series message board-style app that allows users to exchange tips and recruit co-players for popular smartphone game apps provided by other companies. In addition, and factory intends to launch official game-walkthrough apps. By creating official game-walkthrough apps that interface with social games, the company aims to create a new business model employing additional monetization methods (refer to the “Medium-term management outlook”).

Discontinuation of Apple’s affiliate program In August 2018, Apple announced that, as of October 1, 2018, it would discontinue its affiliate program for apps and in-app content on iOS and Mac. Launched on September 1, 2004, the program provided a commission to individuals or companies that linked to an Apple product when a purchase was made. In November 2016, Apple reduced commissions under the affiliate program from 7% to 2.5%. As of October 1, 2018, commissions had been removed completely. Apple explained that it had discontinued the program for apps because its launch of the Apple Store for the new iOS and MacOS made apps easier to find. The program continues to cover music, movies, books, and all other content.

The company is affected by the discontinuation of the App Store, as some revenue from the Saikyo Series depended on and factory’s affiliation with the App Store. No longer able to receive a 2.5% commission, the company aims to cover this shortfall through other ads. The company is also developing new earning methods, such as launching the official apps outlined above.

IoT business (in FY08/19, 41.7% of sales and 22.8% of operating profit)

IoT FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 Sales and profit (JPYmn) Act. Act. Act. Act. Act. Sales nana638002,056 YoY - - - 1179.6% 157.0% % of total sales - - 9.1% 41.7% 52.5% Operating profit na na -30 142 194 YoY ----0 % of total OP - - - 22.8% 24.1% OPM - - - 17.8% 9.5% &AND HOSTEL (buildings) na na na 6 9 YoY ----50.0% intto installation (no. of facilities) na na na 89 232 YoY - - - - 160.7% tabii (units) na na na 275 2853 YoY - - - - 937.5%

Source: Shared Research based on company data

In this segment, the company plans, develops, and operates the &AND HOSTEL brand of smart hostels. Also, in this segment, and factory provides IoT solutions for lodging facilities, including innto (a property management system) and tabii (a tablet-based service).

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The three main elements of the IoT business

Source: Shared Research based on company data

Organization of the IoT business

&IoT (and factory)

Plan, develop Owners (companies) Feedback data Pay fees IoT device manufacturers &AND HOSTEL Prov ide services Provide device and API Pay fees

Pay fees Accommodation Prov ide services Co-develop facilities Users innto Pay fees Pay fees Partner Prov ide services companies List ads tabii Advertiser Request Pay Ad (companies) ad listing fees agencies Projects Co-develop other than Provide services accommodation Pay fees Provide data Source: Shared Research based on company data Business model for &AND HOSTEL smart hostels The company plans, develops, and operates the &AND HOSTEL brand of smart hostel facilities, which enable guests to experience IoT devices. These smart hostels use the company’s platform app (called &IoT; see the “Business policy and strategy” section) and IoT to provide comfortable guest environments. The company had opened 11 such hostels as of end-November 2019

&AND HOSTEL breaks down into two business categories: The first involves planning and developing facilities on property owned by other parties (seven locations planned as of end-2018). The second category entails acquiring property, planning and developing &AND HOSTEL facilities, and selling them to investors (two locations, each requiring JPY500–600mn). In the first instance, the company receives compensation for consulting, real estate brokerage and other services. In the second, and factory earns gains on the sale of real estate. The company generates relatively high profits in the case of the latter, although it is exposed to real estate investment risk (price fluctuation risk, disaster risk, etc.). The company runs the hostels itself in both cases and receives compensation from hostel owners in return.

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As the hostels are dormitory-style (shared room accommodation facilities), accommodation prices do not vary significantly by season. Inbound tourists account for 60–70% of guests, who are mostly male. Guests are mainly attracted through online travel agents (OTAs), such as Expedia and Booking.com.

&AND HOSTEL locations Facility Location Opened Capacity No. of rooms ＆AND HOSTEL Hakata-ku, Fukuoka, Fukuoka Aug 2016 48 11 rooms FUKUOKA (Two minutes' walk from the nearest station) ＆AND HOSTEL Taito-ku, Tokyo Apr 2017 36 8 rooms ASAKUSA NORTH (Six minutes' walk from the nearest station) ＆AND HOSTEL Taito-ku, Tokyo May 2017 32 12 rooms UENO (Seven minutes' walk from the nearest station) ＆AND HOSTEL Chiyoda-ku, Tokyo 12 rooms Jan 2018 54 AKIHABARA (Three minutes' walk from the nearest station) + 30 beds ＆AND HOSTEL Chiyoda-ku, Tokyo 11 rooms Feb 2018 61 KANDA (Four minutes' walk from the nearest station) + 42 beds ＆AND HOSTEL Taito-ku, Tokyo 14 room Feb 2019 56 ASAKUSA (8–10 minutes' walk from the nearest stations) + 28 beds ＆AND HOSTEL Taito-ku, Tokyo Aug 2019 54 27 rooms MINOWA (Five minutes' walk from the nearest station) ＆AND HOSTEL Chuo-ku, Osaka 66 room Aug 2019 150 HOMMACHI EAST (Five minutes' walk from the nearest stations) + 14 beds ＆AND HOSTEL Taito-ku, Tokyo 17 rooms Oct 2019 58 KURAMAE WEST (Six minutes' walk from the nearest station) + 24 beds ＆AND HOSTEL Chuo-ku, Osaka 63 room Nov 2019 150 SHINSAIBASHI EAST (Six minutes' walk from the nearest stations) + 20 beds ＆AND HOSTEL Arakawa-ku, Tokyo 53 rooms Nov 2019 120 MINAMISENJU (Six minutes' walk from the nearest station) + 14 beds

Source: Shared Research based on company data

Exterior of ＆AND HOSTEL AKIHABARA

Source: and factory website

Business model for innto innto is a property management system* for smart hostels that and factory developed jointly with open innovation partner Almex Inc., of the USEN-NEXT Group. As of end-November 2019, the system had been installed at 295 locations. innto enables the centralized management of information related to guest rooms: reservations, room rates, available rooms, and fees. To date, most systems of this sort have been aimed at medium- to large-scale facilities. Such systems were ill-suited to smaller properties because startup costs were high and the time between initial contract and the start of service was long. Aimed at simple lodging facilities, innto is cloud-based, can be launched quickly, and has low launch and running costs. The service also draws on and

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factory’s UI/UX design expertise, which the company says makes operations intuitive and convenient. The company shares revenue with Almex on system sales and also receives recurring revenue from system maintenance and operation. Initial setup is free.

* The broad definition refers to management systems that cover entire hotels or other facilities. In a narrow sense, a property management system is used for rooms only. innto, which is used only for rooms, aims to make the operation of lodging facilities more efficient and save resources. Its principal functions are reservation management, scheduling, room status monitoring, guest management, ledger and report generation, accommodation plan and fee scheduling, and master planning.

Comparison of property management systems Company System Description and factory developed this property management system with an open innovation partner (Almex Inc., a USEN-NEXT Group company). Aimed at simple lodging and factory innto facilities, this system enables the centralized management of information related to reservations, selling prices, room rates, availability, and fee. This portal system is provided by Almex Inc., a USEN-NEXT Group company. Designed for use at business hotels and other hotels where lodging is the focus, the Almex Inc. Wincal system has a simple interface and is designed to reduce the amount of work for front desk staff. The system is available in on-premise and cloud-based versions. This cloud-based hotel system has a market share of around 70%. Use ranges widely, from lodging-focused hotels to large city hotels. The company has installed NEC Corporation NEHOPS the system in numerous large-scale city hotels and nationwide chains of hotels with more than 300 locations. This cloud-based hotel system, provided by Fujitsu, has the top share of the market Fujitsu Limited GLOVIA for simple, non-customized, multitenant cloud-based property management systems. TAP Co., Ltd. TAP This system has a high share of the market for resort hotels, its forte.

This cloud-based hotel system has a top share of the market at foreign-owned Oracle Corporation Japan OPERA hotels and is installed at more than 40,000 locations worldwide.

Source: Shared Research based on data from the company and the Hotelier website (https: //www.hotelier.jp/support/pms.html)

Business model for tabii tabii is a service that and factory developed and is based around tablet devices placed in hotel guest rooms. (As of end-November 2019, 3,713 tabii tablets were in operation.) The company earns advertising revenue, such as placement fees for ads viewed on these in-room tablets. The tablets not only offer information specific to the facility but also information on local restaurants and tourist spots, as well as a wide range of selectable entertainment content (including music and comedy videos). According to the company, this service, designed to enhance the guest’s travel experience, raises the perceived room value for the hotel’s diverse customer bases.

Facilities that use tabii save costs by making service guides, terms and conditions, and other documents available electronically. The company explains that tabii-based help screens and Q&A chatbots address many guest questions, reducing the need for guests to telephone staff or request personal assistance. As a result, hotels can increase operating efficiency without boosting running costs.

As tabii uses an advertising-based model, lodging facilities pay no monthly fees, and the service is available free of charge to guests.

Business policy and strategy In the IoT business, the company seeks to apply the UI/UX technologies it accumulated through the Smartphone Apps business, along with expertise in data analysis and monetization methods, to prompt innovation in areas where technology adoption is currently lagging, such as real estate, housing, and healthcare. and factory also promotes IoT through &IoT, a platform app. This app integrates the operation of individual IoT devices via their APIs (which are provided by the device manufacturers). In addition to improving device operability, &IoT streamlines customer operations. By combining &IoT, innto (property management system), and tabii (tablet-based service for hotels), the company aims to expand its platform business by utilizing big data obtained from IoT devices.

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For example, hotel guests can use tablets to operate IoT devices. This approach automates a range of hotel business activities, from room reservations to the services provided during a guest’s stay, reducing staff requirements, saving resources, and improving operating efficiency. At the same time, analyzing the big data obtained on tablets from the IoT devices in individual guest rooms can help hotels understand guest characteristics and preferences and optimize hospitality for the guest’s next stay. The company aims to develop a highly targeted marketing business through these IoT strategies.

Strategy for the IoT business

Source: Shared Research based on company data

Other businesses (8.4% of sales in FY08/19)

In this segment, and factory mainly conducts an advertising agency business, distributing ads to smartphone apps and media operated by other companies.

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Market and value chain

E-book industry Market scale According to research by Impress Research Institute, the e-book market was worth JPY282.6bn (+26.1% YoY) in FY2018. This represents CAGR of 24.7% from JPY93.6bn in FY2013. Impress expects the market to continue growing, reaching JPY433.0bn in FY2023 (CAGR of 8.9% over the five years from FY2018 through FY2023).

Digital publishing (e-books + e-magazines) market scale (JPYbn)

(JPYbn) E-books E-magazines 500 461.0 442.8 450 421.5 28.0 28.0 393.5 400 28.0 362.2 28.5 350 29.0 312.2 300 29.6 255.6 250 227.8 31.5 30.2 414.8 433.0 200 182.6 393.5 365.0 24.2 141.1 333.2 150 282.6 101.3 14.5 7.7 224.1 100 76.8 197.6 65.6 65.1 57.4 2.2 3.9 158.4 46.4 126.6 50 35.5 93.6 18.2 62.9 72.9 1.0 1.8 4.5 9.4 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F FY22F FY23F

Source: Shared Research based on data from Impress Research Institute

E-book market scale (JPYbn)

(JPYbn) E-comics Other e-books E-comics as % of total publishing industry market (right axis) E-books as % of total publishing industry market (right axis)

300 282.6 25.0%

21.9% 250 43.9 224.1 20.0%

197.6 200 39.6 16.4% 18.5%

35.9 15.0% 158.4 13.4% 150 126.6 30.8 13.5% 10.4% 10.0% 24.2 11.0% 93.6 100 7.9% 72.9 20.5 8.4% 62.9 5.6% 15.5 6.4% 11.5 4.2% 5.0% 50 3.5% 4.3% 2.8% 3.3% 51.4 57.4 73.1 102.4 127.7 161.7 184.5 238.7 0 0.0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: Shared Research based on data from Impress Research Institute and All Japan Magazine and Book Publisher’s and Editor’s Association

E-comics account for more than 80% of e-books, driving growth in the e-book market. E-comics achieved CAGR of 24.5% between FY2011, when the market was worth JPY51.4bn, and FY2018, when it was worth JPY238.7bn. This is in direct contrast to the publishing industry, comprising primarily printed books and manga, which shrank by an annual average of 3.2% to JPY1.3bn in FY2018 over the 22 year since its peak at JPY2.7tn in FY1996. The e-comics market accounted for 2.8% of the overall publishing market in FY2011, but this was up to 18.5% by FY2018, an increase of 15.7pp over seven years.

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(Reference) Publishing industry market scale (JPYbn)

(JPYbn) Magazines Books

3,000 2,656.38

2,500

2,000 1,292.10

1,500

1,000

500

74.40 0 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Shared Research based on data from the All Japan Magazine and Book Publisher’s and Editor’s Association Factors in e-book market expansion Shared Research sees the following factors as being behind the expansion of the e-book market, with e-comics as the growth driver.

◤ Spread of smartphones, tablets, and other smart devices: Since 2010, consumer possession of smart devices has rapidly increased to the point that most people now regularly have a device close at hand. Smartphones have larger screens than older mobile phones, making them easier on the eyes, and many people also have tablets with even bigger screens.

Households using mobile phones, smartphones, and tablets (Japan)

Mobile phones Smartphones Tablets 96.3% 94.4% 95.0% 95.6% 93.2% 94.5% 94.5% 94.5% 94.8% 94.6% 94.7% 94.8% 95.7% 100% 92.2% 90.0% 91.3% 90% 82.6% 78.5% 78.2% 79.2% 75.1% 80% 72.0% 71.8% 70% 62.6% 64.2% 60% 49.5% 50% 40.1% 36.4% 40% 33.3% 34.4% 29.3% 26.3% 30% 21.9% 20% 15.3% 9.7% 8.5% 10% 0% 7.2% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Shared Research based on Survey on IT Use from the Ministry of Internal Affairs and Communications *“Mobile phones” includes PHS, PDAs from 2009 to 2012, and smartphones from 2010. Value chain for the e-book market The e-book value chain includes players such as the author or production company, publisher, e-book agent*, and e-bookstore. The flow of e-book sales and distribution is typically as follows: First, a work produced by a writer with the help of an editor at a publishing company is processed by a production company (contracted by the publisher) into digital content ready for distribution. The publisher concludes a sales agreement with an e-book agent and requests the securing of sales routes. The e-book agent then concludes sales agreements with multiple e-bookstores to secure sales routes. Afterward, the publisher sends the digital content and book data processed by the production company to the e-book agency, and the e-bookstores with which the agency has concluded agreements sell and distribute the digital content to consumers.

The e-book agency not only collects and manages digital content, but also keeps track of e-bookstores’ sales and distribution performances for reporting to the publisher. However, in some cases the roles of each player are not distinct. For example, an e-book agency may conduct production and distribution functions in addition to normal agency work, or a publisher may operate its own e-bookstore.

*The sale of published material (printed books) in Japan is covered by two legal systems: the resale price maintenance system (resale system) and the consignment sales system. Agency functions for e-books differ from printed material in that there is no delivery of physical product from the publisher or printer to bookstores and no collection of unsold products. In terms of printed matter, the agency also performs financial functions in the event of any hold-up in collections from bookstores or advance payments to the publisher, but such functions are not necessary in the case of e-books.

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Value chain for e-book market General e-book business and factory Infocom Amazon Rakuten Sony Toppan Printing Dai Nippon Printing

Kindle Kobo Reader (sales discontinued) Lideo (sales discontinued) Smartphone Users (devices) smartphones Smartphones Smartphones Smartphones Smartphone (Android) Smartphones, PCs PC Content Payment (Comic apps) Meccha Comics Reader Store E-book store Kindle Store Rakuten Kobo BookLive! honto and factory ekubostore BookWeb Plus Content Payment (Content) Infocom booklista Bitway E-book agents Media Do MobileBook.jp from publishers (Sony, Toppan, others) (Toppan Printing) Content Payment - Square Enix - Hakusensha Publishers Publishers Publishers Publishers Publishers Publishers - Shueisha Content Payment Content Payment

Authors and producers Authors and producers Authors and producers Authors and producers Authors and producers Authors and producers Authors and producers

Source: Shared Research based on Trends in the Electronic Book Market from Japan Fair Trade Commission’s Competition Policy Research Center, Beaglee Inc. Share Issue and Stock Reporting Prospectus, and Basic Textbook on E-Book Production and Circulation, edited by Yashio Uemura Factors differentiating e-book apps E-bookstores typically compete based on, and differentiate themselves through, content, price, usability, marketing and promotion, and overseas development. In terms of content, they can set themselves apart by harnessing IT technologies such as AI, strengthening product lineups and conducting initial exclusive distribution. Usability includes ease of reading (e.g., vertical scrolling), faster download speeds, and enhanced search and e-bookshelf functions. In terms of marketing, an e-bookstore spends on advertising and promotion to improve its brand power and uses free content and banner ads to attract new members.

E-bookstore fees: the rise of free apps and the subscription model E-bookstores use a range of fee systems, including monthly payments, per-book purchases, rental fees, and subscription models. They also employ free models that distribute titles and collect advertising revenue. The company’s manga apps utilize a hybrid model that both distributes titles for free while collecting advertising revenue and charges in-app fees (See the “Business overview” section for details on the company’s business model). With the monthly fee model, users pay a set amount each month and use points granted in line with this amount to purchase content. With the per-book model, users pay a designated amount each time they purchase content. The rental model includes both monthly and per-book fees, but content cannot be viewed after a certain period of time. The subscription model allows unlimited reading for a fixed monthly fee. Examples of this model are Amazon’s Kindle Unlimited (JPY980 monthly, tax included), the Book Pass (KDDI) monthly all-you-can-read plan (JPY606), and the COMIC C’moA (NTT Solmare Corporation) all-you-can-read light plan (JPY780) and full plan (JPY1,480). NTT Docomo’s fixed-price all-you-can-read service d-Magazine (JPY432), primarily for e-magazines, began in June 2014 and has steadily grown its user count, reaching 3.3mn by the end of March 2016. Kindle Unlimited, which expanded services to include Japan starting on August 3, 2016, enables unlimited reading of more than 120,000 Japanese books, 30,000 comics and magazines, and 1.2mn foreign books for a fixed monthly fee of JPY980.

Online game industry

According to the JOGA Online Game Market Research Report 2019 (issued by Japan Online Game Association), the 2018 domestic online game market was down 3.7% YoY to JPY1.3tn. Within this market, the smart device (smartphones, tablets) game market was worth JPY1.2tn (-3.0% YoY), the online PC game market JPY77.3bn (-7.5% YoY), and the social game (mainly feature phones) market was worth JPY30.1bn (-20.6% YoY). The smart device game market, which had been growing, shifted to decline, contributing to an ongoing overall downward trend in the overall market. Possible reasons for this are slow growth in game users caused by the slowing spread of smartphones and rapid increase in directly distributed game titles from overseas. Many game titles directly distributed to users in Japan are Chinese game titles.

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Domestic online game market trends

(JPYbn) Feature phones Smartphones and tablets PCs and consumer game machines 1,360 1,400 1,309 1,280 38 36 30 1,200 1,104 53 1,000 931 842 80 800 161 1,239 577 1,152 1,202 600 945 407 736 400 357 550 236 230 200 129 153 82 102 113 103 37 78 58 0 5 23 82 102 112 124 130 133 141 142 131 115 106 92 84 0 58 77 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Shared Research based on data from JOGA “Online Game Market Research Report 2018” and other sources

According to the 2019 Internet White Paper (Internet White Paper Editorial Committee), the online game market is beginning to stagnate, and companies seeking to expand overseas face challenges (possible regulation in response to market risks and “loot box issues”; explained in more detail below). However, the document also indicates that Blockchain, VR, and e-Sports may be the keys to overcoming these challenges. For example, the document points out that, regardless of the country, new gaming platforms could quite possibly emerge moving forward, in the same way that smartphones and tablets pushed aside feature phones at the beginning of the 2010s. Furthermore, the Internet White Paper also mentions the possibility of a paradigm shift in monetization that would expand the relationship between games and business, much in the way that the shift from package sale and monthly subscription business models to models that levy no basic charges but collect item-based fees has. Providing signs of this possibility, the document lists VR (VRChat and virtual YouTubers), Blockchain games (DApps), and e-Sports that have emerged during 2017–2018 as potential footholds for new business models for online games.

The domestic online game market became a trillion-yen industry in 2015 and has continued to expand since then. With gaming entering consumers’ lives as a commonplace form of entertainment, consumer concern regarding the transparency of screen displays regarding gacha is just one example of the issues tackled not just by individual companies offering games, but by the government and the gaming industry, including platform operators. As devices and telecommunications continue to evolve, it is likely that new gaming formats and business models will arise. The white paper concludes that for the future of this trillion-yen industry, it will be critical to protect consumers and abide by the law when responding to these changes.

According to the “Global Games Market Report 2019” by Newzoo, global game software revenue is projected to grow from USD138.7bn in 2018 to USD196.0bn in 2022. Of this, mobile games (Ateam’s strength) are expected to grow from USD62.2bn to USD95.4bn in the same time period (for an annual growth rate of 11.3%). Also, during the same period, the share of mobile games within the game software market is also projected to grow from 35% to 41%. Meanwhile, console games, which have the second largest share of the global games market next to mobile games, are expected to grow and reach USD61.1bn of the market in 2022 (an annual growth rate of 9.7% over 2018–2022) while PC games are also projected to grow and take USD39.5bn of the market (an annual growth rate of 3.5% over 2018–2022).

IoT industry

According to data from IHS Technology cited in the Ministry of Internal Affairs and Communications’ 2018 White Paper on Information and Communications in Japan, the number of IoT devices* connected to the internet is expected to rise from 27.5bn in 2017 to 40.3bn in 2020 (growth of 1.47x). Due to the continuous progress of internet and sensor technologies, around the world a host of new items (such as consumer electronics, automobiles, buildings, and factories) are slated for connectivity, in addition to those that are already connected (such as PCs and smartphones). As of 2017, smartphones and other communication devices made up the largest share of IoT devices around the world. As this market is maturing, the authors of this white paper predict growth in this category will be relatively low. They anticipate sharp increases in the categories of “automobiles and transportation equipment,” due to the shift to IoT as connected cars become more common; in “healthcare” as the digital

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healthcare market expands; and in “industrial applications (factories, infrastructure, and logistics)” as the numbers of smart factories and smart cities increase.

* According to IHS Technology’s definition, an IoT device is a device or sensor network terminal that has a unique IP address and can be connected to the internet.

IoT devices around the world

(bn) 50 45 40.30 40 0.617 35.44 1.44 Medical, defense, 0.507 35 31.05 1.16 aerospace 0.416 9.49 Automotive 30 27.49 0.92 7.28 0.345 2.19 24.10 0.284 0.75 5.45 Industrial 25 0.234 4.24 2.2 20.51 2.21 7.63 0.203 3.27 0.60 2.22 6.72 20 17.07 2.2 5.93 Computer 2.49 5.2 15 1.82 2.11 0.47 4.53 1.93 0.38 3.89 Consumer 3.38 10 17.57 18.93 13.22 14.73 16.12 Communication 5 9.36 11.31 0 2014 2015 2016 2017 2018 Est. 2019 Est. 2020 Est.

Source: Shared Research based on data from IHS Technology from the 2018 White Paper on Information and Communications in Japan, Ministry of Internal Affairs and Communications

Internet advertising market

According to Japan’s Advertising Spending study by Dentsu, the size of the internet advertising market in Japan was JPY1.7tn in 2018 (with media spending of JPY1.4tn and production costs of JPY310.9bn). Internet advertising surpassed radio advertising in 2004, magazine advertising in 2006 and newspaper advertising in 2009. At the time of the Dentsu study, internet advertising was second to television (29.3%) with a 26.9% share of total advertising spending. While advertising spending has been falling for the four traditional mass media formats of television, newspapers, radio and magazines, internet advertising spending is growing.

Advertisement costs by media format

Ad spending (JPYbn) YoY (%) % of total ad spending 2016 2017 2018 2016 2017 2018 2016 2017 2018 Total advertising spending 6,288.0 6,390.7 6,530.0 101.9 101.6 102.2 100.0 100.0 100.0 Four mass media ad expenses 2,859.6 2,793.8 2,702.6 99.6 97.7 96.7 45.5 43.7 41.4 Newspapers 543.1 514.7 478.4 95.6 94.8 92.9 8.6 8.1 7.3 Magazines 222.3 202.3 184.1 91.0 91.0 91.0 3.5 3.2 2.8 Radio 128.5 129.0 127.8 102.5 100.4 99.1 2.0 2.0 2.0 TV 1,965.7 1,947.8 1,912.3 101.7 99.1 98.2 31.3 30.5 29.3 Internet ad expenses 1,310.0 1,509.4 1,758.9 113.0 115.2 116.5 20.8 23.6 26.9 Media expenses 1,037.8 1,220.6 1,448.0 112.9 117.6 118.6 16.5 19.1 22.2 Ad production expenses 272.2 288.8 310.9 113.4 106.1 107.7 4.3 4.5 4.8 Promotional media expenses 2,118.4 2,087.5 2,068.5 98.9 98.5 99.1 33.7 32.7 31.7

Source: Shared Research based on Dentsu’s Japan’s Advertising Spending study

Within the expanding market for internet advertising, growth is particularly pronounced in the area of programmatic advertising that leverages automated ad technology to maximize advertising revenue and ad effectiveness. Programmatic advertising grew 27% YoY in 2017 to JPY1.1tn, marking continuous annual growth of around 20%.

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(JPYbn) 2012 2013 2014 2015 2016 2017 2018 Total advertising expenditures 5,891.3 5,976.2 6,152.2 6,171.0 6,288.0 6,390.7 6,530.0 Internet advertising expenditures 868.0 938.1 1,051.9 1,159.4 1,310.0 1,509.4 1,758.9 YoY 7.7% 8.1% 12.1% 10.2% 13.0% 15.2% 16.5% % of total advertising expenditures 14.7% 15.7% 17.1% 18.8% 20.8% 23.6% 26.9% Production costs 205.1 217.8 227.4 240.0 272.2 288.8 310.9 Medium expenditures 662.9 720.3 824.5 919.4 1,037.8 1,220.6 1,448.0 Display 498.8563.8 Paid search 483.1570.8 Video 29.0 51.6 86.9 115.5 202.7

category Affiliate 104.999.0 Advertising Other 18.311.7 Performance-based 339.1 412.2 510.6 622.6 738.3 940.0 1,151.8 Reserved 153.8175.8197.1 method

Transaction Affiliate 145.7104.899.1 Mobile 80.0 207.3 345.0 497.9 647.6 831.7 1,018.1 Desktop 582.9 513.0 479.5 421.5 390.2 388.9 429.9 Device Changes in media exposure time are behind this growth trend in internet advertising. Exposure time to the four mass media has been on a downward trend, whereas exposure time to the Internet continues to increase. Hakuhodo DY Media Partners’ Time Series Analysis from the Annual Media Consumption Report 2019 (survey period: January 24 to February 8, 2019) shows that in the past 10 years, contact time with television, radio, newspapers, and magazines has declined by annual rates of 0.6%, 2.2%, 4.4%, and 4.9%, respectively, whereas contact time with the Internet has been increasing at an annual rate of 9.1%. As consumers spend more time (or at least increase the proportion of the total time spent) viewing and using the internet, advertisers will likely continue to allocate more of their budgets to internet advertising.

Use of four mass media and internet 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (average minutes per day) Total 323.9 347.9 350.0 351.4 353.1 385.6 383.7 393.8 378.0 396.0 411.6 (YoY) 1.4% 7.4% 0.6% 0.4% 0.5% 9.2% -0.5% 2.6% -4.0% 4.8% 3.9% Television 163.5 172.8 161.4 161.4 151.5 156.9 152.9 153.0 147.3 144.0 153.9 (YoY) 1.3% 5.7% -6.6% 0.0% -6.1% 3.6% -2.5% 0.1% -3.7% -2.2% 6.9% (% of total) 50.5% 49.7% 46.1% 45.9% 42.9% 40.7% 39.8% 38.9% 39.0% 36.4% 37.4% Radio 31.1 28.7 33.0 31.9 35.2 30.5 28.9 30.1 24.5 24.2 25.0 (YoY) -11.6% -7.7% 15.0% -3.3% 10.3% -13.4% -5.2% 4.2% -18.6% -1.2% 3.3% (% of total) 9.6% 8.2% 9.4% 9.1% 10.0% 7.9% 7.5% 7.6% 6.5% 6.1% 6.1% Newspaper 26.0 27.8 23.3 24.0 27.1 23.4 19.9 20.4 19.8 15.9 16.6 (YoY) -8.8% 6.9% -16.2% 3.0% 12.9% -13.7% -15.0% 2.5% -2.9% -19.7% 4.4% (% of total) 8.0% 8.0% 6.7% 6.8% 7.7% 6.1% 5.2% 5.2% 5.2% 4.0% 4.0% Magazine 17.6 16.0 18.6 16.6 16.0 13.6 13.0 13.8 11.9 12.3 10.7 (YoY) 2.9% -9.1% 16.3% -10.8% -3.6% -15.0% -4.4% 6.2% -13.8% 3.4% -13.0% (% of total) 5.4% 4.6% 5.3% 4.7% 4.5% 3.5% 3.4% 3.5% 3.1% 3.1% 2.6% Internet 85.7 102.6 113.7 117.5 123.4 161.3 169.0 176.6 174.5 199.6 205.4 (YoY) 11.2% 19.7% 10.8% 3.3% 5.0% 30.7% 4.8% 4.5% -1.2% 14.4% 2.9% (% of total) 26.5% 29.5% 32.5% 33.4% 34.9% 41.8% 44.0% 44.8% 46.2% 50.4% 49.9% PC 67.6 77.4 81.7 77.1 72.8 69.1 68.1 61.0 59.3 66.6 59.0 (YoY) 13.8% 14.5% 5.6% -5.6% -5.6% -5.1% -1.4% -10.4% -2.8% 12.3% -11.4% (% of total) 20.9% 22.2% 23.3% 21.9% 20.6% 17.9% 17.7% 15.5% 15.7% 16.8% 14.3% Tablet na na na na na 18.2 20.6 24.9 25.0 29.9 28.8 (YoY) na na na na na na 13.2% 20.9% 0.4% 19.6% -3.7% (% of total) na na na na na 4.7% 5.4% 6.3% 6.6% 7.6% 7.0% Mobile 18.1 25.2 32.0 40.4 50.6 74.0 80.3 90.7 90.2 103.1 117.6 (YoY) 2.3% 39.2% 27.0% 26.3% 25.2% 46.2% 8.5% 13.0% -0.6% 14.3% 14.1% (% of total) 5.6% 7.2% 9.1% 11.5% 14.3% 19.2% 20.9% 23.0% 23.9% 26.0% 28.6% Source: Shared Research based on Hakuhodo DY Media Partners data

Shared Research thinks that the penetration of internet advertising will continue to rise as consumers spend more of their waking hours online (via PCs, smartphones, or other devices). Shared Research also thinks that one driver of growth in internet advertising is a greater emphasis on cost effectiveness. As companies look to market more effectively, they are likely to become increasingly open to flexible solutions, combining traditional mass-media advertising with other methods and approaches.

There are other business opportunities that have expanded with the proliferation of the internet. The value of payments made online has mushroomed. The table below shows changes in the size of the e-commerce market for B-to-C (business-to-consumer) transactions in Japan, based on Ministry of Economy, Trade and Industry (METI) statistics. E-commerce has continued to grow steadily and the ratio of e-commerce to the overall B-to-C market increased to 5.8% in 2017 and 6.2% in 2018.

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B2C market size in Japan 2008 2009 2010 2011 2012 2013 2014 2015 2016 20172018 (JPYbn) B2C e-commerce market size 6,089 6,696 7,788 8,459 9,513 11,166 12,797 13,775 15,136 16,505 17,985 YoY 13.9% 10.0% 16.3% 8.6% 12.5% 17.4% 14.6% 7.6% 9.9% 9.0% 9.0% E-commerce ratio 1.8% 2.1% 2.8% 3.2% 3.4% 3.9% 3.9% 4.8% 5.4% 5.8% 6.2% Source: Shared Research based on METI data

According to estimates published by the Nomura Research Institute in November 2015, the e-commerce market should reach JPY25.6tn (about double the FY2014 market size of JPY12.6tn) by FY2021. The spread of smartphones has made e-commerce accessible regardless of time and place, boosting market growth. The research also estimates that the Japanese smart payment market, which was JPY53.6tn in FY2014, will expand to JPY91.3tn by FY2021 as the government accelerates infrastructure improvement in preparation for the Tokyo Olympic Games. (Smart payment is a method for electronic payments between companies and consumers).

Real estate industry Japanese real estate transactions Market size Real estate trading volume in Japan was up 21.1% YoY in FY2017, but the volume of real estate transactions for listed companies was down 3.4% YoY to JPY1.8tn in 1H FY2018, and was down 34% YoY in July–December 2018. In addition to a decrease in the supply of properties on the market, overseas investors appear to be hesitant to buy as a result of rising property prices* (and a downward-trending cap rate**). On the other hand, the real estate fund market expanded 6.9% YoY to JPY34.2tn in 1H FY2018, likely connected with an upward trending yield spread*** accompanying low interest rates. As J-REIT grew, so did Japan’s specialized private real estate funds. As a result of the recent Suruga Bank scandal, banks are becoming stricter in making loans to so-called “salaryman investors” who use funding, mostly from financial institutions, to acquire properties worth JPY100‒200mn. That said, real estate lending is expanding on the whole.

*1 Rising property prices: Prices of newly built condominiums in the Tokyo metropolitan area rose from JPY56.8mn/unit in 2017 to JPY58.9mn (+3.6%) in 2018 (source: Real Estate Economic Institute). Prices for pre-owned condominiums rose 1.7% YoY from JPY35.8mn/70sqm in 2017 to JPY36.4mn/70sqm in 2018 (source: Tokyo Kantei). *2 Cap rate: Short for capitalization rate. Yield used when determining property prices from net earnings generated by a property. Net operating income ÷ cap rate = property price. *3 Yield spread: Gap between cap rate and 10-year government bond yield.

Real estate transactions by listed companies and number of transactions

(JPYbn) 1H transactions 2H transactions Number of transactions (right axis)

7,000 1,340 1,400 1,241 1,259 1,199 1,155 6,000 1,124 1,115 1,200 5,448 5,289 1,014 4,972 5,000 1,000 846 859 4,349 4,600 862 4,123 810 4,090 4,108 4,000 3,610 800 648 3,208 676 673 3,140 594 2,646 3,151 524 2,390 3,000 2,628 2,233 502 513 2,659 2,000 600 2,480 2,408 2,557 1,850 2,408 2,033 2,055 2,000 1,859 1,665 1,723 400 1,811 1,602 1,818 1,163 1,731 802 1,198 1,107 2,240 983 1,000 1,890 1,959 1,112 1,954 2,149 2,090 200 1,551 1,821 1,760 926 949 1,057 878 677 810 553 857 739 847 0 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15FY16FY17FY18 Source: Shared Research based on Urban Research Institute Corporation, Real Estate Topics

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Hotels In 2018, there were 31.2mn overseas tourist arrivals in Japan (+8.7% YoY). Hotel occupancy rates have been trending upward, since bottoming out in 2011, as the number of overseas tourists to Japan has increased.

Number of International Visitors to Japan (mn) and hotel occupancy rates (%) Foreign travelers visiting Japan (mn) Occupancy (nationwide; right axis) Occupancy (Tokyo right axis) Occupancy (Osaka; right axis) Occupancy (Aichi; right axis) 70 100% 60.00 95% 60 87.8% 90% 85.2% 85.1% 50 83.2% 85% 80.6% 80.0% 86.3% 84.8% 78.6% 84.2% 40.00 82.7% 83.3% 80% 40 78.7% 76.6% 79.0% 74.1% 72.7% 70.9% 75.4% 31.19 75% 30 68.3% 73.9% 74.2% 74.4% 69.6% 67.0% 67.7% 72.1% 70% 69.5% 20 62.3% 67.3% 65% 65.0% 28.69 24.04 60% 10 60.1% 19.73 13.41 55% 8.61 6.21 8.35 10.36 0 50% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 2030 Government Government plan plan

Source: Shared Research based on Japan National Tourism Organization’s Foreign Tourists in Japan Statistics, and Ministry of Land, Infrastructure, Transport and Tourism, Accommodation Travel Survey

According to the Ministry of Health, Labour and Welfare, 82,150 facilities provided accommodation to tourists as of March 31, 2018 (+2,308 YoY). Of this figure, 10,402 facilities were hotels and 38,622 were ryokan (Japanese-style inns); 32,451 fell under the simple lodging facility category. In the seven years leading up to March 31, 2018, the annual average rate of growth in ryokan numbers was -0.3%, but the annual average growth rate in simple lodging facility numbers (including hostels) was +4.6%.

Tourist accommodation in Japan

(no. of facilities) 120,000 94,910 100,000 84,411 25,150 81,087 81,404 80,412 79,519 78,898 78,519 79,842 82,150 80,000 23,050 23,719 24,504 25,071 25,560 26,349 32,451 60,000 27,169 29,559

40,000 67,891 50,846 46,906 46,196 44,744 43,363 41,899 40,661 39,489 38,622 20,000 7,944 9,710 9,863 9,796 9,809 9,879 9,967 10,101 10,402 0 009,603 0 FY98 FY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Hotel Ryokan (Japanese-style hotel) Common lodging house Boarding house

Source: Shared Research based on data from the 2016 Report on Public Health Administration and Services, Ministry of Health, Labour and Welfare

Competitors

Many companies are involved in smartphone apps. Shared Research believes that the overlap between the Smartphone Apps business and the IoT business is what sets and factory apart. In the IoT business, the company takes advantage of expertise in UI/UX technology, and data analysis and monetization methods that it accumulated through the Smartphone Apps business to innovate in real estate and other domains that are slow to deploy technology.

Shared Research considers the companies described below to be competitors or similar peer companies in either the Smartphone App or IoT businesses.

Smartphone Apps business Sites with gaming tips The market for sites with gaming tips was led by individual affiliate program participants*, and the market expanded as companies entered. The following companies also operate sites of this nature.

▷ GameWith: Operated by GameWith, Inc. (TSE1: 6552) ▷ Game8: Operated by Game8 Inc., a wholly owned consolidated subsidiary of Gunosy Inc. (TSE1: 6047) ▷ GAMY: Operated by CyberZ, Inc., a wholly owned consolidated subsidiary of CyberAgent, Inc. (TSE1: 4751) ▷ Altema: Operated by NLINKS Inc. (TSE JASDAQ: 6578)

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*Refers to individuals who operate websites, email magazines, social sites and similar commodities, generating income mainly through affiliate advertising (results-based advertising)

Sites with gaming tips: Comparison with major competitors Ticker Company Fiscal Sales OP OPM ROA ROE year (JPYmn) (JPYmn) (RP-based) 6047 Gunosy FY05/19 15,017 2,302 15.3% 17.9% 20.6% 6578 NLINKS FY02/19 4,757 381 8.0% 22.5% 20.9% 6552 GameWith FY05/19 3,149 808 25.7% 23.3% 23.5% 7035 and factory FY08/19 3,917 512 19.1% 22.2% 29.1% Average 6,710 1,001 17.0% 21.5% 23.5% Source: Shared Research based on company data and factory’s sales are smaller than those of other companies that operate sites with gaming tips, but OPM is second-highest (GameWith is first), and ROA is comparatively high.

Manga apps Many companies in addition to and factory have manga apps (operate e-bookstores). The largest company is Amazon, followed by a number of listed companies and many others. Listed companies include Amutus Corporation (a subsidiary of Infocom Corporation [TSE1: 4348]), Papyless Co., Ltd. (TSE JASDAQ: 3641), Beaglee Inc. (TSE1: 3981), and eBOOK Initiative Japan Co., Ltd. (TSE1: 3658). Like its subsidiary, Amutus, Infocom competes with and factory in the manga apps business. Infocom has also moved into the healthcare-related IoT business, a sector that and factory intends to enter.

Main companies involved in e-comics

Sources: Shared Research based on official journals and individual company data

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Manga apps: Comparison with major competitors Ticker Company Fiscal Sales OP OPM ROA ROE year (JPYmn) (JPYmn) (RP-based) 4348 Infocom FY03/19 51,728 6,889 13.3% 16.8% 15.7% 3678 Media Do FY02/19 50,568 1,468 2.9% 5.2% -29.4% 3641 Papyles FY03/19 19,162 1,970 10.3% 19.3% 22.5% 3658 eBOOK Initiative Japan FY03/19 14,786 583 3.9% 9.4% 5.1% 3938 LINE FY12/18 207,182 16,110 7.8% -86.2% -200.7% 3981 Beaglee FY12/18 9,190 517 5.6% 6.7% 5.3% 7035 and factory FY08/19 1,916 365 19.1% 37.7% 80.7% Average 50,647 3,986 9.0% 1.3% -14.4% Source: Shared Research based on company data

Although its sales are smaller than competitors in the e-comics business, and factory has the highest OPM. Similarly, and factory is the leader in terms of efficiency indicators (ROA and ROE).

IoT business Real estate transactions are often characterized by information asymmetry between buyer and seller. A wave of “real estate tech” companies has entered the market, aiming to reduce these asymmetries by using internet, big data, AI, and other technologies. For example, portal and online appraisal sites offer property pricing information. Builders can use crowdfunding to raise money from individual investors over the internet to construct condominiums or buildings, and AI can be used to analyze property values.

Although these companies exist, few are taking the same approach as and factory, using smartphone apps as leverage to enter the real estate business. Shared Research believes Robot Home Co., Ltd. (subsidiary of TATERU, Inc. [TSE1: 1435]) serves as a useful reference.

◤ Robot Home Co., Ltd. (subsidiary of TATERU, Inc.* [TSE1: 1435]) provides “Apartment kit,” a smartphone-based property management app for apartment owners and “TATERU kit,” an app aimed at people who live in TATERU apartments. TATERU kit can be used to open and close smartphone-activated doors and provide security by using smartphones linked with tags. The app for IoT-enabled equipment also allows the use of smartphones for controlling air conditioners, televisions, other home electronics, and lighting. It also offers features through which tablets inside of apartments serve as central controllers, facilitating chats with the management company.

* TATERU, Inc. (TSE1: 1435): The company operates TATERU Apartment**, an apartment management platform it developed. This platform handles a variety of services, such as providing land information, facilitating the planning and construction of designed apartments, and managing rentals. **This platform matches people online (via smartphone) who are interested in managing apartments with people who own land. It also provides a host of other services, such as proposing IoT apartments, construction services, and rental management.

IoT business: Comparison with reference companies Ticker Company Fiscal Sales OP OPM ROA ROE Equity Businesses year (JPYmn) (JPYmn) (RP-based) ratio (% of sales) 6047 TATERU FY12/18E 76,611 7,113 9.3% - - - Apartment (97), Funding (1), bnb (1), Robot Home (2) 7035 and factory FY08/19E 3,070 511 19.1% - - - Smartphone APP (57), IoT (42), Other (1) - Robot Home FY12/18E 1,246 336 9.5% - - - Rental apartment management app, IoT device app Average 39,841 3,812 14.2% - - - Source: Shared Research based on company data Note: Forecast figures for Robot Home, a subsidiary of TATERU, are based on the upcoming fiscal year’s forecast for TATERU’s segment. The sales composition for and factory is based on FY08/18 performance.

and factory has a higher OPM than Robot Home, due to a higher OPM in the Smartphone Apps business.

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Strengths and weaknesses

Strengths

◤ Provides a one-stop manga app-related service and is capable of making improvements more quickly than competing companies

The company forms teams for each manga app and provides fully inclusive services that cover design, development, operation, analysis, improvement, and marketing. As the company has internalized these functions, it is able to implement improvement proposals more quickly than other companies that outsource some of these functions. As a result, it is able to improve the MAUs and ARPUs of its manga apps at a higher rate of speed.

◤ Has secure relationships (including capital and business alliances) with publishers who hold intellectual property and are strong in terms of manga

In July 2019, Square Enix Co., Ltd. announced that it would retain a 4% share in the company. Later, in October 2019, Shueisha, Shogakukan, and Hakusensha announced that they would each retain a 2% share in the company. One important factor that enables the company to offer a large number of original titles from publishers through its manga apps is the secure relationships it has built with publishers like these that are strong in terms of manga. This is one major attribute that helps set the company’s manga apps apart from the competition.

◤ Provides a wide variety of manga app types and has established a structure that minimizes the risk of cannibalization between different manga apps

Manga app ARPU typically rises to a certain level, but is difficult to increase beyond that level. Consequently, increases in MAU are important in terms of securing sales growth. As of January 2020, the company offers manga apps that are unique from one another (in terms of genre and reader attributes), thereby establishing a structure that minimizes the risk of cannibalization between different manga apps. Accordingly, new manga app releases are leading to increases in MAU.

Weaknesses

◤ Most intellectual property is owned by business partners:

and factory is a platform provider rather than a content producer. The development of smartphone games, manga, and other IP requires huge investments of time and money, and the chances of failure are high. For this reason, rather than developing IP itself the company tends to source these assets from other companies or enter alliances for development and operation. Taking less risk means the company reaps commensurately lower rewards than IP owners obtain when their ventures are successful.

◤ Susceptible to impact from external environmental changes because most of its profit comes from the development and operation of manga apps

Most of the company’s profit comes from the development and operation of manga apps. The company’s core business focuses on manga apps and manga competes with other forms of entertainment for the time of consumers. Therefore, the company is susceptible to impact from external environmental changes that cause increases or decreases in the amount of time consumers spend reading manga.

◤ Subject to impact from market conditions because it will retain real estate until its development of smart hostels ends

In terms of ＆AND HOSTEL smart hostel development in the IoT business, the company sometimes adopts a business pattern of provisionally acquiring real estate and selling it to other companies following development. By employing this pattern, the company takes on real estate inventory risk but secures relatively high rates of profitability in exchange.

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Although the company only retains real estate for the period of development, which is usually one year or less, it is susceptible impact from conditions in the real estate market.

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Historical results and financial statements Income statement

Income statement FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 (JPYmn) Parent Cons. Parent Parent Parent Sales 112 372 689 1,916 3,917 YoY - 231.9% 85.2% 178.3% 104.4% Cost of sales - 205 182 803 2,350 Gross profit - 166 506 1,114 1,567 YoY - - 204.4% 120.0% 40.7% GPM - 44.7% 73.5% 58.1% 40.0% SG&A expenses - 132 282 748 1,054 SG&A ratio - 35.4% 41.0% 39.1% 26.9% Operating profit -40 35 224 365 512 YoY - - 543.8% 63.2% 40.3% OPM -35.7% 9.3% 32.5% 19.1% 13.1% Non-operating income (expenses) -4522 Interest income -0000 Commission income - - 1 - - Outsourcing fees - - 2 - - Gain on donation of noncurrent assets - - 1 - - Tax refunds ---0- Subsidy income - - - 2 - Other income -4002 Non-operating expenses - 1 5 6 30 Interest expenses -1168 Rents - - 3 - - Guarantee fees - - 0 1 - Other expenses -000 - Recurring profit -42 37 223 361 484 YoY - - 500.8% 61.5% 34.2% RPM -37.5% 10.0% 32.4% 18.8% 12.4% Extraordinary gains ----- Extraordinary losses - 8 16 4 - Income taxes -203497156 Implied tax rate - 68.6% 16.3% 27.0% 32.3% Minority interests ---- Ne t in c o me -43 -6 174 261 328 YoY - - - 49.9% 25.8% Net margin -38.2% -1.7% 25.3% 13.6% 8.4% Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods. SG&A expenses FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 (JPYmn) Parent Cons. Parent Parent Parent Directors' bonuses 35 41 Salaries and allowances 31 51 102 132 Hiring and training expenses 9 Advertising expenses 47 293 527 Compensations 16 29 R&D expenses 10 19 Depreciation 10 Provision for doubtful accounts 1 -0 0 Provision for bonuses 3 16 Other 0 84 87 276 395 Total 0 132 282 748 1,054 Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

From FY08/15 to FY08/19, the company achieved an average annual sales growth of 143%. The company became profitable on an operating basis in FY08/16, its second year after establishment. Average annual growth in operating profit has been 145% from FY08/16 to FY08/19.

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Results vs. Initial Est. FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 (JPYmn) Parent Cons. Parent Parent Parent Sales (Initial Est.) - - - 1,810 3,070 Sales (Results) 112 372 689 1,916 3,917 Results vs. Initial Est. - - - 5.9% 27.6% Operating profit (Initial Est.) - - - 343 511 Operating profit (Results) -40 35 224 365 512 Results vs. Initial Est. - - - 6.5% 0.3% Recurring profit (Initial Est.) 337 504 Recurring profit (Results) -42 37 223 361 484 Results vs. Initial Est. - - - 7.1% -3.9% Net income (Initial Est.) 220 350 Net income (Results) -43 -6 174 261 328 Results vs. Initial Est. - - - 18.4% -6.3% Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods. Profit margins FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 (JPYmn) Parent Cons. Parent Parent Parent Gross profit - 166 506 1,114 1,567 GPM - 44.7% 73.5% 58.1% 40.0% Operating profit -40 35 224 365 512 OPM -35.7% 9.3% 32.5% 19.1% 13.1% EBITDA - 91 244 397 557 EBITDA margin - 24.6% 35.4% 20.7% 14.2% Net margin - -1.7% 25.3% 13.6% 8.4% Financial ratios ROA (RP-based) - 16.9% 57.5% 37.7% 10.8% ROE - -18.9% 164.7% 80.7% 29.1% Total asset turnover - 1.69 1.69 2.00 1.80 Inventory turnover - - 3.4 13.0 15.7 Days in inventory - - 107.5 28.1 23.3 Working capital - 82 224 256 670 Current ratio - 121.4% 183.6% 172.4% 224.1% Quick ratio - 121.8% 139.7% 166.7% 198.1% OCF / Current liabilities - 0.23 0.22 1.13 -0.13 Net debt / Equity - 81.7% 33.4% -70.7% -44.6% OCF / Total liabilities - 0.2 0.1 0.6 -0.1 Cash conversion cycle (days) - 63.5 135.2 52.1 47.4 Change in working capital - 82 142 32 414 Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

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Balance sheet

Balance sheet FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 (JPYmn) Parent Cons. Parent Parent Parent ASSETS Cash and deposits 79 172 672 1,353 Notes and accounts receivable 103 129 302 484 Inventories - - 108 16 284 Merchandise and finished goods - 0 16 8 Real estate for sale in process - 107 - 276 Prepaid expenses 5 12 14 21 Advances paid 5 42 86 278 Deferred tax assets - 8 22 Other - 1101433 Allowance for doubtful accounts -1 -0 -1 - Total current assets 193 480 1,126 2,453 Buildings and structures 1396265 Tools, furniture, and fixtures 2 16 28 45 Accumulated depreciation -2 -7 -16 -35 Total tangible fixed assets 1 48 74 77 Total intangible fixed assets - 32 41 130 Investment securities 1 1 11 79 Deferred tax assets - 8 35 28 Other 25 24 8 11 Investments and other assets 26 33 103 381 Total fixed assets 27 113 218 587 Total assets 220 594 1,323 3,040

LIA BILITIES Notes and accounts payable 21136398 Short-term debt - 80 97 136 404 Short-term borrowings 65 65 65 65 Current portion of bonds 15 32 71 339 Accounts payable–other 30 101 285 401 Income taxes payable 20 39 91 109 Provision for bonuses - 9 24 - Provision for directors' bonuses - - 16 - Other -27 23972 Total current liabilities 159 262 653 1,095 Long-term debt - 27 140 216 147 Long-term borrowings 27 140 216 147 Other ----- Total fixed liabilities 27 140 216 147 Total interest-bearing debt - 107 237 352 551 Total liabilities 185 401 870 1,242 Ne t a s s e t s Capital stock 34 34 34 543 Capital surplus 33 33 33 542 Retained earnings -34 125 385 713 Treasury stock - - - -0 Total net assets 34 192 453 1,798 Total liabilities and net assets 220 594 1,323 3,040 Working capital - 82 224 256 670 Total interest-bearing debt - 107 237 352 551 Net debt - 28 64 -320 -801 Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

Current assets account for 81% of total assets. On the other side of the balance sheet, however, long-term borrowings account for 18% of total liabilities and net assets. Accounts payable in relation to the IoT business account for 13% (in FY08/19; the company was listed in September 2018).

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Cash flow statement

Cash flow statement FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 (JPYmn) Parent Cons. Parent Parent Parent Cash flows from operating activities (1) 36 46 516 -115 Pretax profit 29 208 357 484 Depreciation 57203245 Amortization of goodwill ---- Increase (decrease) in accounts receivable -76 -38 -173 -182 Increase (decrease) in inventories - -108 92 -267 Increase (decrease) in accounts payable 19 -2 50 36 Other 8 -35 159 -231 Cash flows from investing activities (2) -27 -94 -131 -416 Purchase of tangible fixed assets -9 -60 -67 -19 Purchase of intangible fixed assets -0 -34 -22 -108 Payments and collection of guarantee deposits -17 3 -31 -218 Purchase of investment securities - - -10 -69 Other -0 -4 -11 -70 Fr e e c a s h f low (1+ 2) - 10 -48 385 -531 Cash flows from financing activities 22 130 116 1,211 Change in short-term borrowings 65 Change in long-term borrowings -43 130 116 199 Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods. Cash flows from operating activities In FY08/19, operating activities produced a net cash outflow, mainly due to the acquisition of real estate for sale.

Cash flows from investing activities In FY08/19, investing activities produced a net cash outflow, due to the acquisition of tangible and intangible fixed assets (JPY108mn) and payments for lease and guarantee deposits (JPY217mn).

Cash flows from financing activities Prior to listing in September 2018, the company mainly raised funds through long-term borrowings.

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Historical performance

Full-year FY08/19 results Overview

◤ In FY08/19, the company reported sales of JPY3.9bn (+104.4% YoY), operating profit of JPY512mn (+40.3% YoY), recurring profit of JPY484mn (+34.2% YoY), and net income of JPY328mn (+25.8% YoY).

◤ Compared with the company’s full-year forecast, sales came in 1.2% above plan, operating profit 0.3% above plan, recurring profit 4.0% below plan, and net income 6.6% below plan.

◤ Sales of JPY3.9bn were up 104.4% YoY, with the Smartphone Apps business reporting sales of JPY1.8bn (+62.8% YoY), IoT business sales of JPY2.1bn (+157.0% YoY), and Other businesses sales of JPY72mn (+320.4% YoY). For the full year, the Smartphone Apps business accounted for 45.7% of sales, the IoT business 52.5%, and Other businesses 1.8%.

◤ Operating profit of JPY512mn was up 40.3% YoY, with the Smartphone Apps business reporting an operating profit of JPY600mn (+25.0% YoY), the IoT business an operating profit of JPY194mn (+36.7% YoY), and the Other businesses an operating profit of JPY13mn. The Smartphone Apps business accounted for 75.5% of operating profit and the IoT segment 24.5%.

Results by business Smartphone Apps business In FY08/19, the Smartphone Apps business reported full-year sales of JPY1.8bn (+62.8% YoY) and an operating profit of JPY600mn (+25.0% YoY). The gains were driven by strong growth at Manga UP! (jointly developed with Square Enix Co., Ltd.), Manga Park (jointly developed with Hakusensha, Inc.), and Manga Mee (jointly developed with Shueisha Inc.), where a combination of new content additions (most of which were self-developed) and aggressive advertising and promotion led to increases in both monthly active users (MAUs) and average revenue per user (ARPU). The company also received revenues related to its software development work under new partnership agreements with Shueisha Inc. (for development work on Manga Mee), Shogakukan Inc. (for development work on Sunday Webry), and Nihon Bungeisha Co., Ltd. (for development work on an as yet unnamed app). MAU of and factory’s manga apps grew 123.5% YoY to 5.32mn users. The company’s ARPU for manga apps in FY08/19 was up 75–105% compared to FY03/17.

IoT business In FY08/19, the IoT business reported full-year sales of JPY2.1bn (+157.0% YoY) and an operating profit of JPY194mn (+36.7% YoY). The top-line gains were driven by revenues linked to the progress on ongoing planning and development work for its mainstay &AND HOSTEL brand of smart hostels (lodging facilities offering experiences made possible through IoT) and consulting and real estate brokerage fees related to the development of hostel-type lodging facilities. FY08/19 also saw the sale of &AND HOSTEL HOMMACHI EAST, one of the company’s self-developed &AND HOSTEL brand lodging facilities. With the opening of &AND HOSTEL HOMMACHI EAST, &AND HOSTEL NINOWA, and &AND HOSTEL ASAKUSA during the year, the company brought the total number of &AND HOSTEL brand lodging facilities in operation to nine as of the end of FY08/19. The company also brought the number of facilities using its innto (lodging management system) up to 232 as of the end of FY08/19 (an increase of 28 facilities over the end of Q3), and the number of lodging facilities using its tabii (a guest room tablet service) up to 2,853 (an increase of 829 over the end of Q3) with the help of stronger relations with partner companies (such as H.I.S. Hotel Holdings and TEPCO Energy Partners), expansion of its sales teams, and active development efforts to create new functions aimed at boosting operating efficiency and increasing added-value. At the same time, the company made active investment, including spending to support the openings of new &AND HOSTEL facilities and the expansion of its innto and tabii services.

Other businesses In FY08/19, the Other businesses reported full-year sales of JPY72mn (+320.4% YoY) and an operating profit of JPY13mn (+1,761.0% YoY). The major of the earnings under this segment come from the company’s internet advertising agency services.

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Other topics Capital and business alliance with Shogakukan Inc., Shueisha Inc., and Hakusensha, Inc.

▷ Purpose of capital and business alliance: and factory expects the alliance to enhance the enterprise value and shareholder earnings of all parties to the agreement by providing a stronger foundation for their business partnership to support the expansion of existing digital content businesses (primarily manga apps) and facilitate moves into new business fields. ▷ Outline of capital and business alliance: Under the agreement, Shogakukan, Shueisha, and Hakusensha will each acquire shares in and factory. On the and factory side, Chairman Takamasa Ohara and President Rinji Aoki will each sell part of their personal holdings so that Shogakukan, Shueisha, and Hakusensha each end up with 193,627 shares of and factory common stock (equal to 2% of and factory shares outstanding). Following the off-exchange transaction on October 11, 2019, Shogakukan, Shueisha, and Hakusensha will together hold more than 5% of the voting rights in and factory.

Business alliance with Shueisha Inc. The alliance is aimed at facilitating a total makeover of Shueisha’s popular Young Jump! app service (which owns the rights to many popular manga titles), with and factory for its part supplying its expertise in user interface (UI) and user experience (UX) design, development, and operation to help create a high value-added service for users that will add to earnings at both companies.

Business alliance with Amutus Corp., a wholly owned subsidiary of Infocom Corp. (TSE1: 4348) The alliance is aimed at facilitating a total makeover of Amutus’ Meccha Comics Daily Serial Manga app, with and factory for its part supplying its expertise in UI/UX design, development, and operation to help create a high value-added service for users that will add to earnings at both companies.

Business alliance with Sumasapo Co. Ltd. Under the alliance, the two companies will develop and provide an IoT platform service by combining the experience of and factory in IoT service development and operation with the expertise of Sumasapo in the field of rental properties. In doing so, both companies aim to create a more convenient means of communication between the mangers of rental real estate and the properties’ tenants, and add to their own earnings stream.

Q3 FY08/19 results Overview

◤ Cumulative Q3 FY08/19 (non-consolidated): Sales were JPY1.5bn (the company did not compile quarterly financial statements in Q3 FY08/18), operating profit was JPY155mn, recurring profit was JPY131mn, and net income was JPY89mn.

◤ Cumulative Q3 sales reached 39.6% of the full-year company forecast, while operating profit reached 30.4%. Sales and operating profit were weighted towards 2H in the company’s initial forecasts, because the company plans to sell property developed in its &AND HOSTEL business in 2H in the IoT business. Therefore, the company has no intention to change its full-year company forecasts announced on April 22, 2019.

◤ Sales: JPY1.5bn (the company did not compile quarterly financial statements in Q3 FY08/18). In the Smartphone Apps business, sales were JPY1.2bn (+62.1% YoY), while sales reached JPY251mn (+4.4% YoY) in the IoT business. Sales for Other businesses totaled JPY52mn (+78.3% YoY). The Smartphone Apps business and the IoT business accounted for 80.3% and 16.4% of total sales, respectively. Other businesses had a 3.4% share of total sales.

◤ Operating profit: JPY155mn (the company did not compile quarterly financial statements in Q3 FY08/18). In the Smartphone Apps business, operating profit was JPY390mn (+28.7% YoY). Operating loss in the IoT business was JPY43mn (versus operating profit of JPY69mn in cumulative Q3 FY08/18), while Other businesses recorded JPY10mn in operating profit. The Smartphone Apps business accounted for 112.4% of total operating profit, the IoT business for -17.2%, and Other businesses for 6.7%.

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◤ The company revealed its aim to move its listing to the First Section of the Tokyo Stock Exchange, and announced corporate actions including a capital and business alliance with Square Enix in order to improve corporate value, and the implementation of a stock split (a 2-for-1 split, with a record date of July 31) to improve liquidity and increasing the number of shareholders, and the introduction of shareholder benefits.

Results by business Smartphone Apps business Sales were JPY1.2bn (+62.1% YoY), and operating profit was JPY390mn (+28.7% YoY). Manga UP! and Manga Park (manga apps developed in collaboration with Square Enix Co., Ltd. and Hakusensha, Inc., respectively) both saw solid growth, as initiatives including aggressive advertising and the release of new manga series boosted monthly active users (MAU), and new manga additions lifted average revenue per user (ARPU). Manga Mee, a manga app of Shueisha’s girls’ manga made available to users every day, has also seen solid growth in MAU and APRU since its release in November 2018. MAU of the company’s manga apps grew 110.8% YoY to 4.3mn users. ARPU, which is calculated by dividing sales by MAU, fell 1.3% YoY.

▷ In general, ARPU differs in nature to MAU in that the effect of ARPU improvement measures tends to diminish once ARPU has risen beyond a certain level. As more than two years have passed since the company started releasing manga apps, and factory plans to prioritize growth in MAU over growth in ARPU, but it will still look to maintain ARPU at the current level or higher. ▷ As app development was completed in June 2019, sales are expected to be booked in Q4 rather than in Q3.

IoT business Sales were JPY251mn (+4.4% YoY), and operating loss was JPY43mn (compared with an operating profit of JPY69mn in cumulative Q3 FY08/18). In this business, progress in terms of planning and development of the &AND HOSTEL brand of smart hostels (lodging facilities offering experiences made possible through IoT) contributed to solid revenue from consulting and real estate brokerage fees related to developing hostels. In February 2019, and factory newly opened &AND HOSTEL MINOWA and &AND HOSTEL ASAKUSA. At end Q3 FY08/19, innto (lodging management system) was in use at 204 facilities (+33 versus end February, 2019) and total facilities adopting tabii (a guest room tablet service) as of end-Q3 FY08/19 was 2,024 (+686 versus end February, 2019) thanks primarily to its introduction at Henn na Hotel among other facilities. On the other hand, operating loss grew due to active investment, such as set-up costs for &AND HOSTEL and increased costs associated with heightened expansion of innto and tabii.

▷ A new &AND HOSTEL is due to be opened in Osaka in August 2019.

Other businesses In this segment, the company mainly provides internet advertising agency services. Sales were JPY52mn (+78.3% YoY), and operating profit was JPY10mn (information regarding operating profit was not disclosed in Q3 FY08/18).

Other topics Capital and business alliance with Square Enix Both companies will develop a range of measures to accelerate further growth of “Manga UP!,” which has grown into one of the largest manga apps in Japan, leveraging the capital and business alliance. Additionally, as a new initiative in the games area, they will develop and operate “Final Fantasy Brave Exvius Digital Ultimania,” the first companion app (an official guide app) for “Final Fantasy Brave Exvius.” Square Enix acquired 189,892 shares (4% of issued shared) in the company from major company shareholder Shu Takehana, by an off-market negotiated transaction on July 12.

▷ The social gaming market appears to be showing signs of maturing, with uncertainty growing over the momentum of hit titles that have driven the market until now and user preferences and the types of games being played undergoing change. As a result, past methods used by sites and apps providing gaming tips are maturing in the same way, and in the case of and factory, MAU is continuing to fall for its Saikyo Series. The company has indicated that one of its solutions to this will be to grow

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earnings through the creation of new customer value, such as by providing official guide apps in partnership with game development companies and providing user experiences linked to the original game. ▷ The above-mentioned official guide app will employ a monthly subscription model (monthly fee of JPY800). ▷ A major advantage of an official guide app is that customers can be drawn from the original game.

Business alliance with Shogakukan The company will work on the renewal and post-renewal operation of the “Sunday Webry” manga app owned by Shogakukan.

Business alliance with AIQ The company entered into a business alliance agreement with AIQ, its first investment in the AI domain, with a focus on “IoT x AI” collaboration, using user data in services relating to accommodation. In future, the company aims to create new value together with AIQ, in areas not limited to the lodging business.

1H FY08/19 results Overview

◤ 1H FY08/19 (non-consolidated): Sales were JPY995mn (the company did not compile half-year financial statements in 1H FY08/18), operating profit was JPY103mn, recurring profit was JPY82mn, and net income was JPY55mn. Sales and operating profit exceeded the company forecast by 8.2% and 1,187%, respectively. The company plans to use the amounts that exceeded forecast in 1H for investment in 2H.

◤ 1H sales reached 32.4% of the full-year company forecast, while operating profit reached 20.1%. Through FY08/18, the cycle from investment to recovery lasted two years, but, in FY08/19, the company plans to recover investments made in 1H during 2H.

◤ Sales: JPY995mn (the company did not compile half-year financial statements in 1H FY08/18). In the Smartphone Apps business, sales were JPY814mn (+74.7% YoY), while sales reached JPY152mn (+13.1% YoY) in the IoT business. Sales for Other businesses totaled JPY29mn (+8.6% YoY). The Smartphone Apps business and the IoT business accounted for 81.8% and 15.2% of total sales, respectively. Other businesses had a 2.9% share of total sales.

◤ Operating profit: JPY103mn (the company did not compile half-year financial statements in 1H FY08/18). In the Smartphone Apps business, operating profit was JPY264mn (+36.5% YoY). Operating loss in the IoT business was JPY35mn (versus operating profit of JPY32mn in 1H FY08/18), while Other businesses recorded JPY9mn in operating profit. The Smartphone Apps business accounted for 115.3% of total operating profit, the IoT business for -23.1%, and Other businesses for 8.4%.

Results by business Smartphone Apps business Sales were JPY814mn (+74.7% YoY), and operating profit was JPY264mn (+36.5% YoY). Manga UP! and Manga Park (manga apps developed in collaboration with Square Enix Co., Ltd. and Hakusensha, Inc., respectively) both saw solid growth, as initiatives including aggressive advertising and the release of new manga series boosted monthly active users (MAU), and new manga additions lifted average revenue per user (ARPU). Manga Mee, a manga app of Shueisha’s girls’ manga made available to users every day, has also seen solid growth in MAU and APRU since its release in November 2018. MAU of and factory’s manga apps grew 141.3% YoY to 3.62mn users. ARPU, which is calculated by dividing sales by MAU, rose 54.5% YoY.

The company announced that it concluded a business alliance agreement with Nihon Bungeisha Co., Ltd., a wholly owned subsidiary of RIZAP Group (SSE Ambitious: 2928), with regards to the planning, development, and operation of Nihon Bungeisha’s manga app. This agreement with Nihon Bungeisha had not been anticipated at the beginning of FY08/19. The two companies will select and distribute works, mainly those published in manga magazines such as Weekly Manga Goraku and Comic Heaven, as well as publish original works exclusively on the app, targeting high-ARPU users in their 20s to 30s.

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IoT business Sales were JPY152mn (+13.1% YoY), and operating loss was JPY35mn (compared with an operating profit of JPY32mn in 1H FY08/18). In this business, progress in terms of planning and development of the &AND HOSTEL brand of smart hostels (lodging facilities offering experiences made possible through IoT) contributed to solid revenue from consulting and real estate brokerage fees related to developing hostels. In February 2019, and factory newly opened &AND HOSTEL NINOWA and &AND HOSTEL ASAKUSA. At end 1H FY08/19, innto (lodging management system) was in use at 171 facilities (+24 versus end Q1 FY08/19) and total facilities adopting tabii (a guest room tablet service) had increased thanks to its introduction at Henn na Hotel Kyoto among other facilities (1,338 tablets in operation as of February 28, 2019). On the other hand, operating loss grew due to active investment, such as set-up costs for &AND HOSTEL and increased expenses for hiring business development personnel, which is associated with heightened expansion of innto and tabii.

Other businesses In this segment, the company mainly provides internet advertising agency services and produces articles. Sales were JPY29mn (+8.6% YoY), and operating profit was JPY9mn (information regarding operating profit was not disclosed in 1H FY08/18).

Q1 FY08/19 results Overview

◤ Q1 FY08/19 (non-consolidated): Sales were JPY470mn (the company did not compile quarterly financial statements in Q1 FY08/18), operating profit was JPY42mn, recurring profit was JPY37mn, and net income was JPY25mn. Sales exceeded the company forecast of JPY420mn by 11.9%, and operating profit exceeded the company forecast of JPY5mn by 740.0%.

◤ Q1 sales reached 15.3% of the full-year company forecast, while operating profit was 8.3%, recurring profit was 7.4%, and net income was 7.2%. Through FY08/18, the cycle from investment to recovery lasted two years, but, in FY08/19, the company plans to recover investments made in 1H during 2H.

◤ Sales: JPY470mn (the company did not compile quarterly financial statements in Q1 FY08/18). In the Smartphone Apps business, sales were JPY394mn (+94.1% YoY), while sales reached JPY66mn (+74.0% YoY) in the IoT business. Sales for Other businesses totaled JPY9mn (-33.5% YoY). The Smartphone Apps business and the IoT business accounted for 83.9% and 14.1% of total sales, respectively. Other businesses had a 2.0% share of total sales.

◤ Operating profit: JPY42mn (the company did not compile quarterly financial statements in Q1 FY08/18). In the Smartphone Apps business, operating profit was JPY124mn (+33.8% YoY). Operating loss in the IoT business was JPY24mn (versus JPY7mn in operating loss in Q1 FY08/18), while Other businesses recorded JPY6mn in operating profit. The Smartphone Apps business accounted for 116.5% of total operating profit, the IoT business for -22.0%, and Other businesses for 5.5%.

Results by business Smartphone Apps business Sales were JPY394mn (+94.1% YoY), and operating profit was JPY124mn (+33.8% YoY). Contributing to the increases were Manga UP!, which the company developed with Square Enix Co., Ltd., and Manga Park, a manga app that and factory developed in collaboration with Hakusensha, Inc. Both apps were launched during FY08/17. In November 2018, the company released Manga Mee, a manga app that allows users to read manga for young girls published by Shueisha daily. In the initial stages following its release, this app ranked second among apps in the book category, recording one of the top results among the company’s series of manga apps. Active advertising and promotion and the launch of a new comic series pushed up the average number of monthly active users (MAUs; Shared Research estimates that the number of MAUs of manga apps rose 153% YoY to JPY2.73mn). ARPU, which is calculated by dividing sales by MAU, rose 84% YoY.

Through COMIAD, an ad network specializing in manga apps, the company plans to initially sell advertising space in its own manga apps. In the next phase, it plans to establish a large manga network that includes manga apps from other companies. The company has begun a pilot ad network using its own manga apps and has already received many inquiries from other companies wishing to add their manga apps to the network. As such, it is considering to advance into the second phase of its plan ahead of schedule.

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In December 2018, and factory launched Comic every, a new manga app, with Beaglee, which manages Manga Oukoku, one of the largest e-comics site in Japan. This app takes advantage of the company’s capacity for development and management and Beaglee’s ability to source extensive content.

IoT business Sales were JPY66mn (+74.0% YoY), and operating loss was JPY24mn (compared with an operating loss of JPY7mn in Q1 FY08/18). In this business, performance was strong in terms of planning and development of the &AND HOSTEL brand of smart hostels (lodging facilities offering experiences made possible through IoT). When developing these hostels, the company generated revenue from consulting and real estate brokerage. At end-Q1 FY08/19, innto (a property management system) was in use with 147 facilities (+58 versus end-FY08/18) and total facilities adopting tabii (a guest room tablet service) had increased thanks to its introduction at Henn na Hotel Haneda and other facilities. On the other hand, operating loss grew due to active investment, such as set-up costs for &AND HOSTEL and increased costs associated with heightened expansion of innto and tabii.

Other businesses In this segment, the company mainly provides internet advertising agency services and produces articles. Sales were JPY9mn (-33.5% YoY), and operating profit was JPY6mn (information regarding operating profit was not disclosed in Q1 FY08/18).

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Other information

History

Date Description September 2014 Company established October 2014 Entered the Smartphone Apps business by acquiring Dokodemo Mirror, a smartphone app, from Ignis Ltd. Began offering an iOS version of the Saikyo Series bulletin board-style app where users can exchange tips and tricks and recruit co-players April 2015 Entered into a capital alliance with Ignis Ltd. June 2016 Opened &AND HOSTEL, a smart hostel, in Fukuoka, marking the launch of the IoT business January 2017 Launched iOS and Android versions of Manga UP!, a smartphone manga app, in collaboration with Square Enix Co., Ltd. April 2017 Opened &AND HOSTEL ASAKUSA NORTH May 2017 Opened &AND HOSTEL UENO June 2017 In collaboration with the city of Yokohama and NTT Docomo, Inc., began operating the Homes of the Future project, which leverages IoT Smart Home August 2017 Launched iOS and Android versions of Manga Park, a smartphone manga app, in collaboration with Hakusensha, Inc. February 2018 Opened &AND HOSTEL AKIHABARA March 2018 Opened &AND HOSTEL KANDA Began providing innto, a property management system for simple lodging facilities, which was developed in collaboration with Almec Corporation, of the USEN-NEXT Group May 2018 Developed and began offering tabii, a tablet-based service for hotel rooms September 2018 Listed on the Mothers Market of the Tokyo Stock Exchange October 2018 Launched COMIAD, an ad network service that bundles ad space on multiple manga apps October 2018 Announced business alliance with TEPCO Energy Partner, Inc., in the tablet service business November 2018 Launched iOS and Android versions of Manga Mee, a smartphone manga app, in collaboration with Shueisha Inc. Entered into a business alliance with Tepco Customer Service Co., Ltd. December 2018 Launched iOS and Android versions of Comic Every, a smartphone app, in collaboration with Beeglee Inc. February 2019 Opened &AND HOSTEL ASAKUSA and &AND HOSTEL MINOWA April 2019 Entered into a business alliance with Nihonbungeisha Co., Ltd. June 2019 Launched iOS and Android versions of uraraca, a fortunetelling app July 2019 Entered into a business alliance with Shogakukan Inc. Entered into a capital and business alliance with Square Enix Co., Ltd. Launched iOS and Android versions of Final Fantasy Brave Exvius (FFBE) Digital Ultimania, a smartphone app, co-developed with Square Enix Co., Ltd. August 2019 Launched iOS and Android versions of fully renewed Sunday Web Every, a smartphone app, in collaboration with Shogakukan Inc. Opened &AND HOSTEL ASAKUSA and &AND HOSTEL HOMMACHI EAST

Source: Shared Research based on company data

The company was established in September 2014 as a wholly owned subsidiary of famous, Inc., which itself had been established in May 2012 by Takamasa Ohara (and factory’s CEO) to conduct business as an advertising agency. While running famous, Ohara became aware of business opportunities in the smartphone apps business, so he set up a subsidiary to pursue the business full time. In October 2014, Ohara and other directors of famous acquired the company’s shares, as they believed that further expansion of the smartphone apps business would require independence.

Mission and factory sees itself as a “smartphone idea company” that pursues business opportunities that smartphones make possible. The company’s employees have varied backgrounds and the company encourages them to leverage their areas of expertise to generate ideas and actively pursue areas with new potential. As the “and” in its name suggests, the company’s mission is to provide services that make people’s lives more fulfilling by bringing a little “something extra” to their everyday lives.

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News and topics

On December 13, 2019, the company announced that it decided to borrow funds and purchase real estate for sale.

Purchase of real estate for sale in the &AND HOSTEL smart hostel business

▷ Property: An eight-story building with land in Osaka’s Chuo ward ▷ Seller: Undisclosed as requested by the seller ▷ Sale price: Undisclosed as requested by the seller (over 30% of and factory’s net assets in FY08/19) ▷ Date of transfer: Before December 20, 2019 ▷ Borrowing funds: The company plans to borrow funding from financial institutions accompanying the purchase (amount undetermined). ▷ Outlook: The company expects these transactions to have only a slight impact on FY08/20 results.

On December 11, 2019, Shared Research updated the report following interviews with the company.

On December 3, 2019, the company announced that it decided to borrow funds to purchase real estate for sale.

▷ Lender: Mizuho Bank, Ltd. ▷ Amount: JPY1.2bn (far above 30% of the company’s net assets of JPY1.8bn in FY08/19) ▷ Date effective: December 5, 2019 ▷ Interest rate: Mizuho TIBOR+0.5% ▷ Provision of collateral: None ▷ Outlook: The company will make interest payments in FY08/20 that will vary in amount according to the loan balance. The expected effects of these payments were included in the earnings forecasts announced October 11, 2019. The company said it would promptly disclose any matters requiring public announcement going forward.

On November 22, 2019, the company announced the appointment of an additional representative director.

At the board of directors meeting following the general meeting of shareholders on November 26, 2019, the current representative director and president of the company, Takamasa Ohara, will be appointed representative director and chairman. At the same time, Rinji Aoki, director and executive officer in charge of the Smartphone Apps business, will be appointed representative director and president. With the addition of another representative director (making the total two), the company intends to promptly respond to the rapidly changing market environment and make flexible management decisions, as evolution is fast in the industries where and factory’s mainstay Smartphone App and IoT businesses belong.

On October 16, 2019, the company announced plans for an off-auction distribution of shares.

▷ Number of shares to be distributed: 330,000 shares ▷ Timeframe: October 25, 2019 ▷ Sale price: JPY2,272 ▷ Limit on purchase application: Limit 300 shares per individual buyer (trading unit: 100 shares) ▷ Exchange where transaction will take place: Tokyo Stock Exchange ▷ Purpose: The company has been taking steps to apply for a listing transfer to the First Section of the Tokyo Stock Exchange. With this off-auction

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distribution, it aims to increase share liquidity, boost the number of shareholders, and improve share distribution so that it can meet the listing transfer criteria. Note: the plan may be postponed or cancelled in the event of a development that hinders the execution, such as heavy market fluctuations during the planned period.

On October 11, 2019, the company announced earnings results for full-year FY08/19; see the results section for details.

On the same day, the company announced that it had entered into a capital and business alliance with Shogakukan Inc., Shueisha Inc., and Hakusensha, Inc.

▷ Purpose of capital and business alliance: and factory expects the alliance to enhance the enterprise value and shareholder earnings of all parties to the agreement by providing a stronger foundation for their business partnership to support the expansion of existing digital content businesses (primarily manga apps) and facilitate moves into new business fields. ▷ Outline of capital and business alliance: Under the agreement, Shogakukan, Shueisha, and Hakusensha will each acquire shares in and factory. On the and factory side, Chairman Takamasa Ohara and President Rinji Aoki will each sell part of their personal holdings so that Shogakukan, Shueisha, and Hakusensha each end up with 193,627 shares of and factory common stock (equal

to 2% of and factory shares outstanding). Following the off-exchange transaction on October 11, 2019, Shogakukan, Shueisha, and Hakusensha will together hold more than 5% of the voting rights in and factory. ▷ Impact on earnings: The company said it is examining the impact of this new alliance on its earnings, and will provide timely disclosure if it becomes evident that the impact on FY08/20 results will be material.

On the same day, the company announced a business alliance with Shueisha Inc.

▷ Purpose of business alliance: The alliance is aimed at facilitating a total makeover of Shueisha’s popular Young Jump! app service (which owns the rights to many popular manga titles), with and factory for its part supplying its expertise in user interface (UI) and user experience (UX) design, development, and operation to help create a high value-added service for

users that will add to earnings at both companies. ▷ Outline of business alliance: The alliance calls for the two companies to work together on the makeover of Shueisha’s Young Jump! app from the planning and development stage to the operation of the service after the makeover. ▷ Impact on earnings: The company said it is examining the impact of this new alliance on its earnings, and will provide timely disclosure if it becomes evident that the impact on FY08/20 results will be material.

On the same day, the company announced a business alliance with Amutus Corp., a wholly owned subsidiary of Infocom Corp. (TSE1: 4348).

▷ Purpose of business alliance: The alliance is aimed at facilitating a total makeover of Amutus’ Meccha Comics Daily Serial Manga app, with and factory for its part supplying its expertise in UI/UX design, development, and operation to help create a high

value-added service for users that will add to earnings at both companies. ▷ Outline of business alliance: The two companies will work together on the makeover of Amutus’ Meccha Comics Daily Serial Manga app, from the planning and development stage to the operation of the service after the makeover.

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▷ Impact on earnings: The company said it is examining the impact of this new alliance on its earnings, and will provide timely disclosure if it becomes evident that the impact on FY08/20 results will be material.

On the same day, the company announced a business alliance with Sumasapo Inc.

▷ Purpose of business alliance: Under the alliance, the two companies will develop and provide an IoT platform service by combining the experience of and factory in IoT service development and operation with the expertise of Sumasapo in the field of rental properties. In doing so, both companies aim to create a more convenient means of communication between the

mangers of rental real estate and the properties’ tenants, and add to their own earnings stream. ▷ Outline of business alliance: The two companies will work together to develop and operate smartphone apps and services for tenants in rental properties, and will also look at planning, developing, and operating an IoT service solutions business for

rental properties and other areas within the real estate field. ▷ Impact on earnings: The company said it is examining the impact of this new alliance on earnings, and will provide timely disclosure if it becomes evident that the impact on FY08/20 results will be material.

On October 7, 2019, the company announced the purchase of real estate for sale and borrowing of funds.

Property purchase for the purpose of development and sale in the &AND HOSTEL business

▷ Seller: undisclosed at the seller’s request ▷ Purchasing price: undisclosed at the seller’s request (at least 30% of the company’s net assets in FY08/19) ▷ Contract signing date: by December 27, 2019 (tentative) ▷ Borrowing of funds: the company plans to borrow funds (amount undecided) from a financial institution for the purchase ▷ Outlook: impact on earnings results in FY08/20 and later are under review

On July 12 2019, the company announced a stock split.

The company will carry out a two-for-one stock split of ordinary shares held by shareholders listed on the shareholders registry at the end of July 31 2019 (Wednesday), the record date. The effective date will be August 1, 2019 (Thursday).

On the same day, the company also announced a capital and business alliance with Square Enix Co., Ltd. (a wholly owned subsidiary of Square Enix Holdings Co., Ltd. [TSE1: 9684]).

Outline of the business alliance

▷ Further strengthen partnerships in the publishing filed, with a focus on manga apps. ▷ Build up the relationship with the objective of new initiatives in the games area. Number of shares newly acquired by the other party, and ratio to number of issued shares Square Enix acquired 189,892 shares (4% of issued shared) in the company from its major company shareholder Shu Takehana, by using an off-market negotiated transaction on July 12.

On the same day, the company announced a business alliance with Shogakukan Inc.

Outline of the business alliance

▷ Planning and development for the renewal, and post-renewal operation, of Shogakukan’s manga app and web service “Sunday Webry”

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On the same day, the company announced a business alliance with AIQ Corporation.

Outline of the business alliance

▷ Exploring a comprehensive business alliance, centering on application of IoT and AI

On April 22, 2019, the company announced the sale of real estate for sale.

Sale of property developed by the company in the &AND HOSTEL smart hostel business, which had been planned for Q4

▷ Purchaser: Not disclosed, at request of the purchaser ▷ Sale price: Not disclosed, at request of the purchaser (the sale price is equal to or greater than roughly 10% of the company’s FY08/18 sales of JPY1.9bn) ▷ Contract conclusion date: April 26, 2019 (planned) ▷ Repayment of funds: The company plans to repay debt from financial institutions following the sale

On the same day, the company announced a revision to its full-year FY08/19 forecasts.

Revisions to full-year FY08/19 forecasts

▷ Sales: JPY3.9bn (previous forecast: JPY3.1bn) ▷ Operating profit: JPY511mn (no change to previous forecast) ▷ Recurring profit: JPY504mn (no change to previous forecast) ▷ Net income attributable to parent company shareholders: JPY350mn (no change to previous forecast) ▷ EPS: JPY75.42 (no change to previous forecast)

Reasons for the revision

▷ The company revised up its sales forecast because the sale of real estate held for sale announced on the same day involved a property larger in scale than originally expected, and the sale price greatly exceeded initial forecast. ▷ Meanwhile, initial forecasts for operating profit, recurring profit, and net income all remained unchanged. This is because the company is prioritizing medium- to long-term growth and looking to invest aggressively in growth areas while assessing the

current business environment. In specific, it plans to invest in advertising expenses to accelerate manga app growth and expand recruitment of personnel in the Smartphone Apps and IoT businesses. ▷ The following factors, with the potential to cause changes, will arise in Q3 and Q4: Completion of app development and continuous investment in growth areas. Even so, the company plans to secure its revised sales and initial operating income targets for the full year.

On April 12, 2019, the company announced that it concluded a business alliance agreement with Nihon Bungeisha Co., Ltd., a wholly owned subsidiary of RIZAP Group (SSE Ambitious: 2928), with regards to the planning, development, and operation of Nihon Bungeisha’s manga app.

On the same day, the company announced that it decided to borrow JPY600mn to fund the purchase of real estate for sale.

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Corporate governance and top management

Form of organization and capital structure Cont rolling shareholder None Parent company ticker - Directors Number of directors under Articles of Incorporation 10 Directors' terms under Articles of Incorporation 1 year Number of independent outside directors 2 Audit & Supervisory Board Number of members of Audit & Supervisory Board under Articles of Incorporation 10 Number of independent outside members of Audit & Supervisory Board 3 Other Number of independent outside officers (directors and members of Audit & Supervisory Board) 5 Part icipat ion in elect ronic vot ing plat form None Other initiatives to enhance voting rights of investors None Providing convocation notice in English None Disclosure of directors' compensation None Disclosure of executive officers' compensation None Policy on determining amount of compensation and calculation methodology In place Takeover defenses None Source: Shared Research based on company data Top management Takamasa Ohara, Chairman and Representative Director Born in August 1984, Ohara started a number of companies between his days as a university student and the launch of and factory. He joined CA Mobile in April 2009. That June, he was dispatched to a subsidiary, zeronana Inc. He established docks Inc. in 2011, famous Inc. and Tsutekoto Inc. (now Eichi, Inc.) in 2012, and Day’s Inc. in 2014. As explained in the History section above, and factory was formed in September 2014 as a wholly owned subsidiary of famous, Inc. In October, Ohara and other directors acquired and factory’s shares from famous, Inc., with the aim of expanding the company.

Ohara explains that when he established the company, he brought together people with whom he had come into contact through work since his 20s. Qian Kun, CEO of IGNIS Ltd. (TSE Mothers: 3689), was an older colleague of Ohara’s when they were both at zeronana, a subsidiary of CA Mobile. IGNIS is one of the major shareholders of the company.

Rinji Aoki, President and Representative Director Born in November 1983. Joined CA Mobile in 2006. Dispatched to zeronana Inc. in 2008. Joined docks, Inc. in 2012. Became a director of and factory in 2015. Was a colleague of Ohara at zeronana, a CA Mobile subsidiary, when Ohara was stationed there. Has led the company’s Smartphone Apps business since its founding.

Yuki Umemoto, Director (in charge of the IoT Division) Born in September 1980. Joined Fujitsu Ten Ltd. (now Denso Ten Corp.) in 2004. Joined GREE, Inc. in 2010. In 2013, joined FreakOut Inc. (now FreakOut Holdings, Inc.). Became an executive officer at curations Inc. in 2015. Joined the company in January 2016. Appointed executive officer in August 2016 and named director in 2017.

Ryo Okada, Director (in charge of the Corporate Strategy Division) Born in February 1988. Joined Deloitte Touche Tohmatsu LLC in February 2012. Joined and factory in October 2017. Became a director at and factory in November 2019.

Tomoki Hasumi (in charge of the BA/HR Division) Born in September 1983. Joined KPMG AZSA & Co. (now KPMG AZSA LLC) in 2006. Joined and factory in April 2016. Became a director at and factory in November 2019.

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Corporate governance and factory has put a management and administrative structure based on its fundamental shareholder orientation in place, with policies focused on expanding earnings as a sustainable company and enhancing corporate value. The company also strives to increase management efficiency and speed. Recognizing its corporate responsibility to society, the company provides various services that contribute to society and seeks to achieve harmony among parties that hold an interest in the company.

To ensure the transparency and objectivity of its business activities, when putting a management and administrative management system in place, the company intends to establish a structure for monitoring the business execution process and disclosing information in a timely manner.

Dividend policy

The company recognizes shareholder returns as an important management priority. However, having been established only recently, the company believes that, rather than dividends, the best ways to increase shareholder returns are augmenting retained earnings in preparation to expand the business; increasing working capital in order to build a robust financial system and increase the company’s operations; and making capital investments.

For this reason, and factory has paid no dividends since its establishment, and the company plans to continue expanding retained earnings for the foreseeable future. While concentrating on boosting profitability and expanding its base of operations, and factory plans to provide shareholders with stable ongoing returns, taking the status of retained earnings expansion and the business environment surrounding the company into consideration. Furthermore, the company has no current plans regarding the potential timing or amount of dividends.

If the company does pay dividends from surplus, its fundamental policy is to pay these dividends annually, at the end of the fiscal year, with the dividend amount determined at the general meeting of shareholders. The company’s Articles of Incorporation provide for the issuance of interim dividends, based on a resolution by the Board of Directors.

Major shareholders

Shareholding Top shareholders (as of August 31, 2019) Shares held ratio

Takamasa Ohara 4,349,200 45.8% Rinji Aoki 781,200 8.2% The Master Trust Bank of Japan, Ltd. (Trust account) 580,200 6.1% Shu Takehana 388,736 4.1% Square Enix Co., Ltd. 379,784 4.0% Japan Trustee Services Bank, Ltd. (Trust account) 356,200 3.8% Ryo Mizutani 270,240 2.9% Yohei Iimura 261,840 2.8% The Nomura Trust and Banking Co., Ltd. 240,000 2.5% Yuki Umemoto 157,120 1.7% SUM 7,764,520 81.8%

Source: Shared Research based on company data

In July 2019, the company announced Square Enix held 4% of its shares. In October 2019, the company announced the publishers Shueisha, Shougakukan, and Hakusensha each held 2% of its shares. (Shares were acquired from major shareholders Shu Takehana (4%), Takamasa Ohara (4%), and Rinji Aoki (2%) through off-market negotiated transactions.)

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Employees

FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 Number of employees 8 17 41 65 90 YoY - 112.5% 141.2% 58.5% 38.5% Source: Shared Research based on company data

Glossary

UI/UX: A user interface (UI), which refers to all information the user sees, such as designs, fonts, and external appearance. The user experience (UX) describes the feelings and sensations the user experiences through a product or service.

Ad network: An arrangement in which multiple advertising media (such as websites, social media, blogs, etc.) are bundled together to create an ad distribution network. It allows advertisers to place ads across multiple publishers without having to deal with each publisher individually.

Affiliate: An arrangement through which an advertiser’s products or services are made available within a third-party app or site. The company managing the app or site receives compensation (advertising revenue) if the user purchases the products or services.

API: An application programming interface is a set of subroutine definitions, communication protocols, and tools for building software that provides building blocks for computer programs. An API allows applications and programs to interact with other software and functions.

Fourth Industrial Revolution: Technological innovation in areas such as IoT (described below), big data, and artificial intelligence. (AI) is a core element of this revolution. “Big data” refers to massive quantities of data that are difficult to register, store, manage, and analyze using conventional database management systems. “Artificial intelligence” indicates intelligence that resides in artificial (i.e., not human) computer systems and is capable of learning, reasoning, recognizing, and decision-making.

ICT: Information and communication technology

IoT: Short for the Internet of Things, IoT describes the concept of physical items being connected over the internet. IoT may refer to new services that make this concept a reality, to a business model, or to elemental technologies. Some industry pundits believe that the ability to connect a wide range of items over the internet, collect resulting data, and analyze and make use of this data will make the provision of innovative, high-value-added functions and services possible.

IoT device: A device that can be connected to the internet. The 2017 White Paper on Information and Communications in Japan describes an IoT device as “a device that has a unique IP address and can be connected to the internet. These electronic devices are broad in scope, ranging from devices used as sensor network terminals to devices with computing functions.” Worldwide, the number of IoT devices is expected to grow from an estimated 17.3 billion in 2017 to more than 30.0 billion in 2020.

Labor force: The number of people aged 15 years or more who are able and willing to work.

MAUs: The number of monthly active users (MAUs) indicates the number of people who use an app in a given month.

Multiplay: The ability to play smartphone game apps with other users.

On-premise: Servers, software, and other information systems located within facilities managed by their users

Open innovation: Bringing together knowledge and technologies from a broad range of sources when developing new technologies and products.

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Platform: The foundation upon, or environment in, which applications operate.

Revenue share: The allocation of obtained revenue to partner companies according to standards set in advance.

Test marketing location: A location where products under development can be provided to target consumers to gauge their reactions.

Profile

Company Name Head Office 1F and 2F, Sumitomo Fudosan Aobadai Tower and factory, inc. 3-6-28 Aobadai, Meguro-ku, Tokyo, Japan Phone Listed On - The First Section of the Tokyo Stock Exchange Established Exchange Listing September 16, 2014 September 9, 2018 Website Fiscal Year-End https: //andfactory.co.jp/ August 31 IR Contact IR Web - https: //andfactory.co.jp/ir/

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