Happinet / 7552

R Happinet / 7552

COVERAGE INITIATED ON: 2014.03.06 LAST UPDATE: 2020.10.08

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

Research Coverage Report by Shared Research Inc. Happinet / 7552 R LAST UPDATE: 2020.10.08 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp Coverage

INDEX

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

Key financial data ------3 Recent updates ------4 Highlights ------4 Trends and outlook ------6 Business ------18 Description ------18 Strengths and weaknesses ------27 Market and value chain ------28 Strategy ------31 Historical performance ------33 Historical financial statements ------33 Other information ------44 History ------44 News and topics ------45 Major shareholders (as of end-March 2020) ------46 Profile ------47

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Key financial data

Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 190,891 198,021 176,757 206,867 217,232 187,274 174,059 197,607 240,398 233,347 240,000 YoY -1.7% 3.7% -10.7% 17.0% 5.0% -13.8% -7.1% 13.5% 21.7% -2.9% 2.9% Gross profit 22,326 25,007 22,501 24,039 26,152 21,997 21,971 22,880 25,193 23,540 YoY -0.6% 12.0% -10.0% 6.8% 8.8% -15.9% -0.1% 4.1% 10.1% -6.6% GPM 11.7% 12.6% 12.7% 11.6% 12.0% 11.7% 12.6% 11.6% 10.5% 10.1% Operating profit 2,855 4,855 2,973 3,888 5,056 3,450 3,698 4,806 4,540 2,572 3,700 YoY 22.7% 70.1% -38.8% 30.8% 30.0% -31.8% 7.2% 30.0% -5.5% -43.3% 43.9% OPM 1.5% 2.5% 1.7% 1.9% 2.3% 1.8% 2.1% 2.4% 1.9% 1.1% 1.5% Recurring profit 3,013 5,032 3,081 3,917 5,124 3,497 3,479 4,701 4,383 2,413 3,500 YoY 19.9% 67.0% -38.8% 27.1% 30.8% -31.8% -0.5% 35.1% -6.8% -44.9% 45.0% RPM 1.6% 2.5% 1.7% 1.9% 2.4% 1.9% 2.0% 2.4% 1.8% 1.0% 1.5% Net income attributable to owners of the parent 1,376 2,458 2,011 2,466 4,049 2,359 2,040 4,031 2,735 1,224 2,100 YoY 16.7% 78.6% -18.2% 22.6% 64.2% -41.7% -13.5% 97.6% -32.2% -55.2% 71.6% Net margin 0.7% 1.2% 1.1% 1.2% 1.9% 1.3% 1.2% 2.0% 1.1% 0.5% 0.9% Per share data (JPY) Shares issued (year-end; '000) 12,025 24,050 24,050 24,050 24,050 24,050 24,050 24,050 24,050 24,050 EPS 61.3 109.7 89.8 109.4 178.9 104.1 92.3 185.3 125.4 55.9 95.9 EPS (fully diluted) - 109.6 89.6 108.1 176.2 102.2 90.4 181.1 122.5 54.6 Dividend per share 15.00 27.50 22.50 24.75 28.50 30.00 35.00 40.00 50.00 50.00 50.00 Book value per share 883.7 972.1 1,036.2 1,128.3 1,293.0 1,364.8 1,464.8 1,659.3 1,712.1 1,713.8 Balance sheet (JPYmn) Cash and cash equivalents 8,220 12,359 10,155 9,996 15,867 11,412 11,605 11,458 17,447 14,410 Total current assets 41,039 48,269 47,930 47,025 52,449 44,905 48,975 60,484 59,072 55,086 Tangible fixed assets 1,555 1,392 1,110 1,342 688 753 777 758 810 813 Investments and other assets 2,780 2,946 2,976 5,065 5,900 10,047 10,579 11,614 12,438 12,266 Total fixed assets 7,468 6,054 5,072 6,854 7,443 11,887 12,361 14,838 15,850 15,668 Total assets 48,507 54,323 53,003 53,879 59,893 56,793 61,337 75,323 74,923 70,754 Notes and accounts payable 20,204 23,042 22,672 20,099 20,118 18,282 21,550 27,785 25,589 22,188 Short-term debt ------Total current liabilities 25,837 29,617 26,883 25,036 26,957 21,817 25,188 34,354 32,575 27,996 Long-term debt ------Total fixed liabilities 2,867 2,909 2,829 3,148 3,355 3,621 3,837 4,269 4,364 4,578 Total liabilities 28,704 32,527 29,713 28,185 30,312 25,438 29,026 38,624 36,939 32,575 Net assets 19,802 21,795 23,289 25,694 29,580 31,355 32,311 36,698 37,983 38,178 Total interest-bearing debt ------Cash flow statement (JPYmn) Cash flows from operating activities 5,083 4,609 -1,505 2,547 6,658 978 3,055 4,453 7,940 -1,056 Cash flows from investing activities -315 -50 -108 -87 -158 -4,752 -1,107 -3,837 -948 -1,047 Cash flows from financing activities -2,852 -421 -588 -2,618 -628 -677 -1,754 -762 -1,001 -1,111 Financial ratios ROA (RP-based) 6.2% 9.8% 5.7% 7.3% 9.0% 6.0% 5.9% 6.9% 5.8% 3.3% ROE 7.1% 11.8% 8.9% 10.1% 14.8% 7.8% 6.5% 11.3% 7.4% 3.3% Equity ratio 40.8% 40.1% 43.9% 47.7% 49.4% 55.2% 52.7% 48.7% 50.7% 54.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Per share data adjusted for the 2-for-1 stock split on December 1, 2011. Per share data is retroactively restated. Note: Net income attributable to owners of the parent from before FY03/15 refers to net income.

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Recent updates

Highlights On October 8, 2020, Shared Research updated the report following interviews with Happinet Corporation.

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

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

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

Overview of the subsidiary to be transferred

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

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

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

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

Schedule

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

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

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

1H FY03/21 earnings forecast Sales: JPY110.0bn (1H FY03/20 result: JPY103.0bn) ▷ Operating profit: JPY1.6bn (JPY1.6bn) ▷ Recurring profit: JPY1.5bn (JPY1.6bn) ▷ Net income*: JPY900mn (JPY763mn) ▷ *Net income attributable to owners of the parent.

FY03/21 earnings forecast

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

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

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

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

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

On August 12, 2020, the company announced earnings results for Q1 FY03/21; 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 FY03/20 FY03/21 FY03/21 FY03/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of Est. 1H Est. % of Est. FY Es t . Sales 46,257 103,014 181,590 233,347 50,499 45.9% 110,000 21.0% 240,000 YoY -2.1% -1.5% -5.1% -2.9% 9.2% 6.8% 2.9% Gross profit 5,496 11,747 18,842 23,540 5,241 YoY 1.2% 0.2% -7.6% -6.6% -4.7% GPM 11.9% 11.4% 10.4% 10.1% 10.4% SG&A expenses 4,921 10,141 15,816 20,967 4,790 YoY 5.5% 3.4% 2.0% 1.5% -2.7% SG&A ratio 10.6% 9.8% 8.7% 9.0% 9.5% Operating profit 575 1,605 3,025 2,572 450 28.1% 1,600 12.2% 3,700 YoY -25.0% -16.4% -38.0% -43.3% -21.7% -0.3% 43.9% OPM 1.2% 1.6% 1.7% 1.1% 0.9% 1.5% 1.5% Recurring profit 573 1,571 2,974 2,413 483 32.2% 1,500 13.8% 3,500 YoY -23.9% -15.2% -37.9% -44.9% -15.7% -4.5% 45.0% RPM 1.2% 1.5% 1.6% 1.0% 1.0% 1.4% 1.5% Net income attributable to owners of the parent 137 763 1,710 1,224 285 31.7% 900 13.6% 2,100 YoY -68.5% -30.8% -43.7% -55.2% 107.9% 18.0% 71.6% Net margin 0.3% 0.7% 0.9% 0.5% 0.6% 0.8% 0.9% Quarterly FY03/20 FY03/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 46,257 56,757 78,576 51,757 50,499 YoY -2.1% -1.0% -9.4% 5.3% 9.2% Gross profit 5,496 6,251 7,095 4,698 5,241 YoY 1.2% -0.7% -18.1% -2.2% -4.7% GPM 11.9% 11.0% 9.0% 9.1% 10.4% SG&A expenses 4,921 5,220 5,675 5,151 4,790 YoY 5.5% 1.5% -0.4% 0.1% -2.7% SG&A ratio 10.6% 9.2% 7.2% 10.0% 9.5% Operating profit 575 1,030 1,420 -453 450 YoY -25.0% -10.7% -52.0% - -21.7% OPM 1.2% 1.8% 1.8% - 0.9% Recurring profit 573 998 1,403 -561 483 YoY -24.0% -9.0% -52.2% - -15.7% RPM 1.2% 1.8% 1.8% - 1.0% Net income attributable to owners of the parent 137 626 947 -486 285 YoY -68.5% -6.3% -51.1% - 107.9% Net margin 0.3% 1.1% 1.2% - 0.6% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Three-month quarterly figures are calculated as the cumulative figures minus the previous quarter’s cumulative figures.

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

Breakdown of SG&A expenses

Cumulative FY03/19 FY03/20 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 SG&A expenses 4,921 10,141 15,816 20,967 4,790 YoY 5.5% 3.4% 2.0% 1.5% -2.7% Logistics expenses 1,001 2,130 3,558 4,505 973 YoY 9.4% 7.5% 3.4% 3.3% -2.8% Personnel expenses 2,103 4,207 6,477 8,677 2,079 YoY 2.0% -0.9% -1.8% -2.9% -1.1% Depreciation 125 278 432 589 149 YoY 13.5% 25.3% 28.7% 28.0% 19.3% Amortization of goodwill 33 66 100 133 39 YoY - - - - 16.9% Quarterly FY03/19 FY03/20 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 SG&A expenses 4,921 5,220 5,675 5,151 4,790 YoY 5.5% 1.5% -0.4% 0.1% -2.7% Logistics expenses 1,001 1,129 1,428 947 973 YoY 9.4% 5.8% -2.1% 3.0% -2.8% Personnel expenses 2,103 2,104 2,270 2,200 2,079 YoY 2.0% -3.7% -3.4% -6.0% -1.1% Depreciation 125 153 154 157 149 YoY 13.5% 36.6% 35.1% 26.6% 19.3% Amortization of goodwill 33 33 33 33 39 YoY - - - - 16.9% Source: Shared Research based on company data

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Note: Figures may differ from company materials due to differences in rounding methods. Note: Three-month quarterly figures are calculated as the cumulative figures minus the previous quarter’s cumulative figures.

Performance by segment Segments (cumulative) FY03/20 FY03/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total sales 46,257 103,014 181,590 233,347 50,499 YoY -2.1% -1.5% -5.1% -2.9% 9.2% Toys 16,362 36,785 64,048 79,060 17,493 YoY 25.5% 15.9% 3.9% 2.7% 6.9% Visual and Music 17,829 34,921 53,702 71,618 13,368 YoY -12.1% -18.6% -15.5% -12.4% -25.0% Videogames 7,462 21,227 49,168 63,136 16,856 YoY -20.5% 5.6% -4.3% 2.4% 125.9% Amusement 4,601 10,079 14,671 19,532 2,781 YoY 1.6% 2.5% 0.0% -2.3% -39.6% Segment profit 575 1,605 3,025 2,572 450 YoY -25.0% -16.4% -38.0% -43.3% -21.7% Toys 254 709 1,544 1,065 456 YoY -0.2% -12.2% -38.1% -47.3% 79.5% Visual and Music 278 559 581 533 198 YoY -21.7% -26.3% -47.5% -51.4% -28.5% Videogames 18 173 743 840 236 YoY -81.8% -18.3% -29.3% -19.1% - Amusement 330 790 1,134 1,475 -137 YoY -9.0% 3.7% -6.1% -14.4% - Adjustments -306 -627 -977 -1,342 -304 Segments (quarterly) FY03/20 FY03/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total sales 46,257 56,757 78,576 51,757 50,499 YoY -2.1% -1.0% -9.4% 5.3% 9.2% Toys 16,362 20,423 27,263 15,012 17,493 YoY 25.5% 9.2% -8.9% -2.1% 6.9% Visual and Music 17,829 17,092 18,781 17,916 13,368 YoY -12.1% -24.4% -9.1% -1.5% -25.0% Videogames 7,462 13,765 27,941 13,968 16,856 YoY -20.5% 28.4% -10.6% 35.7% 125.9% Amusement 4,601 5,478 4,592 4,861 2,781 YoY 1.6% 3.2% -4.9% -8.6% -39.6% Segment profit 575 1,030 1,420 -453 450 YoY -25.0% -10.7% -52.0% - -21.7% Toys 254 455 835 -479 456 YoY -0.2% -17.9% -50.5% - 79.5% Visual and Music 278 281 22 -48 198 YoY -21.7% -30.4% -93.7% - -28.5% Videogames 18 155 570 97 236 YoY -81.8% 40.9% -32.1% - - Amusement 330 460 344 341 -137 YoY -9.0% 15.0% -22.9% -33.9% - Adjustments -306 -321 -350 -365 -304 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Three-month quarterly figures are calculated as the cumulative figures minus the previous quarter’s cumulative figures.

Toys segment

Cumulative FY03/20 FY03/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total sales 16,362 36,785 64,048 79,060 17,493 YoY 25.5% 15.9% 3.9% 2.7% 6.9% BANDAI, BANDAI SPIRITS 8,900 21,600 37,600 45,300 8,800 YoY 22.5% 14.0% -0.3% -4.9% -0.6% % of total 54.7% 59.0% 58.7% 57.4% 50.8% TAKARA TOMY 1,600 3,800 6,000 7,400 1,400 YoY -7.5% -4.9% -15.9% -15.9% -7.5% % of total 9.9% 10.5% 9.5% 9.4% 8.6% Happinet original 400 900 1,400 1,500 200 YoY -6.8% -0.1% -6.8% -21.1% -37.0% % of total 2.5% 2.7% 2.3% 1.9% 1.5% Other 5,300 10,200 18,800 24,700 6,800 YoY 52.2% 33.8% 24.8% 33.4% 27.2% % of total 32.9% 27.8% 29.5% 31.3% 39.1% Segment profit 254 709 1,544 1,065 456 YoY -0.2% -12.2% -38.1% -47.3% 79.5% Segment profit margin 1.6% 1.9% 2.4% 1.3% 2.6% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Some sales categorizations have been modified from FY03/19 due to the April 2018 startup of BANDAI SPIRITS CO., LTD.

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Visual and Music segment

Cumulative FY03/20 FY03/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total sales 17,829 34,921 53,702 71,618 13,368 YoY -12.1% -18.6% -15.5% -12.4% -25.0% Visual 10,000 20,200 32,500 43,500 10,000 YoY -16.7% -22.8% -16.4% -3.3% 0.3% % of total 56.1% 58.1% 60.5% 60.8% 75.0% Wholesale 8,900 18,100 29,000 39,100 8,700 YoY -20.5% -26.8% -20.6% -3.7% -1.4% % of total 49.9% 51.9% 54.0% 54.7% 65.7% Manufacturers 1,100 2,100 3,400 4,300 1,200 YoY 35.1% 44.0% 50.2% 0.3% 13.4% % of total 6.2% 6.2% 6.5% 6.1% 9.3% Music 7,800 14,600 21,100 28,000 3,300 YoY -5.5% -12.0% -14.2% -23.6% -57.3% % of total 43.9% 41.9% 39.5% 39.2% 25.0% Segment profit 278 559 581 533 198 YoY -21.7% -26.3% -47.5% -51.4% -28.5% Segment profit margin 1.6% 1.6% 1.1% 0.7% 1.5% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Videogames segment

Cumulative FY03/20 FY03/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total sales 7,462 21,227 49,168 63,136 16,856 YoY -20.5% 5.6% -4.3% 2.4% 125.9% Nintendo products 6,500 19,000 45,300 58,300 15,400 YoY -10.1% 15.5% 1.3% 10.5% 134.9% % of total 87.8% 89.6% 92.2% 92.4% 91.3% SIE products 700 1,600 3,000 3,800 1,000 YoY -63.3% -49.3% -47.2% -50.3% 51.1% % of total 9.7% 7.9% 6.1% 6.0% 6.5% Others 100 500 800 900 300 YoY 41.9% 55.7% -11.5% -16.0% 96.3% % of total 2.5% 2.5% 1.7% 1.6% 2.2% Segment profit 18 173 743 840 236 YoY -81.8% -18.3% -29.3% -19.1% - Segment profit margin 0.2% 0.8% 1.5% 1.3% 1.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: SIE is Sony Interactive Entertainment Inc.

Amusement segment

Cumulative FY03/20 FY03/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total sales 4,601 10,079 14,671 19,532 2,781 YoY 1.6% 2.5% 0.0% -2.3% -39.6% Capsule toys 2,600 6,100 9,000 11,900 2,000 YoY 6.2% 11.3% 6.8% 3.9% -23.9% % of total 58.0% 60.7% 61.6% 61.2% 73.0% Card games 1,400 2,900 4,000 5,400 400 YoY -10.0% -14.4% -14.8% -15.5% -71.1% % of total 32.0% 28.9% 27.5% 28.1% 15.3% Other 400 1,000 1,500 2,000 300 YoY 20.9% 12.2% 9.0% 5.6% -29.3% % of total 10.0% 10.4% 10.9% 10.7% 11.7% Segment profit 330 790 1,134 1,475 -137 YoY -9.0% 3.7% -6.1% -14.5% - Segment profit margin 7.2% 7.8% 7.7% 7.6% -4.9% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Consolidated results for Q1 FY03/21

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

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

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

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

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

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

Q1 sales by manufacturer

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

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

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

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

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

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

Sales by field

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

In visual products field, the decline in sales from wholesaling operations was attributed mainly to the dropout of the sales of packaged products tied to the movie Bohemian Rhapsody booked during the same quarter last year. On the manufacturing side, the gains reflected sales from the distribution of its popular self-produced movie Romance Doll. On the music side, the sharp drop in sales reflected the near total lack of new releases and the cancelation of promotional events, as well as tough comparisons with the same quarter last year, when sales got a big boost from hit albums, such as a greatest hits album by the popular group Arashi. On the earnings front, the 28.5% YoY drop in segment profit closely tracked the 25.0% drop in sales and the resulting decline in gross profit.

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

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

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

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

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

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

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Full-year company forecast for FY03/21

FY03/21 forecast FY03/20 FY03/21 (JPYmn) 1H A ct. 2H A ct. FY A c t . 1H Est. 2H Est. FY Es t . Sales 103,014 130,333 233,347 110,000 130,000 240,000 YoY -1.5% -4.0% -2.9% 6.8% -0.3% 2.9% Cost of sales 91,267 118,540 209,807 Gross profit 11,747 11,793 23,540 GPM 11.4% 9.0% 10.1% SG&A expenses 10,141 10,826 20,967 SG&A rat io 9.8% 8.3% 9.0% Operating profit 1,605 967 2,572 1,600 2,100 3,700 YoY -16.4% -63.1% -43.3% -0.3% 117.2% 43.9% OPM 1.6% 0.7% 1.1% 1.5% 1.6% 1.5% Recurring profit 1,571 842 2,413 1,500 2,000 3,500 YoY -15.2% -66.7% -44.9% -4.5% 137.5% 45.0% RPM 1.5% 0.6% 1.0% 1.4% 1.5% 1.5% Net income attributable to owners of the parent 763 461 1,224 900 1,200 2,100 YoY -30.8% -71.8% -55.2% 18.0% 160.3% 71.6% Net margin 0.7% 0.4% 0.5% 0.8% 0.9% 0.9% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

On September 23, 2020, Happinet announced 1H and full-year FY03/21 earnings forecasts. At the beginning of the year, the company noted that it was refraining from issuing FY03/21 earnings forecast due to limitations on making reasonable estimates given uncertainties in market trends. However, it has now released an earnings forecast that assumes a gradual resumption in economic activity based on currently available information.

For 1H FY03/21, the company forecasts sales of JPY110.0bn (+6.8% YoY), operating profit of JPY1.6bn (-0.3% YoY), recurring profit of JPY1.5bn (-4.5% YoY), and net income attributable to owners of the parent of JPY900mn (+18.0% YoY). It forecasts a YoY increase in sales on the back of favorable performance in the Videogames segment, especially for Nintendo Switch products thanks to stay-at-home demand amid the pandemic, and the positive effects from the company’s full-fledged entry into model toy wholesale business following its November 2019 purchase of shares in Irisawa Corp. (made it a subsidiary). On the other hand, the company expects operating profit and recurring profit to decline YoY amid a slump in the relatively high profit margin Amusement segment due to a decline in inbound demand and consumers refraining from going out. The company forecasts a YoY increase in net income attributable to owners of the parent in reaction to extraordinary losses booked in 1H FY03/20 in line with expenses incurred in celebration of the 50th anniversary of the company’s founding.

For FY03/21, the company forecasts sales of JPY240.0bn (+2.9% YoY), operating profit of JPY3.7bn (+43.9% YoY), recurring profit of JPY3.5bn (+45.0% YoY), and net income attributable to owners of the parent of JPY2.1bn (+71.6% YoY). It assumes trends in place through 1H will continue throughout the year, with the Amusement segment staging a gradual recovery. The company intends to maintain an appropriate level of inventory, reduce inventory disposals, and build a low-cost structure through operational improvements. Based on these initiatives, the company expects full-year FY03/21 sales and profit to grow YoY.

Initiatives for individual business segments in FY03/21 are as follows.

Toys

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

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In terms of promising merchandise, in October 2020, Bandai plans to launch “Kimetsu Tamagotchi” (MSRP: JPY2,300 excluding tax), a collaboration with Demon Slayer: Kimetsu no Yaiba the popular comic series that has sold over 80mn copies to date. In June 2020, Bandai also plans to launch “the General-Purpose Egg-Type Battle Weapon Evatchi” (MSRP: JPY2,300 excluding tax), a collaboration with the Evangelion animated series. Happinet will handle distribution for both.

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

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

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

Visual and Music

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

In terms of promising merchandise, the company released the self-produced film MOTHER in summer 2020.

Videogames

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

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

Amusement

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

In terms of promising merchandise, the company plans to bring out a line of capsule toys based on Demon Slayer: Kimetsu no Yaiba to coincide with the October 2020 scheduled release of the movie Demon Slayer: Kimetsu no Yaiba the Movie: Mugen Train, the theatrical version of the comic Demon Slayer: Kimetsu no Yaiba.

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The COVID-19 pandemic no Yaibas on HappinetD- business As of August 2020, the COVID-19 pandemic’s impacts on Happinet’s business are as follows.

All business segments face the potential of not being able to sell merchandise as planned in the event of delays in the ▷ manufacture of handled merchandise. All business segments, but notably the Amusement segment, experience declines in sales to consumers due to calls to stay ▷ home as well as temporary closure or shortened business hours of commercial facilities, which are the company’s customers. Primarily in the Visual and Music segment, there may be postponements of events or movies financed by Happinet. ▷ In Videogames, calls to stay home may boost demand for merchandise handled by Happinet. ▷

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

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Medium-term outlook

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

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

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

Eighth medium-term business plan targets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Business

Description

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

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

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

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

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

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

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

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

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

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

Toy distribution flow Toy distribution breaks down as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Videogame sales breakdown

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

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

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

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

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

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

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

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

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

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

Capsule-toy vending machines

Source: Company data

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

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

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

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

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

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

Card game machine

Source: Company data

Group companies

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

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

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

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

Consolidated subsidiaries Happinet Marketing Corp. (100% owned) The company distributes a wide range of products nationwide, including Bandai products.

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

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

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

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

Maxgames Corporation (100% owned) Sells videogame consoles and videogames.

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

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

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

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

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

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

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

Weaknesses

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

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

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

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

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

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

Domestic toy market and population

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

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

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

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

Video software market

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

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

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

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

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

Video on Demand (VOD) market

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

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

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

Record production and paid distribution music

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

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

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

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

Shipments of Domestic Home Videogame Consoles

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

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

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

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

Competition

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

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Strategy

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

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

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

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

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

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

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

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

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

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

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

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Historical performance

Historical financial statements Full-year FY03/20 results

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

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

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

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

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

Earnings by segment were as follows.

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

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

Sales by manufacturer

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

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Products from other manufacturers: JPY24.7bn (+33.4% YoY); 31.3% of segment sales (versus 24.0% in FY03/19) ▷

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

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

(Reference) Bandai Namco Holdings Inc. results For FY03/20, the Toys and Hobby segment of Bandai Namco Holdings Inc. reported sales of JPY253.7bn, an increase of 4.5% over FY03/19. According to disclosures from Bandai Namco, sales of its adult-oriented products in the Mobile Suit Gundam series, including plastic models and collector figures (which accounted for 40% of the segment’s sales in FY03/20), were strong, as were sales of mainstay IP-related toys and peripheral products, such as the Kamen Rider, Super Sentai, and One Piece series.

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

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

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

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

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Sales by field

Visual field: JPY43.5bn (-43.3% YoY) ▷  Wholesale business: JPY39.1bn (-3.7% YoY)  Manufacturing business: JPY4.3bn (+0.3% YoY) Music field: JPY28.0bn (-23.6% YoY) ▷

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

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

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

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

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

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

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

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

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

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Cumulative Q3 FY03/20 results

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

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

new core system.

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

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

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

Sales by manufacturer

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

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

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

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

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

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

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

Sales by field

Visual field: JPY32.5bn (-16.4% YoY) ▷  Wholesale business: JPY29.0bn (-20.6% YoY)  Manufacturing business: JPY3.4bn (+50.2% YoY) Music field: JPY21.1bn (-14.2% YoY) ▷

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At its manufacturing business, sales were up thanks to strong package video sales of the drama Tonbo (where Happinet has exclusive distribution rights) and Manaria Friends (an anime series the company has invested).

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

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

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

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

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

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

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

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

1H FY03/20 results

Sales: JPY103.0bn (-1.5% YoY) ▷ Operating profit: JPY1.6bn (-16.4% YoY) ▷ Recurring profit: JPY1.6bn (-15.2% YoY) ▷ Net income*: JPY763mn (-30.8% YoY) ▷ *Net income attributable to owners of the parent

Sales fell YoY due to a lack of hit products supporting performance. Sales grew in the Toys, Videogames, and Amusement ▷ segments, but fell in the Visual and Music segment. In 1H FY03/19, there was a contribution to the Visual and Music segment from strong sales of Namie Amuro’s concert video, Namie Amuro Final Tour 2018: Finally, but no similar hits in 1H FY03/20.

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Gross profit was up YoY as GPM rose to 11.4% (+0.2pp YoY). In addition to lower sales, the company booked JPY584mn in ▷ inventory disposal losses centering on the Toys segment (versus JPY485mn in 1H FY03/19), but the ratios of total sales generated by the Toys and Amusement segments, which have higher GPM, rose. Operating and recurring profits were down YoY on an increase in SG&A expenses, which rose to JPY10.1bn (+3.4% YoY) due ▷ in part to higher distribution and depreciation expenses. Net income attributable to owners of the parent declined due to a drop in recurring profit and JPY282mn in expenses—booked ▷ as an extraordinary loss—related to commemorating the company’s 50th anniversary.

Progress versus the company’s 1H FY03/20 forecasts was sales 103.0%, operating profit 94.4%, recurring profit 98.2%, and net income attributable to owners of the parent 95.4%. Sales were ahead of plan, but results from the operating profit line downward fell short of forecasts due to larger-than-expected inventory disposal losses.

Progress versus the company’s full-year FY03/20 forecasts was sales 42.9% (43.5% of FY03/19 results in 1H FY03/19), operating profit 32.1% (42.3%), recurring profit 32.7% (42.2%), and net income attributable to owners of the parent 27.3% (40.3%). The company maintained its full-year forecasts despite progress on profit from operating profit downward being slower than year- ago levels. There is still uncertainty about sales around Christmas and the New Year, the most important selling season for the company.

Toys In the Toys segment, sales rose 15.9% YoY to JPY36.8bn while segment profit fell 12.2% YoY to JPY709mn.

Sales rose YoY due to robust performances by Bandai products related to the Kishiryu Sentai Ryusoulger television series, by plastic models, collectors’ figures, and other high-target toys from BANDAI SPIRITS, and by the latter’s Ichiban Kuji products.

Sales by manufacturer

Bandai and BANDAI SPIRITS products: JPY21.6bn (+14.0% YoY) for a share of 59.0% of the total (60.0% in 1H FY03/19) ▷ Takara Tomy products: JPY3.8bn (-4.9% YoY) for a share of 10.5% (12.8%) ▷ Happinet’s own products: JPY900mn (-0.1% YoY) for a share of 2.7% (3.1%) ▷ Products from other manufacturers: JPY10.2bn (+33.8% YoY) for a share of 27.8% (24.1%) ▷

BANDAI SPIRITS products performed well. The sales ratio of products from other manufacturers, including the Pokémon Company, also increased.

Segment profit Despite the rise in sales, segment profit was down slightly on inventory disposal losses and changes to the product mix. Inventory disposal losses came to JPY450mn (JPY310mn in 1H FY03/19).

(Reference) Bandai Namco Holdings Inc. results Sales of the Toys and Hobby segment of Bandai Namco Holdings Inc. came to JPY128.0bn (+14.0% YoY) in 1H FY03/20. According to Bandai Namco materials, the performance of adult-oriented products in the Mobile Suit Gundam series, including plastic models and collector figures, was strong, as were sales of mainstay IP-related toys and peripheral products, such as the Dragon Ball, Kamen Rider, Super Sentai, and One Piece series.

(Reference) Takara Tomy results Sales in Takara Tomy totaled JPY71.2bn (-4.6% YoY) in 1H FY03/20. According to materials from Takara Tomy, sales were strong not only for mainstay Tomica and L.O.L. Surprise!, but for merchandise associated with the animated feature Toy Story 4 as well. However, sales of Beyblade Burst declined.

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

In FY01/19, Irisawa had sales of JPY5.4bn and operating profit of JPY38mn. Happinet said that it would start consolidating the new subsidiary in results from Q4, covering five months. It said there was no goodwill associated with the purchase.

Visual and Music In the Visual and Music segment, sales fell 18.6% YoY to JPY34.9bn and segment profit fell 26.3% YoY to JPY559mn.

Sales fell despite favorable package sales for the exclusive-distribution drama Tonbo. In 1H FY03/19, there were strong sales of Namie Amuro’s concert video, Namie Amuro Final Tour 2018: Finally, but no similar hits in 1H FY03/20.

Sales by field

Visual field: JPY20.2bn (-22.8% YoY) ▷  Wholesale business: JPY18.1bn (-26.8% YoY)  Manufacturing business: JPY2.1bn (+44.0% YoY) Music field: JPY14.6bn (-12.0% YoY) ▷

In the visual field wholesale business and music field, sales declined due to the absence of Namie Amuro’s concert video, Namie Amuro Final Tour 2018: Finally, which made a major contribution in 1H FY03/19. In the visual field manufacturing business, sales were up thanks to favorable package sales for the drama Tonbo and Manaria Friends (an anime series the company invests in).

Segment profit Not only did the ratio of the comparatively higher margin visual field manufacturing business rise, but Happinet reduced expenses by integration of its own distribution system with that of the former Seikodo and by other means. However, these positive factors were insufficient to make up for the decline in sales, so profit also declined.

Videogames In the Videogames segment, sales rose 5.6% YoY to JPY21.2bn and segment profit fell 18.3% YoY to JPY173mn.

Sales increased YoY, buoyed by the release of new Nintendo Switch hardware and launch of the Nintendo Switch Lite. By manufacturer, sales of Nintendo products were JPY19.0bn (+15.5% YoY) and JPY1.6bn (-49.3% YoY) for Sony Interactive Entertainment.

In September 2019, Happinet announced the development of original game software Brigandine: Lunasia Senki. It exhibited at a booth at Tokyo Game Show being held that month and incurred roughly JPY30mn in sales promotion expenses, which were a factor in the profit decline.

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

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Amusement In the Amusement segment, sales rose 2.5% YoY to JPY10.1bn and segment profit was 3.7% higher YoY at JPY790mn.

Sales rose YoY as sales growth for capsule toys outweighed lower sales for card game products. Sales of capsule toys came to JPY6.1bn (+11.3% YoY) and card game sales to JPY2.9bn (-14.4% YoY). Capsule toys performed well due to the positive effects of sales events and the development of new locations. Sales of card games declined due to a lack of hit products. Profit rose on higher sales.

Q1 FY03/20 results

Sales: JPY46.3bn (-2.1% YoY) ▷ Operating profit: JPY575mn (-25.0% YoY) ▷ Recurring profit: JPY57mn (-23.9% YoY) ▷ Net income*: JPY137mn (-68.5% YoY) ▷ *Net income attributable to owners of the parent

The toys market saw target customers and genres expand, but amid Japan’s declining birthrate, overall market growth remained flat. In the visual and music business and the videogames sector, the business environment continued to be difficult as the shift to smartphone-based services resulted in a lackluster performance in the packaged products industry.

Sales fell YoY due to a lack of hit products supporting performance. The Toys and Amusement segments generated higher ▷ sales, but the Visual and Music and Videogames segments generated lower sales. Gross profit was up YoY as GPM rose to 11.9% (+0.4pp YoY). In addition to lower sales, the company booked JPY76mn in ▷ inventory disposal losses centering on the Toys segment (versus JPY74mn centering on the Visual and Music segment in Q1 FY03/19), but the ratios of total sales generated by the Toys and Amusement segments, which have higher GPM, rose. Operating and recurring profits were down YoY on an increase in SG&A expenses, which rose to JPY4.9bn (+5.5% YoY) due in ▷ part to higher distribution expenses. Net income attributable to owners of the parent declined due to a drop in recurring profit and JPY280mn in expenses—booked ▷ as an extraordinary loss—related to commemorating the company’s 50th anniversary.

Q1 progress toward the company’s 1H FY03/20 forecast put sales at 46.3% (Q1 FY03/19 progress versus 1H FY03/19 results was 45.2%), operating profit at 33.8% (39.9%), recurring profit at 35.8% (40.7%), and net income attributable to owners of the parent at 17.1% (39.4%). Happinet says these results were fairly much within the scope of its expectations.

Toys In the Toys segment, sales rose 25.5% YoY to JPY16.4bn while segment profit finished essentially flat (-0.2% YoY) at JPY254mn.

Sales rose on favorable performance of related products of Bandai’s Kishiryu Sentai Ryusoulger, BANDAI SPIRITS’s Ichiban Kuji, and trading cards Pokémon Card Game.

Sales by manufacturer

Bandai and BANDAI SPIRITS products: JPY8.9bn (+22.5% YoY) for a share of 54.7% of the total (56.1% in Q1 FY03/19) ▷ Takara Tomy products: JPY1.6bn (-7.5% YoY) for a share of 9.9% (13.4%) ▷ Happinet’s own products: JPY400mn (-6.8% YoY) for a share of 2.5% (3.4%) ▷ Products from other manufacturers: JPY5.3bn (+52.2% YoY) for a share of 32.9% (27.1%) ▷

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Bandai and BANDAI SPIRITS products performed well, and their ratio of total sales increased. The sales ratio of products from other manufacturers, including the Pokémon Company, also increased.

Segment profit Despite the rise in sales, segment profit was down slightly on inventory disposal losses and changes to the product mix. Inventory disposal losses came to JPY74mn.

(Reference) Bandai Namco Holdings Inc. results Sales of the Toys and Hobby segment of Bandai Namco Holdings Inc. came to JPY56.8bn (+12.5% YoY) in Q1 FY03/20. According to Bandai Namco materials, the performance of adult-oriented products in the Mobile Suit Gundam series, including plastic models and collector figures, was strong, as were sales of mainstay IP-related toys and peripheral products, such as the Dragon Ball, Kamen Rider, and Super Sentai series.

(Reference) Takara Tomy results Sales in Takara Tomy’s Japan segment came to JPY30.4bn (-3.5% YoY) in Q1 FY03/20. According to materials from Takara Tomy, sales were strong not only for Tomica and Plarail, but also for Zoids Wild. In addition, L.O.L. Surprise! continued to perform well. However, sales of Beyblade Burst and the Duel Masters Trading Card Game declined.

Visual and Music In the Visual and Music segment, sales fell 12.1% YoY to JPY17.8bn and segment profit fell 21.7% YoY to JPY278mn.

Although pop group Arashi’s best album 5X20 All the BEST!! 1999-2019 and Manaria Friends (an anime series the company invests in) scored well, overall segment sales and profit fell due to the contraction of the packaged product market.

Sales by field

Visual field: JPY10.0bn (-16.7% YoY) ▷  Wholesale business: JPY8.9bn (-20.5% YoY)

 Manufacturing business: JPY1.1bn (+35.1% YoY) Music field: JPY7.8bn (-5.5% YoY) ▷

In the visual field manufacturing business, sales were up as Manaria Friends performed well and the company recorded distribution revenue and packaged version sales of the jointly managed film Nichinichi Kore Kojitsu (released in October 2018, JPY1.3bn in box-office proceeds).

Segment profit Not only did the ratio of the comparatively higher margin visual field manufacturing business rise, but Happinet reduced expenses by integration of its own distribution system with that of the former Seikodo. However, these positive factors were insufficient to make up for the decline in sales, so profit also declined.

Videogames In the Videogames segment, sales fell 20.5% YoY to JPY7.5bn and segment profit fell 81.8% YoY to JPY18mn.

Although products related to Nintendo Switch remained strong, sales and profit declined due to sluggish hardware and software sales for portable game consoles. In addition, the company’s comparatively higher margin exclusive distribution software Utawarerumono: Chiri Yuku Mono e no Komori Uta proved a hit in Q1 FY03/19, but there was no similar hit product in Q1 FY03/20. By manufacturer, Nintendo products generated sales of JPY6.5bn (-10.1% YoY) and Sony Interactive Entertainment products generated sales of JPY700mn (-63.3% YoY).

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Amusement In the Amusement segment, sales rose 1.6% YoY to JPY4.6bn and segment profit dipped 9.0% YoY to JPY330mn.

Segment sales rose YoY as sales growth for capsule toys outweighed lower sales for card game products. Sales of capsule toys came to JPY2.6bn (+6.2% YoY) and card game sales to JPY1.4bn (-10.0% YoY). Capsule toys performed well due to the positive effects of sales events and the development of new locations. Sales of card games declined due to a lack of hit products. On the profit front, expenses related to updating card game machines caused profit to dip.

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Other information

History

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

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

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

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

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

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News and topics January 2020 On January 23, 2020, the company announced revisions to its FY03/20 earnings forecast.

Revised forecast for full-year consolidated results for FY03/20

Sales: JPY220bn (versus previous forecast of JPY240bn) ▷ Operating profit: JPY2.7bn (versus JPY5.0bn) ▷ Recurring profit: JPY2.5bn (versus JPY4.8bn) ▷ Net income: JPY1.3bn (versus JPY2.8bn) ▷ EPS: JPY59.58 (versus JPY128.33) ▷ *Net income attributable to owners of the parent

Reasons for downward revision Due to a lack of major hit products during the year-end sales season (normally the company’s busiest season of the year) and generally weak results across all business areas, sales would likely finish the year short of the previous forecast. Operating profit, recurring profit, and net income attributable to the owners of the parent would also likely finish short of the previous estimates as earnings were hurt by shortfall in sales and valuation losses on slow-moving inventories.

On the same day, the company also announced changes in its dividend policy and revised its dividend forecast for FY03/20.

Changes in dividend policy The company’s basic dividend policy has been to pay a reasonable dividend while assuring sufficient internal reserves to finance medium-term business development initiatives. In addition to this general policy, it has specifically determined to maintain a stable dividend payment of JPY50 per annum and will target a dividend payout ratio of 40%.

Revision to dividend forecast In keeping with the changes in its dividend policy, the company raised its projected annual dividend payout for FY03/20 to JPY50 per share (versus previous forecast of JPY40 per share).

October 2019 On October 9, 2019, the company announced its decision to acquire shares in Irisawa Corp., making it a subsidiary.

The company resolved to acquire shares in Irisawa, a company that handles hobby-related products, and to subsequently make it a subsidiary to enter the model toy wholesale business. Drawing on the distribution network of both companies, Happinet intends to build a strong relationship with retail stores and strengthen alliances with manufacturers to expand the model toy market. Although Happinet expects the acquisition to have only a marginal impact on FY03/20 earnings performance, the company sees it will contribute to earnings growth in the medium to long term.

Irisawa’s earnings performance (JPYmn) FY01/18 FY01/19 Sales 5,921 5,434 Operating profit 72 38 Recurring profit 61 26 Net income 59 23 Net assets 1,004 1,025 Total assets 2,595 2,482

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Overview of seller, acquisition price, and number of shares held before and after the acquisition

Seller and acquisition price: Undisclosed due to confidentiality obligations ▷ Shares held before the acquisition: None (voting rights: 0.0%) ▷ Shares held after the acquisition: 22,150 shares (voting rights: 100.0%) ▷

Schedule

Contract conclusion date: October 9, 2019 ▷ Share transfer date: November 11, 2019 (tentative) ▷

Major shareholders (as of end-March 2020)

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

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

https://www.happinet.co.jp/english/ir/index.html

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Current Client Coverage of Shared Research Inc. Accordia Golf Trust Digital Arts Inc. KAMEDA SEIKA CO., LTD. SanBio Company Limited Advance Create Co., Ltd. Digital Garage Inc. Kanamic Network Co.,LTD SANIX INCORPORATED ADJUVANT COSME JAPAN CO., LTD. DIP Corporation Kawanishi Holdings, Inc. Sanrio Company, Ltd. A eon Delight C o., Ltd. Doshisha Corporation KFC Holdings Japan, Ltd. SATO HOLDINGS CORPORATION A eon Fantasy C o., Ltd. Dream Incubator Inc. KI-Star Real Estate C o., Ltd. SBS Holdings, Inc. Ai Holdings Corporation Earth Corporation KLab Inc. Seikagaku Corporation AI inside Inc. Edion Corporation Kondotec Inc. Seria Co.,Ltd. AirTrip Corp. Elecom Co., Ltd. Kumiai Chemical Industry Co., Ltd. Serverworks Co.,Ltd. and factory, inc. en-Japan Inc. Lasertec Corporation SHIFT Inc. ANEST IWATA Corporation Estore Corporation. Locondo, Inc. Shikigaku Co., Ltd AnGes Inc. euglena Co., Ltd. LUCKLAND CO., LTD. SHIP HEALTHCARE HOLDINGS, INC. Anicom Holdings, Inc. FaithNetwork C o., Ltd. MATSUI SECURITIES CO., LTD. SIGMAXYZ Inc. Anritsu Corporation Ferrotec Holdings Corporation Media Do Co., Ltd. SMS Co., Ltd. Apaman Co., Ltd. FIELDS CORPORATION Medical Sy stem Network C o., Ltd. Snow Peak, Inc. ARATA CORPORATION Financial Products Group Co., Ltd. MEDINET Co., Ltd. Solasia Pharma K.K. Artspark Holdings Inc. First Brothers C ol, Ltd. MedPeer,Inc. SOURCENEXT Corporation AS ONE CORPORATION FreeBit Co., Ltd. Mercuria Inv estment C o., Ltd. Star Mica Holdings Co., Ltd. A team Inc. Fujita Kanko Inc. Micronics Japan Co., Ltd. Strik e C o., Ltd. Aucfan Co., Ltd. Gamecard-Joyco Holdings, Inc. MIRAIT Holdings Corporation Sy mBio Pharmaceuticals Limited AVANT CORPORATION GameWith, Inc. Monex Goup Inc. Synchro Food Co., Ltd. Axell Corporation GCA Corporation MORINAGA MILK INDUSTRY CO., LTD. TAIYO HOLDINGS CO., LTD. Azbil Corporation Good Com Asset Co., Ltd. Mortgage Service Japan Limited. Takashimaya Company, Limited AZIA CO., LTD. Grandy House Corporation NAGASE & CO., LTD Take and Give Needs Co., Ltd. AZoom, Co., Ltd. Hak uto C o., Ltd. NAIGAI TRANS LINE LTD. Takihyo Co., Ltd. Base Co., Ltd Hamee Corp. NanoCarrier Co., Ltd. TEAR Corporation BEENOS Inc. Happinet Corporation Net Mark eting C o., Ltd. Tenpo Innovation Inc. Bell-Park Co., Ltd. Harmonic Driv e Sy stems Inc. Net One Sy stems C o.,Ltd. 3-D Matrix, Ltd. Benefit One Inc. HENNGE K.K. Nichi-Iko Pharmaceutical Co., Ltd. The Hokkoku Bank,Ltd. B-lot C o.,Ltd. Hope, Inc. Nihon Denkei Co., Ltd. TKC Corporation Broadleaf Co., Ltd. HOUSEDO Co., Ltd. Nippon Koei Co., Ltd. TKP Corporation CanBas Co., Ltd. H2O Retailing Corporation NIPPON PARKING DEVELOPMENT Co., Ltd. Tsuzuki Denki Co., Ltd. Canon Marketing Japan Inc. IDOM Inc. NIPRO CORPORATION TOCALO Co., Ltd. Career Design Center Co., Ltd. IGNIS LTD. Nisshinbo Holdings Inc. TOKAI Holdings Corporation Carna Biosciences, Inc. i-mobile Co.,Ltd. NS TOOL CO., LTD. Tokyu Construction Co., Ltd. CARTA HOLDINGS, INC Inabata & Co., Ltd. OHIZUMI MFG. CO., LTD. TOYOBO CO., LTD. CERES INC. Infocom Corporation Oisix ra daichi Inc. Toyo Ink SC Holdings Co., Ltd Chiyoda Co., Ltd. Infomart Corporation Ok i Electric Industry C o., Ltd Toyo Tanso Co., Ltd. Chori Co., Ltd. Intelligent Wav e, Inc. ONO SOKKI Co., Ltd. Tri-Stage Inc. Chugoku Marine Paints, Ltd. ipet Insurance CO., Ltd. ONWARD HOLDINGS CO.,LTD. TSURUHA Holdings cocokara fine Inc. Itochu Enex Co., Ltd. Pan Pacific International Holdings Corporation VISION INC. COMSYS Holdings Corporation JAFCO Co.,Ltd. PARIS MIKI HOLDINGS Inc. VISIONARY HOLDINGS CO., LTD. COTA CO.,LTD. JMDC Inc. PIGEON CORPORATION World Holdings Co., Ltd. CRE, Inc. JSB Co., Ltd. QB Net Holdings Co., Ltd. YELLOW HAT LTD. CREEK & RIVER Co., Ltd. JTEC Corporation RACCOON HOLDINGS, Inc. YOSHINOYA HOLDINGS CO., LTD. Daiichi Kigenso Kagaku Kogyo Co., Ltd. J Trust C o., Ltd Raysum Co., Ltd. YUMESHIN HOLDINGS CO., LTD. Daisek i Co., Ltd. Japan Best Rescue System Co., Ltd. RESORTTRUST, INC. ZAPPALLAS, INC. Demae-Can CO., LTD JINS HOLDINGS Inc. ROUND ONE Corporation DIC Corporation JP-HOLDINGS, INC. RYOHIN KEIKAKU CO., LTD.

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Disclaimer: This document is provided for informational purposes only. No investment opinion or advice is provided, intended, or solicited. Shared Research Inc. offers no warranty, either expressed or implied, regarding the veracity of data or interpretations of data included in this report. We shall not be held responsible for any damage caused by the use of this report. The copyright of this report and the rights regarding the creation and exploitation of the derivative work of this and other Shared Research Reports belong to Shared Research. This report may be reproduced or modified for personal use; distribution, transfer, or other uses of this report are strictly prohibited and a violation of the copyright of this report. Our officers and employees may currently, or in the future, have a position in securities of the companies mentioned in this report, which may affect this report’s objectivity.

Japanese Financial Instruments and Exchange Law (FIEL) Disclaimer: The report has been prepared by Shared Research under a contract with the company described in this report (“the company”). Opinions and views presented are ours where so stated. Such opinions and views attributed to the company are interpretations made by Shared Research. We represent that if this report is deemed to include an opinion from us that could influence investment decisions in the company, such an opinion may be in exchange for consideration or promise of consideration from the company to Shared Research.

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