10 May 2013 Asia Pacific/ Equity Research Entertainment Software ( (Japan)) / MARKET WEIGHT

Square Holdings (9684 / 9684 JP) Rating (from Neutral) OUTPERFORM* Price (09 May 13, ¥) 1,230 UPGRADE RATING

Target price (¥) (from 1,150) 1,450¹ Chg to TP (%) 17.9 Announcement of additional structural reforms Market cap. (¥ bn) 141.54 (US$ 1.41) should mark the end of bad news Enterprise value (¥ bn) 81.64 ■ Action: We foresee a risk of revising guidance concurrently with its Number of shares (mn) 115.07 Free float (%) 50.0 13 May results. Further restructuring measures should enhance its resilience 52-week price range 1,501 - 974 against slumping sales of packaged software. SNS/online games—two segments

*Stock ratings are relative to the coverage universe in each with substantial growth potential—have enjoyed firm momentum in Asia, and an analyst's or each team's respective sector. improved product mix for these should contribute to profits. Earnings are likely to ¹Target price is for 12 months. grow YoY in FY3/15 supported by the launch of new blockbuster titles. Accordingly,

Research Analysts we expect the company’s relative P/B, which has been languishing at historically Shunsuke Tsuchiya low levels, to correct. We revise our forecasts, raise our TP from ¥1,150 to ¥1,450 81 3 4550 9740 (potential return 17.9%) and upgrade the stock from Neutral to OUTPERFORM. [email protected] ■ Additional restructuring: Restructuring in FY3/14 is likely to center on overseas development (former Eidos Interactive). Assuming further write-downs, we believe BPS could drop to just below ¥1,000 (restructuring charges of ¥5.0–6.0bn). However, the shares have fallen substantially following the sharp cut to FY3/13 targets in March, so risk of BPS erosion looks already priced in. If the shares drop on below-consensus FY3/14 guidance (and particularly, a lower-than-expected NP target), we would welcome this as an opportunity to accumulate on weakness. ■ Growth potential: Although obscured by the slump in packaged software sales, we see potential for earnings growth driven by SNS/online games, sales of which are trending firm. Overseas native applications developed with local makers have taken off, with monthly sales of ¥600mn in South Korea spiking as high as ¥1.0bn. Square Enix plans to develop similar applications for and Taiwan. In FY3/14, we expect high-margin remake titles to help stabilize earnings in the troubled package software business, while SNS/online games should also easily contribute. ■ Catalysts: Catalysts include growth in SNS operations overseas, development of titles for SNS platforms, and announcement of blockbuster titles. The main downside risk is the absence of further restructuring measures. ■ Valuation: Although we revise down our forecasts, we raise our TP to ¥1,450 based on a P/B of 1.3x (on par with the industry average) and our FY3/15 BPS forecast. We previously valued the shares using P/E, but shift to P/B as the company is embarking on another period of restructuring.

Share price performance Financial and valuation metrics

Year 3/12A 3/13E 3/14E 3/15E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 128.1 143.4 140.0 150.0 1800 140 Operating profit (¥ bn) 10.7 -6.0 7.5 16.7 1300 90 Recurring profit (¥ bn) 10.3 -5.0 7.7 16.9 800 40 Net income (¥ bn) 6.1 -13.0 1.3 10.0 EPS (¥) 52.7 -113.0 11.3 86.9 Change from previous EPS (%) n.a. n.m -88.3 -10.7 IBES Consensus EPS (¥) n.a. -48.5 58.7 75.6 The price relative chart measures performance against the EPS growth (%) n.m. n.m. n.m. 669.2 TOPIX which closed at 1181.83 on 09/05/13 P/E (x) 33.0 -10.9 108.9 14.2 On 09/05/13 the spot exchange rate was ¥100.62/US$1 Dividend yield (%) 1.7 2.4 2.4 2.4 EV/EBITDA(x) 8.2 81.6 5.7 3.2 Performance Over 1M 3M 12M P/B (x) 1.5 1.2 1.2 1.1 Absolute (%) 14.2 5.4 -18.1 ROE(%) 4.5 -10.1 1.1 8.3

Relative (%) 8.8 -18.0 -72.5

Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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10 May 2013 Table of contents

(1) Factors driving downward revision to FY3/13 guidance 3 (2) Additional restructuring in FY3/14 4 (3) Gauging share price downside 7 (4) Growth potential 8 (5) Valuation 10 (6) Timing of share price rally 13 (7) Room to reduce SG&A costs 14 (8) Earnings forecasts 15

Square Enix Holdings (9684 / 9684 JP) 2 10 May 2013 (1) Factors driving downward revision to FY3/13 guidance FY3/13 reforms focused mainly on domestic development and overseas headquarters/sales companies; restructuring of overseas development still insufficient On 26 March, Square Enix revised down its FY3/13 guidance, lowering its ¥7.5bn OP Domestic development estimate to an operating loss of ¥6.0bn and its ¥3.5bn NP projection to a net loss of operations and overseas ¥13.0bn. The main factors behind the revision were sluggish overseas sales of headquarters/sales blockbuster titles, and the booking of an extraordinary loss of ¥10.0bn. companies the primary targets of restructuring in We suspect the ¥10.0bn extraordinary loss reflected: (1) write-downs of domestic content FY3/13 assets, (2) a reduction in employees and offices at US headquarters and sales companies, and (3) write-downs of content assets in Europe and the US. With sales of packaged software in Europe and the US currently in a downtrend, the restructuring of development operations (former Eidos Interactive) in both regions to date, Expect further restructuring including content asset write-downs and headcount reductions, is likely to prove in overseas development insufficient, thus setting the stage for another round of reforms. operations in FY3/14 In fact, when management announced the downward revision to FY3/13 targets, new President Yosuke Matsuda commented management will determine concrete additional restructuring measures by May 2013 and announce these with FY3/13 results. Accordingly, the new structural reforms will likely be factored into FY3/14 guidance.

Figure 1: FY3/13 extraordinary loss mainly reflects restructuring charges for domestic development operations and overseas headquarters/sales companies

Extraordinary loss Cost Contents 0 (mn yen) (500) 1) Reduction of personnel (2,000) Cash out (1,000) (1,000) Japan - - (1,000) Europe (1,000) Head office functions (2,500) N.America (1,000) Branch office functions (1,500) (1,000) 2) Contents appraisal loss (4,000) Non cash out (1,500) (2,000) Japan (2,500) New IP for western markets (2,000) Europe (1,500) Title of former Eidos development (2,500) N.America 0 -

(3,000) 3) Contents abandonment loss(4,000) Non cash out (1,000) Japan (2,000) New IP for western markets (3,500) (2,000) Europe (1,000) Title of former Eidos development (3,500) N.America (1,000) Related mobile (4,000) Contents abandonment loss Total (FY 3/13) (10,000) (4,500) Contents appraisal loss Japan (4,500) New IP for western markets (4,500) Reduction of personnel Europe (3,500) 2 titles of former Eidos development (5,000) N.America (2,000) Related mobile Japan Europe N.America

Note: high likelihood of further restructuring for overseas development operations in FY3/14 Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 3 10 May 2013 (2) Further restructuring in FY3/14 Expect company to book ¥5.0–6.0bn in additional restructuring charges, centered on overseas development operations (former Eidos Interactive). We see potential for additional restructuring in overseas development operations (former Look for ¥5.0–6.0bn in Eidos Interactive), and our forecasts therefore reflect charges for further content asset additional restructuring write-downs (non-cash expenses) and headcount reductions (cash expenses). charges We estimate a maximum of ¥5.0–6.0bn in additional restructuring charges, breaking down as ¥3.0–4.0bn for write-downs of content assets (non-cash expenses) and ¥2.0bn for headcount reductions (cash expenses).

Figure 2: Estimate roughly ¥3.0bn in additional write- Figure 3: Estimate roughly ¥2.0bn in additional downs of overseas content assets restructuring charges from overseas headcount reductions 30,000 3,000 (Y million) Additional (# of employee) Additional Restructuring 27,000 Restructuring 27,000 2,700 2,500 2,500

24,000 2,400 2,300 2,200

21,000 19,900 20,000 2,100 13,000 18,400 1,000 1,000 800 700 18,000 1,800 Overseas 16,000 15,700 8,400 15,000 10,000 1,500 8,400 5,700 5,700 Overseas 12,000 1,200 Japan

9,000 900 14,000 1,500 1,500 1,500 1,500 6,000 11,500 Japan 600 10,300 10,000 10,000 10,000

3,000 300

0 0 3/10 3/11 12/12 3/13E Case_1 Case_2 12/12 3/13E Case_1 Case_2 After Restructuring After Restructuring

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

Write-downs of overseas content assets (Figure 2) We estimate domestic content assets shrunk from ¥14.0bn at end-December 2012 to (1) Write-downs of overseas roughly ¥10.0bn at end-March (down 30–35%), and overseas content assets from ¥13.0bn content assets to ¥10.0bn (down 25–30%). In both cases, the write-downs were centered on titles destined for the European and US markets. We see a high probability of overseas content assets being further written down from the ¥10.0bn figure at end-March. Accordingly, we have calculated additional restructuring charges based on two scenarios. Scenario 1 assumes overseas content assets will drop to the level seen at end-FY3/11 before the company launches the blockbuster titles and . This would mean a reduction in overseas content assets from ¥10.0bn to ¥8.0–9.0bn, resulting in additional restructuring charges of ¥1.0–2.0bn. Scenario 2 assumes overseas content assets will drop to the level seen at end-FY3/10, mirroring the decline in domestic content assets. This would mean a reduction in overseas content assets from ¥10.0bn to ¥6.0bn, resulting in additional restructuring charges of ¥3.0–4.0bn.

Square Enix Holdings (9684 / 9684 JP) 4 10 May 2013

Headcount reductions overseas (Figure 3) Restructuring measures in FY3/13 centered mainly on overseas headquarters/sales (2) Reduction of overseas companies, but no cuts were made to overseas development staff. development staff However, the outlook for the European and US markets remains grim, and since overseas developers are less likely to be redeployed to mobile/online application units than their domestic counterparts, we expect Square Enix to further scale back its workforce abroad. We estimate the company will slash 200–300 jobs (20–30% of its European and US development teams), generating up to ¥2.0bn in additional charges such as special retirement payments.

Figure 4: Packaged software: unit sales by region (unit: Figure 5: Packaged software: regional sales composition 1,000 copies) (Unit, '000) Others N.America Japan Total Others N.America Japan 100% 30,000 26,660 90% 27,000 28% 33% 30% 80% 24,000 40% 7,370 21,000 70% 18,800 17,660 60% 18,000 16,850 28% 28% 38% 15,000 7,590 5,340 7,600 50% 5,620 30% 12,000 40%

9,000 30% 4,740 6,740 5,600 44% 6,000 11,700 20% 39% 32% 30% 3,000 6,490 5,580 5,600 10%

- 0% 3/10 3/11 3/12 3/13E 3/10 3/11 3/12 3/13E

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

Other (Arcade consoles) In non-content operations, Square Enix also faces risk in its arcade console business, but (3) Arcade consoles the company has apparently already completed write-downs for its Jairozetta game and others in FY3/13. Considering its amusement facility operations continue to break even or turn a profit, we see little likelihood of further restructuring charges being booked for this business.

Square Enix Holdings (9684 / 9684 JP) 5 10 May 2013

Figure 6: Arcade console assets ( portion)

Name of the business place Porpose of building service FY 3/12 book value Emproyee Tools, furniture Buildings etc AM Equipment Land Other Asset Total and fixtures (mn yen) (mn yen) (mn yen) (mn yen) (mn yen) (mn yen) (number) Head Office Administration / Sales and 46 22 10 0 - 80 194 (Shibuya-ku, Tokyo) marketing

Ebina development center AM Equipment development 847 15 23 642 18 1,647 146 (Ebina-city, Kanagawa) / Manufacture

Sapporo Office and other Sales and marketing 59 0 78 0 - 138 6 (Hokkaido)

Sendai Office and other Sales and marketing 185 0 250 171 - 608 23 (Tohoku)

Kanto/Tokyo Office and other Sales and marketing 1,050 13 1,226 3,607 31 5,930 83 (Kanto/Tokyo)

Nagoya Office and other Sales and marketing 193 11 291 65 5 567 19 (Chubu/Hokuriku)

Osaka Office and other Sales and marketing 100 3 215 137 10 467 27 (Kansai)

Hiroshima Office and other Sales and marketing 145 1 248 70 - 465 16 (Chugoku/Shikoku)

Fukuoka Office and other Sales and marketing 118 0 247 - 0 366 24 (Chugoku/Shikoku)

Other Benefit package 5 0 - 40 - 45 -

Total 2,700 100 2,600 4,700 100 10,300 500

Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 6 10 May 2013 (3) Gauging share price downside Additional restructuring charges of ¥5.0–6.0bn likely to push BPS just below ¥1,000 We estimate the sharp revision to FY3/13 targets brought down BPS from ¥1,100 at BPS after the adding end-December 2012 to ¥1,050 at end-March. Adding in another ¥5.0–6.0bn restructuring restructruring is fewer than charges would push BPS just below ¥1,000, which we regard as the floor for the shares. ¥1,000

Figure 7: Estimate shareholder capital erosion of ¥1mn assuming ¥5.0–6.0bn in additional restructuring charges 140.0 PBR 1.04 x PBR 1.11 x PBR 1.17 x 138.0 136.0 134.0 132.0 Market Value, 130.0 130.0 128.0 2.3 126.0 127.7 8.0 likely to include Restructuring 124.0 122.0 oversea development in FY 3/14 2.0 120.0 0.0 0.0 Guidance (former Eidos) 118.0 120.0 3.5 116.0 2.0 114.0 1.0 0.5 112.0 113.0 110.0 Mainly include restructuring of 1) 108.0 Japan development, 2) Oversea head 106.0 office function in FY 3/13 104.0 102.0 100.0 BPS NP Evaluation Employee DTA Forex BPS_1 Fixed Asset Fixed Asset Fixed Asset Employee BPS_2 P&L (Y bn) (12/12) (4Q12) (4Q12) (4Q12) (4Q12) (4Q12) (3/13) (Eidos) (Eidos) (AM) (AM) Source: Company data, Credit Suisse estimates

Figure 8: BPS downside (¥): Floor of just below ¥1,000, likely priced in after downward revision ¥1,250 PBR 1.04 x PBR 1.11 x PBR 1.17 x ¥1,230 ¥1,210 ¥1,190 ¥1,170 Share Price, ¥1,150 ¥1,150 ¥1,130 ¥20 ¥1,110 likely to include Restructuring ¥1,090 ¥1,110 ¥70 oversea development in FY 3/14 ¥1,070 Guidance (former Eidos) ¥1,050 ¥20 ¥0 ¥0 ¥1,030 ¥1,040 ¥30 ¥1,010 ¥20 ¥990 ¥10 ¥0 ¥970 ¥980 ¥950 ¥930 Mainly include restructuring of 1) Japan development, 2) Oversea head office ¥910 function in FY 3/13 ¥890 ¥870 ¥850 BPS NP Evaluation Employee DTA Forex BPS_1 Fixed Asset Fixed Asset Fixed Asset Employee BPS_2 P&L (12/12) (4Q12) (4Q12) (4Q12) (4Q12) (4Q12) (3/13) (Eidos) (Eidos) (AM) (AM) Note: “Eidos” is overseas development section, “AM” is amusement enterprise Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 7 10 May 2013 (4) Growth potential Rapid growth in native applications overseas Square Enix’s future growth potential lies in the growth of online and SNS games. Native application rollout in Specifically, we focus on: (1) growth in SNS overseas: rollout of native application for Asia to drive growth Kaku-San-Sei Million Arthur, particularly in Asia, and (2) the launch of XIV Online. Kaku-San-Sei Million Arthur has maintained its no. 2 position in the domestic native Native application (Japan) application market, just behind Gungho’s Puzzle & Dragons (estimated at roughly ¥300mn/month based on user-generated revenue). The rollout of a royalty-based business model overseas probably holds even greater Native application (Korea) growth potential. In Korea, after the tie up with ACTOZSOFT in December 2012, the game remains in the top 3 applications of the AppStore. Revenue from user-fees increased MoM, reaching approximately ¥600mn/month in user-generated revenue for March and probably peaked as high as ¥1bn/month. The company is scheduled to roll out the game in China and Taiwan. Since the business Future rollout in other will once again be royalty-based as in the case of Korea, Square Enix’s revenue from regions royalty is expected to contribute almost entirely to earnings. We anticipate monthly earnings of ¥800–900mn on an average in FY3/14 supported by full earnings contribution in Korea and the launch elsewhere in Asia.

Figure 9: Overseas OP simulation for Kaku-San-Sei Million Arthur: Set to become ¥1.0–2.0 YoY OP growth factor Unit: Y million "Vertical Axis": Royalty % of Square Enix, "Horizontal Axis": Overseas SNS Monthly Sales

Apple/Google Margin 30% Monthly SNS Sales (Overseas, User payment)

SQEX Profitability 90% 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400

10.0% 100 200 200 300 400 500 500 600 700 800 800 900 1,000 1,100

15.0% 100 200 300 500 600 700 800 900 1,000 1,100 1,200 1,400 1,500 1,600 (1) 3/13 (2) 4Q12 level (3) 3/14 Upside 20.0% 200 300 500 600 800 900 1,100 1,200 1,400 1,500 1,700 1,800 2,000 2,100

25.0% 200 400 600 800 900 1,100 1,300 1,500 1,700 1,900 2,100 2,300 2,500 2,600

30.0% 200 500 700 900 1,100 1,400 1,600 1,800 2,000 2,300 2,500 2,700 2,900 3,200

35.0% 300 500 800 1,100 1,300 1,600 1,900 2,100 2,400 2,600 2,900 3,200 3,400 3,700

% % of Royalty 40.0% 300 600 900 1,200 1,500 1,800 2,100 2,400 2,700 3,000 3,300 3,600 3,900 4,200

45.0% 300 700 1,000 1,400 1,700 2,000 2,400 2,700 3,100 3,400 3,700 4,100 4,400 4,800

50.0% 400 800 1,100 1,500 1,900 2,300 2,600 3,000 3,400 3,800 4,200 4,500 4,900 5,300

55.0% 400 800 1,200 1,700 2,100 2,500 2,900 3,300 3,700 4,200 4,600 5,000 5,400 5,800

Source: Company data, Credit Suisse estimates We expect: (1) growth in overseas SNS, (2) the launch of Final Fantasy XIV Online, and Improvement in earnings (3) Dragon Quest X Online to contribute to full-year earnings from FY3/14. A greater ratio due to better product mix in of SNS and online games is likely to mean further improvement in earnings due to an FY3/14 improved product mix. As a result of the above, the ratio of SNS/Online games at Square Enix is gradually Well-balanced SNS/Online catching up with that of the leaders such as Konami and Namco Bandai. But unlike these business two firms which rely heavily on domestic SNS, Square Enix has a well-balanced business portfolio. The risk of a sharp decline in SNS/Online games due to changes in market conditions is likely to be relatively small.

Square Enix Holdings (9684 / 9684 JP) 8 10 May 2013

Figure 10: Games-related sales breakdown (Square Enix): Figure 11: Games-related sales breakdown (Square Enix Mix improvement fueled by higher ratio of SNS/Online vs rival firms): Square Enix catching up with the leaders games Namco Bandai and Konami 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% FY11 78% 2%6% 11% 90%

FY12E 72% 9% 7% 11%

(9697) Capcom 80% FY13E 71% 9% 7% 12%

70% Package Game FY11 67% 4%2%10% 6%

FY12E 62% 10% 2% 9% 12% 60% FY13E 58% 13% 5% 9% 12% Feature Phone (9684) SQEX 50% FY11 72% 13% 40% MMO FY12E 58% 36% 12% 12% FY13E 55% 38% 5% 30% (7832) Bandai 12% SNS (PC) 9% 8% 20% 6% FY11 58% 32% 1% 9% 12% FY12E 54% 39% 2% 10% 10% 18% 18% 18% SNS (Mobile) 12% FY13E 52% 40% 4%3% 6% 5% (9766) Konami 0% Others Package Game Domestic SNS (mobile) FY08 FY09 FY10 FY11 FY12E FY13E FY14E Foreign SNS (mobile) SNS (PC) Online (monthly charge) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 12: Kaku-San-Sei Million Arthur ranking (Korea): A Figure 13: A comparison of games market in Japan, Korea fairly strong start; revenue peaking as high as and China: Upside potential in the shift from PC to mobile

¥1bn/month in China

12/15/2012 12/22/2012 12/29/2012

1/19/2013 2/23/2013 3/30/2013 12/1/2012 12/8/2012 1/12/2013 1/26/2013 2/16/2013 3/16/2013 3/23/2013 4/13/2013 4/20/2013 4/27/2013

2/2/2013 2/9/2013 3/2/2013 3/9/2013 4/6/2013 5/4/2013 1/5/2013 Mobile Game Console PC Online 15,000 ($ mn)

0 Following to Japan/Korea, 5 in China, the shift will start 10 "PC-->Mobile" ? Higher Ranking 15 20 10,000 25 30 35 iTunes S.Korea Gross Rank (Overall) 40 45 5,000 Google S.Korea Gross Rank (Overall) 50 55 60 65 70 75 0 Lower Ranking 80 CY11 CY12 CY11 CY12 CY11 CY12 Japan Korea China Source: Company data, Credit Suisse preparation Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 9 10 May 2013 (5) Valuation Relative P/B near historical low; four preconditions for a correction in P/B valuation We see P/B forming the firm’s valuation basis for the time being. While the underlying P/B P/B valuation multiple works out to 1.1x factoring in additional restructuring measures, Square Enix’s relative P/B remains close to the historical bottom. Amid such conditions, the firm is likely to gradually fulfill the conditions that could bring about a correction to its low P/B valuations. We see room for an increase in relative P/B valuations.

Figure 14: Relative P/B: Near historical bottom 135% 131% 128% vs 3Cos Average vs 4Cos Average 130% 125% 121% 120% 115% 110% 105% 100% 96% 97% 95% 99% 89% 95% 90% 84% 85% 80% 77% 75% 79% 77% 70% 74% 65% 69%

60%

Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-07 Source: Company data, Credit Suisse preparation

Figure 15: P/B: End to valuations below book value? 1.80 x 1.70 x 1.60 x 1.50 x 1.47 x 1.50 x 1.41 x 1.36 x 1.40 x 1.32 x 1.30 x 1.20 x 1.09 x 1.07 x 1.10 x 1.02 x 1.11 x 1.09 x 1.00 x 1.05 x 0.90 x 0.95 x 0.92 x 0.80 x 0.82 x 0.82 x

0.70 x

Jul-09 Jul-10 Jul-11 Jul-12

Apr-10 Apr-09 Oct-09 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

Jan-10 Jan-11 Jan-12 Jan-13

Source: Company data, Credit Suisse preparation

Taking Namco Bandai in 2010–11 as an example, we list the following four points as Four preconditions for a preconditions for a correction in Square Enix’s low P/B valuation. correction in P/B valuation (1) Announcement of restructuring (fixed cost reductions, change in business portfolio) (2) Announcement of conservative guidance followed by an earnings upside (3) Likelihood of YoY profit growth (in the fiscal year post-restructuring) (4) Effective use of available cash (share buybacks/higher dividends)

Square Enix Holdings (9684 / 9684 JP) 10 10 May 2013

Square Enix is likely to meet conditions (1)-(3) by 1H 2013. The company is expected to Prospective catalysts for announce (1) additional restructuring measures, and (2) a conservative guidance, at its Square Enix full-year results release due in May 2013. The announcement of a major title at (June 2013) should lead to (3) prospects for YoY profit growth in FY3/15. Also, expectations of upside versus a conservative guidance should build up around Apr–Jun results due for release in early-August 2013.

Figure 16: Share price, BPS and NP during key events: Namco Bandai (7832) (Net profit or loss, Y bn) (Share Price/ BPS) Net Profit & Loss Share Price BPS 14.0 ¥1,600

12.0 ¥1,550

10.0 ¥1,500 ¥1,450 8.0 ¥1,400 6.0 (14) ¥1,350 4.0 (13) ¥1,300 2.0 ¥1,250 0.0 (11) ¥1,200 (2.0) ¥1,150 (2) (4.0) (12) ¥1,100 ¥1,050 (6.0) (8) (10) (4)-a (9) ¥1,000 (8.0) (6) ¥950 (10.0) ¥900 (12.0) (7) ¥850 (14.0) (1) (3) ¥800

(16.0) ¥750

(18.0) (4)-b (5) ¥700

(20.0) ¥650 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 09 10 11 12 13 Notes for events: (1) February 2009: Medium-term plan for FY3/10-FY3/12 (OP target ¥100bn) (2) August 2009: Decrease to FY3/10 guidance (OP ¥22.5bn  ¥15bn, NP ¥12.5bn  ¥8.5bn) (3) February 2010: Announcement of lower FY3/13 guidance (OP ¥15bn  ¥1bn, NP ¥8.5bn  ¥31bn net loss), headcount reduction (by 630 staff), impairment of goodwill/DTA/assets, provision for software losses (4)-a May 2010: Announcement of conservative guidance (FY3/14 OP ¥11bn) (4)-b August 2010: Increase to 1H guidance (¥1bn operating loss  OP of ¥1.5bn) (5) November 2010: Increase to 1H guidance (¥1.5bn operating loss OP of ¥5bn) and share buyback (¥4bn) (6) February 2011: Share buyback (¥2bn) and retirement (7) May 2011: Share buyback (¥2bn) (8) August 2011: Increase to guidance (1H FY3/12 OP ¥3bn ¥6bn), establishment of JV with DeNA (9) October 2011: Increase to FY3/12 guidance (OP ¥16.5bn  ¥25bn) (10) February 2012: Announcement of increase to FY3/12 guidance and medium-term plan for FY3/13-FY3/15 (FY3/15 target OP ¥42.5bn, ROE 10%) (11) May 2012: “Complete gacha” problem (12) August 2012: Increase to FY3/13 guidance (OP ¥30bn  ¥36.5bn) (13) November 2012: Increase to FY3/13 guidance (OP ¥36.5bn  ¥40bn) (14) February 2012: Increase to FY3/13 guidance (OP ¥40bn  ¥42.5bn) Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 11 10 May 2013

Square Enix also has ample cash available, which barring M&A activities should boost prospects of shareholder returns after the company has carried out additional restructuring and redeemed bonds worth ¥35.0bn in 2015. Thus, we see higher prospects of the firm achieving precondition (4) as and when it is able to meet preconditions (1)-(3). With this, Square Enix would have fulfilled all four preconditions.

Figure 17: A comparison of game developers’ balance sheets (FY3/15): Ample room for shareholder returns after additional restructuring measures and bond redemption

20 x

18 x

16 x (8), 3.5 (8), 1.9 (1), 3.4 (8), 0.5 14 x (9), 0.7 (9), 0.7 (9), 0.6 (10), 0.0 (1), 8.6 (10), 0.1 (10), 0.1 (11), 1.7 (11), 2.6 12 x (8), 2.1 (2), 1.4 (11), 2.5 (1), 5.5 (1), 3.4 (9), 1.0 (3), 1.3 10 x (10), 0.0 (11), 2.1 (2), 1.8 (8), 0.5 (4), 3.2 (2), 1.7 (2), 2.4 8 x (9), 1.2 (1), 2.7 (10), 0.0 (11), 0.8 (3), 2.6 6 x (3), 3.8 (12), 11.9 (3), 2.6 (5), 3.3 (12), 11.1 (12), 11.3 (2), 1.8 (4), 1.7 4 x (12), 8.0 (4), 1.8 (3), 1.1 (4), 1.7 (12), 6.4 (6), 2.0 (5), 0.9 (4), 1.2 (5), 0.7 (5), 0.9 2 x (6), 1.2 (5), 0.2 (6), 0.9 (6), 1.2 (6), 1.3 (7), 1.0 (7), 1.6 (7), 1.1 0 x (7), 0.8 (7), 0.7 Capcom Konami SQEX SQEX (After CB redemption) Namco Bandai

(1): Cash (4): Tangible fixed assets (7) Other assets (10): Minority interest (2): Account receivable (5): Intangible fixed assets (8): Interest-bearing debt (11): Other liability (3): Inventory (6): Investment and Others (9): Account payable (12): Equity Note: B/S versus monthly sales ratio (based on end- FY 3/12) Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 12 10 May 2013 (6) Timing of share price rally Historical pattern suggests entry timing after full-year results The fact that guidance poses considerable risk to the shares is evident from their The shares rose twice and performance around full-year results release. Over the last 10 years, the stock rose twice receded eight times around and fell eight times around full-year results. The announcement of yet another full-year results over the last conservative guidance in FY3/14 could trigger a share price decline. 10 years While a simple comparison is difficult in light of the price difference, we note that Namco Bandai’s shares rose after the announcement of downward revisions and restructuring measures, but declined after it released a conservative guidance. We regard (1) the release of a conservative guidance at full-year results, or (2) the shares dipping below ¥1,100 (less than 10% potential downside risk) as favorable entry opportunities.

Figure 18: Share price performance around full-year results: two hits and eight misses

15% 13% 12%

9%

6% 2% 3%

0%

-3% -1%

-6% -5% -5% -5% -6% -6% -9% -8% -7% -12% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Source: Company data, Credit Suisse preparation

Figure 19: Share price, BPS and NP during key events: Square Enix (9684) (Net profit or loss, Y bn) NP Price BPS (Share Price/ BPS) (1) Feb '09: Downward revision&Eidos acquisition Downward revision: announced the delay of Dragon Quest 6.0 ¥2,600 IX release. Eidos: Acquisition Y12.1 bn.

5.0 ¥2,500 (1) (4) (2) Apr-May '09: FY 3/10 Guidance announcement 4.0 OP 25 bn yen, NP 15 bn yen ¥2,400 3.0 (3) (3) Jul '09: Dragon Quest IX/NDS release ¥2,300 2.0 Released on 11th July, 3 mn units sold on 14th July. ¥2,200 1.0 (4) Oct '09: 1H upward revision, FY NP downward revision ¥2,100 0.0 (5) Spending TAITO restructuring cost Y2 bn. (1.0) ¥2,000 (5) Jan '10: CB35 bn yen issued, potential dilution12% (2.0) (8) ¥1,900 Conversion price Y2,500, Price Y2,00, expiration 2015 (3.0) (10) ¥1,800 (6) Dec '10: FF14 Online failed & Downward revision (4.0) (2) ¥1,700 OP 20 bn yen --> 8 bn yen, NP 12 bn yen --> 1 bn yen (5.0) ¥1,600 (6.0) (7) May '11: Downward revision (asset write off Y4.5 bn) (6) OP 8 bn --> 7.3 bn yen, NP 1 bn --> 12 bn yen red ink (7.0) ¥1,500

(8.0) (9) ¥1,400 (8) Sep '11: Dragon Quest X Online release First time of online service. (9.0) (11) ¥1,300 (10.0) (9) Nov '11: 1H upward revision (7) ¥1,200 Maintained FY target. (11.0) ¥1,100 (12.0) (10) May '12: FY 3/13 Guidance ¥1,000 FY 3/13 OP 15 bn, FY 3/12 Actual OP 10.7 bn yen. (13.0)

(14.0) (12) ¥900 (11/12) Oct '12, Mar: Downward revision OP: 15 bn yen --> 7 bn yen --> 6 bn yen red ink. (15.0) ¥800 NP: 9 bn yen --> 3.5 bn yen --> 13 bn yen red ink, 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 Extraordinary loss 10 bn yen,(asset write off Y8.0 bn) 09 10 11 12 13 Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 13 10 May 2013 (7) Room to reduce SG&A costs We compare sector firms’ SG&A costs to determine how much room each one has to Room to reduce SG&A reduce fixed costs in FY3/14 and subsequent years. Fixed costs appear to have risen only costs at Square Enix in terms of absolute value and as a percentage of sales versus the historical average. The negative effect is probably attributable to excessive expectations from major overseas packages and Dragon Quest X Online. We see considerable room for Square Enix to reduce SG&A costs as it is not scheduled to release major titles in FY3/14.

Figure 20: SG&A cost trend (Square Enix) Figure 21: SG&A cost trend (Konami)

(Y million) Hit the gas at the wrong (% of sales) (Y million) (% of sales) アクセルの踏み間違え。 time. Substantial 17,000 削減余地は大きい。 50% 17,500 28% potential downside.

16,000 16,500 26% 45% 15,000 15,500 24%

14,000 40% 14,500 22%

13,000 Average 35% 13,500 20% Average 12,000 12,500 18% 30% 11,000

11,500 16% 10,000 25%

10,500 14% 9,000 20% 8,000 9,500 12%

7,000 15% 8,500 10%

3Q09 2Q10 4Q10 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 4Q09 1Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 FY07 FY08 FY09 FY10 FY11 FY12 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 22: SG&A cost trend (Capcom) Figure 23: SG&A cost trend (Namco Bandai) (Y million) (% of sales) (Y million) (% of sales)

9,000 45% 41,000 38%

8,500 40% 36% 8,000 38,000

7,500 35% 34%

35,000 7,000 30% 32% 6,500 Average 25% 32,000 6,000 30%

5,500 Average 20% 28% 29,000 5,000 15% 26% 4,500 26,000

4,000 10% 24%

3,500 23,000 5% 22% 3,000

2,500 0% 20,000 20%

4Q08 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12

3Q10 2Q11 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 4Q10 1Q11 3Q11 4Q11 1Q12 2Q12 3Q12 FY07 FY08 FY09 FY10 FY11 FY12 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 14 10 May 2013 (8) Earnings forecasts Earnings to track ahead of conservative FY3/14 guidance FY3/13 earnings forecasts We expect FY3/13 earnings to finish in line with the revised targets announced on 26th Forecast OP of ¥6bn in March. We forecast an operating loss of ¥6.0bn (consensus estimate ¥1.8bn operating FY3/13 loss/ guidance ¥6.0bn operating loss) and a net loss of ¥13.0bn (¥7.9bn net loss/¥13.0bn net loss). We do not anticipate additional restructuring in FY3/13 (bringing these forward to FY3/13 could be seen as a positive development). FY3/14 earnings forecasts We forecast OP of ¥7.5bn (¥19bn previously; consensus estimate ¥10.9bn) and NP of Forecast OP of ¥7.5bn in ¥1.3bn (¥11.1bn; ¥6.4bn). We expect OP guidance to fall substantially short of the ¥5bn FY3/14 consensus estimate. However, we look for actual OP to track ahead of guidance. The package software business, which is currently facing some challenges, could face a lean season in the absence of major titles, with earnings mainly generated by highly profitable game remakes. Although profits may not be substantial, earnings are also unlikely to end deep in the red as in FY3/13. We accordingly expect relatively stable earnings in FY3/14.

■ MMO Online +¥3.0bn: (1) +¥1.0bn from full earnings contribution from Dragon Quest X Online, (2) ¥1.0-1.5bn from cost reductions, and (3) ¥0.5-1.0bn from Final Fantasy XIV sales. ■ SNS +¥3.0bn: (1) +¥2.0bn from overseas growth, and (2) +¥1.0bn from domestic growth ■ Package software +¥4.0bn: (1) ¥2.0bn from costs brought forward, and (2) ¥2.0bn from fewer instances of price discounting (reduced provision for inventory impairment) ■ Amusement business +¥2.0bn: Our forecasts assume a return to normal earnings base after elimination of impairment charges on slow-moving amusement machines.

Figure 24: Sales by segment Figure 25: OP by segment 45,000 12,277 28,235 7,325 10,713 -6,000 7,500 16,700 (Y mn) 210,000 135,693 192,257 125,271 127,896 143,400 140,000 150,000 (Y mn) 200,000 40,000 190,000

35,000 180,000 170,000 30,000 160,000 150,000 25,000 Eliminations Eliminations 140,000 20,000 130,000 Rights/Property Rights/Property 120,000 15,000 Publish Publish 110,000

100,000 Amusument 10,000 Amusument 90,000 Package Game 5,000 Package Game 80,000 70,000 0 Feature Phone Feature Phone 60,000 -5,000 MMO 50,000 MMO 40,000 SNS (PC) SNS (PC) -10,000 30,000 20,000 -15,000 SNS (Mobile) SNS (Mobile) 10,000 -20,000 0 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY08 FY09 FY10 FY11 FY12E FY13E FY14E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 15 10 May 2013

FY3/15 earnings forecasts We forecast OP of ¥16.7bn (¥19.2bn previously; consensus estimate ¥14bn) and NP of Forecast OP of ¥16.7bn in ¥10bn (¥11.2bn; ¥8.6bn). We attribute OP growth mainly to the launch of package FY3/15 versions of Final Fantasy and Dragon Quest series likely to be announced at the E3 game show in June 2013. We expect SNS/online games to steadily grow into cash-generating businesses.

Figure 26: Square Enix Holdings (9684) – Segment sales and operating profit (Y million) FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY12CoE

Sales (Y mn) 135,693 192,257 125,271 127,896 143,400 140,000 150,000 145,000 YoY% -8% 42% -35% 2% 12% -2% 7% 13% Digital Entertainment 54,064 120,100 64,203 71,873 84,900 81,500 91,600 87,000 YoY% -3% 122% -47% 12% 18% -4% 12% 21% SNS 11,800 11,400 13,200 19,900 22,100 24,100 25,800 NA YoY% 0% 0% 16% 51% 11% 9% 7% - MMO (Online) 10,600 7,700 7,900 4,000 10,200 10,100 11,100 NA YoY% -12% -27% 3% -49% 155% -1% 10% - Package Game 36,500 100,900 43,100 48,000 52,600 47,300 54,700 NA YoY% -12% 176% -57% 11% 10% -10% 16% - Amusument 59,915 52,300 45,012 41,921 44,000 44,000 43,900 44,000 YoY% -11% -13% -14% -7% 5% 0% 0% 5% Publish 12,984 14,400 13,045 11,335 11,500 11,500 11,500 11,000 YoY% 16% 11% -9% -13% 1% 0% 0% -3% Rights/Property 3,757 5,500 3,009 2,767 3,000 3,000 3,000 3,000 YoY% 26% 46% -45% -8% 8% 0% 0% 8%

Operating profit (Y mn) 12,277 28,235 7,325 10,713 -6,000 7,500 16,700 -6,000

Digital Entertainment 6,727 29,100 11,283 12,602 700 11,000 20,200 1,000 SNS 3,689 3,600 5,100 7,700 7,100 9,900 12,900 NA MMO (Online) 3,087 4,500 -700 200 -2,000 1,300 2,300 NA Package Game 4,162 21,000 6,900 4,700 -4,400 -200 5,000 NA Amusument 3,281 4,000 2,178 2,552 -500 1,500 1,500 -500

Publish 3,540 4,100 3,204 2,575 2,500 2,500 2,500 2,200

Rights/Property 815 1,800 680 742 500 500 500 500

Eliminations -6,335 -10,700 -10,021 -7,759 -9,200 -8,000 -8,000 -9,200

OPM% 9.0% 14.7% 5.8% 8.4% -4.2% 5.4% 11.1% -4.1%

Digital Entertainment 12.4% 24.2% 17.6% 17.5% 0.8% 13.5% 22.1% 1.1% SNS 31.3% 31.6% 38.6% 38.7% 32.1% 41.1% 50.0% - MMO (Online) 29.1% 58.4% -8.9% 5.0% -19.6% 12.9% 20.7% - Package Game 11.4% 20.8% 16.0% 9.8% -8.4% -0.4% 9.1% - Amusument 5.5% 7.6% 4.8% 6.1% -1.1% 3.4% 3.4% -1.1%

Publish 27.3% 28.5% 24.6% 22.7% 21.7% 21.7% 21.7% 20.0%

Rights/Property 21.7% 32.7% 22.6% 26.8% 16.7% 16.7% 16.7% 16.7%

Software Unit FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY12CoE CoE Unit ('000) 11,060 26,660 16,850 17,660 18,800 16,900 18,600 18,800 YoY% -23% 141% -37% 5% 6% -10% 10% 6%

ASP (Y) ¥3,300 ¥3,785 ¥2,558 ¥2,718 ¥2,800 ¥2,800 ¥2,940 NA YoY% 14% 15% -32% 6% 3% 0% 5% -

Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 16 10 May 2013

Figure 27: Square Enix Holdings (9684) – Income statement (Y million) FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY12CoE

Sales 147,516 135,693 192,257 125,271 127,896 143,400 140,000 150,000 145,000 YoY% -10% -8% 42% -35% 2% 12% -2% 7% 13%

Cost of sales 81,201 79,527 108,536 75,846 76,268 92,600 85,000 85,800 NA COGS 55.0% 58.6% 56.5% 60.5% 59.6% 64.6% 60.7% 57.2% - Gross profit 66,315 56,166 83,721 49,425 51,628 50,800 55,000 64,200 NA

SG&A costs 44,795 43,889 55,486 42,100 40,915 56,800 47,500 47,500 NA SG&A / sales 30.4% 32.3% 28.9% 33.6% 32.0% 39.6% 33.9% 31.7% -

Operating Profit 21,520 12,277 28,235 7,325 10,713 -6,000 7,500 16,700 -6,000 YoY% -17% -43% 130% -74% 46% NA NA 123% NA OP margin% 14.6% 9.0% 14.7% 5.8% 8.4% -4.2% 5.4% 11.1% -4.1%

Non-operating profit / loss -2,656 -1,016 -413 -1,935 -416 1,000 200 200 1,000

Recurring Profit 18,864 11,261 27,822 5,390 10,297 -5,000 7,700 16,900 -5,000 YoY% -28% -40% 147% -81% 91% NA NA 119% NA RP margin% 12.8% 8.3% 14.5% 4.3% 8.1% -3.5% 5.5% 11.3% -3.4% Extraordinary profit -2,179 -2,122 -17,791 -15,374 -436 -9,600 -5,600 -600 NA Extraordinary profit 1,439 228 128 633 305 400 400 400 NA Extraordinary loss 3,618 2,350 17,919 16,007 741 10,000 6,000 1,000 NA

Pretax profit 16,685 9,139 10,031 -9,983 9,861 -14,600 2,100 16,300 NA YoY% -9% -45% 10% NA NA NA NA 676% NA Pretax profit margin% 11.3% 6.7% 5.2% -8.0% 7.7% -10.2% 1.5% 10.9% - Taxes 7,557 2,859 468 2,083 3,792 -1,600 800 6,300 NA Effective tax rate 45.3% 31.3% 4.7% -20.9% 38.5% 11.0% 38.1% 38.7% - Minority interests -73 -39 48 -11 13 0 0 0 NA

Net Profit 9,196 6,333 9,509 -12,043 6,060 -13,000 1,300 10,000 -13,000 YoY% -21% -31% 50% NA NA NA NA 669% NA NP margin% 6.2% 4.7% 4.9% -9.6% 4.7% -9.1% 0.9% 6.7% -9.0%

Shares outstanding ('000) 114,826 115,010 115,073 115,071 115,069 115,069 115,069 115,069 115,069 EPS (¥) ¥80 ¥55 ¥83 -¥105 ¥53 -¥113 ¥11 ¥87 -¥113 BPS (¥) ¥1,281 ¥1,284 ¥1,333 ¥1,168 ¥1,186 ¥1,044 ¥1,025 ¥1,081 ¥0 DPS (¥) ¥30 ¥30 ¥35 ¥30 ¥30 ¥30 ¥30 ¥30 ¥30

Capex 6,952 13,131 6,916 5,400 5,200 12,000 7,000 7,000 12,000 Depreciation 9,933 6,978 7,962 6,600 5,000 7,000 7,000 7,000 7,000 Source: Company data, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 17 10 May 2013

Figure 28: Square Enix Holdings (9684) – Balance sheet (Y million) FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E

Current assets: 155,730 158,387 213,347 164,301 172,161 154,200 152,200 159,800 Liquidity in hand 115,515 111,981 146,211 111,126 111,495 100,200 98,800 105,400 Accounts and notes receivable 17,738 15,432 30,682 15,474 18,431 20,700 19,800 20,800 Inventories 4,268 5,789 3,760 3,706 3,654 3,700 3,700 3,700 Other current assets 18,209 25,185 32,694 33,995 38,581 29,600 29,900 29,900

Fixed assets: 56,404 54,806 57,182 42,034 41,819 46,800 46,800 46,800 Tangible assets 19,938 19,082 18,850 17,328 17,183 22,200 22,200 22,200 Intangible assets 20,024 18,697 21,623 10,324 10,121 10,800 10,800 10,800 Investment and other assets 16,442 17,027 16,709 14,382 14,515 13,800 13,800 13,800

Total assets 212,134 213,194 270,529 206,336 213,981 201,000 199,000 206,600 ROA 7.9% 4.3% 3.7% -4.8% 4.6% -7.3% 1.1% 7.9%

Current liabilities: 23,082 23,477 75,257 28,504 33,778 36,700 36,900 38,000 Notes and accounts payable 10,704 10,097 10,666 7,777 9,220 9,000 9,200 10,300 Short-term borrowings 26 26 39,808 1,338 5,253 5,300 5,300 5,300 Others 12,352 13,354 24,783 19,389 19,305 22,400 22,400 22,400

Fixed liabilities: 40,858 40,992 41,013 42,687 42,906 43,400 43,400 43,400 Bonds & CB 37,000 37,000 35,000 35,000 35,000 35,000 35,000 35,000 Long-term debt 0 0 0 0 0 0 0 0 Accrued retirement benefits Others 3,858 3,992 6,013 7,687 7,906 8,400 8,400 8,400

Total liabilities 63,940 64,469 116,270 71,191 76,684 80,100 80,300 81,400

Minority interests 1,077 995 861 771 783 800 800 800

Shareholders' equity: 147,116 147,729 153,397 134,372 136,514 120,100 117,900 124,400 ROE 6.3% 4.3% 6.2% -9.0% 4.4% -10.8% 1.1% 8.0% Total liabilities & shareholder's equity 212,134 213,194 270,529 206,336 213,981 201,000 199,000 206,600 Source: Company data, Credit Suisse estimates

Figure 29: Square Enix Holdings (9684) – Earnings forecast summary Square Enix (9684) consolidated 09-May-13 Sales Net business profit Recurring profit Net profit EPS DPS P/E ¥1,230 ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x) Consolidated Mar-12 A 127,896 2.1 10,713 46.3 10,297 91.0 6,060 NM 52.7 NM 30.0 Mar-13 1Q 24,914 1.6 -1,163 NM -2,049 NM -2,077 NM -18.1 NM 2Q 36,141 9.6 -4,077 NM 4,217 8.2 -3,403 NM -29.6 NM 3Q 41,739 9.2 387 -89.9 2,065 -50.6 -265 NM -2.3 NM Mar-13 CS E (new) 143,400 12.1 -6,000 NM -5,000 NM -13,000 NM -113.0 NM 30.0 NM CS E (prev) 147,700 15.5 7,500 -30.0 6,500 -36.9 3,500 -42.2 30.4 -42.2 30.0 40.4 Co E 145,000 13.4 -6,000 NM -5,000 NM -13,000 NM -113.0 NM 30.0 NM IBES E 144,930 13.3 -1,830 NM -891 NM -7,916 NM -48.5 NM 29.8 NM Mar-14 CS E (new) 140,000 -2.4 7,500 NM 7,700 NM 1,300 NM 11.3 NM 30.0 108.9 CS E (prev) 149,500 1.2 19,000 153.3 19,000 192.3 11,100 217.1 96.5 217.1 30.0 12.8 IBES E 144,140 -0.5 10,856 NM 11,204 NM 6,392 NM 58.7 NM 28.5 20.9 Mar-15 CS E (new) 150,000 7.1 16,700 122.7 16,900 119.5 10,000 669.2 86.9 669.2 30.0 14.2 CS E (prev) 145,200 -2.9 19,200 1.1 19,200 1.1 11,200 0.9 97.3 0.9 30.0 12.6 IBES E 151,732 5.3 13,968 28.7 14,281 27.5 8,628 35.0 75.6 28.7 29.0 16.3 Source: Company data, I/B/E/S, Credit Suisse estimates

Square Enix Holdings (9684 / 9684 JP) 18 10 May 2013

Companies Mentioned (Price as of 09-May-2013) Actoz Soft (052790.KQ, W54,300) Capcom (9697.T, ¥1,650) Konami (9766.T, ¥2,141) Namco Bandai Holdings (7832.T, ¥1,802) Square Enix Holdings (9684.T, ¥1,230, OUTPERFORM, TP ¥1,450)

Disclosure Appendix

Important Global Disclosures I, Shunsuke Tsuchiya, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Price and Rating History for Square Enix Holdings (9684.T)

9684.T Closing Price Target Price Date (¥) (¥) Rating 09-Sep-11 1,551 1,700 N 23-Jul-12 1,193 1,500 30-Oct-12 1,083 1,150 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; , New Zealan d are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its c urrent share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Square Enix Holdings (9684 / 9684 JP) 19 10 May 2013

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 39% (47% banking clients) Underperform/Sell* 15% (39% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Price Target: (12 months) for Square Enix Holdings (9684.T) Method: Target price: We base our ¥1,450 target price for Square Enix on a P/B of 1.3x (in line with the sector average) applied to our FY3/15E BPS. Risk: Risks: Upside risks to our ¥1,450 target price for Square Enix include rapid overseas growth for the company’s social network games, the release of a social-network Dragon Quest title, and the announcement of an upcoming title in a proven blockbuster series. Downside risks include the company not carrying out further headcount reductions.

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See the Companies Mentioned section for full company names

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (9684.T) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Shunsuke Tsuchiya

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Square Enix Holdings (9684 / 9684 JP) 20 10 May 2013

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9684_051013_SQEX_E.doc Square Enix Holdings (9684 / 9684 JP) 21