07 July 2016 Asia Pacific/Japan Equity Research Internet

Rakuten (4755 / 4755 JP) Rating NEUTRAL* Price (06 Jul 16, ¥) 1,098 INITIATION

Target price (¥) 1,220¹ Chg to TP (%) 11.1 Market cap. (¥ bn) 1,566.09 (US$ 15.46) Initiating at NEUTRAL; waiting for recovery in Enterprise value (¥ bn) 1,735.87 Number of shares (mn) 1,425.66 earnings momentum in domestic e-commerce Free float (%) 55.0 52-week price range 2,082 - 991 ■ Action: We initiate coverage of Rakuten with a NEUTRAL rating and a *Stock ratings are relative to the coverage universe in each target price of ¥1,220 (potential return 11.1%). While we are positive on the analyst's or each team's respective sector. ¹Target price is for 12 months. company’s solid business model, we would need to see a turnaround in domestic e-commerce (EC) earnings to take a more bullish view. Research Analysts

Keiichi Yoneshima ■ Investment case: As the top player in the domestic EC market, Rakuten is 81 3 4550 9740 positioned for medium- to long-term growth with a business model that [email protected] combines financial and Internet services. However, with changes in the competitive environment, three issues cloud near-term earnings visibility: (1) slowing near-term earnings growth amid escalating competition in the domestic EC market, (2) the possibility that the timing of improvement in Rakuten’s growth rate will depend on the strategies of its rivals, and (3) moves by telecom carriers and other major companies to bolster their financial and Internet services. ■ Catalysts/risks: Major catalysts include: (1) a change in momentum for gross platform sales in the domestic EC business and (2) the start of earnings improvement in the domestic EC business. We also focus on a possible pickup in the growth rate for the FinTech business, earnings improvement resulting from greater selection and focus in the overseas business. Risks include: (1) the impact of new businesses and M&A deals on the income statement and balance sheet and (2) the additional impairment losses on goodwill. ■ Valuation: Our target price is derived by using SOTP (sum of the parts) methodology. We use DCF for Internet services (including adjustments), P/E (peer multiples) for Rakuten Securities and Rakuten Credit, and book value for Rakuten Bank and Rakuten Life Insurance (details on page 7).

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 713.6 800.9 882.8 963.3 4000 160 Operating profit (¥ bn) 94.7 113.3 132.5 150.4 3000 Pre-tax profit (¥ bn) 92.0 110.3 129.6 147.5 2000 110 Net income (¥ bn) 44.4 64.9 77.8 88.5 1000 EPS (¥) 31.5 45.6 54.6 62.1 0 60 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 47.2 60.5 75.3 The price relative chart measures performance against the EPS growth (%) -36.5 44.8 19.8 13.8 TOPIX which closed at 1234.2 on 06/07/16 P/E (x) 44.6 24.1 20.1 17.7 On 06/07/16 the spot exchange rate was ¥101.31/US$1 Dividend yield (%) 0.32 0.55 0.64 0.64 EV/EBITDA(x) 12.8 11.2 9.9 9.0 Performance over 1M 3M 12M P/B (x) 2.9 2.3 2.0 1.8 Absolute (%) -7.3 -9.8 -43.0 ROE(%) 8.2 9.6 10.7 10.9 Relative (%) 0.6 -5.6 -21.0 Net debt/equity (%) 22.7 21.8 19.6 17.6

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE 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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07 July 2016 Table of contents

Key charts 3 Investment opinion 4 Initiate at NEUTRAL with ¥1,220 TP 4 We give high marks to Rakuten, but near-term earnings outlook is unclear by changes in the competitive environment 4 Earnings forecasts and key assumptions 5 Reasons for our NEUTRAL rating 5 Share price and valuation trends 6 Valuation 7 Risks 8 Company profile 9 Corporate history 9 Executives 10 Shareholders 11 Business portfolio 12 Internet services segment 13 Domestic EC: take-rate approximately 10%; seasonal factors tend to boost 3Q–4Q 13 Other Internet services: improving, but broad mix brings high volatility 15 FinTech (finance) segment 16 Rakuten Card: helps drive consolidated earnings with a successful business model that combines Internet and financial technologies 16 Rakuten Bank: revenue and profits continue to rise on loan growth 18 Rakuten Securities 19 Others segment 19 Outlook 20 Longer-term strategy: Vision 2020 clarifies numerical targets and withdrawal guidelines 20 Concrete profit targets 20 Three principles to lead to business withdrawals, scaled down overseas operations 20 Business portfolio restructuring likely to continue 21 Far-sweeping reform of domestic e-commerce business could take some time 21 SPU introduction has increased new uses but heavy users might be puzzled 21 Yahoo Japan used reforms to narrow gap with Rakuten 21 Yahoo (4689) catching up might have provided catalyst for reform 22 Gradual recovery of other Internet services 23 FinTech business likely to advance steadily 24 Plenty of room for growth in Rakuten Card membership 24 Bank and insurance businesses making effective use of Rakuten ecosystem 24 Rakuten Securities: reducing volatility by increasing weight of asset management business 25 Others segment: looking for improvement from Rakuten Mobile 26 Remaining goodwill of ¥350bn indicates risk of additional impairment losses 26 Market environment: domestic EC market 26 Market environment: growing number of entrants into the Internet field 29 Earnings forecasts 31

Rakuten (4755 / 4755 JP) 2 07 July 2016 Key charts

Figure 1: Domestic EC (GMS, EC sales and Take rate) Figure 2: Domestic EC sales and OP

Domestic GMS Domestic EC sales Take Rate (RHS) Domestic EC

800,000 11.4% 100000 11.3% 90000 700,000 11.2% 78,430 80000 71,069 72,484 71,239 600,000 11.0% 65,850 65,802 67,853 70000 65,021 61,928 10.8% 500,000 10.8% 60000 10.7% 10.8% 400,000 10.6% 50000

10.6% 10.6% 10.6% 10.5% (JPYmn) (JPYmn) 40000 300,000 10.4%10.4% 30000 22,982 22,745 25,145 22,856 23,228 25,017 25,305 200,000 10.2% 21,256 18,891 20000 100,000 10.0% 10000 0 9.8% 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Sales OP Sales OP Sales OP Sales OP Sales Q1/14 Q3/14 Q1/15 Q3/15 Q1/16 FY2014 FY2015 FY2016

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

Figure 3: Increase in transaction value (YoY) Figure 4: Credit card: sales and OP 100 92.7 Credit card 77.4 73.4 76.5 200,000 64.6 165,232 150,731 150,000 135,446 50 42.5

117,504 (JPYbn) 24.4 98,163 100,000

18 76,840 (JPYmn)

0 50,000 37,194 29,586 33,551 RAKUTEN Yahoo! RAKUTEN Yahoo! RAKUTEN Yahoo! RAKUTEN Yahoo! 18,529 24,124 Japan Japan Japan Japan 12,583 Apr-Jun Jul-Sep Oct-Dec Jan-Mar - Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP 2015 2016 12/13 12/14 12/15 12/16E 12/17E 12/18E Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates

Figure 5: Balance of goodwill B alance of Goodw ill (JP Y m n) 31-D ec-14 31-D ec-15 31-D ec-16 Internet Services 214,111 213,813 202,754 P R ICE M INISTE R S.A.S 15,679 - - R akuten Kobo Inc. 20,813 10,374 10,328 V IKI, Inc. 19,961 18,888 17,646 R akuten M arketing Group 13,279 14,972 13,988 E bates Group 99,493 97,211 91,929 O verDrive Group - 37,664 34,842 S lice Technologies, Inc. 13,478 13,485 13,267 O thers 31,409 21,218 20,754 Fintech 46,971 52,234 52,111 R akuten Securities, Inc. 7,544 10,935 10,935 R akuten Bank, Ltd. 32,886 32,886 32,886 O thers 6,540 8,413 8,290 O thers 102,564 103,381 96,792 V iber Group 99,349 100,175 93,588 O thers 3,215 3,206 3,204 Total 363,646 369,428 351,657 Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 3 07 July 2016 Investment opinion Initiate at NEUTRAL with ¥1,220 TP

Figure 6: Rakuten (4755) – Earnings summary Rakuten (4755) Earnings Summary EV 06-Jul-16 Sales Operating profit Recurring profit Net profit EPS P/E /EBITDA ¥1,099 ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) (x) (x) Consolidated FY Dec-15 A 713,555 19.2% 94,689 -11.0% 91,987 -11.8% 44,436 -37.1% 31.5 -36.5% 12.8 44.6 Dec-16 CS E (new) 800,898 12.2% 113,349 19.7% 110,277 19.9% 64,886 46.0% 45.6 44.8% 11.2 24.1 CoE NA NA NA NA NA NA IBES E 814,784 14.2% 118,651 25.3% 118,553 28.9% 67,030 50.8% 47.2 50.1% 11.7 23.3 Dec-17 CS E (new) 882,848 10.2% 132,478 16.9% 129,598 17.5% 77,759 19.8% 54.6 19.8% 9.9 20.1 IBES E 932,329 14.4% 148,806 25.4% 147,885 24.7% 85,860 28.1% 60.5 28.0% 9.7 18.2 Dec-18 CS E (new) 963,318 9.1% 150,420 13.5% 147,540 13.8% 88,524 13.8% 62.1 13.8% 9.0 17.7 IBES E 1,029,416 10.4% 179,710 20.8% 178,551 20.7% 106,238 23.7% 75.3 24.5% 8.3 14.6 Source: Company data, I/B/E/S, Credit Suisse estimates We give high marks to Rakuten, but near-term earnings outlook is clouded by changes in the competitive environment We give high marks to Rakuten for creating a business model that combines e-commerce and financial services. However, we expect domestic EC earnings growth to slow as the company revises the Rakuten Ichiba site and its marketing strategy. Considering the increasing uncertainty of the near-term earnings outlook caused by changes in the competitive environment as other major companies, including telecom carriers, strengthen their financial and Internet services, we think the market is unlikely to assign a premium to Rakuten’s stock valuations anytime soon. We therefore initiate coverage with a NEUTRAL rating. However, if Rakuten demonstrates its ability to sustain steady growth and increase profits even as its competitive environment becomes more challenging, we would expect the market to value the stock at a premium. From that perspective, we will be closely monitoring the following points. (1) Domestic e-commerce profit growth is slowing, weighed down by costs of reform and reward points Gross platform sales in the domestic e-commerce segment increased 12.5% YoY in 1Q FY12/16, maintaining double-digit growth. Rakuten’s take-rate (revenues as percentage of platform sales) is relatively stable, despite being on a slight downward slope. In 1Q FY12/16, however, domestic e-commerce OP totaled just ¥18.9bn, −17.3% YoY (compared with −0.5% in 1Q FY5/12, +9.3% in 2Q, +10.0% in 3Q, and +0.6% in 4Q). The 1Q OP decline evidently reflects aggressive spending on various sales promotions as Rakuten seeks to attract new users to Rakuten Ichiba and increase usage by light users. OP was also curtailed by an increase in costs related to Rakuten Ichiba’s reward points program, as the company reacted to stronger competitive challenges from rivals, such as Yahoo! Shopping, stepping up promotion of its rewards point program. While we expect competition to gradually ease, we think Rakuten is likely to continue spending aggressively to maintain or increase platform sales in its domestic e-commerce business, which makes its profit trend somewhat less visible. (2) Telecoms companies’ strengthening of financial and Internet services further complicates competitive environment Softbank (9984) subsidiary Yahoo Japan (4689) as well as mobile telecom network operators NTT DoCoMo (9437) and KDDI (9433) have begun aggressive strengthening of their financial and Internet services. In addition to expanding its Yahoo! Shopping online shopping business, Yahoo Japan is aggressively strengthening its credit card business. Similarly, NTT DoCoMo and KDDI are leveraging the strength of their large mobile phone customer bases to strengthen their reward point services and credit card businesses.

Rakuten (4755 / 4755 JP) 4 07 July 2016

While Yahoo Japan's e-commerce strategies are having some effect on Rakuten, the impact from NTT DoCoMo and KDDI is less notable. Nonetheless, we think it reasonable to assume the competitive environment is growing increasingly challenging. (3) Strong business platform should sustain earnings growth That said, Rakuten has a strong business platform that delivers a diverse range of services, from its domestic Internet services with leading market shares (Rakuten Ichiba and Rakuten Travel) to financial services with strong growth potential (Rakuten Card, Rakuten Bank and Rakuten Securities), and overseas Internet services (Ebates and Kobo). In addition, the new medium-term plan, Vision 2020, unveiled in February, maps out the company’s plans for reassessing and consolidating its businesses that have spread to a wide range of business areas. We think implementation of this new plan could trigger a sharp earnings recovery. However, it is currently difficult to judge when we should be re- evaluating our view of Rakuten’s growth momentum, so we rate the stock NEUTRAL, although we see potential for profit growth. Earnings forecasts and key assumptions We expect Rakuten to sustain high single-digit to low double-digit growth of consolidated sales over the medium term. We assume Internet services will achieve double-digit growth, while the FinTech segment posts mid-single-digit revenue growth. We assume domestic e- commerce gross platform sales will expand 13–15% a year. Our somewhat low expectation for growth of FinTech revenues reflects our view that revenues from the securities and banking businesses will not change significantly. For FY12/16, we forecast OP will reach ¥113.3bn, a YoY increase of 19.7%. Excluding one-off factors, however, YoY growth should be rather flat. In FY12/15, Rakuten posted one-off gains totaling ¥22.1bn, which were more than offset by an impairment loss of ¥38.1bn and relocation costs of ¥4.1bn. As a result, OP was only ¥94.7bn. Looking forward, we expect Rakuten’s OP to expand by 10–20% a year from FY12/17. In FY12/16, we forecast the Internet services segment will post OP of ¥73.0bn. In FY12/15, segment OP came to ¥99.5bn, but that includes a one-time boost from a valuation gain of ¥21.1bn on Rakuten’s investment in shares of Lyft, Inc. With the profitability of the domestic e-commerce business declining, we expect a slight fall in segment profits when excluding the one-time gain from the previous year. From FY12/17 onwards, however, we forecast double-digit OP growth for the Internet services segment, as we expect domestic e-commerce margins to improve and losses at other Internet services to shrink. We forecast FinTech segment OP will total ¥66.8bn in FY12/16, up just 4.6%, as we expect a difficult market environment to reduce earnings at the securities business. From FY12/17 onwards, however, we forecast FinTech segment OP will grow 5–10% a year. Reasons for our NEUTRAL rating

■ As a prominent company in the domestic Internet field, Rakuten is likely to see strong growth from its existing domestic EC customer base. (Positive)

■ Rakuten constructed a profitable financial business through the early fusion of its EC and finance operations. We expect the finance business to continue expanding. (Positive).

■ Growth in gross platform sales has slowed. One reason is that competitor Yahoo Japan is investing aggressively in sales promotion. In response, Rakuten has revised its Rakuten Ichiba point redemption program and sales promotion strategies in an effort to boost platform sales growth. However, it is unclear at this time when those measures will bear fruit and generate higher growth in platform sales. (Negative)

Rakuten (4755 / 4755 JP) 5 07 July 2016

■ NTT DoCoMo, KDDI and other telecom carriers with large customer bases are moving aggressively into Internet and financial services. Concerns about possible intensification of competition (Negative) ■ Valuations are not expensive, but a lack of earnings visibility makes a premium unlikely. (Neutral) Share price and valuation trends Rakuten's valuation has seen considerable fluctuation in both P/E and EV/EBITDA. In our view, the main factors behind the increase in valuation from 2012 through early 2015 were the strength of the EC business, as well as rapid profit growth in the FinTech (finance) business and market recognition of the fusion of the Internet and finance. As revenue in the company's domestic EC business is somewhat lackluster, we think concerns about the domestic EC business will need to be swept away if the valuation is to rise.

Figure 7: Rakuten’s share price vs. TOPIX ¥2,500 2.0 1.8 ¥2,000 1.6 1.4 ¥1,500 1.2 1.0 ¥1,000 0.8 0.6 ¥500 0.4 RAKUTEN TOPIX relative(RHS) 0.2 ¥0 0.0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Thomson Reuters, Credit Suisse

Figure 8: FY2 forward P/E Figure 9: FY2 forward EV/EBITDA

40 x Yahoo JAPAN Rakuten Recruit 18 x Yahoo JAPAN Rakuten Recruit 35 x 16 x 30 x 28.3 x 14 x 25 x 12 x

20 x 18.4 x 10 x 8.0 x PER 15 x 16.7 x 8 x 7.9 x

EV/EBITDA 6 x 10 x 7.1 x 4 x 5 x 2 x

0 x 0 x

Jul-13

Jan-10

Jun-16

Oct-11

Apr-15

Feb-14 Sep-14

Dec-12

Aug-10

Nov-15

Mar-11 May-12

Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse

Rakuten (4755 / 4755 JP) 6 07 July 2016 Valuation We use SOTP (sum of the parts) methodology to derive our target price for Rakuten. We use DCF to value the core Internet services (including adjustments), other than financial operations. We use P/E based on peer comparison to value Rakuten Securities and Rakuten Credit. For Rakuten Bank and Rakuten Life Insurance, we use book value.

■ The assumptions in our Internet services (including adjustments) DCF model are ERP of 6.5% and RFR of 0.0%. As the Internet business is sustained by its own cash flow, we assume zero debt; We also assume a 1.3 beta and 8.45% WACC. We look at earnings to FY12/20 and apply a FY12/20 EV/EBITDA of 13x to derive enterprise value for FY12/21 onward. We use the average two-year forward EV/EBITDA for domestic EC companies including Rakuten, Yahoo Japan, and Recruit.

■ We value Rakuten Card on a P/E of 12x (derived from Aeon Financial’s (8570) FY3/17e P/E of 11x plus a premium) applied to our FY3/17 adjusted NP estimate (OP x (1−0.35). We attach a premium for Rakuten Card’s upbeat earnings and strong synergies with the EC business.

■ We value Rakuten Credit on a P/E of 15x (FY3/16E average for Mitsui Securities, Monex Group, and Kabu.com Securities) applied to our adjusted FY3/17 NP estimate (OP x (1−35%)).

■ We value Rakuten Bank and Rakuten Life Insurance using book value. Our SOTP methodology yields a fair-value share price for Rakuten of ¥1,216, which we round up to ¥1,220. Our target price implies a P/E of 26.8x based on FY12/16 and 22.4x based on FY12/17.

Figure 10: DCF analysis DCF Analysis

(JPY mn) Assumptions FCF estimates ( Internet service) # of shares (mn) 1,424 12/16E 12/17E 12/18E 12/19E 12/20E Net Debt (15/12A) 236,427 OP (Internet Service) 54,927 64,165 74,192 84,657 97,558 Exit EV/EBITDA Multiple 13.0x Tax rate 35% 35% 35% 35% 35% EBIAT 35,702 41,708 48,225 55,027 63,413 WACC Calculation Depreciation & Amortization 40,982 41,739 43,095 44,224 45,165 Risk free rate 0.00% Other non-cash cost Beta 1.30 EBITDA 95,909 105,904 117,286 128,881 142,723 Mkt. Risk Premium 6.50% Net working capital (20,092) 845 770 671 603 Cost of Equity 8.45% CAPEX (52,910) (50,000) (50,000) (50,000) (50,000) Interest rate 3.0% FCF 42,089 49,922 59,181 49,922 59,181 After-tax cost of debt 1.95% Year 1.00 2.00 3.00 4.00 5.00 D/E ratio (15/12A) 0.0x Discount rate 0.92 0.85 0.78 0.72 0.67 WACC 8.45% Present Value 38,810 42,445 46,397 36,089 39,449

(a) Present Value Current - 12/20E 203,190 (b) Exit Terminal Value 1,236,775 (c) Enterprise Value (a) + (b) 1,439,965 (d) Net debt (15/12A Parent company only) 236,427 (e) Market Value (ex. Financial related) (c) - (d) 1,203,538 (f) Estimated Brokerage Market Value Applied P/E 15x 186,000 16/3A (g) Bank and Insurance's Book Value Book value of subsidiaries 102,000 (h) Estimated Credit card Value Applied P/E 12x 241,000 (i) Total Market Value (e)+(f)+(g)+(h) 1,732,538 (J) Estimated Fair Price (JPY) (h) / # of shares(include PO impact) 1,216 Source: Company data, Credit Suisse estimates

Rakuten (4755 / 4755 JP) 7 07 July 2016 Risks The main risks (upside or downside) to our ¥1,220 target price and NEUTRAL rating on Rakuten are as follows: (1) acceleration/deceleration of earnings momentum in domestic e-commerce, (2) acceleration/deceleration of earnings momentum of Rakuten’s financial business (FinTech), and (3) improvement/deterioration in the earnings trend at other Internet services. Additional factors that could affect the share price include new entry into or exits from overseas business (with consequent improvement or deterioration in the company's results), intensification/relaxation of the competitive environment in Internet- related business in Japan and overseas, favorable or unfavorable changes in the management policies and strategies of founder/CEO Hiroshi Mikitani, and (7) favorable or unfavorable regulatory trends in the Internet and finance businesses.

Rakuten (4755 / 4755 JP) 8 07 July 2016 Company profile Corporate history Rakuten was established in February 1997 and started the online shopping mall Rakuten Ichiba, now one of its core businesses, in May of that year. The company then listed on the OTC market in April 2000 and on JASDAQ in December 2004, culminating in TSE-1 listing in December 2013. Rakuten has also been heavily involved in M&A activity, acquiring the online travel site Mytrip Net (travel portal operator) and the online securities firm DLJdirect SFG Securities in 2003. In 2005, Rakuten made credit card company Kokunai Shinpan a subsidiary. In 2009, Rakuten made eBank a subsidiary, further solidifying its financial business base. Since 2010, Rakuten has made numerous M&A deals, making subsidiaries of ebook company Kobo and the online cash-back site Ebates among others. Rakuten has accelerated its growth not only through business expansion but also through the aggressive use of M&A activity.

Figure 11: Corporate history C orporate history 1997 Feb M D M established, capitalized at ¥10m n, at 6-7, 1-chom e Atago, M inato W ard, Tokyo, to develop online com m erce servers and operate the Rakuten Ichiba internet shopping m all 1997 M ay Starts Rakuten Ichiba internet shopping m all service 1999 Jun Renam ed Rakuten 2000 Apr G oes public via an IPO on the OTC m arket 2001 M ar Starts Rakuten Travel service 2002 N ov Starts Rakuten Super Point program 2003 Sep M akes hotel booking site operator M yTrip Net a wholly ow ned subsidiary via acquisition of shares 2003 N ov M akes DLJdirect SFG Securities (now Rakuten Securities) a subsidiary via share acquisition 2004 O ct Establishes RAKU TEN BASEBALL, INC. 2004 D ec Listed on JASD AQ (now TSE JASD AQ (Standard)) 2005 Jun M akes Kokunai Shinpan a subsidiary (nam e later changed to Rakuten KC) 2005 Sep M akes LinkShare Corporation (currently Rakuten M arketing) a wholly ow ned subsidiary via Rakuten USA 2007 Aug Acquires IP telephone business com pany Fusion Com m unications (now Rakuten Com m unications), m akes it a subsidiary 2009 Feb Converts preferred shares in eBank (now Rakuten Bank) into com m on stock and m akes it a subsidiary 2010 Jan Acquires bitW allet (now Rakuten Edy) and m akes it a subsidiary 2010 Jul Fully acquires Buy.com (now Rakuten Com m erce), which operates US e-com m erce site Buy.com 2010 Jul Fully acquires Pricem inister S.A. (now Pricem inister S.A.S.), which operates PriceM inister, an e-com m erce site in France, via Rakuten Europe 2011 Aug Continues business related to Rakuten Card, which Rakuten KC operates, via split and m erger with Rakuten Credit (now Rakuten Card) and sells Rakuten KC shares 2011 O ct M akes Play Holdings (now Rakuten Europe), which operates an e-com m erce site in the UK, into a wholly ow ned subsidiary

2012 Jan Acquires Kobo (now Rakuten Kobo), which is developing a global e-book service and m akes it a wholly ow ned subsidiary 2012 M ay U nderwrites a capital increase via a third-party allocation of new shares via Kenko.com , and m akes the com pany a subsidiary 2012 Jun Acquires W uaki.TV, a provider of video stream ing services in Spain, and m akes it a wholly ow ned subsidiary 2012 O ct Acquires m ore shares in equity m ethod affiliate Airio Life Insurance (now Rakuten Life Insurance) and m akes it a subsidiary 2013 Sep Acquires Viki, a global provider of video stream ing services, and m akes it a wholly ow ned subsidiary 2013 D ec Listed in the First Section of the Tokyo Stock Exchange 2014 M ar Acquires Viber M edia, which operates a m obile m essaging and VoIP service worldw ide, and m akes it a wholly ow ned subsidiary 2014 O ct Acquires Ebates, provider of Ebates, the leading m em bership-based online cash-back site in the US, and m akes it a wholly ow ned subsidiary 2015 Apr Acquires OverDrive Holdings, a leading eBook content provider m ainly for libraries, and m akes it a wholly ow ned subsidiary Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 9 07 July 2016

Executives Rakuten’s 12-member board of directors includes 11 males and 1 female. It has nine outside directors, of which four are corporate auditors. The company also has an executive officer system, including two executive vice presidents and 12 managing executive officers as of 1 July 2016.

Figure 12: List of executives as of 1 July 2016 Title N am e N am e April 1988 Joined The Industrial Bank of Japan, Limited February 1997 Founder and President and Representative Director of Rakuten, Inc. Representative Director, President, Chairm an and CEO H iroshi M ikitani February 2001 Chairm an and President and Representative Director of Rakuten, Inc. (current position) February 2010 Representative Director of Japan e-business Association (currently Japan Association of New Econom y) (current position) April 1980 Joined ORIX Credit Corporation Vice Chairm an and Representative Director M asayuki Hosaka April 2009 President and Representative Director of Rakuten Credit, Inc. (current position) M arch 2016 Vice Chairm an and Representative Director of Rakuten, Inc.(current position) O ctober 1998 CEO of eTranslate, Inc. D irector C harles B.Baxter Septem ber 2005 M anager of LinkShare Corporation (currently RAKU TEN M ARKETING LLC) (current position) M arch 2011 Director of Rakuten, Inc. (current position) April 1975 Joined Sony Corporation June 2007 Honorary Chairm an of Sony Com puter Entertainm ent Inc. Senior technology advisor of Sony D irector Ken Kutaragi* Corporation (current position) M arch 2010 Outside Director of Rakuten, Inc. (current position) August 1984Assistant at Inform ation Processing Center of Tokyo Institute of Technology D irector Jun M urai O ctober 2009D ean of Faculty of Environm ent and Inform ation Studies of Keio University (current position) M arch 2012O utside Director of Rakuten, In. (current position) July 1997 Assistant Professor of M assachusetts Institute of Technology (M IT) Septem ber 2005 Director of Avid Technology, Inc. (current position) D irector Youngm e Moon July 2014 Senior Associate Dean of Strategy and Innovation and Donald K. David Professor of Harvard Business School (current position) M arch 2015 Director of Rakuten, Inc. (current position) O ctober 1996 Founder and CEO of Om niture, Inc. D irector Joshua G.James O ctober 2010 Founder and CEO of Dom o, Inc. (current position) M arch 2016 Outside Director of Rakuten, Inc. (current position) April 1979 Joined Japan Airlines Co., Ltd. D irector Takashi M itachi January 2016 Senior Partner & M anaging Director of The Boston Consulting Group (current position) M arch 2016 Outside Director of Rakuten, Inc. (current position) April 1969 Joined The Sum itom o Bank, Limited (currently Sum itom o M itsui Banking Corporation) June 2010 Outside Com pany Auditor of Rakuten Bank, Ltd. (current position) Com pany Auditor Yoshiaki Senoo M arch 2011O utside Full-time Com pany Auditor of Rakuten, Inc. M arch 2016 Outside Com pany Auditor of Rakuten, Inc. (current position) April 1982 Joined the M inistry of International Trade and Industry Com pany Auditor Takeo Hirata M arch 2007 Outside Com pany Auditor of Rakuten, Inc. (current position) August 2013 Special Advisor to the Cabinet (current position) April 1991Registered with Dai-ichi Tokyo Bar Association. Joined Nishimura & Partners Com pany Auditor Katsuyuki Yam aguchi August 2000 Attorney and Partner of Nishimura & Partners (currently Nishimura & Asahi) (current position) M arch 2001 Outside Com pany Auditor of Rakuten, Inc. (current position) April 1977 Joined The Sum itom o Bank, Limited (currently Sum itom o M itsui Banking Corporation) Com pany Auditor (Full time) Takahide Uchida April 2010 Senior M anaging Director of Daiwa SB Investm ents Ltd. M arch 2016 Outside Full-time Com pany Auditor of Rakuten, Inc. (current position) Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 10 07 July 2016

Shareholders The top three shareholders include founder Hiroshi Mikitani and family members/interests. The ownership distribution shows a high overseas investor ratio at nearly 40%, nearly equal to the 37% held by the founder and his family members.

Figure 13: List of shareholders as of 31 December 2015 C ontribution to the Com pany S hareholder nam e N o. of shares S hareholding ratio Crimson Group, LLC. 226,419,000 15.83 H iroshi M ikitani 176,155,800 12.32 H aruko M ikitani 132,625,000 9.27 JP MORGAN CHASE BANK 380055 52,865,384 3.70 Japan Trustee Services Bank,Ltd. (Trust Account) 42,103,100 2.94 The M aster Trust Bank of Japan, Ltd. (Trust Account) 30,517,300 2.13 M ELON BANK, N.A. AS AGENT MELON OM NIBUS US PENSION 21,077,071 1.47 Culture Convenience Club Co.,Ltd. 20,662,000 1.44 JP MORGAN CHASE BANK 385164 19,991,600 1.40 STATE STREET BANK AND TRUST COM PANY 505103 19,625,675 1.37 Source: Company data, Credit Suisse Corporate group Rakuten is one of the leading Internet-related corporate groups. At end-December 2015, the company had 12,981 employees at the consolidated level and 5,138 at the parent, as well as 126 consolidated subsidiaries and 10 equity-method affiliates.

Figure 14: Major consolidated subsidiaries A ddress/Location C apital/Investm ent V oting rights ratio (JP Y mn) R akuten Auction, Inc. S etagaya-ku, Tokyo 60 1,650 (US D ) 100.0 RAKUTEN MARKETING LLC US 1 (100.0) (JP Y mn) 100.0 LinkS hare Japan K.K. S etagaya-ku, Tokyo 259 (27.5) (US D mn) 100.0 RAKUTEN COM M ERCE LLC US 11 (100.0) (EU R 1,000) 100.0 PRICEM INISTER S.A.S. France 356 (100.0) (CA D mn) R akuten Kobo Inc. C anada 100 858 C huo-ku, Fukuoka City, (JP Y mn) 56.7 K enko.com . Inc. Fukuoka Pref. 2,208 (10.5) (US D ) 100.0 V IKI, Inc. US 1 (100.0) (US D ) 100.0 E bates Inc. US 0.1 (100.0) (US D ) 100.0 O verDrive Holdings, Inc. US 1 (100.0) (JP Y mn) 100.0 R akuten Bank, Ltd. S etagaya-ku, Tokyo 25,954 (100.0) (JP Y mn) R akuten Securities, Inc. S etagaya-ku, Tokyo 100 7,496 (JP Y mn) R akuten Card Co., Ltd. S etagaya-ku, Tokyo 100 19,324 (JP Y mn) R akuten Edy, Inc. S etagaya-ku, Tokyo 100 1,840 (JP Y mn) R akuten Life Insurance Co., Ltd. S etagaya-ku, Tokyo 100 2,500 M iyagino-ku, Sendai (JP Y mn) R akuten Baseball, Inc. 100 C ity, M iyagi Pref. 400 (JP Y mn) R akuten Com m unications Corp. S etagaya-ku, Tokyo 100 2,026 (US D 1,000) 100.0 VIBER M ED IA LTD . C yprus 71 (100.0) , Note: Voting rights figures in parentheses indicate the percentage of voting rights held indirectly Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 11 07 July 2016 Business portfolio Rakuten’s business portfolio mainly comprises three segments—the Internet services segment, the FinTech (finance) segment, and the others segment. Rakuten has adopted IFRS, but also discloses non-GAAP segment OP adjusted for one-off items, amortization of intangible assets (purchase price allocation), and stock-based compensation expenses.

Figure 15: Business organization chart

Source: Company data, Credit Suisse

Figure 16: Rakuten sales trends

Internet service Fintech(Internet Finance) Others

1,000,000

52,093 42,445 275,135 35,746 500,000 236,520

(JPYmn) 201,494

440,744 315,228 362,751

0 12/13 12/14 12/15

Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 12 07 July 2016

Internet services segment Internet services includes Rakuten Ichiba, Rakuten Travel, Ebates, Kobo, and other operations. For disclosure purposes, the segment is divided into domestic EC and other Internet services. The main components of domestic EC services are Rakuten Ichiba and Rakuten Travel. The domestic EC "take-rate" (the ratio of domestic EC sales compared to domestic EC gross merchandise sales) is around 10%, and we estimate that the rates for Rakuten Ichiba and Rakuten Travel are roughly equal.

Figure 17: Internet service segment: sales and OP trends

Domestic EC Other Internet Services

180,000

131,248 130,000 110,046 110,589 111,760 102,785 96,122 52,818 86,756 84,906 81,043 38,977 38,104 40,521 34,932

(JPYmn) 30,320 80,000 20,906 19,886 19,115

42,995 78,430 65,850 71,069 22,287 65,802 67,853 16,862 72,484 20,623 17,690 71,239 30,000 65,021 14,585 61,928 13,974 17,591 19,028 15,221

22,982 21,256 22,745 25,145 22,856 23,228 25,017 25,305 18,891 (8,398) (7,283) (5,153) (2,858) (3,828) (6,366) (4,394) (3,670) (20,000) Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse Domestic EC: take-rate approximately 10%; seasonal factors tend to boost 3Q–4Q Domestic EC segment disclosure has included Rakuten Travel since 3Q FY12/15. Previously, that segment's earnings were disclosed separately, but reporting has now been integrated into domestic EC. Rakuten Ichiba’s earnings reflect store listing fees, system usage fees (fees based on transaction amount), point costs, affiliate fees, and other items. Additionally, the company levies a 2.65% fee for charge card transactions (3.60% for non-Rakuten cards). Rakuten Ichiba’s credit card utilization rate is over 70%, and most of its credit card transactions generate financing fees. Rakuten Ichiba’s take-rate roughly breaks down as follows (our estimate): monthly fixed fees 1%, transaction fees 4%, advertising fees 2%–3%, and other fees 2%. Rakuten Travel’s business model is to charge booking fees for participating lodging facilities based on the room rate. In addition to the standard fee (7%–9% by our estimate), Rakuten Travel’s earnings reflect point fees, credit card fees, and affiliate fees. In other product lines, Rakuten Travel also offers its Dynamic Package (including airline tickets) and car rental reservations. We estimate that the take-rate as a percentage of gross travel platform revenue is not much different from the rate for Rakuten Ichiba. As for seasonality, Rakuten Travel sees peak demand in the Jul–Sept quarter (3Q), which is the summer season, and Rakuten Ichiba sees peak demand in the October–December quarter (4Q), which includes the year-end shopping season. Consequently, domestic EC earnings are roughly the same in 1Q and 2Q, while revenue is boosted by seasonality in 3Q at Rakuten Travel and 4Q at Rakuten Ichiba.

Rakuten (4755 / 4755 JP) 13 07 July 2016

Figure 18: Domestic EC (GMS, EC sales and Take rate)

Domestic GMS Domestic EC sales Take Rate (RHS)

800,000 11.4% 11.3% 700,000 11.2% 600,000 11.0% 500,000 10.8% 10.8% 10.7% 10.8% 400,000 10.6% 10.6%

10.6% 10.6% 10.5% (JPYmn) 300,000 10.4%10.4% 200,000 10.2% 100,000 10.0% 0 9.8% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY2014 FY2015 FY2016

Source: Company data, Credit Suisse Figure 19: Domestic EC: sales and OP

Domestic EC

100000

90000 78,430 80000 71,069 72,484 71,239 67,853 70000 65,021 65,850 65,802 61,928 60000

50000 (JPYmn) 40000

30000 25,145 25,017 25,305 22,982 21,256 22,745 22,856 23,228 18,891 20000

10000

0 Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse

Figure 20: Trends in no. of membership merchants Figure 21: Member shop plan

No. of Merchants Mega-shop Standard Ganbare Light

46,000 Monthly charge (¥) 100,000 50,000 19,500 39,800

45,000 44,876 System fee 2.0-4.0% 2.0-4.0% 3.5-6.5% 3.5-5.0% 44,000 44,201 Semi-annual Semi-annual Annual Three-month Payment 43,000 payment payment payment payment 42,601 Initial charge (¥) 60,000 60,000 60,000 60,000 42,000 41,945 41,817 41,718 41,659 41,442 41,568 41,000 No. of items available to list Unlimited 20,000 5,000 5,000

40,000 Contract period (month) 12 12 12 3 39,000 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY2014 FY2015 FY2016 Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 14 07 July 2016

Other Internet services: improving, but broad mix brings high volatility Other Internet services mainly comprises overseas businesses, but the broad product mix makes earnings difficult to interpret. Nevertheless, they appear to be improving. Significant OP improvement for other Internet services from −¥23.7bn in FY12/14 to +¥3.1bn in FY12/15 (+¥26.8bn) due to ¥21.1bn in valuation gains in FY12/15, particularly from the booking of ¥13.7bn in valuation gains in 4Q by Lyft. Earnings appear to be in an uptrend, with improvement totaling ¥5.7bn, even excluding the ¥21.1bn in valuation gains. In particular, Ebates is growing sharply, contributing to improved earnings in the other Internet services segment.

Figure 22: Other Internet services: sales and OP

Other Internet Services

60000 52,818

50000

40,521 38,977 40000 38,104 34,932 30,320 30000

20,906 19,886 19,115 (JPYmn) 20000 17,690

10000

0

(2,858) (3,828) (4,394) (3,670) -10000 (5,153) (6,366) (8,398) (7,283) Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse

Figure 23: Ebates OP trends

Ebates OP

18 15.5 16

14

12 10.8

10 7.8 8 (USDmn) 6.2 6.6 6 5.3

4 3.3 3.3 2.5 2

0 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 15 07 July 2016

FinTech (finance) segment The FinTech segment, whose name has been adopted to show the segment's combination of finance and Internet technologies, is made up of online banking and securities, credit card services, life insurance, e-money, and other such businesses. Major businesses include Rakuten Card (credit card), Rakuten Bank, Rakuten Securities, and Rakuten Life Insurance. Among these businesses, Rakuten Card derives earnings growth from its connection with the Rakuten economic sphere, including Rakuten Ichiba, which not only drives FinTech earnings but also helps drive consolidated earnings as well. Online bank Rakuten Bank achieves strong double-digit growth, which Rakuten Securities shows the strength of the Rakuten brand by being Japan’s second largest online brokerage firm. Although earnings are vulnerable to the market environment, Rakuten has stabilized earnings by upgrading its non-equity businesses, including investment trusts and foreign exchange. Figure 24: FinTech segment: sales and OP

Rakuten Card Rakuten Bank Rakuten Securities Life Insurance Others

100,000

90,000 70,760 71,544 69,576 69,340 64,710 65,460 80,000 60,667 56,753 70,000 54,390

60,000

50,000 (JPYmn) 40,000

30,000 15,279 15,913 16,886 15,959 15,669 20,000 13,015 15,140 11,467 9,735 10,000

- Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse Rakuten Card: helps drive consolidated earnings with a successful business model that combines Internet and financial technologies Rakuten Card's cumulative cards issued surpassed the 12mn mark in 2015, yet growth remains strong. In addition to efficiently acquiring cardholders via promotions aimed at existing Rakuten Ichiba users, the connection with the Rakuten economic sphere holds another advantage in the large number of active cardholders that use their cards to pay for transactions on Rakuten Ichiba. Rakuten Card’s profits are driven by credit card purchases while Rakuten Bank’s are driven by Rakuten Super Loan. For credit card purchases, income from revolving balance fees exceeds card transaction fees. Revolving balances, which carry high fees (15%), increase along with growth in card purchases (roughly 3% transaction fee), and this is powering Rakuten’s earnings. Also, Rakuten Super Loan provided by Rakuten Bank is guaranteed by Rakuten Card, and we estimate that roughly 5% of the loan balance becomes earnings for Rakuten Card. Rakuten has constructed an ecosystem in which Rakuten Ichiba and other Internet services attract customers and card users, which feeds payment and loans for Rakuten Card and Rakuten Bank, which in turn feeds back into Internet services.

Rakuten (4755 / 4755 JP) 16 07 July 2016

Figure 25: Trends in Rakuten cards issued Figure 26: Rakuten card sales and expenses (JPYmn)

FY2014 FY2015 FY2016 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Total revenues 22,474 23,833 24,823 27,033 27,015 28,652 29,803 32,034 32,288 Shopping 13,840 14,857 15,456 16,378 16,832 17,959 18,565 19,865 20,507 Revolving 8,177 8,719 9,184 9,747 10,264 10,720 11,099 11,533 12,131 Others 5,663 6,137 6,271 6,631 6,568 7,240 7,465 8,332 8,376 Credit guarantee 2,957 3,223 3,369 3,547 3,639 3,886 4,066 4,224 4,245 Cash advances 1,806 2,017 2,142 2,412 2,454 2,724 2,847 3,066 3,233 Others 3,871 3,737 3,856 4,696 4,090 4,083 4,325 4,873 4,304 Total operating expenses 18,460 19,609 20,070 21,495 20,870 22,447 24,485 25,577 25,186 Personnel costs 1,624 1,807 1,859 1,707 1,894 1,972 2,119 2,154 2,242 General expenses 11,312 11,805 11,699 12,763 11,662 12,823 14,449 15,169 14,199 Interest expenses 1,748 1,949 1,947 2,060 2,093 2,288 2,346 2,407 2,448 Expenses relatead to doubtful accounts 3,739 4,019 4,533 4,956 5,203 5,357 5,558 5,856 6,264 Others 37 29 33 8 18 7 13 (10) 34 Non-GAAP OP 3,980 4,188 4,710 5,495 6,145 6,205 5,317 6,457 7,102

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

Figure 27: Revolving balance Figure 28: Trends in Rakuten Bank super loans

Revolving balance Rakuten Bank Super Loans

400,000 40,000 35,320 337,595 34,010 34,510 350,000 35,000 32,660 317,161 31,220 295,232 305,870 283,211 29,330 300,000 271,687 30,000 28,050 256,879 26,570 242,461 25,470 228,935 250,000 25,000 200,000

20,000 (JPYmn) 150,000 (JPYmn) 15,000 100,000 10,000 50,000 5,000 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY2014 FY2015 FY2016 FY2014 FY2015 FY2016 Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 29: Rakuten Card sales and OP

Rakuten Card

40,000

35,000 32,034 32,288 29,803 30,000 28,652 27,033 27,015 24,823 25,000 23,833 22,474

20,000 (JPYmn)

15,000

10,000 7,102 6,145 6,205 6,457 5,538 5,317 4,224 4,753 5,000 4,014

- Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 17 07 July 2016

Rakuten Bank: revenue and profits continue to rise on loan growth Growth in card loans and housing loans is supporting expansion of Rakuten Bank’s overall loan balance. The bank's card loans (Rakuten Super Loan) are handled entirely online, including application, loan funding, and loan payments, making them highly convenient for customers. Also, the loans carry interest rates of 4.9% to 14.5%, which are lower than the upper rates on typical consumer finance products, meaning lower repayment hurdles for users. Also, borrowers receive preferential Rakuten Points and other benefits when using Super Loan in combination with other Rakuten services. Rakuten Bank had 5.35mn accounts at end-March 2016 (up from 4.60mn at end-FY3/14 and 4.96mn at end-FY3/15), showing steady growth. The loan balance has increased to ¥1.5tn. We believe that Rakuten Bank is able to some degree to control its lending status, Rakuten Card trust beneficiary rights balance, and deposit balance (through such means as campaigns for favorable interest rates tied to assets under management).

Figure 30: Rakuten Bank sales and OP

Rakuten Bank

20,000

18,000 16,318 15,548 15,933 16,000 15,250 14,270 13,680 14,000 12,370 12,760 11,631 12,000

10,000 (JPYmn) 8,000

6,000 3,773 3,791 4,040 3,676 4,000 3,018 3,111 2,533 1,978 2,145 2,000

- Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse

Figure 31: Loan balance Figure 32: Invested assets

Card loans Others Loan-deposit rate Securitized loan receivables Loans Corporate bonds JGBs Others Short-term bonds 1,500,000 500 32% 35% 1,205,800 28% 30% 25% 144.4 963,100 25% 1,000,000 60.7 786,000 20%

16.7 (JPYmn)

(JPYbn) 15% 500,000 331 294 10% 242 5% - Mar-14 Mar-15 Mar-16 0 0% Mar-14 Mar-15 Mar-16

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

Rakuten (4755 / 4755 JP) 18 07 July 2016

Rakuten Securities Rakuten Securities is Japan’s No. 2 online brokerage, with 16.9% market share in retail investors trading value in FY3/16. Rakuten Securities seeks stable earnings from a diversified business portfolio that consists not only of equities trading but other services such as investment trusts and foreign exchange. Rakuten Securities had 2.04mn accounts at end-March 2016, with roughly half consisting of Rakuten members.

Figure 33: Rakuten Securities: sales and OP

Rakuten Securities

20,000

18,000

16,000

14,000 12,861 13,114 12,477 12,246 12,144 12,162 12,000 11,244 10,573

10,000 9,213 (JPYmn) 8,000 6,110 5,866 5,859 5,589 6,000 5,173 4,890 4,905 4,661 3,732 4,000

2,000

- Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse

Figure 34: Rakuten Bank no. of accounts Figure 35: Market share of retail investors by trading value (FY3/16) Rakuten Bank accounts Others 0.9% 3,000 Monex Rakuten Click 6.2% 2,500 Securities 9.5% 16.9% 2039.53 2,000 Kabu.com 10.4%

1,500 ("000) Matsui 1,000 14.1% SBI 42.0% Rakuten members 500 49.9%

0 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Others segment The others segment includes Rakuten Communications (IP telephone), VIBER, Rakuten Mobile (MVNO), Rakuten Baseball (the Rakuten Golden Eagles pro team), and O-net (bridal information service). We estimate that VIBER and Rakuten Mobile remain unprofitable in their upfront- investment stage. Rakuten Baseball earnings are weak during the off season (1Q and 4Q), but tend to be strong during the active season (2Q-3Q).

Rakuten (4755 / 4755 JP) 19 07 July 2016 Outlook Aiming for sustained growth in an increasingly competitive domestic e-commerce market, Rakuten is in the midst of a wholesale reform of its domestic e-commerce business model, including its point service, special sales, and site make-up. However, this reform will likely take a considerable amount of time. Given the competitive environment, Rakuten will have difficulty completing needed reforms entirely on its own. In addition, it will need to move ahead slowly while monitoring user reaction. We therefore think a recovery in domestic e-commerce earnings could be slower than expected. On the bright side, Rakuten’s FinTech should be able to achieve stable growth, with the number of Rakuten Card holders and card usage both expected to see solid expansion. While Rakuten’s Vision 2020 medium-term plan clarifies the direction management is taking, it remains unclear whether it will be able to reach its goals. Our earnings forecasts are therefore based on more conservative assumptions. Longer-term strategy: Vision 2020 clarifies numerical targets and withdrawal guidelines Concrete profit targets Rakuten released its Vision 2020 medium-term business plan this past February. The plan targets adjusted OP (non-GAAP) of ¥300bn in 2020, up from ¥130bn in 2015. It also presents targets for each segment: ¥160bn for domestic e-commerce, ¥120bn for FinTech services, and ¥20bn for other Internet services. These targets are all on a non-GAAP basis, which is different from IFRS.

Figure 36: Vision 2020 profit by business (JPYbn) 2015 Vision 2020 Domestic EC 96 160 Other internet services -18* 20 FinTech 64 120 Others/Adjustments -12* 0 Non-GAAP OP 130 300 Note: Non-GAAP OP excluding ¥22.1bn in valuation gains (¥21.1bn on other Internet services, ¥1.0bn on consolidation adjustments) Source: Company data, Credit Suisse Three principles to lead to business withdrawals, scaled down overseas operations In addition to numerical goals, Vision 2020 sets forth the “3S” principles for sustainable growth—“Strong,” “Smart, and "Speed." Strong businesses refer to the Rakuten ecosystems in Japan and Taiwan, where its businesses have leading market shares. Smart businesses are unique businesses in niche markets where the company expects to be able to maintain a certain market share. Current examples include Ebates, Kobo, and Wuaki.tv. The speed businesses refer to high-growth ones capable of annual growth rates of 70% or more. Rakuten businesses that fit this bill include Viber, Rakuten Mobile, and several others. We think it reasonable to assume that Rakuten will be withdrawing from businesses that do not fit the 3S model. Accordingly, Rakuten has abandoned its first-party sales model in the US and is focusing instead on Ebates and a marketplace business model. In Brazil, it is moving away from the marketplace model and focusing on software as a service (SaaS). Rakuten is also exiting its marketplace business in Southeast Asia (Indonesia, Singapore, Malaysia, and Thailand) and moving toward a model based on C2C mobile apps. In addition, following a review of its European operations, Rakuten announced on 8 June that it would restructure its marketplace e-commerce business in the United Kingdom, Spain, and Austria and focus on France and Germany.

Rakuten (4755 / 4755 JP) 20 07 July 2016

Figure 37: Transformation of EC Area Early models Future Models US First party and marketplace Open platform (Ebates) and marketplace Brazil Marketplace and SaaS SaaS Southeast Asia Marketplaces (Indonesia, Singapore, Malaysia and Thailand) C2C mobile app (Rakuma) Source: Company data, Credit Suisse Business portfolio restructuring likely to continue Looking ahead, we think Rakuten could decide to exit even more businesses if it decides they do not fit somewhere into the 3S model. In particular, when businesses currently in the speed category start to grow more slowly, management will turn its focus to their future profit-generating prospects, and those with unappealing prospects will likely be abandoned. Far-sweeping reform of domestic e-commerce business could take some time SPU introduction has increased new uses but heavy users might be puzzled Rakuten Ichiba is revamping its website and also considering changes to its special sales and point programs. This leads us to believe a drastic reform of the Rakuten ecosystem is underway. In the past, Rakuten Ichiba seemed to hold many festive or event-oriented sales, focusing on its Super Sales, but recently it is holding fewer sales and instead promoting its Super Point Up (SPU) program that provides users with more "kickback points" the more they use Rakuten ecosystem services. The SPU program has increased the number of new and returning users and increased the transaction value from light users. On the other hand, heavy users appear to be perplexed by Rakuten Ichiba’s strategic shift. While the growth in domestic e-commerce transaction value is improving, it still looks low to us. Yahoo Japan used reforms to narrow gap with Rakuten Yahoo Japan announced its own e-commerce business reforms back in October 2013, when it eliminated store tenant fees and sales royalty fees on its Yahoo! Shopping site (stores must still pay a credit card settlement fee and point program fee). In addition, as a forward-looking investment not focused on profitability, it began rewarding points to people making purchase on Yahoo! Shopping. As a result, Yahoo! Premium membership has expanded five-fold. Even though these changes took some time to be recognized, shopping-related transaction value (including Yahoo! Shopping, Yahoo! Travel, and Ikyu,) totaled ¥160.7bn in Jan–Mar 2016, up ¥64.6bn or 67% YoY. Rakuten's domestic e- commerce transaction value (including Rakuten Ichiba, Rakuten Checkout, and Rakuten Travel) totaled ¥687.9bn in the same quarter, up ¥76.5bn or 12.5% YoY. Although differences in business scale and breadth make comparisons difficult, Yahoo Japan has begun to catch up with Rakuten as measured by the absolute increase in transaction value. We therefore think that Yahoo Japan is beginning to capture new e-commerce demand.

Rakuten (4755 / 4755 JP) 21 07 July 2016

Figure 38: EC domestic EC domestic 500,000 457,782 450,000 407,317 400,000 360,790 350,000 317,163 284,569 300,000 263,867 239,241 250,000

(JPYmn) 200,000 150,000 102,782 92,129 96,406 94,317 100,000 83,522 81,815 86,790 50,000 0 Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E

Source: Company data, Credit Suisse estimates

Figure 39: Increase in transaction value (YoY)

100 92.7

77.4 76.5 73.4 64.6

50 42.5 (JPYbn)

24.4 18

0 RAKUTEN Yahoo! Japan RAKUTEN Yahoo! Japan RAKUTEN Yahoo! Japan RAKUTEN Yahoo! Japan Apr-Jun Jul-Sep Oct-Dec Jan-Mar 2015 2016

Source: Company data, Credit Suisse Yahoo (4689) catching up might have provided catalyst for reform Yahoo Japan's promotion is unlikely to last forever, as the company is bearing the cost of issuing points. However, the company’s current financial condition indicates that it has the capability to continue the promotion for some time. We expect Rakuten will hold on to its leading position in Japan’s e-commerce market, a position it secured by providing safety, security, and detailed responses to customer needs. That said, it may be a while before the stock market can see the results of Rakuten’s reforms reflected in its transaction value growth rate and renewed profit growth at its domestic e-commerce segment, and that timing could depend on Yahoo Japan’s strategy.

Rakuten (4755 / 4755 JP) 22 07 July 2016

Figure 40: Major EC companies’ gross merchandise sales (Shopping)

Rakuten AMAZON Yahoo Japan Start Today(ZOZOTOWN) DeNA Shopping 2,000

1,800

1,600

1,400

1,200

1,000 (JPYbn) 800

600

400

200

0 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015

Notes: 1. Rakuten discloses only transaction value, including that for online travel services. Consequently, figures for 2014 and 2015 are Credit Suisse estimates based on domestic e-commerce growth rates.2. Exchange rate for Amazon; 1USD=JPY121.05 Source: Company data, Credit Suisse Gradual recovery of other Internet services Rakuten’s other Internet services include many overseas operations. In addition to earnings growth at Ebates, earnings are improving at e-book business (Kobo and Overdrive) and certain other overseas businesses. We expect the performance of Rakuten’s overseas operations to gradually improve as it continues to realign its overseas business portfolio in line with the 3S principles set forth in Vision 2020. However, given Rakuten’s wide variety of businesses, business restructuring and M&A deals could cause its earnings to fluctuate. The current trend is toward organic improvement, but it is easily influenced by strategy, and we therefore are ready to review at any time.

Figure 41: Ebates OP trends

Ebates OP

18 15.5 16

14

12 10.8

10 7.8

8 (USDmn) 6.2 6.6 6 5.3

4 3.3 3.3 2.5 2

0 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16

Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 23 07 July 2016

FinTech business likely to advance steadily Plenty of room for growth in Rakuten Card membership We think the financial business will be a steady growth segment in the Rakuten ecosystem. Rakuten Card membership surpassed the 12mn figure in 2015 and continues to grow steadily owing to synergies with Rakuten Ichiba. We estimate the annual number of unique purchases on Rakuten Ichiba at 25–30mn, a figure which we think indicates considerable further growth potential. Rakuten Card holders are increasing at a pace of more than 1mn new members each year, and the business’s sales and profits should be able to achieve double-digit CAGR over the next five years.

Figure 42: Rakuten Card: sales and OP trends

Credit card 200,000 169,482 152,417 150,000 136,010 117,504 98,163 100,000

76,840 (JPYmn)

50,000 34,119 38,385 24,124 29,820 12,583 18,529 - Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP 12/13 12/14 12/15 12/16E 12/17E 12/18E

Source: Company data, Credit Suisse estimates Bank and insurance businesses making effective use of Rakuten ecosystem Rakuten Bank continues to expand its Super Loan receivables and earnings. A full-fledged effort to move into the corporate and housing loan markets would force us to reexamine Rakuten Bank’s earnings and balance sheet risk, but for now we regard the Super Loan product as its key growth driver. Rakuten Life Insurance still has a rather small business scale, but it should be able to expand while holding down customer acquisition costs by pursuing users of Rakuten Ichiba. We think it could gradually grow its business by leveraging the light cost burden of web-based insurance.

Figure 43: Rakuten bank: sales and OP trends

Bank 100,000

66,630 68,006 68,646 61,001 50,441

43,884 (JPYmn)

14,715 15,702 16,958 17,598 7,111 9,674

- Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP 12/13 12/14 12/15 12/16E 12/17E 12/18E

Source: Company data, Credit Suisse estimates

Rakuten (4755 / 4755 JP) 24 07 July 2016

Rakuten Securities: Reducing volatility by increasing weight of asset management business Rakuten Securities has been strengthening its asset management operations, which we think has reduced its exposure to changes in the market environment and reduced earnings volatility. In addition, earnings growth at Rakuten Card and Rakuten Bank have lessened the impact of volatility at the securities business on overall earnings in the FinTech segment. Of course, as Japan’s second largest online broker, Rakuten Securities is an important business capable of making a major contribution to segment and company earnings.

Figure 44: Rakuten Securities: sales and OP trends

Securities 100,000

50,365 47,838 47,646 47,718

42,847 43,507 (JPYmn) 22,731 21,340 19,393 18,922 19,192 19,402

- Sales OP Sales OP Sales OP Sales OP Sales OP Sales OP 12/13 12/14 12/15 12/16E 12/17E 12/18E

Source: Company data, Credit Suisse estimates

Rakuten (4755 / 4755 JP) 25 07 July 2016

Others segment: looking for improvement from Rakuten Mobile The others segment includes Rakuten Mobile, Viber, and the company’s pro sports business. Rakuten Mobile has been expanding revenues at the expense of profitability. However, we think it can improve profits once it has secured a certain size customer base and can begin reducing customer acquisition costs. We think it will continue to spend aggressively on customer acquisition in FY12/16, and from FY12/17 we expect segment profitability to improve as revenues increase and spending on customer acquisition decreases. Remaining goodwill of ¥350bn indicates risk of additional impairment losses As of end-FY3/16, Rakuten still had goodwill on its books totaling ¥351.7bn. The company wrote off impairment losses on its investments in PRICEMINISTER and Rakuten Kobo on its FY12/15 results, reducing the risk of further write-offs in the near term. That said, Rakuten still carries large amounts of goodwill on its investments in Ebates (¥91.9bn) and Viber (¥93.6bn). The risk of write-offs on Ebates’ goodwill is limited by the company’s strong earnings growth trend. Viber, however, is likely to be in the red, as it is still making forward investments. As such, the risk of impairment losses on Rakuten’s investment in Viber could increase in the future.

Figure 45: Balance of goodwill B alance of Goodw ill (JP Y m n) 31-D ec-14 31-D ec-15 31-D ec-16 Internet Services 214,111 213,813 202,754 P R ICE M INISTE R S.A.S 15,679 - - R akuten Kobo Inc. 20,813 10,374 10,328 V IKI, Inc. 19,961 18,888 17,646 R akuten M arketing Group 13,279 14,972 13,988 E bates Group 99,493 97,211 91,929 O verDrive Group - 37,664 34,842 S lice Technologies, Inc. 13,478 13,485 13,267 O thers 31,409 21,218 20,754 Fintech 46,971 52,234 52,111 R akuten Securities, Inc. 7,544 10,935 10,935 R akuten Bank, Ltd. 32,886 32,886 32,886 O thers 6,540 8,413 8,290 O thers 102,564 103,381 96,792 V iber Group 99,349 100,175 93,588 O thers 3,215 3,206 3,204 Total 363,646 369,428 351,657 Source: Company data, Credit Suisse Market environment: domestic EC market Rakuten is a conglomerate that provides multiple Internet and financial services. However, we view the EC business as the core of the Rakuten economic sphere. The domestic B2C EC market continues to grow at a double-digit pace. According to information from the Ministry of Economy, Trade and Industry (METI), Japan's product sales EC ratio (ratio of e-commerce to total BtoB commerce) for 2014 was 4.37%. This ratio is still relatively low compared with other industrialized nations, so we expect B2C EC market growth to remain in the double digits. However, we believe the domestic EC business faces an increasingly competitive environment, as the ample room for market growth is enticing an increasing number of well-capitalized participants, including major retailers and telecom business operators with

Rakuten (4755 / 4755 JP) 26 07 July 2016 broad customer bases. Still, new entry into the EC space requires multiple elements, including the construction of logistics, payment and other systems, marketing capabilities, and access to products and sellers. Considering the time and capital required, we think entry is limited to major players.

Figure 46: Domestic B2C EC market Figure 47: Domestic B2C EC market breakdown E-Commerce market (LHS) EC ratio (RHS) C Y2013 C Y2014 YoY 14,000 5 4.37 Shopping 5,993.1 6,804.2 13.5%

12,000 3.85 4 Service 4,071.0 4,481.6 10.1% 3.4 10,000 3.17 2.84 D igital Content 1,101.9 1,511.1 37.1% 3

) 8,000

％） ( JPYbn 12,797 ( 6,000 11,166 2 9,513 4,000 7,788 8,459 1 2,000

0 0 CY2010 CY2011 CY2012 CY2013 CY2014 Source: METI, Credit Suisse Source: METI, Credit Suisse

Figure 48: Domestic B2C EC market（CY2013 vs. CY2014） CY2013（ 11.2trn） CY2014(12.8trn）

Shopping Service Digital Content Shopping Service Digital Content

9.9% 11.8%

36.5% 53.7% 35.0% 53.2%

Source: METI, Credit Suisse

Rakuten (4755 / 4755 JP) 27 07 July 2016

Figure 49: BtoC-EC market size in merchandising businesses CY2013 CY2014 EC m arket size EC ratio EC m arket size EC ratio (JPYbn) （% ) (JPYbn) （% ) food, beverage, alcoholic drinks 989.7 1.58% 1,191.5 1.89% (20.4% ) hom e electric appliances. AV equipm ent, PC, com puter peripherals 1,188.7 22.67% 1,270.6 24.13% (6.9% ) book, video, m usic software 785.0 16.51% 896.9 19.59% (-14.3% ) cosm etics, pharm aceuticals supplies 408.8 3.80% 441.5 4.18% (8.0% ) sundry goods, furniture, Interior 963.8 13.17% 1,159.0 15.49% (20.3% ) clothing, apparel goods 1,163.7 7.47% 1,282.2 8.11% (-10.2% ) autom obiles, autom atic m otorcycle, auto parts 167.5 1.87% 1802 1.98% (-7.6% ) office supplies, stationery 135.4 23.30% 159.9 28.12% (-18.1% ) O thers 190.7 0.48% 222.7 0.56% (-16.8% ) Total 5,993.1 3.85% 6,804.3 4.37% (-13.5% ) Source: Company data, Credit Suisse

Figure 50: B2C EC market Figure 51: Retail EC ratio 2013 2014 2015 2016 2017 2018 B2C EC market UK 11.6 13.0 14.4 15.6 16.9 18.0 30 C hina 8.3 10.1 12.0 13.8 15.5 16.6 25.6 Finland 9.2 9.8 10.4 10.8 11.2 11.5 25 22.9 N orw ay 8.8 9.7 10.7 11.5 12.1 12.7 20.6 South Korea 8.1 9.0 9.8 10.5 11.3 12.0 20 18.6 16.8 D enm ark 7.7 8.6 9.3 9.9 10.4 10.8 15.2 G erm any 6.1 7.3 8.4 9.4 10.4 11.2 15 13.8 12.6

(JPYtrn) 11.7 US 5.8 6.5 7.1 7.7 8.3 8.9 C anada 4.5 5.2 5.9 6.6 7.4 8.2 10 Japan 4.4 4.9 5.4 5.8 6.2 6.7

5 France 4.2 4.6 5.1 5.4 5.8 6.2 N etherland 3.8 4.3 4.6 4.9 5.1 5.3

0 Australia 3.6 4.1 4.5 4.9 5.3 5.6 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E Spain 3.6 4.1 4.8 5.4 6.0 6.5 B razil 3.4 3.8 4.1 4.4 4.6 4.8 Sw eden 3.2 3.5 3.8 4.1 4.4 4.6 Russia 2.0 2.2 2.4 2.6 2.8 3.0 Italy 1.5 1.7 1.9 2.1 2.2 2.3 Argentina 1.3 1.4 1.6 1.9 2.2 2.5 M exico 1.0 1.2 1.5 1.9 2.2 2.6 India 0.6 0.7 0.9 1.1 1.3 1.4 Indonesia 0.5 0.6 0.8 1.0 1.2 1.4 Source: NRI “IT navigator”, Credit Suisse Source: eMarketer, Credit Suisse

Rakuten (4755 / 4755 JP) 28 07 July 2016

Market environment: Growing number of entrants join Internet field Internet connection times have increased sharply along with the proliferation of smartphones. In 2015, connection time via PCs, tablets, mobile phones, and smartphones was 163 minutes per week, accounting for 44% of connection time for all media (383.7 minutes), including TVs and other devices. Specifically, the proliferation of smartphones has created an environment that enables Internet connection at any time and from virtually any location. In addition to online advertising and EC, the Internet has become a platform for people to conduct various activities in their daily lives, and we believe this is attracting a growing number of major entrants into the field. In Japan, telecom carriers have leveraged their high compatibility with online services to make strong entrances into the Internet field. For one, NTT DoCoMo has separated its Smart Life business and other businesses into its own business segment with FY3/16 sales of ¥863.4bn, OP of ¥ 74.2bn, and gross merchandise volume of ¥3,000bn. FY3/17 guidance calls for OP of ¥120.0bn, on par with Rakuten and Recruit. KDDI too has aggressively entered the Internet space. Competition could very well escalate further with the entry of major firms from other industries.

Figure 52: Change in media contact over time (Tokyo)

Television Radio Newspapers Magazine Computers Tablet Mobile/SP

(min) 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0

CY2006 171.8 43.9 32.3 19.6 56.6 10.9

CY2007 163.7 39.2 28.2 17.8 61.8 14.1

CY2008 161.4 35.2 28.5 17.1 59.4 17.7

CY2009 163.5 31.1 26.0 17.6 67.6 18.1

CY2010 172.8 28.7 27.8 16.0 77.4 25.2

CY2011 161.4 33.0 23.3 18.6 81.7 32.0

CY2012 161.4 31.9 24.0 16.5 77.1 40.4

CY2013 151.5 35.1 27.1 16.0 72.8 50.6

CY2014 156.9 30.5 23.4 13.6 69.1 18.2 74.0

CY2015 152.9 28.9 19.9 13.0 68.1 20.6 80.3

Internet

Source: Institute of Media Environment, Credit Suisse

Rakuten (4755 / 4755 JP) 29 07 July 2016

Figure 53: NTT DoCoMo’s Smart Life business and other businesses (JPYbn)

GMS Sales OP

3,500.0 3000 3,000.0 2700 2,500.0

2,000.0

1,500.0

1,000.0 753.0 863.4

500.0 120 3.0 74.2 NA NA 0.0 FY15/3 FY16/3 FY17/3

Source: Company data, Credit Suisse

Rakuten (4755 / 4755 JP) 30 07 July 2016 Earnings forecasts

Figure 54: Rakuten (4755) – Income statement Income Statement

(JPY mn) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Revenues Internet service 315,228 362,751 440,744 508,538 572,165 638,692 709,157 783,558 %yoy 10.3% 15.1% 21.5% 15.4% 12.5% 11.6% 11.0% 10.5% EC domestic 239,241 263,867 284,569 317,163 360,790 407,317 457,782 512,183 Others 75,987 98,883 156,174 191,375 211,375 231,375 251,375 271,375 Fintech(Internet Finance) 201,494 236,520 275,135 295,756 314,819 333,596 352,740 372,447 %yoy 28.8% 17.4% 16.3% 7.5% 6.4% 6.0% 5.7% 5.6% Credit card(KC) 76,840 98,163 117,504 136,010 152,417 169,482 187,262 205,618 Bank 43,884 50,441 61,001 66,630 68,006 68,646 68,957 69,274 Brokerage 42,847 43,507 50,365 47,838 47,646 47,718 47,771 47,805 Others 10,900 12,386 13,963 11,624 12,000 12,000 12,000 12,000 Others 35,746 42,445 52,093 56,862 57,662 58,462 59,262 60,062 Adjustment -33,900 -43,151 -54,417 -60,258 -61,799 -67,432 -73,347 -79,556 Total Net Revenues 518,568 598,565 713,555 800,898 882,848 963,318 1,047,812 1,136,511 %yoy 16.9% 15.4% 19.2% 12.2% 10.2% 9.1% 8.8% 8.5% Operating Income Internet service 59,495 68,437 99,508 72,999 82,165 92,192 102,657 115,558 %yoy 1.5% 15.0% 45.4% -26.6% 12.6% 12.2% 11.4% 12.6% %margin 18.9% 18.9% 22.6% 14.4% 14.4% 14.4% 14.5% 14.7% EC domestic 83,522 92,129 96,406 81,815 86,790 94,317 102,782 112,183 Others -24,027 -23,692 3,102 -8,816 -4,625 -2,125 -125 3,375 Internet Finance 43,648 49,496 63,898 66,806 73,813 79,728 85,385 91,242 %yoy 84.1% 13.4% 29.1% 4.6% 10.5% 8.0% 7.1% 6.9% %margin 21.7% 20.9% 23.2% 22.6% 23.4% 23.9% 24.2% 24.5% Credit card 12,583 18,529 24,124 29,820 34,119 38,385 42,734 47,290 Bank 7,111 9,674 14,715 15,702 16,958 17,598 17,909 18,225 Brokerage 21,340 19,393 22,731 18,922 19,192 19,402 19,599 19,783 Others 2,614 1,900 2,328 2,363 3,544 4,344 5,144 5,944 Others 3,790 190 -8,599 -8,384 -5,500 -3,500 -1,500 -1,500 Adjustments -16,689 -11,726 -60,119 -18,072 -18,000 -18,000 -18,000 -18,000 Total Operating Income 90,244 106,397 94,689 113,349 132,478 150,420 168,542 187,301 %yoy 24.9% 17.9% -11.0% 19.7% 16.9% 13.5% 12.0% 11.1% % of Revenue 17% 18% 13% 14% 15% 16% 16% 16% non-operating income (1,765) (2,756) (3,688) (3,072) (2,880) (2,880) (2,880) (2,880) Recurring Profit 88,610 104,245 91,987 110,277 129,598 147,540 165,662 184,421 % of Revenue 17% 17% 13% 14% 15% 15% 16% 16% Income Tax, adjusted 45,129 33,142 47,707 45,774 51,839 59,016 66,265 73,768 Minority Interests 581 489 -156 304 400 400 400 400 Extraordinary Profits/Loss ------Net Income 42,900 70,614 44,436 64,886 77,759 88,524 99,397 110,653 % of Revenue 8% 12% 6% 8% 9% 9% 9% 10% EBITDA 116,330 136,537 134,811 154,331 174,217 193,514 212,766 232,466 % of Revenue 22% 23% 19% 19% 20% 20% 20% 20% EPS 30.1 49.6 31.5 45.6 54.6 62.1 69.8 77.7 Source: Company data, Credit Suisse estimates

Rakuten (4755 / 4755 JP) 31 07 July 2016

Figure 55: Rakuten (4755) – Balance sheet Balance Sheet 1.24889633 1.17899251 0.8899593 1.19706732 (JPY mn) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/18E 12/18E Current Assets 2,840,346 3,035,869 3,448,232 3,515,305 3,584,332 3,664,891 3,704,070 3,812,963 Cash & Securities 384,008 428,635 501,029 544,564 460,527 379,669 250,200 184,567 Working Capital 2,456,338 2,607,234 2,947,203 2,970,742 3,123,805 3,285,222 3,453,870 3,628,396 Fixed Assets 369,462 644,826 821,721 812,872 821,133 828,038 833,815 838,650 Tangibles 30,408 34,811 48,442 53,019 55,169 56,884 58,251 59,342 Intangibles 235,881 490,679 514,752 501,628 507,739 512,930 517,338 521,083 Investments & Others 103,173 119,336 258,527 258,225 258,225 258,225 258,225 258,225 Others ------Total Assets 3,209,808 3,680,695 4,269,953 4,328,177 4,405,465 4,492,929 4,537,885 4,651,612 Current Liabilities 2,884,502 3,232,762 3,584,305 3,637,327 3,636,856 3,635,797 3,581,354 3,584,430 Short-term Debt 389,683 589,927 649,195 694,499 679,613 663,342 592,906 579,174 Other 2,494,819 2,642,835 2,935,110 2,942,828 2,957,243 2,972,454 2,988,448 3,005,255 Long-term Liabilities ------Long-term Debt ------Other ------Total Liabilities 2,884,502 3,232,762 3,584,305 3,637,327 3,636,856 3,635,797 3,581,354 3,584,430 Securities Trading Liability Reserve ------Minority Interests 6,391 6,524 1,969 996 996 996 996 996 Shareholders' Equity 306,454 421,562 662,044 689,854 767,613 856,137 955,534 1,066,187 Liabilities & Shareholders' Equity 3,209,808 3,680,695 4,269,953 4,328,177 4,405,465 4,492,929 4,537,885 4,651,612 Source: Company data, Credit Suisse estimates

Rakuten (4755 / 4755 JP) 32 07 July 2016

Companies Mentioned (Price as of 06-Jul-2016) Aeon Financial Service (8570.T, ¥2,222) Amazon com Inc. (AMZN.OQ, $737.61) DeNA (2432.T, ¥2,418) KDDI (9433.T, ¥3,264) Kabu.com Securities (8703.T, ¥315) Matsui Securities (8628.T, ¥838) Monex Group (8698.T, ¥222) NTT DoCoMo (9437.T, ¥2,884) Rakuten (4755.T, ¥1,098, NEUTRAL, TP ¥1,220) Recruit Holdings (6098.T, ¥3,745) SoftBank Group Corp. (9984.T, ¥5,613) Start Today (3092.T, ¥5,340) Yahoo Japan (4689.T, ¥445) For other companies mentioned see Figures 5, 11,13,14 and 35

Disclosure Appendix Important Global Disclosures I, Keiichi Yoneshima, 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.

3-Year Price and Rating History for Rakuten (4755.T)

4755.T Closing Price Target Price Date (¥) (¥) Rating 11-Mar-14 1,402 1,400 O 14-Apr-14 1,250 1,400 N 03-Apr-15 2,143 NR 08-Jul-15 1,928 2,400 O * 13-May-16 1,155 NR * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL N O T RAT ED

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 attractive, 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 American 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; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. 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.

Rakuten (4755 / 4755 JP) 33 07 July 2016

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 cover multiple sectors.

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

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 55% (40% banking clients) Neutral/Hold* 35% (17% banking clients) Underperform/Sell* 10% (40% banking clients) Restricted 0% *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 holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Rakuten (4755.T)

Method: We derive our ¥1,220 target price for Rakuten using a sum-of-the-parts (SOTP) valuation. For the individual parts, we use the DCF model for non-financial services, which are mainly internet services (including adjustments). For Rakuten Securities and Rakuten Card, we use P/E based on a comparison with similar companies, and for Rakuten Bank and Rakuten Life Insurance we use book value. Our DCF model for Rakuten’s internet services (including adjustments) assumes WACC of 8.45% (based on RFR of 0.0%, ERP of 6.5%, beta of 1.3, and D/E=0). To estimate enterprise value from FY12/21, we multiplied our forecast for FY12/20 EBITDA by 13x (the I/B/E/S consensus average two-year forward EV/EBITDA multiple for domestic e-commerce 7 stocks including Rakuten, Yahoo Japan and Recruit). For Rakuten Card, we applied a P/E of 12x (assigning a slight premium to the 11x FY3/17E multiple for Aeon Financial Service, which we consider to be an appropriate comp) to our FY3/17E adjusted NP [OP x (1–35%)]. Similarly, for Rakuten Securities, we applied a P/E of 15x (the average FY3/17E multiple for rivals Matsui Securities, Monex, and Kabu.com) to our FY3/17E adjusted NP. We valued Rakuten Bank and Rakuten Life Insurance at book value. Any change in our rating on Rakuten will be based on momentum changes for transaction value and profitability in domestic e-commerce. Based on the potential return over the next 12 months indicated by our target price and comparisons with our coverage universe, we assign a NEUTRAL rating. Risk: The main risks (upside or downside) to our ¥1,220 target price and NEUTRAL rating on Rakuten are as follows: (1) acceleration/deceleration of earnings momentum in domestic e-commerce, (2) acceleration/deceleration of earnings momentum of Rakuten’s financial business (fintech), and (3) improvement/deterioration in the earnings trend at other internet services. Additional factors that could affect the share price include new entry into or exits from overseas business (with conesquent improvement or deterioration in the company's results), intensification/relaxation of the competitive environment in internet-related business in Japan and overseas, favorable or unfavorable changes in the management policies and strategies of founder/CEO Hiroshi Mikitani, and (7) favorable or unfavorable regulatory trends in the internet and finance businesses.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (AMZN.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Rakuten (4755 / 4755 JP) 34 07 July 2016

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (4755.T, AMZN.OQ, 3092.T, 6098.T) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (AMZN.OQ).

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Rakuten (4755 / 4755 JP) 35 07 July 2016

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4755_070716_Rakuten_E.doc Rakuten (4755 / 4755 JP) 36