30 October 2014 Asia Pacific/Japan Equity Research Integrated Telecommunication Services (Telecommunication Services (Japan)) / MARKET WEIGHT
Softbank (9984 / 9984 JP) Rating OUTPERFORM* Price (29 Oct 14, ¥) 7,509 REINSTATEMENT Target price (¥) 10,000¹ Chg to TP (%) 33.2 Market cap. (¥ bn) 9,015.76 (US$ 83.39) Valuing large unrealized gains, FCF of over ¥1tn Enterprise value (¥ bn) 16,299.76 Number of shares (mn) 1,200.66 ■ Reinstate coverage: In conjunction with Credit Suisse's initiation of Alibaba Free float (%) 65.0 Group Holding coverage (The Giant Marches On), we resume coverage of 52-week price range 9,220 - 6,766
*Stock ratings are relative to the coverage universe in each Softbank with a ¥10,000 target price (potential return 33%) and analyst's or each team's respective sector. OUTPERFORM rating. The stock is currently trading at around ¥7,500, but ¹Target price is for 12 months. we think the market is undervaluing the company’s investment securities and Research Analysts existing business and has not priced in annual FCF in excess of ¥1tn or the Hitoshi Hayakawa future value of the company’s debt-funded global business strategy. 81 3 4550 9952 [email protected] ■ Unrealized gains on Alibaba shares, abundant FCF could support new M&A: Softbank generates annual FCF of more than ¥1tn from existing businesses, and the value of its shares in Alibaba mean it now has even greater scope to borrow. We see potential for another M&A deal of some several trillion yen if the right target emerges. However, a major deal could be a negative for the stock in the near term. Experience suggests active buying is the right approach when the stock falls after M&A deals. ■ Catalysts/risks: Factors likely to impact the share price include a rise (fall) in the value of investment securities holdings, news of a major M&A deal, and an improving (deteriorating) competitive environment in the domestic mobile business or the US mobile business. ■ Valuation: We base our ¥10,000 TP on a Sum-of-the-Parts (SoTP) valuation. In addition to the value of investment securities, we apply EV/EBITDA multiples of 6x for the domestic mobile business and 4x for the fixed-line business (using our FY3/16 estimates).
Share price performance Financial and valuation metrics
Year 3/14A 3/15E 3/16E 3/17E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 6,666.7 8,090.0 8,191.4 8,375.8 10000 400 8000 300 Operating profit (¥ bn) 1,077.0 1,258.4 1,360.5 1,454.4 6000 200 Recurring profit (¥ bn) 924.0 1,455.7 1,288.1 1,465.6 4000 100 2000 0 Net income (¥ bn) 578.3 917.4 823.1 936.4 EPS (¥) 204.8 756.4 678.7 772.1 Change from previous EPS (%) n.a. 117.0 51.0 IBES Consensus EPS (¥) n.a. 504.5 523.1 636.8 The price relative chart measures performance against the EPS growth (%) -37.6 269.3 -10.3 13.8 TOPIX which closed at 1270.64 on 29/10/14 P/E (x) 38.1 9.9 11.1 9.7 On 29/10/14 the spot exchange rate was ¥108.12/US$1 Dividend yield (%) 0.51 0.53 0.53 0.53 EV/EBITDA(x) 9.2 6.8 6.2 5.8 Performance Over 1M 3M 12M P/B (x) 12.2 3.3 2.6 2.0 Absolute (%) -3.8 -0.8 1.9 ROE(%) 36.1 40.4 26.2 23.3 Relative (%) 1.2 0.6 -4.6 Net debt/equity (%) 397.7 266.9 193.1 142.4
Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, 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.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
30 October 2014
Valuation Reinstate coverage with ¥10,000 TP Softbank has been on our Restricted list for some time. Following Alibaba’s IPO and other developments, we reinstate coverage of Softbank with a ¥10,000 TP (potential return 33%) and OUTPERFORM rating. We continue to view a SoTP approach as the best way to value Softbank. We think the key to valuing Softbank is in its holdings of investment securities, which have increased to several trillion yen regardless of which valuation method we use due to Alibaba’s IPO having provided the company a market value. Enterprise value approach Our ¥10,000 TP translates into enterprise value (EV) of ¥16tn. This breaks down into three main parts: the values of investment securities holdings, the mobile communications business, and the fixed-line telecommunications business. Investment securities are further divided into three key holdings: investment securities listed on domestic markets, shares in Alibaba Group Holding, and shares in Sprint.
Figure 1: Softbank enterprise value (¥mn) Figure 2: Softbank enterprise value (%) Fixed Line and Fixed Line and other business other business 624,000 Alibaba 6,553,738 4% Alibaba 75.4% Sprint 15.4% Sprint 1,336,425 Yahoo Japan 7.3% Yahoo Japan 632,692 Others 2.0% Others 174,580
Investment Mobile Mobile securities Investment Business Business securities 7,320,196 values 8,697,436 44% values 52%
Note: Share prices as of 28 October 2014 Note: Share prices as of 28 October 2014 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates To calculate the value of Softbank’s holdings of listed securities, we multiply the market Discount of 35.64% used for value of each company by Softbank’s stake in that company to work out the total market non-Alibaba businesses value of all its holdings. We then apply a discount, which in the case of non-Alibaba businesses is the Japanese corporate tax rate of 35.64%. We use a discount of 24.4% only for Alibaba Group Holding. This is because a domestic Discount of 24.4% used for subsidiary holds 60.4% of Softbank’s stake in the group, while a subsidiary in Singapore Alibaba to reflect stake held holds the remaining 39.6%; we therefore apply the domestic corporate tax rate of 35.64% in Singapore to the stake held in Japan and Singapore’s corporate tax rate of 17% to that held by the subsidiary in Singapore. The above approach yields a total value for Softbank’s investment securities holdings of ¥8.69tn. We estimate the value of Softbank’s investment securities holdings, before applying the Value of securities holdings above discounts, at ¥12tn, which is ¥3.1tn higher than Softbank’s total market cap as of 28 without application of October (¥8.9tn). Even taking into account net interest-bearing debt of ¥4.6tn, the recent discount share price would therefore suggest that Softbank can acquire the domestic mobile communications business of roughly ¥1.4tn with the remaining annual EBITDA of ¥1.5tn, equating to a low EV/EBITDA multiple of around 1x. Our TP without applying the discount would be around ¥12,000, or roughly ¥2,000 higher than our actual ¥10,000 TP with application of the discount.
Softbank (9984 / 9984 JP) 2 30 October 2014
Application of a discount therefore has a significant impact on our valuation of Softbank. What is a fair discount? There is no consensus on how to value investment securities. One investor may see applying a discount as unnecessary, while another might agree with us and view the application of the effective corporate tax rate as the minimum required adjustment. Either way, Softbank’s share price is finding its natural level against this backdrop of differing views. In other words, there may be little value in arguing the need for a discount, or indeed, what type of discount should be applied. Based on Softbank's share price since Alibaba Group Holding listed, the market does seem to be applying some sort of discount to the value of Softbank’s investment securities. We apply a 6x multiple to our FY3/16 EBITDA estimate for the mobile business, resulting Valuing the domestic mobile in an EV of ¥7.32tn. Our multiple is the simple average of the FY15E EV/EBITDA multiples business for the world’s leading integrated telecommunications companies and the world’s leading mobile communications companies (6.0x and 6.4x, respectively). We estimate EV for Softbank’s fixed-line business is ¥624bn, based on an EV/EBITDA multiple of 4x. We therefore value the domestic business at ¥7.944tn, comprising ¥7.32tn for the mobile business and ¥624bn for the fixed-line business.
Figure 3: EV/EBITDA multiples for the world’s leading communications companies
Telefonica 7.5
Verizon 6.5
Mobile telecom 6.4
Global telecom 6.2
Integrated telecom 6.0
America Movil 5.8
AT&T 5.8
Vodafone 5.7
Note: Share prices as of 28 October 2014 "Mobile telecom" is the average of 14 companies including Vodafone, and" Integrated telecom" is the average of 16 companies including AT&T and Verizon. "Global telecom" is a simple average of "Mobile telecom" and "Integrated telecom. Please see Figure 4 for the list of companies. Source: Company data, Credit Suisse estimates
Softbank (9984 / 9984 JP) 3 30 October 2014
Figure 4: Global telecom sector valuation Data as of MktCap MktCap Closing Target EV/EBITDA (x) 10/28/14 US$m Rating* Curr. (mn) Price Price FYE 2012 2013 2014 2015 2016 Integrated operators AT&T 178,035 O USD 178,035 34.33 39.00 Dec 6.2 6.1 5.8 5.5 BT Group 49,317 O GBp 30,575 375.40 440.00 Mar 4.5 4.9 6.1 5.8 5.6 China Telecom 51,226 O HK$ 313,146 4.91 5.15 Dec 4.9 3.5 4.0 3.9 3.6 China Unicom HK 35,079 O HK$ 214,440 11.38 20.40 Dec 4.9 4.0 3.5 3.2 2.8 Deutsche Telekom 66,320 O EUR 52,073 11.48 13.00 Dec 4.1 5.3 5.3 5.1 4.8 France Telecom 40,602 U EUR 31,879 12.04 11.00 Dec 3.9 4.3 5.2 5.2 5.3 KDDI 56,421 N JPY 6,100,249 6,801.00 6,200.00 Mar 3.7 4.3 4.7 5.1 4.5 KT 8,053 N W 8,433,911 32,300.00 36,000.00 Dec 3.8 3.7 4.4 2.9 2.6 NTT 67,096 O JPY 7,254,402 6,382.00 8,500.00 Mar 2.2 2.2 2.8 2.9 2.9 PLDT 15,260 U P 682,128 3,158.00 2,850.00 Dec 8.1 8.3 10.1 9.8 9.5 Singapore Telecom 46,613 N S$ 59,310 3.72 4.00 Mar 11.1 12.4 12.7 13.0 12.8 Softbank 82,376 O JPY 8,906,499 7,418.00 10,000.00 Mar - 9.7 9.0 6.8 6.2 Sprint Nextel 23,831 U USD 23,831 6.04 6.00 Dec 11.3 8.1 7.1 6.6 Telefonica 67,533 R EUR 53,042 11.66 Dec 4.6 5.2 6.0 6.0 5.9 Telstra 60,178 N A$ 67,852 5.56 5.64 Jun 5.5 7.0 7.1 7.5 7.2 Verizon 207,334 N USD 207,334 49.96 52.00 Dec 4.6 4.3 6.8 6.5 6.0 Average (16) 5.1 6.0 6.4 6.0 5.7
Mobile operators America Movil 81,848 N USD 81,848 23.81 27.00 Dec 5.5 5.8 6.0 5.8 5.5 Bharti 26,691 U Rs 1,632,738 408.45 275.00 Mar 8.1 7.3 7.2 7.8 7.2 China Mobile 240,286 O HK$ 1,468,340 91.45 102.00 Dec 3.9 3.5 4.7 5.0 4.3 Far EasTone Telecom 6,731 U NT$ 204,308 62.70 61.25 Dec 9.3 9.1 8.8 8.4 8.3 IDEA Cellular 9,093 U Rs 557,334 154.95 110.00 Mar 9.0 8.6 7.9 8.0 8.2 PT Indosat 1,653 O Rp 20,078,384 3,695.00 4,750.00 Dec 5.3 4.4 4.1 4.0 3.9 LG Uplus 4,794 O W 5,021,031 11,500.00 15,000.00 Dec 4.8 4.7 4.6 4.0 3.5 Maxis Berhad 15,435 O RM 50,441 6.72 8.00 Dec 12.9 14.2 13.9 13.4 13.0 NTT DoCoMo 63,557 U JPY 6,871,744 1,733.00 1,500.00 Mar 3.2 3.5 4.0 4.2 4.0 Reliance 3,851 U Rs 235,547 98.05 105.00 Mar 7.2 6.8 7.6 5.3 5.2 SK Telecom 21,318 O W 22,326,189 276,500.00 350,000.00 Dec 3.8 4.3 4.6 4.1 3.7 SmarTone Telecom 1,334 N HK$ 10,345 9.89 12.60 Jun 4.7 4.5 3.9 4.5 3.9 StarHub 5,576 U S$ 7,095 4.11 3.95 Dec 9.6 10.7 10.1 9.6 9.4 Vodafone 87,077 O GBp 53,948 203.55 220.00 Mar 8.3 9.3 5.7 5.7 5.9 Average (14) 6.8 6.9 6.7 6.4 6.1
Apple 626,013 N S$ 626,013 106.74 110.00 Dec 10.3 7.6 10.4 8.4 8.6 eBay 63,609 N S$ 63,609 51.20 61.00 Dec 11.5 11.2 9.5 8.0 6.2 Amazon 136,860 O S$ 136,860 295.59 395.00 Dec 37.8 43.6 28.3 16.3 10.0 Google 189,495 O S$ 189,495 558.94 723.00 Dec 14.5 20.5 17.6 13.4 10.3 Source: Company data, Credit Suisse estimates Note: N=NEUTRAL, O=OUTPERFORM, U=UNDERPERFORM, R=RESTRICTED, "-"=Not covered by Credit Suisse
Softbank (9984 / 9984 JP) 4 30 October 2014
Our valuation assumes net interest-bearing debt of ¥4.59tn, which is total interest-bearing debt of ¥7.31tn as of end-1Q FY3/15 excluding Sprint’s portion of ¥2.72tn. We exclude Sprint’s portion because we have used investment securities to value Softbank’s stake in the company. Figure 5: Softbank’s net interest-bearing debt (¥ bn) 8,000 7,315 7,000
6,000 Sprint 2,723
5,000
4,000
3,000 Except Sprint 2,000 4,592
1,000
0 June 2014
Source: Company data Based on the above, our theoretical market cap for Softbank is ¥12.049tn (EV after net interest-bearing debt). Divided by the number of shares outstanding (1,212mn), our theoretical share price is ¥10,000.
Softbank (9984 / 9984 JP) 5 30 October 2014
Implied valuations for domestic telecoms business Taking the value of the abovementioned investment securities to be ¥8.69tn and using the share price as of 28 October, we have examined whether the implied valuations for the domestic telecoms business are appropriate. Softbank's market cap as of 28 October was ¥8.90tn, so deducting ¥8.69tn leaves ¥209bn. Adding the above estimate of interest-bearing debt of ¥4.592tn to this figure of ¥209bn puts Softbank's EV at ¥4.80tn, excluding the value of the investment securities. Adding EBITDA of ¥1.22tn for the mobile telecoms business to EBITDA of ¥156bn for the fixed-line telecoms business gives total EBITDA of ¥1.376tn for the domestic telecoms business. Thus, dividing our implied EV estimate of ¥4.8tn (which we calculate assuming investment Implied EV/EBITDA of 3.49x security value of ¥8.69tn, on a discounted basis, and using the current share price) by our points to undervaluation EBITDA estimate of ¥1.376tn gives an EV/EBITDA multiple of 3.49x.
Figure 6: Major global telecom EV/EBITDA multiples vs. Softbank's implied EV/EBITDA
Mobile telecom 6.4
Global telecom 6.2
SoftBank 3.5
Note: Share prices as of 28 October 2014 Source: Company data, Credit Suisse estimates Softbank's implied EBITDA multiple is roughly 44% lower than the global mobile telecoms multiple (6.4x), the overall telecoms multiple (6.0x), and the overall average (6.2x). We note it is also lower than the 4.2x multiple for NTT DoCoMo (9437), whose earnings are on a downward trajectory.
Figure 7: Comparison of NTT DoCoMo and Softbank implied EV/EBITDA multiples
NTT DoCoMo 4.2
SoftBank 3.5
Note: Share prices as of 28 October 2014 Source: Company data, Credit Suisse estimates In our view, the three domestic carriers in Japan have looked increasingly alike since NTT DoCoMo's decision to sell the iPhone, complicating differentiation. As a result, it seems fair to say that Softbank's mobile telecoms business in Japan is unlikely to see the robust earnings growth of the past. However, we see no reason to ignore the fact that Softbank's valuations are even lower than those for NTT DoCoMo, whose profits seem trapped on a downward course with no apparent way out. We therefore think that sooner or later this disparity will be eliminated by either an upward correction in Softbank's share price or by a downward one in NTT DoCoMo's. With an eye on the spread between their valuations, we would favor a position that is long on Softbank and short on NTT DoCoMo.
Softbank (9984 / 9984 JP) 6 30 October 2014
TP-based approach On 29 October, Credit Suisse initiated coverage of Alibaba Group Holding (The Giant Alibaba TP of $114 Marches On), assigning it a $114 TP and an OUTPERFORM rating. Our US team has a $6 TP for Sprint, and we have a ¥500 TP for Yahoo Japan. Applying a sum-of-the-parts approach to these businesses yields a ¥10,970 TP for Softbank.
Figure 8: Sum-of-the-parts valuation (mark-to-market) a b c = a x b d e = c x d (¥ mn) MKT CAP Holdings Holding Value Discount True Value (¥/share) Investment securities values 32,349,617 - 11,997,630 - 8,697,436 7,176 - - - - A Value of listed companies in Japan 2,873,022 - 1,217,337 - 783,478 646 Yahoo Japan 2,289,362 42.9% 983,052 35.6% 632,692 - Softbank Technology 13,737 50.0% 6,869 35.6% 4,421 - IT Media 4,944 54.6% 2,697 35.6% 1,736 - Vector 9,054 41.8% 3,782 35.6% 2,434 - Broadmedia 14,479 30.1% 4,360 35.6% 2,806 - Ghungho Online Entertainment 541,445 40.0% 216,578 35.6% 139,390 - Alibaba Group Holding 26,782,564 32.4% 8,666,838 24.4% 6,553,738 5,408 Sprint 2,597,554 79.9% 2,076,485 35.6% 1,336,425 1,103 RenRen 96,477 38.3% 36,970 35.6% 23,794 20
Japan Business EV 7,944,196 6,555 - - - - B
Mobile Business 7,320,196 6,040 - - - - C Mobile EBITDA 1,220,033 Mobile EV/EBITDA ratio 6.0
Fixed Line and other business 624,000 515 - - - - D Fixed Line EBITDA 156,000 Fixed Line EV/EBITDA ratio 4.0
Net Debt 4,592,400 -3,789 - - - - E Consolidated 7,315,500 Sprint's (deduct) 2,723,100
Market Capitalization 12,049,232 - - - - F
Diluted number of shares outstanding (million) 1,212 - - - - G
Theoretical share price (¥) 9,942 - - - - I = F / G
Key Assumptions JPY/USD ¥ 109 / US$ Alibaba share price US$ 99.68 Sprint share price US$ 6.04 Renren share price US$ 3.36 Yahoo share price ¥ 402 Note: Share prices as of 28 October 2014 Source: Company data, Thomson Reuters, Credit Suisse estimates
Softbank (9984 / 9984 JP) 7 30 October 2014
Figure 9: Sum-of-the-parts valuation (based on target prices) a b c = a x b d e = c x d (¥ mn) MKT CAP Holdings Holding Value Discount True Value (¥/share) Investment securities values 37,415,080 - 13,693,745 - 9,950,970 8,211 - - - - A Value of listed companies in Japan 3,476,750 - 1,474,796 - 949,178 783 Yahoo Japan 2,847,450 42.9% 1,222,695 35.6% 786,927 - Softbank Technology 14,400 50.0% 7,200 35.6% 4,634 - IT Media 4,400 54.6% 2,400 35.6% 1,545 - Vector 7,900 41.8% 3,300 35.6% 2,124 - Broadmedia 18,600 30.1% 5,600 35.6% 3,604 - Ghungho Online Entertainment 584,000 40.0% 233,600 35.6% 150,345 - Alibaba Group Holding 31,226,787 32.4% 10,104,988 24.4% 7,641,247 6,305 Sprint 2,582,646 79.9% 2,064,567 35.6% 1,328,755 1,096 RenRen 128,898 38.3% 49,394 35.6% 31,790 26
Japan Business EV 7,944,196 6,555 - - - - B
Mobile Business 7,320,196 6,040 - - - - C Mobile EBITDA 1,220,033 Mobile EV/EBITDA ratio 6.0
Fixed Line and other business 624,000 515 - - - - D Fixed Line EBITDA 156,000 Fixed Line EV/EBITDA ratio 4.0
Net Debt 4,592,400 -3,789 - - - - E Consolidated 7,315,500 Sprint's (deduct) 2,723,100
Market Capitalization 13,302,766 - - - - F
Diluted number of shares outstanding (million) 1,212 - - - - G
Theoretical share price (¥) 10,976 - - - - I = F / G
Key Assumptions JPY/USD ¥ 109 / US$ Alibaba Share Price US$ 114.00 Sprint Share Price US$ 6.00 Renren Share Price US$ 3.35 Yahoo Share Price ¥ 500 Note: Share prices as of 28 October 2014 Source: Company data, Thomson Reuters, Credit Suisse estimates
Softbank (9984 / 9984 JP) 8 30 October 2014
P/E-based approach after factoring in Alibaba earnings Credit Suisse analyst Dick Wei’s consolidated earnings forecasts for Alibaba Group Holding are summarized below.
Figure 10: Alibaba Group Holding: Sales, OP, EBIDTA, NP, and EPS (¥ mn) FY3/14A FY3/15E FY3/16E FY3/17E Sales 932,074 1,421,374 1,966,248 2,432,268 Operating profit 442,391 550,152 792,402 999,718 EBITDA 466,161 591,112 858,483 1,097,435 Net income 490,062 570,162 827,917 1,060,007 EPS (¥) 189 218 310 389 Source: Company data, Credit Suisse estimates Equity in Alibaba Group Holding’s parent net profits, reported under US GAAP, are reflected in Softbank’s earnings with a three-month time lag. These US GAAP-based net profits are adjusted, as Softbank uses IFRS reporting standards for consolidated earnings. Softbank converts these net profits into yen and books them as Softbank pretax profits under equity in net income of affiliates. The basic structure is outlined in Figure 11.
Figure 11: Alibaba Group Holding
Alibaba Group Holding SoftBank
US GAAP IFRS
Net income IFRS attributable to adjustment owners of the parent, Converted Net income Softbank's Equity in three months into yen and attributable to stake income of earlier incorporated owners of the 32.4% associates parent, after into pretax IFRS adjustment profits
Source: Company data, Credit Suisse We expect Alibaba Group Holding to generate quarterly NP of more than ¥130bn, or more than ¥550bn a year. Softbank should book about 32.4% of this amount after IFRS adjustment, boosting pretax profits by around ¥44bn on a quarterly basis and about ¥170bn annually. Taking the effective corporate tax rate into account, we anticipate an NP boost of about ¥110bn. We forecast FY3/17 NP of ¥936bn for Softbank factoring in Alibaba Group Holding earnings, giving EPS of ¥772. Our TP suggests an implied P/E of 13.0x. The inclusion of Alibaba earnings should support NP growth, but the stock looks slightly overvalued relative to other telecom companies. Thus, calculating a TP using a SoTP approach with mark-to-market valuation of Alibaba Group Holding indicates greater upside than valuing the shares as a telecom stock on a P/E basis. To reflect valuations on Internet shares, including the company’s 32.4% equity in Alibaba Group Holding, we need to either apply a P/E multiple above the telecom sector average or to adopt a SoTP approach.
Softbank (9984 / 9984 JP) 9 30 October 2014 Possible global telecom acquisitions The Nikkei and other media outlets report that Softbank is interested in acquiring shares in Overseas telecom M&A such potential targets as Vodafone (market cap $87.0bn), Telefonica ($67.5bn), and initiatives América Móvil ($81.8bn). It is worth considering the possibility that Softbank could embark on new capital strategies to follow up the acquisition of Sprint in the US with further M&A initiatives in other countries. With earnings recovery at Sprint apparently proceeding slower than Softbank initially anticipated, the equities market seem unlikely to take a positive view of moves to expand Softbank’s areas of operation before the Sprint business provides a return. We cannot help thinking that managing Sprint without a partner may be spreading the company a bit thin. We institutional investors are also learning how factors such as time differences and distance make participating in management different than in the case of domestic acquisitions. If Softbank were to pursue M&A worth trillions of yen, it could raise concerns regarding increased leverage, uncertainties associated with expansion, and deterioration in investor sentiment that could cool the share price sharply. Softbank shares eventually regained more than twice the deep hit they took when the Ultimately, shares regained Sprint acquisition was announced. In retrospect, therefore, the acquisition was a golden more than twice the sharp opportunity. However, we cannot predict the possibility of M&A, the partner and the timing drop after Sprint acquisition in advance. While it may be worth waiting for another drop in the share price, we already consider the shares undervalued. We recommend picking up the shares beginning now and calmly and steadily continuing to accumulate—even if the share price should fall in response to a large-scale M&A deal.
Figure 12: Share price doubled in six months from bottom after Sprint acquisition (¥) +106.6% 5,000
4,500
4,000
3,500
3,000
2,500
2,000 10/12 11/12 12/12 1/13 2/13 3/13
Source: Thomson Reuters, Credit Suisse
Softbank (9984 / 9984 JP) 10 30 October 2014 Domestic business: Current conditions and outlook We expect EBITDA from mobile telecom operations to increase by more than 20% YoY in FY3/15 due partly to the impact of new consolidations, but we think EBITDA will likely remain flat YoY from FY3/16. We do not see any drivers for significant earnings improvement in fixed-line business, and if growth in Yahoo earnings is limited, this might cast a shadow over prospects for sustainable expansion in domestic earnings.
Figure 13: EBITDA forecasts for domestic business
(¥bn) 1,800 11 11 11 1,600 244 272 295 1,400 14 204 158 156 156 1,200 13 193 170 1,000 168 800 600 1,215 1,220 1,226 1,001 400 797 200 0 3/13 3/14 3/15E 3/16E 3/17E Total 1,171 1,389 1,627 1,659 1,687 Mobile Communications Fixed-line Telecommunications Internet Others Source: Company data, Credit Suisse estimates With NTT DoCoMo inaugurating iPhone sales and mobile network technologies converging on LTE, competition among the three major mobile carriers (NTT DoCoMo, KDDI au, and Softbank Mobile) has to a considerable extent leveled out. As the declining number of MNP (mobile number portability) users suggests, customer churn among the three majors has declined.
Figure 14: Comparison of actual cost at each company of change to new iPhone 6 model (¥) 30,000 27,480 27,480 24,624 25,000
20,000
15,000 12,960 12,960 12,960
10,000
5,000
0 New, MNP Upgrade New, MNP Upgrade New, MNP Upgrade NTT DOCOMO KDDI SoftBank
Note: Data as of Sep 2014, after iPhone 6 release Source: Company data
Softbank (9984 / 9984 JP) 11 30 October 2014
Figure 15: Comparison of monthly iPhone usage cost (5GB plan) (¥) 9,000 8,000 8,000 8,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 NTT DOCOMO KDDI SoftBank Note: Data as of Sep 2014 after iPhone 6 release Source: Company data The increasing difficulty of winning new users away from other carriers means operators Softbank Mobile looking at are unlikely to achieve double-digit top-line growth. Softbank’s mobile telecom business is potentially flat earnings built around earnings from Softbank Mobile, but also includes game operators GungHo Entertainment and Supercell, mobile phone distributor Brightstar, and Ymobile (formerly eAccess, which merged with Willcom). These are enabling the company to maintain profit growth. However, looking only at mainstay Softbank Mobile business, as expansion was formerly driven by ex-DoCoMo users, we think medium-term profit growth might be single- digit, or that profits might even remain broadly flat YoY. Whatever happens, the general trend is toward weaker earnings growth at Softbank Mobile, which accounts for the bulk of mobile telecom segment profits, and we expect just modest increases through contributions from newly consolidated subsidiaries. Major changes in earnings also look unlikely in the fixed-line telecom business, and we expect profit levels to remain broadly flat.
Figure 16: Softbank Mobile operations data FY3/13 FY3/14 FY3/15 E FY3/16 E FY3/17 E Cumulative subscribers ('000) SoftBank Mobile 32,480 35,925 38,062 40,102 42,142 Ymobile (*) 10,011 10,511 11,011 11,511 PHS 5,086 5,546 5,500 5,500 5,500
Net additions (SoftBank Mobile, '000) 3,531 3,445 2,137 2,040 2,040 Postpaid 3,585 3,526 2,291 2,200 2,200 Prepaid -54 -81 -154 -160 -160
Handsets shipped (SoftBank Mobile, '000) 11,558 12,033 9,338 10,248 10,689
Units sold (SoftBank Mobile, '000) 13,112 14,175 11,994 12,811 13,361 New subscriptions 7,518 8,629 7,850 8,099 8,405 Handset upgrades 5,594 5,546 4,144 4,711 4,956
ARPU (SoftBank Mobile, ¥/month) After monthly discounts Total 4,553 4,453 4,230 3,990 3,750 Voice 1,775 1,520 1,243 963 683 Data 2,778 2,933 2,988 3,028 3,068
Before monthly discounts Total 5,413 5,293 5,060 4,820 4,580 Voice 2,543 2,275 1,993 1,713 1,433 Data 2,870 3,018 3,068 3,108 3,148
Monthly discouns Total -865 -840 -830 -830 -830 Voice -768 -755 -750 -750 -750 Data -93 -85 -80 -80 -80
Churn rate 1.09% 1.27% 1.25% 1.25% 1.25% Postpaid 1.03% 1.22% 1.24% 1.25% 1.25% Upgrade rate 1.53% 1.36% 0.93% 1.00% 1.00% Source: Company data, Credit Suisse estimates
Softbank (9984 / 9984 JP) 12 30 October 2014 US business: Current conditions and outlook We think that while it lags rivals in the US market, Sprint is poised for a gradual earnings recovery. We expect improvement from FY3/14 EBITDA of ¥412bn and EBITDA margin of 15.9% to ¥758bn and 20.9% in FY3/15 and to ¥889bn and 24.0% in FY3/16.
Figure 17: Sprint EBITDA and EBITDA margin forecasts (¥bn) 1,200 30%
1,000 25.0% 25% 24.0%
800 20.9% 20%
600 15.9% 15%
889 959 400 758 10%
200 412 5%
0 0% 3/14 3/15E 3/16E 3/17E
EBITDA EBITDA margin
Source: Company data, Credit Suisse estimates
Figure 18: Sprint debt repayment schedule USD m (¥ bn in brackets) 3,554 (360.2) (30.4) 300
3,254 3,000 (329.8) 2,729 (304.1) 698 (276.6) (70.7) 1,300 1,500 (45.0) 444 754 (131.8) (152.0) (25.7) 254 (76.4) FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 FY3/20 FY3/21
Sprint Notes & Credit Facilities Clearwire Notes
Source: Company data
Softbank (9984 / 9984 JP) 13 30 October 2014
We had the opportunity to speak with new Sprint president Marcelo Claure in September. New president at the helm Mr. Claure established mobile phone distributor Brightstar when he was 25 years old. He is now 43. He took over as Sprint CEO on 11 August, moving his family from Miami to Kansas City, where Sprint is headquartered. We felt he was strongly committed to turning Sprint earnings around. We are positive on the prospective changes in how Sprint is managed. Claure succeeded Dan Hesse, who achieved some success in shifting the company’s mobile networks to LTE and winding up old networks. However, in the face of obstacles such as an unexpected counterattack from industry No. 4 T-Mobile, he was less successful in expanding the company’s earnings and customer base. Looking at issues we believe need to be resolved, a year after the Sprint acquisition it Lingering issues regarding would appear that Softbank’s management participation generally does not go as deep as extent of Softbank’s it did with the Vodafone Japan acquisition. With Vodafone Japan, C-suite and division management participation manager level executives were replaced across the board with Softbank personnel, but looking at what has happened at Sprint over the past year there have been no significant changes among Dan Hesse’s management team. Furthermore, very few Softbank managers actually live in the regions to which they are assigned. While there are daily teleconferences and other exchanges among managers, it is unclear to what extent these have been reflected in the actual business left to local staff. The corporate culture under Dan Hesse did not appear to change much after Softbank became the leading shareholder. In these circumstances, we think it significant that the company has brought in a new president from outside. If nothing else, this one event is likely to heighten tensions among the management team. The spotlight now shifts to Mr. Claure’s new strategies and the pace at which they can be implemented.
Softbank (9984 / 9984 JP) 14 30 October 2014 Consolidated earnings: current conditions and outlook As indicated above, we believe the basic situation regarding Softbank’s consolidated earnings is that while domestic growth is slowing, the earnings outlook could change substantially if the Sprint recovery drives consolidated profit growth and business can be expanded through M&A. We expect Softbank to increase consolidated EBITDA from ¥1,778.4bn in FY3/14 to We expect flat domestic ¥2,300bn in FY3/15. Subsequently, growing Sprint earnings will likely be the main driver, earnings after profit growth boosting EBITDA to the ¥2,500bn line in FY3/16 and the ¥2,600 line in FY3/17. in FY3/15, Sprint to drive companywide growth Figure 19: Consolidated EBITDA (¥bn) 3,000 11 11 2,500 11 272 295 244 156 156 2,000 158 14 204 889 959 1,500 170 758 412 1,000 1,226 500 1,001 1,215 1,220
0 -23 -21 -20 -20 -500 Total 1,778 2,365 2,527 2,626 3/14 3/15E 3/16E 3/17E Mobile Communications Sprint Fixed-line Telecommunications Internet Others Reconciliations Source: Company data, Credit Suisse estimates
Softbank (9984 / 9984 JP) 15 30 October 2014
We expect consolidated capex to rise from ¥1,245bn in FY3/14 to ¥1,429bn in FY3/15, normalizing to ¥1,270bn in FY3/16 and ¥1,253bn in FY3/17 as Sprint-related investments wind down.
Figure 20: Consolidated EBITDA, capex, and FCF (¥bn) 3,000 2,500 2,528 2,626 2,000 2,365 1,500 1,778 1,258 1,373 1,000 936 500 533 0 -500 -1,000 -1,245 -1,270 -1,253 -1,429 -1,500 3/14 3/15E 3/16E 3/17E
EBITDA Capex EBITDA - Capex
Note: Capex is on acceptance basis Source: Company data, Credit Suisse estimates. We expect FCF (EBITDA minus capex) to exceed ¥1tn. We believe that as Softbank’s Financial capacity to pursue management is among the most expansion-oriented not just in Japan but perhaps globally, global strategies it is unlikely to use the company’s over ¥1tn in FCF to repay loans. Rather, we think it will likely secure additional leverage if need be as it pursues a dominant global position through M&A. The company has high leverage, as well as significant earning power. Against this backdrop, what heights is the management team under Softbank president Masayoshi Son aiming for? We are keen about the prospects and intend to keep an eye on future developments.
Softbank (9984 / 9984 JP) 16 30 October 2014 Consolidated earnings
Figure 21: Softbank (9984): Consolidated earnings forecast summary Sales Operating profit Recurring profit Net profit Diluted EPS DPS P/E ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x) Consolidated Mar-14 A 6,666,651 108.2 1,077,000 34.7 924,049 29.1 578,251 32.1 204.8 -37.6 40.0 38.1 Mar-15 CS E 8,090,007 21.4 1,258,395 16.8 1,455,658 57.5 917,360 58.6 756.4 269.3 40.0 9.9 CoE 8,000,000 20.0 1,000,000 -7.1 ------IBES E 8,213,655 1,110,459 3.1 1,033,084 11.8 584,112 1.0 504.5 146.4 40.9 14.9 Mar-16 CS E 8,191,407 1.3 1,360,519 8.1 1,288,134 -11.5 823,095 -10.3 678.7 -10.3 40.0 11.1 Mar-17 CS E 8,375,756 2.3 1,454,373 6.9 1,465,599 13.8 936,415 13.8 772.1 13.8 40.0 9.7 Source: Company data, I/B/E/S, Credit Suisse estimates
Softbank (9984 / 9984 JP) 17 30 October 2014
Figure 22: Softbank (9984): IFRS profit and loss statement (¥mn) FY3/13 FY3/14 FY3/15 E FY3/16 E FY3/17 E Consolidated net sales 3,202,536 6,666,651 8,090,007 8,191,407 8,375,756 Mobile Communications 2,345,630 3,165,518 3,586,803 3,588,331 3,605,246 Domestic mobile businesses excluding impact from new consolidations 2,308,999 2,530,427 - - - Impact from new consolidations 36,631 635,091 - - - Sprint - 2,601,031 3,635,484 3,701,076 3,838,510 Fixed-line Telecommunications 531,028 548,090 521,836 520,000 520,000 Internet 356,609 399,869 417,000 454,000 484,000 Others 117,065 124,453 107,132 108,000 108,000 Reconciliations -147,796 -172,310 -178,248 -180,000 -180,000
EBITDA 1,152,740 1,778,492 2,365,364 2,527,884 2,626,034 Mobile Communications 797,343 1,000,829 1,214,700 1,220,033 1,225,783 Domestic mobile businesses excluding impact from new consolidations 786,149 819,503 - - - Impact from new consolidations 11,194 181,326 - - - Sprint - 412,342 758,047 888,652 958,551 Fixed-line Telecommunications 168,061 170,379 157,656 156,000 156,000 Internet 193,290 204,318 244,300 272,400 294,900 Others 13,158 13,592 11,211 10,800 10,800 Reconciliations -19,112 -22,968 -20,551 -20,000 -20,000
Segment income 797,620 878,588 1,258,395 1,360,519 1,454,373 Mobile Communications 517,120 605,845 783,632 789,433 793,154 Domestic mobile businesses excluding impact from new consolidations 516,456 524,164 - - - Impact from new consolidations 664 81,681 - - - Sprint - -6,119 177,139 248,226 318,359 Fixed-line Telecommunications 114,232 108,302 104,717 104,000 104,000 Internet 180,720 188,949 209,000 234,000 254,000 Others 6,400 6,041 4,823 4,860 4,860 Reconciliations -20,852 -24,430 -20,916 -20,000 -20,000
EBITDA margin 36.0% 26.7% 29.2% 30.9% 31.4% Mobile Communications 34.0% 31.6% 33.9% 34.0% 34.0% Domestic mobile businesses excluding impact from new consolidations 34.0% 32.4% - - - Impact from new consolidations 30.6% 28.6% - - - Sprint - 15.9% 20.9% 24.0% 25.0% Fixed-line Telecommunications 31.6% 31.1% 30.2% 30.0% 30.0% Internet 54.2% 51.1% 58.6% 60.0% 60.9% Others 11.2% 10.9% - - -
Segment profit margin 24.9% 13.2% 15.6% 16.6% 17.4% Mobile Communications 22.0% 19.1% 21.8% 22.0% 22.0% Domestic mobile businesses excluding impact from new consolidations 22.4% 20.7% - - - Impact from new consolidations 1.8% 12.9% - - - Sprint - - 4.9% 6.7% 8.3% Fixed-line Telecommunications 21.5% 19.8% 20.1% 20.0% 20.0% Internet 50.7% 47.3% 50.1% 51.5% 52.5% Others 5.5% 4.9% - - -
Finance cost -65,297 -271,478 -339,987 -340,000 -340,000 Interest expense -65,297 -271,478 -339,987 -340,000 -340,000
Other non-operating income and loss -3,663 74,402 508,424 243,616 327,225
Other non-operating income and loss -14,935 44,081 28,251 24,000 24,000 Interest income 3,109 21,015 3,989 4,000 4,000 Derivative gain (loss) 11,877 -19,588 -1,542 0 0 Gain from remeasurement relating to applying equity method - 6,249 0 0 Other -29,921 42,654 19,555 20,000 20,000
Other non-operating income and loss 715,504 924,049 1,455,658 1,288,134 1,465,599
Other non-operating income and loss -277,667 -345,798 -538,298 -465,040 -529,184
Other non-operating income and loss 437,837 578,251 917,360 823,095 936,415
Shares outstanding (including treasury stocks, '000 shares) 1,200,600 1,200,660 1,200,660 1,200,660 1,200,660 Treasury stocks ('000 shares) 9,160 12,205 12,149 12,149 12,149 Average shares outstanding ('000 shares) 1,120,201 1,190,650 1,188,482 1,188,482 1,188,482
EPS (¥) 332.51 205.09 764.05 685.54 779.92 Diluted EPS (¥) 328.08 204.80 756.39 678.67 772.10 DPS (¥) 40 40 40 40 40 Source: Company data, Credit Suisse estimates
Softbank (9984 / 9984 JP) 18 30 October 2014
Figure 23: Softbank (9984): IFRS balance sheet (¥ mn) FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Current assets 2,786,019 4,330,974 4,736,346 4,169,134 4,590,594 Cash and cash equivalents 1,439,057 1,963,490 1,676,250 1,883,360 1,859,247 Operating and other receivables 936,307 1,669,545 1,669,545 1,669,545 1,669,545 Other financial assets 229,239 164,727 200,000 200,000 200,000 Inventories 54,268 251,677 251,677 251,677 251,677 Accrued corporate income taxes - - 0 0 0 Other current assets 127,148 281,535 938,874 164,552 610,124 Non-current assets 4,432,153 12,359,153 12,421,947 13,596,854 13,616,409 Tangible fixed assets 1,830,615 3,586,327 3,886,094 3,960,716 4,016,271 Customer assets (goodwill) 924,972 1,539,607 1,503,607 1,467,607 1,431,607 Intangible assets 528,683 6,177,701 6,000,000 6,000,000 6,000,000 Investment under equity-method accounting 208,664 304,318 300,000 300,000 300,000 Other financial assets 634,647 401,693 400,000 400,000 400,000 Deferred tax assets 175,390 182,246 182,246 182,246 182,246 Other non-current assets 129,182 167,261 150,000 150,000 150,000 Total assets 7,218,172 16,690,127 17,158,293 17,765,988 18,207,003
Current liabilities 2,837,916 3,767,196 3,689,855 3,669,855 3,649,855 Interest-bearing debt 1,534,128 1,147,899 1,127,899 1,107,899 1,087,899 Operating and other payables 972,669 1,705,956 1,705,956 1,705,956 1,705,956 Other financial liabilities 4,833 5,847 6,000 6,000 6,000 Accrued corporate income taxes 182,050 246,013 250,000 250,000 250,000 Allowances 1,602 93,115 100,000 100,000 100,000 other current liabilities 142,634 568,366 500,000 500,000 500,000 Non-current liabilities 2,449,816 10,092,549 9,890,546 9,695,146 9,219,746 Interest-bearing debt 2,173,725 8,022,154 7,832,354 7,636,954 7,161,554 Other financial liabilities 38,654 41,151 41,151 41,151 41,151 Vestid benefit obligation 14,506 77,041 77,041 77,041 77,041 Allowances 21,765 136,920 140,000 140,000 140,000 Deferred tax liabilities 120,979 1,533,021 1,500,000 1,500,000 1,500,000 Other non-current liabilities 80,187 282,262 300,000 300,000 300,000 Total liabilities 5,287,732 13,859,745 13,580,401 13,365,001 12,869,601 Equity attributable to owners of the parent 1,612,756 1,930,441 2,677,951 3,501,046 4,437,461 Common stock 238,772 238,772 238,772 238,772 238,772 Additional paid-in capital 436,704 405,045 405,045 405,045 405,045 Retained earnings 712,088 1,168,266 2,085,626 2,908,721 3,845,136 Treasury stocks -22,834 -51,492 -51,492 -51,492 -51,492 Other comprehensive profit 248,026 169,850 0 0 0 Non-controlling interests 317,684 899,941 899,941 899,941 899,941 Total equity 1,930,440 2,830,382 3,577,892 4,400,987 5,337,402 Total liabilities and equity 7,218,172 16,690,127 17,158,293 17,765,988 18,207,003 Source: Company data, Credit Suisse estimates
Softbank (9984 / 9984 JP) 19 30 October 2014
Figure 24: Softbank (9984): IFRS cash flow statement (JPY mn) 3/13 3/14 3/15E 3/16E 3/17E Cashflows from operating activities 813,025 860,245 1,513,919 1,754,905 1,786,881 Net income 437,837 578,251 917,360 823,095 936,415 Depreciation and amortization 355,120 899,904 1,129,245 1,195,426 1,197,691 Income from remeasurement relating to business combination -1,778 -253,886 0 0 0 Finance cost 65,297 271,478 339,987 340,000 340,000 Equity in loss (income) of associates 3,663 -74,402 -508,424 -243,616 -327,225 Other non-operating loss (income) 14,935 -44,081 -28,251 -24,000 -24,000 Income taxes 277,667 346,218 538,298 465,040 529,184 Increase in trade and other receivables -58,444 -106,055 0 0 0 increase in trade and other payables 39,365 21,375 0 0 0 Other -35,007 -164,029 0 0 0 Subtotal 1,098,655 1,474,773 2,388,215 2,555,945 2,652,065 Interest and dividends received 2,886 7,546 3,989 4,000 4,000 Interest paid -72,296 -306,697 -339,987 -340,000 -340,000 Income taxes paid -216,220 -315,377 -538,298 -465,040 -529,184
Cash flows from investing activities -874,144 -2,718,188 -1,529,012 -1,270,048 -1,253,247 Purchase of property, plant and equipment, and intangible assets -589,321 -1,371,400 -1,429,012 -1,270,048 -1,253,247 Payments for acquisition of investments -318,306 -208,322 0 0 0 Proceeds from sales/redemption of investments 20,676 260,789 0 0 0 Increase (decrease) from acquisition of control over subsidiaries 12,227 -1,663,539 -100,000 0 0 Proceeds from settlement of foreign currency forward contract for acquisition of control of subsidiaries - 310,104 0 0 0 Other 580 -45,820 0 0 0
Cash flows from financing activities 471,477 2,359,375 -272,147 -277,747 -557,747 Increase (decrease) in short-term interest-bearing debt, net 345,572 -201,794 -20,000 -20,000 -20,000 Proceeds from long-term interest-bearing debt 1,324,585 4,698,294 0 0 0 Repayment of long-term interest-bearing debt -898,867 -1,971,594 -189,800 -195,400 -475,400 Payment from purchase of subsidiaries' equity from non-controlling interests -20,549 -83,232 0 0 0 Cash dividends paid -66,527 -47,600 -47,600 -47,600 -47,600 Cash dividends paid to non-controlling interests -12,798 -14,747 -14,747 -14,747 -14,747 Payments for preferred stocks, stock acquisition rights, and long-term debt of subsidiaries -200,444 - 0 0 0 Other 505 -19,952 0 0 0
Effect of exchange rate changes on cash and cash equivalents 7,586 23,001 0 0 0 Net increase in cash and cash equivalents 417,944 524,433 -287,240 207,110 -24,112 Cash and cash equivalents, beginning of the year 1,021,113 1,439,057 1,963,490 1,676,250 1,883,360 Cash and cash equivalents, end of the year 1,439,057 1,963,490 1,676,250 1,883,360 1,859,247 Source: Company data, Credit Suisse estimates
Softbank (9984 / 9984 JP) 20 30 October 2014
Companies Mentioned (Price as of 29-Oct-2014) AT&T (T.N, $34.4) Alibaba Group Holding Limited (BABA.N, $98.31) Alibaba Group Holdings (Unlisted) America Movil (AMX.N, $23.89) Brightstar Corp. (Unlisted) Broadmedia (4347.T, ¥214) Clearwire (CLWR.OQ^G13, $4.99) Clearwire (CLWR.OQ^G13, $4.99) GungHo Online (3765.T, ¥488) ITmedia (2148.T, ¥728) KDDI (9433.T, ¥6,899, NEUTRAL, TP ¥6,200) NTT DoCoMo (9437.T, ¥1,780, UNDERPERFORM, TP ¥1,500) Nippon Telegraph and Telephone (9432.T, ¥6,453) Renren Inc. (RENN.N, $3.39) Softbank (9984.T, ¥7,509, OUTPERFORM, TP ¥10,000) Softbank Mobile (Unlisted) Softbank Tech (4726.T, ¥1,318) Sprint Corp (S.N, $6.0) Supercell (Unlisted) T-Mobile USA, Inc. (Unlisted) Telefonica (TEF.MC, €11.68) Vector (2656.T, ¥644) Verizon Communications Inc (VZ.N, $49.83) Vodafone Group (VOD.L, 205.3p) Yahoo Japan (4689.T, ¥413) Ymobile (Unlisted) Additional companies mentioned in Figure 4.
Disclosure Appendix
Important Global Disclosures I, Hitoshi Hayakawa, 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 KDDI (9433.T)
9433.T Closing Price Target Price Date (¥) (¥) Rating 16-Jan-12 2,415 2,750 N 29-May-12 2,468 2,850 O 24-Oct-12 3,020 3,900 18-Apr-13 4,150 5,000 06-Sep-13 4,895 6,000 27-Jan-14 5,965 6,300 N 28-May-14 5,881 6,200 * Asterisk signifies initiation or assumption of coverage.
NEUTRAL OUTPERFORM
Softbank (9984 / 9984 JP) 21 30 October 2014
3-Year Price and Rating History for NTT DoCoMo (9437.T)
9437.T Closing Price Target Price Date (¥) (¥) Rating 20-Feb-12 1,369 1,500 N 29-May-12 1,251 1,500 O 01-Nov-12 1,172 1,200 N 10-Dec-12 1,232 1,200 U 22-May-13 1,647 1,500 * Asterisk signifies initiation or assumption of coverage.
NEUTRAL OUTPERFORM UNDERPERFORM
3-Year Price and Rating History for Softbank (9984.T)
9984.T Closing Price Target Price Date (¥) (¥) Rating 19-Jan-12 2,067 3,000 O 05-Jul-12 2,860 3,500 06-Nov-12 2,694 4,200 15-Apr-13 4,685 6,000 21-May-13 5,850 R 10-Jul-13 5,760 6,000 O 13-Aug-13 6,370 R * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM REST RICT 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 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; 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, 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.
Softbank (9984 / 9984 JP) 22 30 October 2014
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* 46% (53% banking clients) Neutral/Hold* 38% (51% banking clients) Underperform/Sell* 13% (44% 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 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.
Price Target: (12 months) for Softbank (9984.T)
Method: We base our ¥10,000 target price for Softbank on a Sum-of-the-Parts (SoTP) valuation. In addition to the value of investment securities, we apply EV/EBITDA multiples of 6x for the domestic mobile business and 4x for the fixed-line business (using our FY3/16 estimates). In calculating our multiple, we take into consideration the FY15E EV/EBITDA multiples for the world's leading integrated telecommunications companies (16 companies including AT&T and Verizon) and the world's leading mobile communications companies (14 companies including Vodafone and China Mobile) (6.0x and 6.4x, respectively). Our FY15 EV/EBITDA multiple for fixed-line business is based on current valuations for domestic and overseas fixed-line telecommunications businesses. Risk: Risks to our ¥10,000 target price for Softbank include a rise (fall) in the value of investment securities holdings, news of a major M&A deal, and an improving (deteriorating) competitive environment in the domestic mobile business or the US mobile business.
Price Target: (12 months) for NTT DoCoMo (9437.T) Method: We derive our ¥1,500 target price for NTT DoCoMo is based on FY3/15E EPS of ¥122.6 (reflecting the impact of share buybacks of ¥500bn) and a P/E of 12.3x based on the historical correlation between sector average P/E of 12.47x and DoCoMo’s P/E of 0.99x.
Risk: Risks to our ¥1,500 target price for NTT DoCoMo include increases in monthly net subscriber adds and lower churn rates thanks to the new rate plans. Positive earnings trends and stronger shareholder returns could also boost the share price.
Price Target: (12 months) for KDDI (9433.T) Method: Our ¥6,200 target price for KDDI is rounded from our theoretical share price of ¥6,240, which is based on fair-value P/E of 12x applied to our average EPS estimate of ¥520 for FY3/15, assuming annual share buybacks totaling ¥100bn. Our multiple is derived from the sector- average P/E and KDDI’s relative P/E (minus 1 standard deviation is 11x).
Risk: Risks to our ¥6,200 target price for KDDI include announcement of measures to counter NTT DoCoMo and NTT’s optical fiber wholesaling service, and of large-scale M&A activity.
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 (9984.T, 4689.T, AMX.N, BABA.N, S.N, T.N, TEF.MC, VZ.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (9984.T, 4689.T, AMX.N, BABA.N, S.N, T.N, TEF.MC, VZ.N) within the past 12 months.
Softbank (9984 / 9984 JP) 23 30 October 2014
Credit Suisse provided non-investment banking services to the subject company (AMX.N, BABA.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (9984.T, AMX.N, BABA.N, S.N, T.N, TEF.MC, VZ.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (9984.T, 4689.T, AMX.N, BABA.N, S.N, T.N, TEF.MC, VZ.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (9984.T, 9433.T, 4689.T, AMX.N, BABA.N, S.N, T.N, TEF.MC, VZ.N, 9432.T) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (AMX.N, BABA.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (AMX.N, BABA.N, S.N, T.N, VZ.N, 9432.T). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (VOD.L). Credit Suisse has a material conflict of interest with the subject company (9984.T) . . Credit Suisse has a material conflict of interest with the subject company (S.N) . Credit Suisse acted as financial advisor to a shareholder of Clearwire in connection with the announced proposed acquisition of Clearwire by Sprint. Credit Suisse has a material conflict of interest with the subject company (TEF.MC) . Credit Suisse are advising GVT Holding SA and Vivendi SA on a potential sale and/or merger with Telefônica Brasil.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. 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 (9984.T, 9437.T, 9433.T, 4689.T, AMX.N, BABA.N, S.N, T.N, TEF.MC, VOD.L, VZ.N, 9432.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 (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (TEF.MC, VOD.L). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (9984.T, 9437.T, AMX.N, BABA.N, S.N, T.N, TEF.MC, VZ.N, 9432.T) within the past 3 years. 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 ...... Hitoshi Hayakawa
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
Softbank (9984 / 9984 JP) 24 30 October 2014
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
9984_103014_Softbank_E.doc Softbank (9984 / 9984 JP) 25