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13 July 2016 Asia Pacific/Japan Equity Research Internet Mixi (2121.T / 2121 JP) Rating NEUTRAL* [V] Price (12 Jul 16, ¥) 4,295 INITIATION Target price (¥) 4,900¹ Chg to TP (%) 14.1 Market cap. (¥ bn) 356.97 (US$ 3.46) Initiate at NEUTRAL; valuations attractive, but Enterprise value (¥ bn) 341.97 Number of shares (mn) 83.11 need more income sources to lessen Free float (%) 40.0 52-week price range 6,060 - 3,015 dependence on Monster Strike *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ■ Action: We initiate coverage of Mixi with a NEUTRAL rating and a ¥4,900 ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). target price (potential return 14.1%). Although valuations appear low, and we see few downside risks to the share price, we would need more catalysts to Research Analysts take a more positive view. Keiichi Yoneshima 81 3 4550 9740 ■ Investment case: Despite the stock’s comparatively low valuations, Mixi's [email protected] earnings depend heavily on Monster Strike, creating a risk of earnings fluctuations. However, its ample cash flow should enable promotional/development-related spending to sustain long-term Monster Strike profits, and also new business investment. We see no relative overvaluation, and only limited downside risk, so we assign a NEUTRAL rating. ■ Catalysts/risks: Catalysts include development of new sources of earnings, clear earnings contribution from growth in new business areas. Risks include earnings trends for Monster Strike, including in overseas markets, and tightening or loosening of online gaming regulations. ■ Valuation: We base our TP on a DCF model. We set our forecasts through FY3/20 and derive our going-concern value for FY3/21 onward by applying an EBITDA of 3.0x. We assume an 8.45% WACC. Share price performance Financial and valuation metrics Year 3/16A 3/17E 3/18E 3/19E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 208.8 225.6 214.8 202.8 8000 160 Operating profit (¥ bn) 95.0 95.6 83.1 71.4 6000 140 Recurring profit (¥ bn) 94.8 95.7 83.2 71.5 120 Net income (¥ bn) 61.0 62.2 54.1 46.5 4000 100 EPS (¥) 734.6 738.4 641.7 551.6 2000 80 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 659.5 615.9 535.1 The price relative chart measures performance against the EPS growth (%) 79.3 0.5 -13.1 -14.0 TOPIX which closed at 1285.73 on 12/07/16 P/E (x) 5.8 5.8 6.7 7.8 On 12/07/16 the spot exchange rate was ¥103.3/US$1 Dividend yield (%) 1.9 3.4 3.5 3.1 EV/EBITDA(x) 3.6 3.6 4.2 4.8 Performance over 1M 3M 12M P/B (x) 2.9 2.1 1.7 1.5 Absolute (%) -3.4 11.3 -26.1 ROE(%) 69.7 42.5 28.2 20.2 Relative (%) — 14.8 -5.8 Net debt/equity (%) net cash net cash net cash net cash 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 13 July 2016 Table of contents Key charts 3 Investment opinion 4 Initiate at NEUTRAL with ¥4,900 TP 4 Re-rating needs new catalysts; assign NEUTRAL rating as no overvaluation 4 (1) Long-term Monster Strike profits could reduce risk of share price decline. 4 (2) Re-rating requires new catalysts 4 Views on Mixi's earnings outlook 4 Rationale for rating the stock NEUTRAL 5 Valuation 6 Risks 7 Company profile 8 History: From SNS to gaming; major change in profit sources 8 Executives 8 Shareholders 9 Corporate group 9 Business portfolio 10 Developing entertainment-funded stable growth 10 Entertainment segment 10 Monster Strike (Japan): Efforts to extend product life cycle 10 Monster Strike (overseas): Upgraded marketing push in North America 11 New title Marvel Tsum Tsum growing steadily in Japan, overseas launch in FY3/18 11 Media platform segment 12 Ticket Camp: Developing as leader in online secondary ticketing distribution market 12 Current media: Holding the line with Mixi SNS and Diverse 12 New business development an ongoing challenge 12 Business outlook 13 Focusing on Monster Strike while also developing new titles and overseas operations 13 Monster Strike following similar trajectory to Puzzle & Dragons 14 Media platform business may need M&A activity expansion 15 Sizing up the growth potential of Ticket Camp 16 Capacity to invest with appropriate level of shareholder returns 16 Earnings forecasts 17 Mixi (2121.T / 2121 JP) 2 13 July 2016 Key charts Figure 1: Trends in number of Monster Strike downloads Domestic Overseas (Taiwan, HongKong, Macau, North America, South Korea) 40 Launch of Hong Kong and 35 35 Macao version Launch of North America version 30 Launch of South Launch on 25 Korea version Android Millions of users of Millions 20 Start of TV commercials Launch of 15 Taiwan version 10 Launch on iOS 5 0 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Source: Company data, Credit Suisse Figure 2: Mixi’s sales trends (entertainment segment) Figure 3: GungHo’s sales trends Mixi's entertainment segment sales Gungho 60,000 60,000 55,051 51,276 49,909 50,000 47,002 50,000 46,799 43,717 44,424 44,618 42,226 42,025 41,369 40,241 38,495 40,000 40,000 37,72236,879 35,110 30,528 30,904 31,699 30,000 30,000 (JPYmn) (JPYmn) 19,452 20,000 20,000 14,121 10,044 10,000 10,000 3,113 3,291 3,846 4,561 0 0 261 0 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY14/3 FY15/3 FY16/3 FY12/12 FY13/12 FY14/12 FY15/12 FY16/12 Source: Company data, Credit Suisse Source: Company data, Credit Suisse Figure 4: Estimates on entertainment segment sales Figure 5: Media platform business Entertainment segment (sales) TicketCamp MUSE&Co. Marriage Support SNS "mixi" and etc. 60,000 4000 55,051 Acquire MUSE&CO. and 53,000 53,000 52,000 52,000 51,276 50,000 50,000 Hunza 49,000 49,000 47,002 47,000 47,000 46,000 50,000 46,000 Acquire Diverse 42,025 3000 40,000 30,000 2000 (JPYmn) (JPYmn) 20,000 1000 10,000 0 0 1Q 2Q 3Q 4Q 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY16/3 FY17/3 FY18/3 FY19/3 FY14/3 FY15/3 FY16/3 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse Mixi (2121.T / 2121 JP) 3 13 July 2016 Investment opinion Initiate at NEUTRAL with ¥4,900 TP Figure 6: Mixi (2121) – Earnings summary Mixi (2121) Earnings Summary EV 12-Jul-16 Sales Operating profit Recurring profit Net profit EPS P/E /EBITDA ¥4,295 ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x) Consolidated FY Mar-16 A 208,799 84.9% 95,033 80.4% 94,798 79.9% 61,022 85.1% 734.6 79.3% 3.6 5.8 Mar-17 CS E (new) 225,600 8.0% 95,648 0.6% 95,728 1.0% 62,223 2.0% 738.4 0.5% 3.6 5.8 CoE 218,000 4.4% 80,000 -15.8% 80,000 -15.6% 54,000 -11.5% 640.8 -12.8% NA 6.7 IBES E 211,930 1.5% 84,474 -11.1% 84,772 -10.6% 55,249 -9.5% 659.5 -10.2% 2.6 6.5 Mar-18 CS E (new) 214,800 -4.8% 83,103 -13.1% 83,183 -13.1% 54,069 -13.1% 641.7 -13.1% 4.2 6.7 IBES E 210,521 -0.7% 80,263 -5.0% 79,908 -5.7% 51,960 -6.0% 615.9 -6.6% 3.0 7.0 Mar-19 CS E (new) 202,800 -5.6% 71,423 -14.1% 71,503 -14.0% 46,477 -14.0% 551.6 -14.0% 4.8 7.8 IBES E 186,889 -11.2% 68,542 -14.6% 68,489 -14.3% 43,764 -15.8% 535.1 -13.1% 5.0 8.0 Source: Company data, I/B/E/S, Credit Suisse estimates Re-rating needs new catalysts; assign NEUTRAL rating as no overvaluation Mixi’s earnings rebounded sharply after its smartphone game application Monster Strike proved to be a major hit. While the shares appear undervalued in terms of P/E and EV/EBITDA, we see a high risk of earnings fluctuation over the longer term given the company’s reliance on a single game title.

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