3319 Golf Digest Online

Sponsored Research Sessa Investment Research June 22, 2020

First Look ‘Golf Links the World’

SUMMARY • GDO operates the recognized no.1 portal site specialized in golf, and it boasts the world’s largest online sales of golf gear, achieving consistent double-digit growth. However, the trend of high growth in profits was interrupted in mid-2018 when the company acquired a majority 60% stake in US GolfTEC Enterprises LLC, with net income dropping -46.1%, causing the share price to halve, remaining in that lower Focus Points: range since then. ‘Only one’ golf specialist online gear retail, course reservations • In this First Look Report, we examine 3 key questions for the company. ① If the and media platform operator outlook for the number of golfers over the medium-term is a slight but steady entering a new growth phase decline due to demographic factors, won’t the company’s Japan business peak out soon? ② What is the opportunity sought by taking on the risk of acquiring a Key Indicators majority stake of a company making losses? Now that GolfTEC Enterprises Share price (6/22) 558 ③ YH (20/2/14) 707 (hereinafter GTE) is turning the corner on profitability, what is the expected time YL (20/4/6) 414 horizon for GTE to make a meaningful contribution to GDO profits? 10YH (18/6/4) 1,500 • Regarding question ①, the short answer is no, for two reasons. A leading indicator 10YL (12/10/16) 70.4 for Japan business is the number of GDO Club members, which has achieved Shrs out. (mn shrs) 18.274 consistent growth of +10% CAGR to 4.1mn at the end of 2019. Over the last 5 years, Mkt cap (¥ bn) 10.20 EV (¥ bn) 12.98 online sales of golf gear grew at +9.5% CAGR, and online course reservations, the Shr equity ratio 32.3% highest margin business, grew at +12.7% CAGR. Going forward, the driver for net FY12/19 P/E (act) 28.4x sales is the steady rise in the EC ratio, at the expense of brick-and mortar chains, FY12/19 EV/EBITDA 5.3x and the OP driver is controlling SG&A, sustaining higher sales on the same cost base. FY12/19 P/B (act) 1.61x • Regarding question , while Japan business is set to continue growing for the FY12/19 DY (act) 1.7% ② foreseeable future, at some point GDO’s market share will reach saturation, and Share price/vol 52 weeks growth will slow. The US is attractive as the largest golf market in the world, but there was no rational path forward for acquiring a lasting foothold in the US market with GDO’s existing portfolio. GTE’s core business has had continued high growth, however profits were temporarily depressed in recent years in the wake of the collapse of Golfsmith, a golf specialty megastore chain with strength in customized clubs, forcing GTE to scramble to find new locations for a portion of its studios. Source: SPEEDA • Having obtained the master franchise for GOLFTEC Japan, GDO has steadily opened Chris Schreiber CFA new studios since 2012, and has high confidence in the viability of the business and Company Specialist strength of the proprietary technology. GDO already had an 8% stake since 2016, so [email protected] when asked about a potential new round of financing, GDO responded it wanted to obtain a majority stake. During FY12/19, GTE turned into the black before goodwill, and GDO’s FCF turned positive. • Regarding question ③, GDO is planning to announce a new MTP later this year, delayed due to adjustments for coronavirus. While the company cannot comment on specific details to be included such as numerical targets etc., the purpose of establishing an MTP in the first place is to lay out a roadmap for initiatives to grow the business and improve profitability, so we believe there is a strong chance this may provide the next share price catalyst.

This report was prepared by Sessa Partners on behalf of Golf Digest Online Inc. Please refer to the legal disclaimer at the end for details.

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GDO Consolidated Financial Highlights at a Glance JPY mn, % FY12/15 YoY FY12/16 YoY FY12/17 YoY FY12/18 YoY FY12/19 YoY act % act % act % act* % act % Net Sales 18,047 12.6 19,309 7.0 21,574 11.7 26,739 23.9 34,274 28.2 by segment • Japan 18,047 12.6 19,309 7.0 21,574 11.7 25,245 17.0 26,842 6.3 • Overseas －－－ 1,495 － 7,432 397.3 breakdown (% total) • Japan 100.0% 100.0% 100.0% 94.4% 78.3% • Overseas －－－ 5.6% 21.7% by business • RETAIL (online gear sales) 12,450 12.8 13,367 7.4 14,081 5.3 16,301 15.8 17,354 6.5 • COURSE (play reservations) 4,715 14.8 5,106 8.3 5,806 13.7 6,929 19.3 7,475 7.9 • MEDIA (news content, ad sales) 812 2.0 811 (0.2) 874 7.7 971 11.1 846 (12.9) • LESSONS (plus club fitting/sales) －－ 800 2,530 216.2 8,597 239.9 breakdown (% total) • RETAIL (online gear sales) 69.0% 69.2% 65.3% 61.0% 50.6% • COURSE (play reservations) 26.1% 26.4% 26.9% 25.9% 21.8% • MEDIA (news content, ad sales) 4.5% 4.2% 4.0% 3.6% 2.5% • LESSONS (plus club fitting/sales) －－ 3.7% 9.5% 25.1% Gross Profit 7,372 13.4 8,012 8.7 8,850 10.5 10,475 18.4 13,656 30.4 ratio to sales (%) 40.9% 41.5% 41.0% 39.2% 39.8% SG&A Expenses 6,544 8.0 6,939 6.0 7,636 10.0 9,671 26.6 12,677 31.1 ratio to sales (%) 36.3% 35.9% 35.4% 36.2% 37.0% EBITDA 1,458 36.9 1,577 8.2 1,645 4.3 1,537 (6.6) 2,469 60.6 ratio to sales (%) 8.1% 8.2% 7.6% 5.7% 7.2% • Japan 1,458 36.9 1,577 8.2 1,645 4.3 1,876 14.0 2,057 9.6 • Overseas －－－ (338) 412 Operating Profit 828 86.7 1,073 29.6 1,214 13.1 805 (33.7) 979 21.7 ratio to sales (%) 4.6% 5.6% 5.6% 3.0% 2.9% • Japan 828 86.7 1,073 29.6 1,337 24.6 1,387 3.7 1,535 10.7 • Overseas －－ (123) (582) (556) Ordinary Profit 816 86.7 1,089 33.4 1,226 12.5 823 (32.9) 972 18.1 Profit Before Income Taxes 768 82.1 1,009 31.4 1,127 11.7 765 (32.1) 786 2.7 Profit Attributable to Owners of Parent 430 138.3 611 42.0 707 15.7 381 (46.1) 359 (5.8) *Raising stake in GolfTEC Enterprises LLC from 8% → 60% was completed on July 2, 2018 (3Q), and its P/L was included in the scope of consolidation from 4Q (Oct-Dec) 2018.

B/S, CF, and key financial indicators FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 JPY mn, % act act act act* act Total Assets 9,174 8,712 10,806 18,237 19,565 Cash and Deposits 2,841 1,509 1,534 1,701 1,997 ST Loans Payable 1,000 － 950 2,435 3,446 Current Portion of LT Loans Payable －－－ 667 667 LT Loans Payable －－－ 1,335 667 Total Interest-Bearing Debt 1,000 0 950 4,437 4,780 Net Assets 4,882 5,417 6,020 6,207 6,316 Equity ratio (%) 53.2% 62.2% 55.7% 34.0% 32.3% Current ratio (%) 171.7% 197.7% 171.2% 94.4% 89.2% Net D/E ratio (x) (0.38) (0.28) (0.10) 0.44 0.44 ROA (%) 10.1% 12.2% 12.6% 5.7% 5.1% ROE (%) 12.3% 11.9% 12.4% 6.2% 5.7% CF from Operating Activities 1,861 756 435 442 2,124 CF from Investing Activities (720) (994) (1,255) (3,527) (1,953) FCF 1,140 (238) (820) (3,084) 171 CF from Financing Activities 998 (1,095) 845 3,236 129 Shares Outstanding (000) 17,747 18,053 18,274 18,274 18,274 Avg. Shares Outstanding (000) 16,054 17,893 18,256 18,274 18,274 Basic EPS (¥) 26.80 34.16 38.73 20.84 19.63 DPS (¥) 5.50 7.00 9.00 9.50 9.50 Payout Ratio (%) 20.5% 20.5% 23.2% 45.6% 48.4% BPS (¥) 274.97 299.96 329.34 339.69 345.61 Source: compiled by Sessa Partners from TANSHIN financial statements, results briefing materials and GDO Fact Book. Figures reported in thousand yen are rounded to the nearest million yen. Golf Digest Online Sessa Investment Research

Introduction to GDO’s 4 main business lines in Japan: at the core is ‘only one’ GDO golf specialist portal site

Used clubs etc. (5) Golf Gear RETAIL Online Sales ❶

Database

News and other content attract site visitors PC and mobile

❸ ❷ MEDIA COURSE SCHOOL ❹ On-Site Ad Online Tee Time Lessons, Club Placement Bookings Fitting & Sales

Golf Digest Online Inc. iPhone apps

GDO Score Golf Course Cheap golf play ticket GDO Golf Course Easy My GOLFTEC Reservations sales HOT PRICE Golf SHOP Phone Reservations by GDO

Highly effective and scalable business model: self-reinforcing ecosystem based on IT iPad/iPhone app around core media specialized in all things golf GDO was established in May-2000 at the height of the ‘dot.com’ internet bubble. Founder and CEO Nobuya ‘Mike’ Ishizaka, a veteran of Mitsubishi Corporation and holder of a Harvard Business School MBA, had a simple premise: build a media platform specialized in golf, and develop IT-based businesses revolving around the core media. The graphic above shows the initial 3 main ‘tricycle’ wheels of RETAIL (golf gear online sales), COURSE (online tee time bookings), and MEDIA (on-site ad placement). LINE News Awards 2019 ‘Media Supported by Users’ The core media is GDO News, which covers all news, topics and tournament/event Sports category: #1 GDO News related information. The company has a dedicated Editorial Department with staff writers producing proprietary content as well as culling together a myriad of information of interest to golfers. In Dec-2019, GDO News was awarded No.1 in the sports category for ‘Media Supported by Users’ by LINE News. LINE’s social media platform has 68mn monthly users, and LINE News handles smartphone news service from over 800 media partners. ‘Media Supported by Users’ (13 categories) is based on user satisfaction and engagement rankings. GDO News attracts visitors to the site, creating a platform for various services.

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The trend of GDO Club Members is a leading indicator for Japan business GDO is coming up on its 20TH anniversary since founding, and during the entire period, net sales only declined once in 2011 (-8.1%) as a result of the earthquake and tsunami off the coast of TOHOKU on March 11 of that year. 5-Year CAGR for consolidated net GDO News Content sales through FY12/19 is +16.4%, and even stripping out the acquisition of GolfTEC · Tournament updates Enterprises LLC, 5-Year CAGR for Japan segment business is +10.9%. The breakdown of · Player information net sales by businesses is shown in the table on P2. 5-Year CAGR by business is: RETAIL · World rankings +9.5%, COURSE +12.7% and MEDIA +1.2%. · TOPICS · Interviews Quarterly Trend of GDO Club Members: adding over 100k per quarter · New products million (LHS) YoY % (RHS) · Kids topics 4.50 14 · Golf travel 4.13 · Photo gallery 4.00 3.72 12 · Event calendar 3.50 3.36 10 3.04 3.00 2.77 8 2.53 2.50 2.34 6 2.17 1.92 2.00 4

1.50 2

1.00 0 11.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1 Source: GDO IR

8-Year CAGR over this period is +10.1%, the textbook definition of consistent growth. During FY12/19, the company added on average 102,500 members per quarter, with no signs of slowing down. For reference, the total number of golfers in Japan is estimated at 7.8 million, so GDO members account for roughly 53% of the total. This brings us to key question no.1 for the company: if the outlook for the number of golfers medium-term is a slight but steady decline due to demographics, won’t the company’s Japan business peak out soon? The short answer is no, for two reasons.

GDO SHOP Golf Gear Sales (mainly online, JPY bn), YoY Trend and Market Share

¥ bn (LHS) mkt share YoY % 21.00 14.0% 17.35 18.00 16.30 12.0% 14.88 15.00 13.37 10.0% 12.45 12.00 11.04 8.0% 4.8% 9.00 4.0% 4.4% 6.0% 3.3% 3.7% 6.00 4.0%

3.00 2.0%

0.00 0.0% 2014 2015 2016 2017 2018 2019

Source: Japan Productivity Center ‘Leisure White Paper’, Yano Research Institute ‘Golf Industry White Paper’, GDO IR

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DENTSU: Advertising Expenditures in Japan (JPY bn, %) Ad spend by media (JPY bn) CY [A] Japan YoY [B] Total YoY B / A [C] Terres TV YoY C / B [D] Internet YoY D / B GDP Ad Spend Ad Spend Ad Spend TV Internet 05 524,133 0.6 6,824 2.9 1.30% 2,041 (0.1) 29.9% 378 48.0 5.5% 2,100 06 526,880 0.5 6,940 1.7 1.32% 2,016 (1.2) 29.1% 483 27.8 7.0% 1,800 07 531,688 0.9 7,019 1.1 1.32% 1,998 (0.9) 28.5% 600 24.4 8.6% 1,500 1,200 08 520,716 (2.1) 6,693 (4.7) 1.29% 1,909 (4.4) 28.5% 698 16.3 10.4% 900 09 489,501 (6.0) 5,922 (11.5) 1.21% 1,714 (10.2) 28.9% 707 1.2 11.9% 600 10 500,354 2.2 5,843 (1.3) 1.17% 1,732 1.1 29.6% 775 9.6 13.3% 300 11 491,409 (1.8) 5,710 (2.3) 1.16% 1,724 (0.5) 30.2% 806 4.1 14.1% 0 12 494,957 0.7 5,891 3.2 1.19% 1,776 3.0 30.1% 868 7.7 14.7% 05 10 15 13 503,176 1.7 5,976 1.4 1.19% 1,791 0.9 30.0% 938 8.1 15.7% Source: DENTSU Inc. 14 513,876 2.1 6,152 2.9 1.20% 1,835 2.4 29.8% 1,052 12.1 17.1% 15 531,320 3.4 6,171 0.3 1.16% 1,809 (1.4) 29.3% 1,159 10.2 18.8% 16 535,986 0.9 6,288 1.9 1.17% 1,837 1.6 29.2% 1,310 13.0 20.8% 17 545,122 1.7 6,391 1.6 1.17% 1,818 (1.1) 28.4% 1,509 15.2 23.6% 18 548,496 0.6 6,530 2.2 1.19% 1,785 (1.8) 27.3% 1,759 16.5 26.9% Source: 'Advertising Expenditures in Japan 2018' by DENTSU INC., March 14, 2019 Notes: [A] GDP from 'Annual Report on National Accounts' by the Cabinet Office [B] Data series was revised in 2007 retroactive to 2005: Internet ad spend includes est. production cost [C] 2018: Terrestrial TV ¥1784.8bn, Satellite TV ¥127.5 bn [D] 2018: Total internet ads ¥1,758.9bn, ad placement ¥1,448.0bn, production cost ¥310.9bn

METI: Japan's B2C E-commerce Market (JPY bn) and EC Ratio

B2C EC market (LHS, JPY bn) EC Ratio YoY Future Key Drivers of GDO 21,000 21.0% Japan Business Growth 17,985 18,000 16,505 18.0% ❶ Net sales: rising EC ratio 15,136 15,000 13,775 15.0% 12,797 ❷ OP: controlling SG&A 12,000 11,166 12.0% 9,513 8,459 9,000 7,788 9.0% 6.2% 5.4% 5.8% 4.8% 6,000 3.9% 4.4% 6.0% 2.8% 3.2% 3.4% 3,000 3.0%

0 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Ministry of Economy, Trade and Industry (METI) ‘2018 E-Commerce Market Survey’, May 16, 2019

Top physical store chains According to market data obtained by GDO, the 2018 Japan market for golf gear was golf gear sales (JPY bn) ¥343.0bn, +1.5% YoY. Referring back to the graph on the bottom of P4, 2018 GDO golf AlpenGroup XEBIO HD gear online sales were ¥16.3bn, +9.5% YoY. For reference, the 2018 online market for 100.0 golf gear was ¥48.0bn, and GDO had the top share at 34.0%. But what about the top 80.9 78.2 75.8 73.8 73.6 brick-and-mortar sporting goods retailers? The graph on the left shows No.1 (3038) 80.0 62.4 61.1 Alpen and No.2 (8281) XEBIO golf gear sales declined -3.4% and -2.1%, respectively. 56.1 56.0

60.0 52.0

40.0 Our conclusion is that net sales for RETAIL business are set to continue growing for the

20.0 foreseeable future driven by rise in the EC Ratio (online business in total sales). The graph above shows that this is a well-defined trend for the overall economy. In 0.0 addition to structural growth in net sales due to the rising EC ratio, operating profit will 15 16 17 18 19 Source: respective company IR benefit from controlling growth in SG&A expenses. Despite rising costs of personnel, IT websites. Note: Alpen June FY-end, systems and logistics transportation costs, scale merits can be realized by effectively XEBIO March FY-end managing the existing infrastructure which can support higher net sales.

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GDO Corporate History visualized: since inception, only 1 down year

Net sales (¥ mn, LHS) YoY %

40,000 40

35,000 34,274 35

30,000 30 26,739 26,739 28.2 25,000 25 21,574 21,574 19,309 19,309

20,000 18,047 20 16,031 16,031 14,039 14,039 13,166 13,166 12,885 12,885 12,841 12,841 15,000 12,755 15 12,095 12,095 10,126 10,126

10,000 8,034 10 5,546 5,546 4,119 4,119 5,000 3,605 5 2,425 2,425 998 998 136 136 0 0

(5,000) -5 (8.1) (10,000) -10

Source: YUHO financial statements, results briefing materials, GDO IR

COURSE (online tee time reservations) and MEDIA (on-site ad placement etc.) The company is not required to disclose a breakdown of profits by businesses, however it does provide the following guidance for reference. In terms of margins, from high to low, the order is ① COURSE, ② MEDIA and ③ RETAIL. In terms of absolute amount of profit contribution, from high to low, the order is ① COURSE, ② RETAIL and ③ MEDIA. The fourth business SCHOOL (lessons, custom club fitting and sales) is relatively new so Golf course reservations profit contribution in Japan is still low, however we examine that in the next section.

According to the company, the market for online golf course reservations by stand alone platforms with comprehensive nationwide coverage is basically split between Rakuten GORA and GDO, Rakuten estimated to have a higher share. Of Japan’s over 2,200 golf courses, GDO has tie-ups with over 2,000, and Rakuten’s site says it has tie- ups with over 1,900. The basic model for this business is a GDO Club member logs on, and inputs the requested date, time, and course, as well as the number of players in his or her party. After the member and party actually visit the course and play, a commission of several hundred yen is paid by the corresponding golf course to GDO times the number of players. There is no commission paid in the event of cancellation.

The biggest risk factor for this business is weather events and natural disasters like typhoons, flooding, earthquakes etc. We asked about the potential impact from the novel coronavirus epidemic. Regarding inbound traffic, as Japan accounts for over half of the courses in Asia, which are situated in some of the most beautiful locations on the planet, there is a fair amount of foreign visitors who come to play golf in Japan. HOWEVER, while acknowledging this is an unaddressed opportunity, GDO’s business is still virtually exclusive to Japanese customers. After Japan’s emergency declaration, roughly 150 courses closed independently, and from the latter half of April, some areas were requested to close in order to curtail movement between prefectures.

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GDO member attributes: Regarding MEDIA business, FY12/19 net sales declined -12.9%. The company attributes Annual income breakdown this to two factors. First, now accounting for less than 3% of consolidated revenue, the company admits that it is not aggressively pursuing ad sales. This business is positioned < ¥4mn more as a way to offset costs to operate GDO News, at the core of all business. Second, 16% 25% as can be seen in the graph on the left, GDO members tend to have higher incomes. In ¥4mn ─ ¥7mn addition to gear makers, paid ad sponsors include autos, financial products, etc. ¥7mn ─ Automakers were forced to curtail ad spend in 2019 due to the US-China trade war. 24% 35% ¥10mn > ¥10mn The 6-Year Monthly Share Price Chart tells a different story… Source: GDO IR Note: refer to the table on the top of P5 for the correlation of ad spend / GDP.

Source: SPEEDA

Consolidating GolfTEC Enterprises in FY12/18 resulted in net income -46% EBITDA (¥ mn) OP (¥ mn) Profit ATOP (¥ mn) GTE financial disclosures 3,000 JPY mn 12/15 12/16 12/17 2,469 2,469 Total assets 2,150 2,267 3,388 2,500 Net assets (154) 99 (205) Net Sales 4,179 4,693 4,867 OP (26) 46 (275) 2,000 1,645 1,645 1,577 1,577

Net income (68) 16 (302) 1,537 1,458 1,458 Source: GDO press release, Jun 1, 2018 1,500 1,214 1,214

*Dec-end forex rates used for yen 1,073 1,065 1,065 conversion each year 979 828 828

1,000 805 707 707 611 611 444 444 430 430 381 381 500 359 181 181

0 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 Source: TANSHIN financial statements, results briefing materials

The share price chart above shows the rise ahead of moving listing designation to TSE1 in Sep-2015, and normal profit-taking after inclusion in TOPIX, followed by another rise on the back of strong profits through Jun-2018, pulling back sharply again after the 1H 12/18 downward revision due to acquiring GolfTEC Enterprises LLC. This brings us to key question no.2 for the company: what is the opportunity sought by taking on the risk of acquiring a majority stake of a company making losses?

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Cutting edge swing diagnosis GOLFTEC Japan locations (13 studios)

One-on-one lessons TOKYO ● Roppongi ● Ebisu OSAKA ● Ginza ANNEX ● Osaka Umeda ● Otemachi ● Grand Front Osaka Mall ● Kanda ● Ikebukuro ● Shinjuku ● Fukuoka Tenjin ● Haneda Airport ● Yokohama Sakuragicho ● Nagoya Meieki My GOLFTEC app

Source: GDO GOLFTEC Inc. website

Timeline leading up to acquiring the majority stake in GolfTEC Enterprises While core Japan business is likely to continue growing for the foreseeable future, the company is fully aware of the fact that at some point, its market share will reach a Self-training video system point of saturation, and growth will slow. As part of its diversification strategy, management entered golf lessons business in 2012, acquiring the master franchise for GOLFTEC in Japan. The lower left graph shows it has taken a measured approach by opening 1–2 studios / year. The table on P2 shows SCHOOL sales were re-classified and split from RETAIL in FY12/17.

In 2016, in discussions with the management team of the US parent GolfTEC Enterprises, GDO agreed to take an 8% stake. While dealing with expected growing pains of any high growth company in securing funding to support ongoing expansion, Custom club fitting using TECFITTM GTE was faced with a new problem: closure of a golf goods megastore chain forced the company to scramble to find new locations for a portion of studios renting space within those stores. Golfsmith partnered with GTE in 2004 for providing in-store lessons (GTE had space in 57 stores as of Aug-2010). In Sep-2016, Golfsmith filed for Chapter 11 protection, a victim of overly aggressive store expansion (109 stores), and in the wrong mega-size format, in the face of the persistent shift toward online retailing.

When GTE approached the company in 2018 for another potential round of financing, GOLFTEC Japan Studios Trend GDO responded that in that case, it would like to acquire a majority stake. To be sure, the table on the bottom of P11 highlights the US as the largest market for golf. 15 13 12 However, GDO management believed strongly that it would be the epitome of 9 10 7 recklessness to try to enter the US market cold, with no name recognition and no 5 5 prospects for gaining a lasting foothold with its current business portfolio. There are striking similarities to Seven-Eleven Japan acquiring a 69.9% stake in Southland 0 15 16 17 18 19 Corporation in Mar-1991, in two key respects: ① high confidence in the viability of the Source: GDO Factbook business model, and ② no other way to gain a lasting foothold in the US market. GDO raised its stake from 8% to 60% in Jul-2018, consolidating GTE’s PL from the 4Q.

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GolfTEC Enterprises LLC GOLFTEC is the world’s No.1 provider of golf lessons Co-founder and CEO Joe Assell

Golf Digest Online Inc. Founder and CEO Nobuya ‘Mike’ Ishizaka

Trend of GOLFTEC Studios no. of studios DM FC TTL end of FY12/18 102 98 200 new opens +6 +3 +9 FC conv. to direct +6 -6 ─ Source: GOLFTEC Media Guide Sep-2019 end of FY12/19 114 95 209 Source: GDO results briefing Dramatic improvement in GTE fundamentals during the first full FY Referring back to the table on the top of P2, during FY12/19, GTE turned into the black before GW, and GDO’s FCF turned positive. The table at left shows that during the same period, GTE managed to increase the number of studios from 200 to 209, mainly in the US. From an organization chart perspective, GTE falls under GDO Sports Inc., the management company headquartered in California responsible for all US business GOLFTEC Studios by country including purchasing etc. According to CFO Nishino, GDO’s name recognition in the US US 173 golf industry has been steadily rising since the acquisition. GTE co-founder and CEO Joe Canada 19 Assell explains in an interview with Colorado’s AvidGolfer magazine, “They’re a Japan 13 household name in Japan when it comes to golf ─ the GolfNow of Japan. They’re also HK 2 the largest golf retail site in the world. They’re maxing out in Japan and we’re the Singapore 1 perfect partner for them to enter the US market.” A summary of the key points for GTE China 1 is provided on P10. GTE’s deep connections throughout the US golf industry cannot be TOTAL 209 understated, employing the highest number of PGA professionals as coaches, partnership with Golf Channel etc.

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GOLFTEC Facts from the 2019 Media Guide

• Founded in 1995, GOLFTEC is the world leader in golf instruction and one of the fastest growing, most successful companies in the golf industry. Its fact-based approach to improvement benefits golfers of all skill levels, maximizing performance and enjoyment of the game.

• With its unique position in golf instruction, GOLFTEC has continued to break records for revenue, profit, students, employees and coaches. This type of growth and influence over the past 24 years is unmatchedin golf.

• The company continues to evolve to ensure its growth and strength in the marketplace continues unimpeded. Among the new changes are completely updated in-center designs that provide the ideal learning environment for students and an increased emphasis on club fitting via the new TECFIT™ program that will see GOLFTEC become the nation’s leading provider of custom fittings.

• Leading global provider of golf lessons; more than 9 million lessons given. More than 200 centers worldwide, including North America, Hong Kong, China and Japan. No.1 employer of PGA Teaching Professionals.

• Responsible for more than 26% of all private golf lessons given to core golfers in the U.S. Students drop an average of 7 strokes from their game.

• 2018 was the single biggest year in GOLFTEC history; eclipsed $100 million in sales and gave over 1 million golf lessons and club fittings. Revenue is up 110% since 2010 –outpacing well-known companies inside & outside of golf.

• 36 GOLFTEC Training Centers named to Golf Digest’s prestigious “100 Best Club Fitters in America” list.

• All Coaches attend rigorous multi-week certification at GOLFTEC University to master the analysis of golf mechanics, the technology of the GOLFTEC system and the most productive teaching techniques. Teaching philosophy focused on fact- based diagnosis and instruction.

• Patented TECSWING™ Training System provides video combined with motion measurement quantifying swing mechanics which aids coaches in our fact-based approach to instruction.

• More than 100 million swings captured on video. 266 million motion datapoints recorded.

• New comprehensive club fitting software released in 2018 cross-references launch monitor ball flight characteristics with a database of thousands of clubhead & shaft combinations to recommend the most optimized golf equipment for an individual’s unique swing.

• New customized hardware and iPad-based putting software system released in 2019 measures putter aim, path and speed to establish baselines and patterns for students to improve putting.

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GDO is currently preparing a new MTP, delayed due to coronavirus This brings us to key question no.3 for the company: now that GTE is turning the corner on profitability, what is the expected time horizon for GTE to make a meaningful contribution to GDO profits? As it is often stated, the devil is in the details. The company is planning to announce a new Medium-Term Management Plan (MTP) later this year, delayed due to coronavirus. As the MTP is still being formulated, the company cannot comment on the level of detail concerning earnings targets etc., however the purpose of establishing an MTP in the first place is to lay out a roadmap for initiatives to grow the business and improve profitability, so this may provide the next catalyst for the share price.

One key component of GOLFTEC business is custom club fitting. Utilizing GOLFTEC’s proprietary technology, clubs are custom tailored to each individual for optimum functionality and performance. Since each player is getting custom tailored clubs, he or she is often willing to pay a considerably higher unit price than for standard clubs off the rack. As the world’s largest online retailer of golf gear, this point has not gone unnoticed, and opens up potential avenues for expanding gear sales and margins. GDO peer: (4436 TSE Mothers) MINKABU Finally, investors often ask for a list of peers for comparison. Since GDO operates an THE INFONOID ‘only one’ golf specialist portal site, the recognized de facto standard, there really are no peers for comparison. Toyo Keizai, which publishes SHIKIHO (The Japan Company Handbook), cites (4755) Rakuten as the only peer for comparison. This is problematic, in our view, since Rakuten’s business model is completely different, based on establishing an online ‘mall’, and creating a broad portfolio of consumer services to tack onto the platform and brand.

In our opinion, the company with the closest business model to GDO is (4436 TSE Mothers) MINKABU THE INFONOID. MINKABU operates the largest portal site for retail stock investment in Japan, MINNA NO KABUSHIKI (Stocks for Everyone), with over 7.1mn unique users per month, the chart for which is a mirror image of growth in GDO Club members. Like GDO, MINKABU has a dedicated Editorial Dept., which produces a high volume of content for stock investors through its MINKABU PRESS service. Like GDO, new business development is driven by IT.

World Golf Market 2019

Source: GDO results briefing materials, from Yano Research Institute “2019 World Golf Market Report”

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Japan earnings seasonality and profit margins: some context for coronavirus impact Since 2/25, GDO was an early adopter of Japan employees teleworking from home, shifting in-house meetings to teleconferences and replacing outside meetings with phone calls, refraining from business trips, promoting masks and thorough hand sanitizing for shop workers etc. In addition, the company formulated an alternative webcast option for the AGM held on 3/30. Announcement of the MTP has been pushed back indefinitely, later this year at the earliest.

Impact from coronavirus on 1Q 12/20 earnings was relatively minor. However, this must be taken in the context of earnings seasonality. Since segment classifications were changed from FY12/17, reference data on the following page covers the period from 2013 – 2016, comprised of the 3 main business units in Japan. The graphs below show that 1Q has the smallest sales contribution, and until 2016, 1Q operating losses. This is due to the normal decline in retail spending after high year-end sales, as well as courses in Northern Japan closed for the winter.

By business units, the impact on RETAIL was from the latter part of March for both online gear sales due to slowing consumer confidence, and less visits to used gear shops. The impact for 2Q (Apr-Jun) is significant. 1Q COURSE reservations as a whole were steady, but there was a rise in cancellations from April onward due to closures. MEDIA ad spending remains under pressure, citing anecdotally that cancellation of events like the US Masters scheduled for Apr-2020 affected corporate ad campaigns. As a result, the company was forced to withdraw initial full-term guidance for FY12/20. It is clear that 2Q earnings will have some significant impact, shifting the focus to 2H.

REFERENCE: Average Quarterly Seasonality and Profit Margins [2013 – 2016, 4-year average]

Net sales seasonality SG&A seasonality Operating profit seasonality

27.6% 45.7% 30.0% 26.2% 30.0% 27.3% 50.0% 25.3% 25.0% 24.9% 38.1% 22.8% 40.0% 32.8% 25.0% 20.8% 25.0% 30.0% 20.0% 20.0% 20.0% 15.0% 15.0% 10.0% 10.0% 10.0% 0.0% 5.0% 5.0% -10.0% 0.0% 0.0% -20.0% -16.6%

Gross profit margin SG&A ratio to sales Operating profit margin 6.1% 43.0% 42.1% 42.0% 43.0% 7.0% 41.7% 4.9% 42.0% 42.0% 41.1% 6.0% 4.6% 5.0% 41.0% 41.0% 4.0% 40.0% 40.0% 3.0% 39.0% 39.0% 2.0% 38.0% 39.2% 38.0% 37.1% 37.1% 1.0% 0.0% 37.0% 37.0% -1.0% 36.0% 36.0% -2.0% 35.0% 35.0% 35.9% -3.0% -1.9%

Source: compiled by Sessa Partners from TANSHIN financial statements. Note: seasonality = % relative to full-term amounts.

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REFERENCE DATA: Quarterly Seasonality and Profit Margins [2013 – 2016, 4 years] JPY mn 1Q.13 2Q.13 3Q.13 4Q.13 1Q.14 2Q.14 3Q.14 4Q.14 1Q.15 2Q.15 3Q.15 4Q.15 1Q.16 2Q.16 3Q.16 4Q.16 NC NC NC NC NC consol consol consol consol consol consol consol consol consol consol consol Net sales 2,913 3,755 3,500 3,871 3,256 4,158 4,097 4,519 3,699 4,736 4,516 5,095 4,209 5,023 4,948 5,129 • RETAIL 2,081 2,598 2,319 2,681 2,413 2,782 2,761 3,079 2,666 3,226 3,026 3,531 3,012 3,454 3,350 3,551 • COURSE 616 890 941 985 662 1,115 1,141 1,189 853 1,304 1,265 1,293 1,015 1,372 1,353 1,365 • MEDIA 215 268 239 205 181 211 190 214 166 178 216 252 176 191 237 206 Gross profit 1,202 1,605 1,528 1,629 1,231 1,769 1,689 1,813 1,429 1,962 1,871 2,110 1,646 2,089 2,062 2,215 • RETAIL 433 561 486 608 506 617 569 662 625 751 675 822 692 811 783 889 • COURSE 592 846 854 859 570 966 968 986 666 1,051 1,036 1,097 815 1,126 1,124 1,162 • MEDIA 176 198 188 162 155 164 149 146 133 148 155 182 137 150 149 163 SG&A exp. 1,284 1,442 1,430 1,516 1,408 1,561 1,557 1,532 1,463 1,543 1,614 1,923 1,587 1,763 1,667 1,922 Oper. profit (81) 161 98 114 (177) 208 131 281 (33) 417 257 187 58 326 396 293

% progress 1Q.13 2Q.13 3Q.13 4Q.13 1Q.14 2Q.14 3Q.14 4Q.14 1Q.15 2Q.15 3Q.15 4Q.15 1Q.16 2Q.16 3Q.16 4Q.16 NC NC NC NC NC consol consol consol consol consol consol consol consol consol consol consol Net sales 20.7% 26.7% 24.9% 27.6% 20.3% 25.9% 25.6% 28.2% 20.5% 26.2% 25.0% 28.2% 21.8% 26.0% 25.6% 26.6% • RETAIL 21.5% 26.8% 24.0% 27.7% 21.9% 25.2% 25.0% 27.9% 21.4% 25.9% 24.3% 28.4% 22.5% 25.8% 25.1% 26.6% • COURSE 17.9% 25.9% 27.4% 28.7% 16.1% 27.1% 27.8% 29.0% 18.1% 27.7% 26.8% 27.4% 19.9% 26.9% 26.5% 26.7% • MEDIA 23.2% 28.9% 25.8% 22.1% 22.7% 26.5% 23.9% 26.9% 20.4% 21.9% 26.6% 31.0% 21.7% 23.6% 29.3% 25.4% Gross profit 20.2% 26.9% 25.6% 27.3% 18.9% 27.2% 26.0% 27.9% 19.4% 26.6% 25.4% 28.6% 20.5% 26.1% 25.7% 27.6% • RETAIL 20.7% 26.9% 23.3% 29.1% 21.5% 26.2% 24.2% 28.1% 21.8% 26.1% 23.5% 28.6% 21.8% 25.5% 24.7% 28.0% • COURSE 18.8% 26.8% 27.1% 27.3% 16.3% 27.7% 27.7% 28.3% 17.3% 27.3% 26.9% 28.5% 19.3% 26.6% 26.6% 27.5% • MEDIA 24.3% 27.3% 26.0% 22.4% 25.2% 26.7% 24.3% 23.8% 21.5% 23.9% 25.1% 29.4% 22.9% 25.0% 24.9% 27.2% SG&A exp. 22.6% 25.4% 25.2% 26.7% 23.2% 25.8% 25.7% 25.3% 22.4% 23.6% 24.7% 29.4% 22.9% 25.4% 24.0% 27.7% Oper. profit -27.7% 55.1% 33.6% 39.0% -40.0% 47.0% 29.6% 63.4% -4.0% 50.4% 31.0% 22.6% 5.4% 30.4% 36.9% 27.3%

% total 1Q.13 2Q.13 3Q.13 4Q.13 1Q.14 2Q.14 3Q.14 4Q.14 1Q.15 2Q.15 3Q.15 4Q.15 1Q.16 2Q.16 3Q.16 4Q.16 NC NC NC NC NC consol consol consol consol consol consol consol consol consol consol consol Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% • RETAIL 71.4% 69.2% 66.3% 69.3% 74.1% 66.9% 67.4% 68.1% 72.1% 68.1% 67.0% 69.3% 71.6% 68.8% 67.7% 69.2% • COURSE 21.1% 23.7% 26.9% 25.4% 20.3% 26.8% 27.8% 26.3% 23.1% 27.5% 28.0% 25.4% 24.1% 27.3% 27.3% 26.6% • MEDIA 7.4% 7.1% 6.8% 5.3% 5.6% 5.1% 4.6% 4.7% 4.5% 3.8% 4.8% 4.9% 4.2% 3.8% 4.8% 4.0% Gross profit 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% • RETAIL 36.0% 35.0% 31.8% 37.3% 41.1% 34.9% 33.7% 36.5% 43.7% 38.3% 36.1% 39.0% 42.0% 38.8% 38.0% 40.1% • COURSE 49.3% 52.7% 55.9% 52.7% 46.3% 54.6% 57.3% 54.4% 46.6% 53.6% 55.4% 52.0% 49.5% 53.9% 54.5% 52.5% • MEDIA 14.6% 12.3% 12.3% 9.9% 12.6% 9.3% 8.8% 8.1% 9.3% 7.5% 8.3% 8.6% 8.3% 7.2% 7.2% 7.4%

% margins 1Q.13 2Q.13 3Q.13 4Q.13 1Q.14 2Q.14 3Q.14 4Q.14 1Q.15 2Q.15 3Q.15 4Q.15 1Q.16 2Q.16 3Q.16 4Q.16 NC NC NC NC NC consol consol consol consol consol consol consol consol consol consol consol Gross profit 41.3% 42.7% 43.7% 42.1% 37.8% 42.5% 41.2% 40.1% 38.6% 41.4% 41.4% 41.4% 39.1% 41.6% 41.7% 43.2% • RETAIL 20.8% 21.6% 21.0% 22.7% 21.0% 22.2% 20.6% 21.5% 23.4% 23.3% 22.3% 23.3% 23.0% 23.5% 23.4% 25.0% • COURSE 96.1% 95.1% 90.8% 87.2% 86.1% 86.6% 84.8% 82.9% 78.1% 80.6% 81.9% 84.8% 80.3% 82.1% 83.1% 85.1% • MEDIA 81.9% 73.9% 78.7% 79.0% 85.6% 77.7% 78.4% 68.2% 80.1% 83.1% 71.8% 72.2% 77.8% 78.5% 62.9% 79.1% SG&A exp. 44.1% 38.4% 40.9% 39.2% 43.2% 37.5% 38.0% 33.9% 39.6% 32.6% 35.7% 37.7% 37.7% 35.1% 33.7% 37.5% Oper. profit -2.8% 4.3% 2.8% 2.9% -5.4% 5.0% 3.2% 6.2% -0.9% 8.8% 5.7% 3.7% 1.4% 6.5% 8.0% 5.7% Source: compiled by Sessa Partners from TANSHIN financial statements. Note: % progress = % relative to full-term amounts, % total = breakdown of 100%, % margins = ratio to sales.

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LEGAL DISCLAIMER

This report is intended to provide information about the subject company, and it is not intended to solicit or recommend investment. Although the data and information contained in this report have been determined to be reliable, we do not guarantee their authenticity or accuracy.

This report has been prepared by Sessa Partners on behalf of the concerned company for which it has received compensation. Officers and employees of Sessa Partners may be engaged in transactions such as trading in securities issued by the company, or they may have the possibility of doing so in the future. For this reason, the forecasts and information contained in this report may lack objectivity. Sessa Partners assumes no liability for any commercial loss based on use of this report. The copyright of this report belongs to Sessa Partners. Modification, manipulation, distribution or transmission of this report constitutes copyright infringement and is strictly prohibited.

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