Round One / 4680

COVERAGE INITIATED ON: 2009.07.07 LAST UPDATE: 2018.06.07

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Executive summary ------3 Key financial data ------4 Recent updates ------5 Highlights ------5 Trends and outlook ------6 Monthly performance ------6 Quarterly trends and results ------7 Full-year FY03/18 company forecasts ------12 Long-term strategy ------15 Business ------17 Summary ------17 Cost structure analysis ------21 Strengths and weaknesses ------23 Market and value chain ------24 Historical financial statements ------27 Summary ------27 Income statement ------37 Balance sheet ------38 Cash flow statement ------39 Other information ------40 History ------40 News and topics ------40 Top management ------41 Employees ------41 Major shareholders ------41 Investor relations ------42 Company profile ------42

02/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Executive summary

Core business—operation of amusement complex centers

◤ Round One specializes in running amusement complex centers in Japan and North America. At end of March 2018 it operated 129 stores (108 stores in Japan, and 21 stores in North America). The amusement services include bowling as well as games, karaoke, and SPO-CHA (abbreviation for “Sports Challenge”).

◤ In Japan, due to the continuing decline in the market for bowling, owing to a declining population and diversified entertainment choices, the company pressed on with its program of closing unprofitable stores and opening new ones. Through these measures, the company aims to eliminate cannibalization among stores and improve profitability to maintain and improve its current profit level. In the medium-term, the company will continue to close unprofitable stores and open new ones, maintaining approximately 100 stores.

◤ In the North American market, the company will accelerate store openings while leveraging the lessons it has learned from existing stores, with the objective of establishing a network of 100 stores in the US at an early point. The company opened its first US store in August 2010, and it improved the effectiveness of store openings and operations as it accumulated experience operating amusement complex centers in North America. In FY03/16 the company achieved a current account surplus, since which time it has gradually increased new store openings as it accumulated operational know-how. The company opened six stores in FY03/17 and six stores in FY03/18, and plans to open 11 stores in FY03/19 and more than 10 stores each year thereafter. Trends and outlook

◤ FY03/18 sales were JPY95.9bn (+9.3% YoY), operating profit was JPY10.5bn (+57.7%), recurring profit was JPY10.3bn (+75.3%), and net income attributable to parent company shareholders was JPY8.4bn (+207.5%). By region, domestic sales were JPY84.3bn (+4.7%), operating profit was JPY9.5bn (+53.6%), and recurring profit was JPY9.3bn (+72.5% YoY). In the US, sales were JPY11.6bn (+59.6%), operating profit was JPY1.0bn (+112.2%), and recurring profit was JPY930mn (+111.4%).

◤ In FY03/19, the company expects sales of JPY101.4bn (+5.7% YoY), operating profit of JPY11.6bn (+9.6%), recurring profit of JPY11.0bn (+7.1%), and net income attributable to parent company shareholders of JPY6.3bn (-24.9%).

Strengths and weaknesses

Shared Research believes that the three main strengths of Round One are its unique business model, strong brand name, and cash-flow generating ability. Weaknesses include its higher risks on new store openings compared with retailers, shrinking market, and slower-than-expected industry shakeout (see Strengths and weaknesses).

03/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Key financial data

Income statement FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Bowling 28,188 28,334 30,787 31,000 32,400 29,700 27,200 24,520 23,030 22,910 24,520 Amusement 33,205 32,218 33,405 35,224 36,400 34,500 34,900 36,520 36,580 40,530 45,340 Karaoke 5,447 5,686 6,037 6,715 8,200 8,300 8,400 8,640 8,660 9,130 9,840 SPO-CHA 9,199 9,278 8,963 8,748 9,400 10,300 10,900 11,500 12,190 12,270 13,280 Other 1,952 2,466 2,918 2,613 3,000 2,900 2,700 2,700 2,920 2,920 2,900 Sales 77,993 77,983 82,113 84,303 89,568 85,903 84,272 83,905 83,516 87,776 95,910 101,400 YoY 18.5%0.0%5.3%2.7%6.2%-4.1%-1.9%-0.4%-0.5%5.1%9.3%5.7% Gross profit 19,890 15,361 13,810 13,273 17,789 13,328 11,723 8,395 8,426 8,935 12,842 YoY 2.9% -22.8% -10.1% -3.9% 34.0% -25.1% -12.0% -28.4% 0.4% 6.0% 43.7% GPM 25.5% 19.7% 16.8% 15.7% 19.9% 15.5% 13.9% 10.0% 10.1% 10.2% 13.4% Operating profit 18,287 13,611 12,031 11,416 16,036 11,565 10,088 6,641 6,367 6,681 10,537 11,550 YoY 2.1% -25.6% -11.6% -5.1% 40.5% -27.9% -12.8% -34.2% -4.1% 4.9% 57.7% 9.6% OPM 23.4% 17.5% 14.7% 13.5% 17.9% 13.5% 12.0% 7.9% 7.6% 7.6% 11.0% 11.4% Recurring profit 15,986 9,798 7,848 6,929 11,481 8,217 7,818 6,150 5,402 5,858 10,267 11,000 YoY -2.4% -38.7% -19.9% -11.7% 65.7% -28.4% -4.9% -21.3% -12.2% 8.4% 75.3%7.1% RPM 20.5% 12.6% 9.6% 8.2% 12.8% 9.6% 9.3% 7.3% 6.5% 6.7% 10.7% 10.8% Net income 9,152 3,977 3,396 -12,673 2,781 601 -19,681 -4,568 449 2,735 8,411 6,320 YoY -5.9%-56.5%-14.6%------24.9% Net margin 11.7% 5.1% 4.1% - 3.1% 0.7% -23.4% -5.4% 0.5% 3.1% 8.8% 6.2% Per share data (JPY, after stock split adjustments) EPS 145.1 63.5 46.8 -136.8 29.2 6.3 -206.6 -48.0 4.7 28.7 88.3 66.3 Book value per share 1,104.5 1,147.6 1,080.0 829.4 838.4 826.1 603.8 541.9 522.0 534.0 595.4 Dividend per share 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Cash flow statement (JPYmn) Cash flows from operating activities 17,285 13,978 22,175 22,418 32,852 26,418 20,456 22,576 15,955 17,217 24,210 Cash flows from investing activities -23,632 -25,762 -35,616 -23,563 24,036 4,371 46,611 592 -5,082 -3,527 -7,448 Cash flows from financing activities 3,256 10,625 24,881 -4,551 -45,981 -34,564 -66,200 -20,820 -15,309 -16,964 -13,286 Financial rat ios ROA (RP-based) 9.3% 5.0% 3.4% 2.8% 4.8% 3.8% 4.7% 5.2% 5.0% 5.7% 9.8% ROE 13.9% 5.6% 4.3% - 3.5% 0.8% - - 0.9% 5.4% 15.6% Equity ratio 39.5% 33.5% 34.1% 31.3% 35.0% 38.2% 45.3% 46.3% 47.6% 50.0% 53.0% Net debt / Equity ratio 108.5% 133.2% 126.2% 143.5% 101.9% 82.5% 20.2% -1.3% -0.8% -7.4% -17.2% Total asset turnover 0.40.40.30.30.40.40.70.80.80.90.9 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

04/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Recent updates

Highlights

On June 7, 2018, Round One Corporation released monthly sales data for May 2018.

On May 25, 2018, Shared Research updated the report following interviews with the company.

On May 8, 2018, the company announced earnings results for Full-year FY03/18; see the results section for the details.

On May 7, 2018, the company released monthly sales data for April 2018; see the monthly performance section for details.

On April 5, 2018, the company released monthly sales data for March 2018.

On March 12, 2018, Shared Research updated the report following interviews with the company.

For previous releases and developments, please refer to the News and topics section.

05/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Trends and outlook Monthly performance

Monthly sales FY03/19 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total sales (JPYmn)6,4706,833 Bowling1,7231,798 Amusement2,8323,065 Karaoke584608 SPO-CHA1,0971,119 Other231242 Sales YoY (total) 4.1%-2.2% Bowling2.8%-3.9% Amusement3.7%-1.3% Karaoke4.8%-3.1% SPO-CHA8.2%-1.6% Other-1.3%-1.3% Sales YoY (comparable)3.5%-2.0% Bowling2.1%-3.5% Amusement3.2%-1.0% Karaoke3.4%-3.8% SPO-CHA8.2%-1.6% Other-2.1%-1.1% Store count: total 107105 Store count: comparable 106104 Monthly sales FY03/18 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total sales (JPYmn) 6,210 6,984 5,783 6,445 8,979 6,712 6,410 5,759 7,467 8,447 6,281 8,797 Bowling 1,673 1,870 1,581 1,623 2,239 1,754 1,617 1,458 2,004 2,371 1,784 2,716 Amusement 2,732 3,104 2,644 3,083 4,064 3,131 3,033 2,745 3,418 3,734 2,7043,294 Karaoke 558 627 534 618 774 631 584 527 754 747 572 777 SPO-CHA 1,014 1,137 799 881 1,630 950 941 814 1,042 1,333 993 1,749 Other 231 244 224 237 270 244 232 214 247 261 226 259 Sales YoY (total) 3.5% -2.4% 1.9% 1.8% 10.5% 5.9% 8.5% 8.8% 6.8% 3.0% 3.9% 4.0% Bowling 0.2% -2.0% 4.3% 3.5% 9.5% 5.0% 8.8% 5.1% 6.6% 3.9% 5.1% 5.7% Amusement 6.0% -4.7% -0.7% -0.2% 12.6% 8.9% 8.7% 12.6% 8.4% 3.6% 2.9% 2.5% Karaoke-6.8%-7.0%-5.7%-3.7%2.8%1.2%2.6%4.3%0.4%0.6%0.6%5.5% SPO-CHA 11.2% 7.7% 13.2% 11.4% 12.9% 2.5% 12.9% 8.5% 8.7% 2.1% 8.6% 4.6% Other -4.1% -6.4% -1.1% 0.3% 0.5% 1.2% 2.0% 1.9% 1.8% -2.0% -2.6% -3.0% Sales YoY (comparable) 4.8% -0.2% 4.2% 3.5% 12.0% 6.8% 8.7% 8.6% 6.7% 2.5%3.1%3.1% Bowling 4.0% 2.5% 8.7% 7.4% 13.0% 7.5% 8.6% 4.7% 6.3% 3.2% 3.7% 4.3% Amusement 6.2% -3.7% 0.5% 0.1% 12.7% 8.5% 9.1% 12.3% 8.0% 3.0% 2.1% 1.7% Karaoke -2.7% -2.2% -1.0% 0.8% 7.0% 4.8% 3.1% 4.8% 0.7% 0.1% -0.7% 4.0% SPO-CHA 8.4% 7.7% 13.2% 11.4% 12.9% 2.5% 12.9% 8.5% 8.7% 2.1% 8.6% 4.6% Other -0.2% -2.4% 2.7% 4.0% 4.1% 4.0% 1.8% 1.6% 1.6% -2.7% -3.8% -4.1% Store count: total 107 107 107 107 107 108 108 108 108 108 108 108 Store count: comparable 105 106 106 106 106 106 106 107 107 107 107 107 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

06/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Quarterly trends and results

Cumulative FY 03/ 17 FY 03/ 18 FY 03/ 18 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4% of FYFY Est. Sales 20,289 42,671 62,621 87,776 21,379 46,241 68,732 95,910 100.1% 95,801 YoY 7.7%4.6%4.3%5.1%5.4%8.4%9.8%9.3% 9.1% Gross profit 1,144 3,770 4,236 8,935 1,531 5,395 6,903 12,842 YoY 173.0% 17.7% 5.4% 6.0% 33.8% 43.1% 63.0% 43.7% GPM 5.6% 8.8% 6.8% 10.2% 7.2% 11.7% 10.0% 13.4% SG&A expenses 512 1,076 1,663 2,253 556 1,125 1,653 2,304 YoY 4.5%9.7%9.0%9.4%8.6%4.6%-0.6%2.3% SG&A ratio 2.5% 2.5% 2.7% 2.6% 2.6% 2.4% 2.4% 2.4% Operating profit 632 2,694 2,573 6,681 975 4,269 5,250 10,537 108.6% 9,707 YoY - 21.3% 3.2% 4.9% 54.3% 58.5% 104.0% 57.7% 45.3% OPM 3.1%6.3%4.1%7.6%4.6%9.2%7.6%11.0% 10.1% Recurring profit 172 2,063 1,850 5,858 881 4,074 4,977 10,267 110.0% 9,332 YoY - 13.1% -5.6% 8.4% 412.2% 97.5% 169.0% 75.3% 59.3% RPM 0.8%4.8%3.0%6.7%4.1%8.8%7.2%10.7% 9.7% Net income -100 967 582 2,735 355 2,456 3,039 8,411 150.3% 5,595 YoY - 62.8% -8.8% 509.1% - 154.0% 422.2% 207.5% 104.6% Net margin - 2.3% 0.9% 3.1% 1.7% 5.3% 4.4% 8.8% 5.8% Quart erly FY 03/ 17 FY 03/ 18 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Sales 20,289 22,382 19,950 25,155 21,379 24,862 22,491 27,178 YoY 7.7% 2.0% 3.4% 7.3% 5.4% 11.1% 12.7% 8.0% Gross profit 1,144 2,626 466 4,699 1,531 3,864 1,508 5,939 YoY 173.0% -5.6% -43.0% 6.6% 33.8% 47.1% 223.6% 26.4% GPM 5.6% 11.7% 2.3% 18.7% 7.2% 15.5% 6.7% 21.9% SG&A expenses 512 564 587 590 556 569 528 651 YoY 4.5% 14.9% 7.9% 10.5% 8.6% 0.9% -10.1% 10.3% SG&A ratio 2.5% 2.5% 2.9% 2.3% 2.6% 2.3% 2.3% 2.4% Operating profit 632 2,062 -121 4,108 975 3,294 981 5,287 YoY - -10.0% - 6.0% 54.3% 59.7% - 28.7% OPM 3.1% 9.2% - 16.3% 4.6% 13.2% 4.4% 19.5% Recurring profit 172 1,891 -213 4,008 881 3,193 903 5,290 YoY - -7.3% - 16.4% 412.2% 68.9% - 32.0% RPM 0.8% 8.4% - 15.9% 4.1% 12.8% 4.0% 19.5% Net income -100 1,067 -385 2,153 355 2,101 583 5,372 YoY - -9.5% - - - 96.9% - 149.5% Net margin - 4.8% - 8.6% 1.7% 8.5% 2.6% 19.8% Source: Shared Research based on company data Note: Company estimates are the most recent figures. Note: Figures may differ from company materials due to differences in rounding methods.

Seasonality: the company’s sales and profits are not spread evenly across quarters. Q1 (April-June) is busy due to many events held to coincide with the beginning of the business and school year, as well as the “Golden Week” holiday season in early May. Q2 (July-September) includes the busy summer vacation period. Q4 (January-March) includes New Year events and the spring vacation period in late March. In contrast, Q3 (October-December) has few holidays and is comparatively quiet.

Number of stores FY 03/ 17 FY 03/ 18 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Store count (quarter end) 123 120 121 122 122 125 127 129 YoY 3.4% -0.8% -0.8% 0.0% -0.8% 4.2% 5.0% 5.7% Domestic 113 109 109 107 107 108 108 108 YoY 0.0% -3.5% -4.4% -5.3% -5.3% -0.9% -0.9% 0.9% US 10 11 12 15 15 17 19 21 YoY 66.7% 37.5% 50.0% 66.7% 50.0% 54.5% 58.3% 40.0% Source: Shared Research based on company data

07/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Sales breakdown Cumulative FY03/17 FY 03/ 18 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Domestic 18,834 39,625 57,811 80,507 18,985 41,136 60,780 84,324 YoY 4.6% 2.6% 2.1% 2.7% 0.8% 3.8% 5.1% 4.7% Bowling 5,095 10,379 15,132 21,669 5,127 10,755 15,841 22,724 YoY 1.0% -2.0% -2.2% -1.9% 0.6% 3.6% 4.7% 4.9% Amusement 8,495 18,071 26,455 35,904 8,481 18,763 27,963 37,701 YoY 8.6% 8.1% 7.0% 7.5% -0.2% 3.8% 5.7% 5.0% Karaoke 1,840 3,860 5,685 7,735 1,720 3,743 5,610 7,709 YoY -1.0% -0.5% -0.7% -0.3% -6.5% -3.0% -1.3% -0.3% SPO-CHA 2,674 5,837 8,381 12,275 2,951 6,414 9,213 13,289 YoY 2.2% -2.9% -1.9% 0.6% 10.4% 9.9% 9.9% 8.3% Other 728 1,476 2,156 2,923 704 1,458 2,152 2,899 YoY 9.8% 3.8% 0.7% 0.0% -3.3% -1.2% -0.2% -0.8% US 1,450 3,040 4,790 7,250 2,390 5,100 7,930 11,560 YoY 76.8% 42.7% 38.8% 40.5% 64.8% 67.8% 65.6% 59.4% Bowling 260 520 810 1,220 390 820 1,260 1,780 YoY 73.3% 33.3% 26.6% 27.1% 50.0% 57.7% 55.6% 45.9% Amusement 910 1,950 3,050 4,620 1,540 3,360 5,180 7,620 YoY 85.7% 45.5% 43.9% 45.3% 69.2% 72.3% 69.8% 64.9% Karaoke and other 270 560 900 1,390 440 910 1,460 2,120 YoY 68.8% 40.0% 34.3% 26.4% 63.0% 62.5% 62.2% 52.5% Quarterly FY03/17 FY03/18 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Domestic 18,834 20,791 18,186 22,696 18,985 22,151 19,644 23,544 YoY 4.6% 0.8% 1.2% 4.3% 0.8% 6.5% 8.0% 3.7% Bowling 5,095 5,284 4,753 6,537 5,127 5,628 5,086 6,883 YoY 1.0% -4.7% -2.6% -1.1% 0.6% 6.5% 7.0% 5.3% Amusement 8,495 9,576 8,384 9,449 8,481 10,282 9,200 9,738 YoY 8.6% 7.6% 4.9% 8.8% -0.2% 7.4% 9.7% 3.1% Karaoke 1,840 2,020 1,825 2,050 1,720 2,023 1,867 2,099 YoY -1.0% 0.0% -1.1% 0.8% -6.5% 0.1% 2.3% 2.4% SPO-CHA 2,674 3,163 2,544 3,894 2,951 3,463 2,799 4,076 YoY 2.2% -6.8% 0.5% 6.5% 10.4% 9.5% 10.0% 4.7% Other 728 748 680 767 704 754 694 747 YoY 9.8% -1.4% -5.4% -2.0% -3.3% 0.8% 2.1% -2.6% US 1,450 1,580 1,750 2,440 2,390 2,710 2,830 3,630 YoY 76.8% 20.6% 32.6% 43.5% 64.8% 71.5% 61.7% 48.8% Bowling 260 260 290 390 390 420 440 520 YoY 73.3% 13.0% 16.0% 25.8% 50.0% 61.5% 51.7% 33.3% Amusement 910 1,030 1,100 1,560 1,540 1,810 1,820 2,440 YoY 85.7% 22.6% 41.0% 48.6% 69.2% 75.7% 65.5% 56.4% Karaoke and other 270 280 340 470 440 470 550 660 YoY 68.8% 21.7% 25.9% 42.4% 63.0% 67.9% 61.8% 40.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Earnings results in Japan Cumulative FY 03/ 17 FY 03/ 18 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Domestic sales 18,834 39,625 57,811 80,507 18,985 41,136 60,780 84,324 YoY -0.2% 2.6% 2.1% 2.7% 0.8% 3.8% 5.1% 4.7% Domestic recurring profit 182 1,983 1,780 5,418 761 3,784 4,737 9,337 YoY - 7.5% -10.5% 5.0% 318.1% 90.8% 166.1% 72.3% Quarterly FY 03/ 17 FY 03/ 18 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 Domestic sales 18,834 20,791 18,186 22,696 18,985 22,151 19,644 23,544 YoY -0.2% 5.2% 1.2% 4.3% 0.8% 6.5% 8.0% 3.7% Domestic recurring profit 182 1,801 -203 3,638 761 3,023 953 4,600 YoY - -9.0% - 14.7% 318.1% 67.9% - 26.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

08/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Earnings results in the US Cumulative FY03/17 FY 03/ 18 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 US sales 1,450 3,040 4,800 7,250 2,390 5,100 7,940 11,570 YoY 76.8% 42.7% 39.1% 40.5% 64.8% 67.8% 65.4% 59.6% US recurring profit -10 80 70 440 120 290 240 930 YoY - - - 83.3% - 262.5% 242.9% 111.4% Quarterly FY 03/ 17 FY 03/ 18 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4 US sales 1,450 1,590 1,760 2,450 2,390 2,710 2,840 3,630 YoY 76.8% 21.4% 33.3% 43.3% 64.8% 70.4% 61.4% 48.2% US recurring profit -10 90 -10 370 120 170 -50 690 YoY - 50.0% - 37.0% - 88.9% - 86.5% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Average hourly wage for part-time workers in three major metropolitan areas (Tokyo, Tokai, and Kansai) FY03/17 FY03/18 (JPY) Q1Q2Q3Q4Q1Q2Q3Q4 Average hourly wage 983 987 1,001 998 1,007 1,012 1,025 1,019 YoY 1.9% 1.9% 2.0% 2.0% 2.4% 2.5% 2.4% 2.2% Source: Shared Research based on data provided by Recruit Jobs Co., Ltd. *The average hourly wage is based on data for a three-month period.

Full-year FY03/18 results

Earnings overview

▷ Sales: JPY95.9bn (+9.3% YoY) ▷ Operating profit: JPY10.5bn (+57.7%) ▷ Recurring profit: JPY10.3bn (+75.3%) ▷ Net income*: JPY8.4bn (+207.5%)

*Net income is net income attributable to parent company shareholders.

Round One posted higher sales and profits on a strong performance from domestic comparable stores.

In Japan, the company conducted a JPY1,000 cash back campaign and endeavored to maintain their repeat customers as well as cultivate a wide range of customers including future fan base. In the US, Round One implemented unique initiatives such as selling beer at USD1.99 and ice-cream at USD0.99 to differentiate themselves from the competition.

Factors that raised/lowered recurring profit In Japan, sales were JPY84.3bn (+4.7% YoY) and recurring profit was JPY9.3bn (+72.3%). In the US, sales were JPY11.6bn (+59.6%) and recurring profit was JPY930mn (+86.5%).

In Japan, sales rose because comparable store sales rose 5.3% YoY due to an increase in the number of customers and higher customer spend, with the overall number of stores rising to 108 stores (an increase of one store YoY).

With respect to customers, both families and the young people (age 18 to age 35) who comprise the company’s principal demographic both increased in number. The company increased the family demographic by running a campaign providing free entry to one elementary or junior high-school student per accompanying adult. Also, with respect to the youthful demographic, Shared Research thinks that the increase in the average hourly wage for young part-time workers contributed to the increase in the number of young customers because this means that young people had more disposable income. According to the company, the typhoon in October 2017 and other such weather-related factors also contributed to the increase in the number of customers.

Customer spend increased as Round One raised package prices for some of its bowling, karaoke and SPO-CHA offerings in May 2017 (a 4–9% increase). According to the company, these price revisions boosted overall sales by roughly 2–3% YoY.

09/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

In the US, sales rose because of a YoY increase in the number of stores (opened six additional stores for a total of 21 stores) due to store openings. Comparable store sales also rose by 5.6% YoY. As well as increased sales, the changes to accounting procedures described below contributed to increased profit.

Factors behind YoY earnings changes (recurring profit)

Domestic business Positive factors Negative factors Sales increase JPY3.8bn Increase in Amusement segment sales promotion JPY1.0bn costs (more prizes in the Amusement segment) Decrease in bowling promotion expenses JPY360mn Increase in labor costs (increased work hours, JPY490mn increased hourly wages) Decline in water, electricity, and heating expenses (price JPY310mn reduction at Kansai Electric Power) Lower communications costs (due to a decline in sales JPY320mn for game machines with communication function in the Amusement segment) Decline in forex-related losses JPY370mn Other JPY280mn

US business Positive factor Negative factor Sales increase JPY4.3bn Cost increase JPY3.8bn Source: Shared Research based on company data

Results versus forecasts Recurring profit for FY03/18 exceeded the company’s forecast announced by the company in February 2018 by JPY930mn. In Japan, factors contributing to increased profit exceeded forecasts due to higher sales and lower leasing expenses, supplies expenses, and other costs. However, Amusement segment sales promotion costs and labor costs were higher than forecasts. In the US, sales were below forecasts, but factors contributing to increased profit exceeded forecasts due to decreased expenses from changes to accounting practices, decreases to Amusement segment promotion costs, and decreases to labor costs.

Following the expansion of operations in the US, the company altered its accounting to adopt US standards regarding amusement machine amortization periods, rent during construction periods, and a redemption point reserve, which was a positive factor contributing JPY180mn more than the forecasts to profit.

◤ The company changed the amortization period for amusement machines from three years, the standard amortization period for all machines in Japan, to seven years, the US standard. This was positive factor contributing JPY850mn to profit.

◤ The company decided to record rent proportionately over the period of the contract, including the construction period, rather than continue recording rent during construction periods as a cash-flow expense. This was a negative factor reducing profit by JPY330mn.

◤ The company had not previously established a reserve when granting redemption points, and doing so was a negative factor reducing profit by JPY340mn.

Redemption points are tickets granted to amusement game players according to the results of their game. Players gather tickets and exchange them for prizes (such as stuffed toys).

Domestic business Positive factors Negative factors Increase in domestic sales JPY330mn Increase in Amusement segment sales promotion JPY270mn costs (increase in prize expenses) Decrease in leasing expenses JPY320mn Increase in labor costs (increased work hours, JPY110mn increased hourly wages)

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Decrease in supplies expenses JPY110mn Decline in water, electricity, and heating expenses JPY110mn Decrease in depreciation (excluding leases) JPY90mn Other JPY120mn

US business Positive factors Negative factors Changes to accounting methods JPY180mn Sales falling below forecasts JPY220mn Decrease in Amusement segment sales promotion costs JPY110mn (decrease in prize expenses) Decrease in labor costs JPY80mn Other JPY80mn Source: Shared Research based on company data

Round One opened six stores in the US (21 stores total as of the end-March 2018) and one store in Japan (108 stores total as of the end-March 2018).

The breakdown of sales by service is as follows.

Bowling: +7.0% YoY (in Japan, +4.8% YoY company-wide and +6.2% for existing stores) Sales increased YoY. The number of customers increased as a result of an ongoing JPY1,000 cash back campaign, and the expansion of the target of free entry of one schoolchild per accompanying adult to include children up to junior high-school. Also, the company raised prices (a 3–4% increase in May 2017).

Amusement: +11.9% YoY (+5.0% YoY company-wide, +5.0% YoY for existing stores) The company introduced new games with prizes such as UFO Catcher Triple and Trypod, and offered prizes such as character goods of popular movies. Further, new campaigns offering free entry for elementary and junior high-school students at medal game corners also yielded results and increased sales YoY.

Karaoke: +5.8% YoY (-0.3% YoY company-wide, +1.6% YoY for existing stores) Sales increased YoY as a result of initiatives to increase customers, such as installing 65-inch monitors in all stores, changing the food and drink menu as well as having select stores selling alcoholic beverages such as beer for JPY100 per drink as part of the Toast at Round One! campaign.

SPO-CHA: +8.1% YoY (+8.3% YoY company-wide, +8.1% YoY for existing stores) Sales increased YoY as a result of installation of air trampolines and self-balancing scooters, at all stores with such equipment.

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

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Full-year FY03/19 company forecasts

FY03/18 FY03/19 (JPYmn) 1H Act. 2H Act. FY Act. 1H Est. 2H Est. FY Est. Sales 46,261 49,649 95,910 48,940 52,460 101,400 YoY 8.4% 10.1% 9.3% 5.8% 5.7% 5.7% Cost of sales 40,846 42,202 83,067 Gross profit 5,395 7,447 12,842 YoY 43.1% 44.2% 43.7% GPM 11.7% 15.0% 13.4% SG&A expenses 1,125 1,179 2,304 SG&A ratio 2.4% 2.4% 2.4% Operating profit 4,269 6,268 10,537 5,000 6,550 11,550 YoY 58.5% 57.2% 57.7% 17.1% 4.5% 9.6% OPM 9.2% 12.6% 11.0% 10.2% 12.5% 11.4% Recurring profit 4,074 6,193 10,267 4,730 6,270 11,000 YoY 97.5% 63.2% 75.3% 16.1% 1.2% 7.1% RPM 8.8% 12.5% 10.7% 9.7% 12.0% 10.8% Net income 2,456 5,955 8,411 3,000 3,320 6,320 YoY 154.0% 236.8% 207.5% 22.1% -44.2% -24.9% Net margin 5.3% 12.0% 8.8% 6.1% 6.3% 6.2% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Segment forecasts FY 03/ 18 A c t . FY 03/ 19 Es t . (JPYmn) Cons. Japan US Cons. Japan US Net increase in store count 7 1 6 9 -2 11 Total store count 129 108 21 138 106 32 Total store operational months 1,496 1,290 206 1,575 1,270 305 Sales 95,910 84,330 11,570 101,400 84,600 16,800 YoY 9.3% 4.7% 59.6% 5.7% 0.3% 45.2% Bowling 24,520 22,720 1,790 24,900 22,500 2,400 YoY 7.0% 4.8% 46.7% 1.5% -1.0% 34.1% Amusement 45,340 37,700 7,640 49,670 38,230 11,440 YoY 11.9% 5.0% 65.4% 9.6% 1.4% 49.7% Karaoke 9,840 7,700 2,130 10,610 7,660 2,950 YoY 7.8% -0.4% 53.2% 7.8% -0.5% 38.5% SPO-CHA 13,280 13,280 - 13,350 13,350 - YoY 8.2% 8.2% - 0.5% 0.5% - Other 2,900 2,900 - 2,860 2,860 - YoY -0.7% -0.7% - -1.4% -1.4% - Operating profit 10,530 9,490 1,040 11,550 9,630 1,850 YoY 57.6% 53.6% 112.2% 9.7% 1.5% 77.9% Recurring profit 10,260 9,330 930 11,000 9,420 1,580 YoY 75.1% 72.5% 111.4% 7.2% 1.0% 69.9% RPM 10.7% 11.1% 8.0% 10.8% 11.1% 9.4% Net income 8,410 7,510 890 6,320 5,470 850 YoY 207.5% 163.5% - -24.9% -27.2% -4.5% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

For full-year FY03/19, the company forecasts sales of JPY101.4bn (+5.7% YoY), operating profit JPY11.6bn (+9.6%), recurring profit JPY11.0bn (+7.1%), and net income attributable to parent company shareholders JPY6.3bn (-24.9%). The company plans to maintain results on a par with FY03/18 in Japan, and increase sales and profits by opening new stores in the US.

In Japan For full-year FY03/19, the company forecasts sales of JPY84.6bn (+0.3% YoY), operating profit of JPY9.6bn (+1.5%), recurring profit of JPY9.4bn (+1.0%), and net income attributable to parent company shareholders of JPY5.5bn (-27.2%).

The company plans to open one new store, ending FY03/19 with a total of 106 stores and 1,270 total store-operation months (-1.6% YoY). Despite total store-operation months decreasing due to the closure of non-profitable stores, the company expects sales at existing stores to increase 0.2% YoY.

Regarding comparable store sales, the company expects customer spend to remain at similar levels to the previous period due to the effect of price revisions (unit price increases of 4–9%) implemented in May 2017 for some of its bowling, karaoke, and SPO-CHA offerings. In addition to continuing its campaign providing free entry to elementary and junior high-school students,

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the company also plans to implement measures to increase customer numbers, including holding bowling classes and introducing new amusement machines.

The company expects operating profit to increase by JPY140mn due to increased sales results and a review of lease fees following renewal of lease contracts*, despite Amusement segment sales promotion expenses (prizes) and supplies expenses increasing due to the operation of catcher machines, introduced in July 2017.

*For company facilities, leasing contract renewals, except for bowling, are signed every three years, and the lease fees from the fourth year onward decrease as initial investments run out. For bowling, leasing contracts last six to seven years, after which lease fees decrease.

The company expects recurring profit to increase by JPY90mn YoY, owing to the increase of operating profit.

The company expects net income attributable to parent company shareholders to decrease by JPY2.0bn YoY. The company foresees a decrease because of increases to corporate tax, despite increases to recurring profit.

The US For full-year FY03/19, the company forecasts sales of JPY16.8bn (+45.2% YoY), operating profit of JPY1.9bn (+77.9%), recurring profit of JPY1.6bn (+69.9%), and net income attributable to parent company shareholders of JPY850mn (-4.5%).

The company plans to open 11 new stores, ending FY03/19 with a total of 32 stores, and 305 total store-operation months (+48.1% YoY). The company expects sales and profit to increase due to increased total store-operation months. The company expects comparable store sales to decrease 0.4% YoY. For stores opened in FY03/18, the company expects sales to decline at existing stores that have been open for over a year, in contrast to strong sales during the opening period. The falling off of the effect of recording a redemption point reserve, implemented in FY03/18, will be a factor contributing to increased profit.

Redemption points are tickets granted to amusement game players according to the results of their game. Players gather tickets and exchange them for prizes (such as stuffed toys).

Although not incorporated into company forecasts, Shared Research considers there to be room for an increase of comparable store sales due to the measure of discounting beer and ice cream to increase customer numbers, and raising amusement game prices to increase customer spend.

As a measure to increase customer numbers, the company implemented a price reduction for beer and ice cream at all stores in North America in December 2017, and it says it will continue this measure in FY03/19. The company is selling beer at a price of USD1.99, equating to one third of restaurant prices, and ice cream at USD0.99. The company plans to maintain GPM by increasing the price of other food and drink menu items in line with these discounts. According to the company, when beer and ice cream discounts were introduced initially at certain stores, the effect was an increase in sales of 13–14%.

As a measure to increase customer spend at existing stores, in April 2018 the company raised amusement game prices (Amusement segment sales accounted for 68.1% of sales in North America in FY03/18) by 7%. According to the company, it has brought prices, which had been low in comparison to competitors, into line with the levels of competitors.

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Results vs. historical company estimates Results vs. Initial Est. FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales (Initial Est.) 79,800 85,000 91,000 86,000 88,000 90,000 86,000 85,500 85,000 87,100 92,200 Sales (Results) 77,993 77,983 82,113 84,303 89,568 85,903 84,272 83,905 83,516 87,776 95,910 Results vs. Initial Est. -2.3% -8.3% -9.8% -2.0% 1.8% -4.6% -2.0% -1.9% -1.7%0.8%4.0% Operating profit (Initial Est.) 20,300 19,000 16,500 14,000 12,500 14,100 11,600 10,000 6,890 6,060 7,170 Operating profit (Results) 18,287 13,611 12,031 11,416 16,036 11,565 10,088 6,641 6,367 6,681 10,537 Results vs. Initial Est. -9.9% -28.4% -27.1% -18.5% 28.3% -18.0% -13.0% -33.6% -7.6% 10.2% 47.0% Recurring profit (Initial Est.) 18,100 16,700 13,000 9,000 80,000 10,000 8,400 9,000 6,150 5,500 6,700 Recurring profit (Results) 15,986 9,798 7,848 6,929 11,481 8,217 7,818 6,150 5,402 5,858 10,267 Results vs. Initial Est. -11.7% -41.3% -39.6% -23.0% -85.6% -17.8% -6.9% -31.7% -12.2% 6.5% 53.2% Net income (Initial Est.) 10,500 9,600 6,300 2,500 3,300 1,000 -7,500 5,000 1,200 1,500 3,600 Net income (Results) 9,152 3,977 3,396 -12,673 2,781 601 -19,681 -4,568 449 2,735 8,411 Results vs. Initial Est. -12.8% -58.6% -46.1% - -15.7% -39.9% - - -62.6% 82.3% 133.6% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Long-term strategy

Round One has not released a medium-term management plan. In the medium to long term, the company aims for growth by focusing on store openings in the US market. Among other measures that impact earnings in the medium term, the company intends to develop and introduce new bowling machinery, and promote automation and systemization to reduce total working hours.

Store openings centered on the US With regard to the domestic market, it plans to press on with closing unprofitable stores and opening new ones as the market continues to shrink owing to a decline in the bowling participation rate caused by a decline in the population and diversified entertainment choices. Through these measures, the company hopes to sustain its current profit level as the elimination of counterproductive intra-company competition leads to higher profitability.

The company is leveraging the lesson it learned from its US stores and is carefully vetting options with an eye to higher profitability. The company opened the first US store in August 2010, and it improved the effectiveness of store openings and operations as it accumulated experience operating stores at amusement complex centers in North America. Starting in FY03/17, the company has been gradually increasing the number of new store openings guided by this accumulated operation expertise. Round One opened six stores in FY03/17 and six stores in FY03/18, and plans to open 11 stores in FY03/19 and over 10 stores each year thereafter. The company expects to establish a structure for 100 stores in the US at an early point.

Round One aims to attain the same level of recurring profit there as it does domestically, and its target is to double the consolidated recurring profit through these measures. Further, with the number of stores expanding, the company believes it is possible to ask game machinery manufacturers to develop customized game machineries.

In the long term, Round One will work to achieve sustained growth by concentrating on the top 300 shopping malls (out of a total of about 900 in the US) in each strategic area for new store opening. In terms of investment, the company’s basic policy is to conduct business within the limit of its operational cash flow. Financially, it plans to maintain its current level.

The company, when opening a new store in the US, leases amusement equipment worth JPY210mn and amortizes this investment over seven years. As a result, the company’s OPM usually increases from the eighth year as this expense disappears, comparing with first seven years.

US stores: the present and the future

Stores currently in operation as of end-March 2018 Opening Name (location) Description Floor s pac e Performance (tsubo) (sqm) 1 August 2010 Puente Hills (Los Angeles, California) Standard; roadside; in a large shopping mall 1,686 5,600 Strong 2 September 2012 Moreno Valley (Riverside, California) Standard; roadside; in a large shopping mall 1,249 4,100 Average 3 August 2013 Lakewood (Lakewood, California) Standard; roadside; in a large shopping mall 1,223 4,000 Strong 4 October 2014 Stratford Square (Chicago, Illinois) Standard; roadside; in a large shopping mall 1,121 3,700 Weak 5 December 2014 Arlington Parks (Arlington, Texas) Standard; roadside; in a large shopping mall 1,824 6,000 Average 6 May 2015 Main Place (Santa Ana, California) Standard; roadside; in a large shopping mall 1,143 3,800 Strong 7 July 2015 Southcenter (Seattle, Washington) Standard; roadside; in a large shopping mall 1,171 3,900 Average 8 September 2015 Eastridge (San Jose, California) Standard; roadside; in a large shopping mall 1,463 4,800 Strong 9 December 2015 Silver City (Taunton, Massachusetts) Standard; roadside; in a large shopping mall 1,818 6,000 Average 10 May 2016 Grapevine Mills (Dallas, Texas) Standard; roadside; in a large shopping mall 2,285 7,600 Strong 11 August 2016 Sun Valley (Concord, California) Standard; roadside; in a large shopping mall 1,329 4,400 Strong 12 December 2016 Exton (Exton, Pennsylvania) Standard; roadside; in a large shopping mall 1,673 5,500 Weak 13 January 2017 Southwest (Littleton, Colorado) Standard; roadside; in a large shopping mall 1,857 6,100 Average 14 March 2017 Stonecrest (Lithonia, Georgia) Standard; roadside; in a large shopping mall 1,420 4,700 Weak 15 March 2017 Fox Valley Mall (Aurora, Illinois) Standard; roadside; in a large shopping mall 1,453 4,800 Weak 16 July 2017 Broadway Mall (Hicksville, New York) Standard; roadside; in a large shopping mall 1,422 4,700 Strong 17 September 2017 Galleria at Crystal Run (Middletown, New York) Standard; roadside; in a large shopping mall 1,295 4,300 Average 18 October 2017 Great Lakes Crossing (Auburn Hill, Michigan) Standard; roadside; in a large shopping mall 1,454 4,800 Strong 19 November 2017 Northwoods Mall (Peoria, Illinois) Standard; roadside; in a large shopping mall 1,653 5,500 Average 20 January 2018 Four Seasons Town Centre (Greensboro, North Carolina) Standard; roadside; in a large shopping mall 1,734 5,700 Strong 21 March 2018 Great Lakes Mall (Mentor, Ohio) Standard; roadside; in a large shopping mall 1,433 4,700 Strong Source: Shared Research based on company data

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Capital expenditure and business performance

Category High-performing stores Average stores Low-performing stores

Initial investment amount USD7.2mn (approx. JPY780mn)

Annual Total sales USD7.4mn USD6.0mn USD3.8mn account (approx. JPY810mn) (approx. JPY650mn) (approx. JPY410mn) Operating profit USD1.1mn USD0.3mn -USD1.0mn (first year) (approx. JPY120mn) (approx. JPY30mn) (approx. -JPY110mn)

Operating profit USD2.0mn USD1.2mn -USD0.1mn (2–7 years) (approx. JPY220mn) (approx. JPY130mn) (approx. -JPY10mn)

Operating profit USD2.2mn USD1.4mn USD0.0mn (8th year onward) (approx. JPY240mn) (approx. JPY150mn) (approx. JPY0mn)

OPM 27.0% 20.0% -2.6% (2–7 years) Source: Shared Research based on company data Note: USD/JPY109 Note: First year operating profit includes store opening costs, with the exception of those of head office.

Summary of store opening policy:

Candidate Directly managed store openings using existing facilities in large-scale shopping malls across the US (approximately 900 locations: shopping malls in the US are possible locations)

Floor area 42,000–64,000sqft (approx. 3,900–6,000sqm)

Population of 150,000 persons in a 5-mile radius, 400,000 persons in a 10-mile radius surrounding area

Target audience Shopping mall visitors (At night, younger customers such as college students), assuming a 50/50 split between males and females

Average spend per USD14（JPY1,540） customer

Sales composition Amusement, 66%; Bowling, 16%; Food, 14%; karaoke (excluding food and drink) 1%; Other, 3%

Standard capex USD7.2mn (approx. JPY780mn, composed of: interior remodeling, JPY280mn; fixtures and fittings, JPY140mn; amusement machinery, JPY210mn; bowling machinery, JPY80mn; other related expenses, JPY0mn)

Characteristics of Depreciated over seven years. From the eighth year onward, lease fees decrease and profit amounts (profit margins) leasing expenses increase. Source: Shared Research based on company data Note: USD/JPY109

Develop and introduce Round One Live (provisional name) According to the company, no new products have been launched in the past 30 years in the bowling industry. This factor has been behind the decline in the bowling population and the shrinking market. Round One is developing its own new machinery, and plans to introduce this machinery at all stores from December 2018 to June 2019. The new machinery includes monitors that are installed in the bowling bench area—this setup allows users to bowl by lining up alongside players in other regions using connections between stores. These and other new features could make bowling more attractive. The company expects investment to total JPY7.0bn, of which JPY4.0bn will occur in FY03/19.

Promote automation and systemization to reduce total working hours As a countermeasure for wage increase in Japan, the company is contemplating systems investment from FY03/19, with the aim of reducing total working hours (roughly 100,000 hours per store) by roughly 10% in the medium-term. In FY03/19 the company plans to introduce automated reception machines and tablets for staff to go with the new bowling machines. As well as eliminating the need for reception staff by installing automated reception machines, introducing tablets for staff will make it easier to grasp the use of facilities by customers, the state of machines, and operational changes.

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Business

Summary

Core business: operation of amusement complex centers

Round One specializes in running amusement complex centers in Japan and North America. As of March 2018, it operated 129 stores (108 stores in Japan, and 21 stores in North America). The amusement services include bowling as well as game, karaoke, and SPO-CHA (short for “Sports Challenge”). As the company provides a wide range of services, understanding profit and loss at each service level is difficult. As all services are provided in the same location and for the same customers, it is hard to appropriately allocate direct costs and overhead to each category.

Bowling has high marginal profitability Marginal profitability appears to be the highest in bowling, followed by SPO-CHA. For bowling, the marginal profitability is suggested to be over 90% while gaming is relatively lower due to variable costs associated with prizes in redemption type machines etc. Karaoke has a high exposure to variable costs; this service includes foods and beverage sales. SPO-CHA has a marginal profitability structure similar to bowling.

US Moreno Valley Mall Branch Okinawa Ginowan Branch

Source: Shared Research based on company data

Business description

The company’s amusement centers are divided into “standard” and “stadium.” Bowling, Amusement (games), and Karaoke are the three main revenue pillars at standard facilities, while SPO-CHA is the key feature for the stadium format.

Returning to the standard format from the stadium format Stadium added SPO-CHA to become the newer format. However, this format requires a large land area. Consequently, excluding certain stores (Sennichimae store), most stadium format stores are standalone. The company’s recent store opening strategy has been limited to tenancies within existing malls and commercial complexes. For this reason, when space sufficient for the stadium format cannot be leased, the company opts for the standard format.

Bowling (25.6％ of sales in FY03/18) Revenues are mainly derived from fees for bowling rounds, bowling shoe rentals, and vending machines sales (such as drinks and snacks). Within the company’s overall sales mix, although Bowling accounts for less than the Amusement of 47.3% (FY03/18), Bowling is the company’s core business and all stores include a bowling alley. Nearly all of Japan’s existing bowling alleys opened during Japan’s bowling boom from the mid-1960s to the mid-1970s, and have continued to operate in their original style. Round One’s facilities were newly opened long after the boom period and feature a range of innovations, such as moonlight strike games (game rooms illuminated with black lights), which help boost bowling’s leisure appeal and differentiate the facilities from those of competitors. From FY03/09 onward, Round One has grown faster than the market, but it suffered in FY03/13 as competitors drove down prices. Growth was also sluggish in FY03/15, owing to the prolonged effect of the consumption tax hike in April 2014, and poor weather over the year-end holiday season—normally a time of peak demand. The adverse effect of the consumption tax hike lingered on. However, it seemed to be finally bottoming out in FY03/17.

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Bowling business performance (JPYmn) FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 Market growth YoY -8.3% -6.8% -3.7% -6.7% -1.3% -9.2% -5.4% -7.3% -4.6% -2.0% Bowling sales 28,334 30,787 31,000 32,400 29,700 27,200 24,520 23,030 22,910 24,520 YoY 0.5% 8.7% 0.7% 4.5% -8.3% -8.4% -9.9% -6.1% -0.5% 7.0% % of cons. sales 36.3% 37.5% 36.8% 36.2% 34.6% 32.3% 29.2% 27.6% 26.1% 25.6% Domestic ------2 2,060 21,680 22,720 YoY ------1.7%4.8% US ------9 60 1,220 1,790 YoY ------27.1%46.7% Source: Shared Research based on company data and Statistics of Production by Specialized Service Industry by the Ministry of Economy, Trade and Industry Note: Figures may differ from company materials due to differences in rounding methods. Note: Market data on a calendar year basis.

Source: Company data

Amusement (47.3% of sales in FY03/18) This category mainly comprises revenue from medal games, prize games, virtual games, video games, and purikura (photo sticker booth) machines. Amusement accounts for the largest share of the company’s sales mix. While many of the major game arcade operators in Japan are affiliated with particular game manufacturers (Sega, Namco, Taito, etc.), the company is the largest independent game arcade operator in the country. That means the company is able to use its own judgment in choosing the best games for its arcades from a diverse range of machines. As the scale of the company’s operations has expanded, its purchasing power has increased, putting it in a strong bargaining position vis-à-vis arcade game vendors and giving it access to many of the latest game machines.

Amusement business performance (JPYmn) FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY 03/ 17 FY 03/ 18 Market growth YoY -12.2% -13.4% -7.6% -2.1% -1.3% -3.7% -4.3% -4.5% - - Amusement sales 32,218 33,405 35,224 36,400 34,500 34,900 36,520 36,580 40,530 45,340 YoY -3.0% 3.7% 5.4% 3.3% -5.2% 1.2% 4.6% 0.2% 10.8% 11.9% % of cons. sales 41.3% 40.7% 41.8% 40.6% 40.2% 41.4% 43.5% 43.8% 46.2% 47.3% Domestic ------3 3,390 35,900 37,700 YoY ------7.5%5.0% US ------3 ,180 4,620 7,640 YoY ------45.3%65.4% Source: Shared Research based on company data, Japan Productivity Center (JPC) Note: Figures may differ from company materials due to differences in rounding methods. Note: Market data on a calendar year basis.

Source: Company data

Karaoke (10.3% of sales in FY03/18) Sales are mainly derived from karaoke room rental fees, and food and beverage services for karaoke customers. In the Karaoke business it is difficult to achieve differentiation apart from store location. However, the company has attempted to differentiate itself from competitors via inter-store networks and ranking systems, karaoke rooms with mini-stages, and rooms equipped with massage chairs.

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Karaoke business performance (JPYmn) FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 Market growth YoY -1.3% -8.6% -1.6% 1.6% 1.6% 1.2% 0.6% 0.4% -1.9% - Karaoke sales 5,686 6,037 6,715 8,200 8,300 8,400 8,640 8,660 9,130 9,840 YoY 4.4% 6.2% 11.2% 22.1% 1.2% 1.2% 2.9% 0.2% 5.4% 7.8% % of cons. sales 7.3% 7.4% 8.0% 9.2% 9.7% 10.0% 10.3% 10.4% 10.4% 10.3% Domestic ------7 ,750 7,730 7,700 YoY ------0.3%-0.4% US ------9 00 1,390 2,130 YoY ------54.4%53.2% Source: Shared Research based on company data and the All-Japan Karaoke Industrialist Association’s Karaoke White Paper Note: Figures may differ from company materials due to differences in rounding methods. Note: Market data on a calendar year basis.

Source: Company data

SPO-CHA (13.8% of sales in FY03/18) Sales mainly comprise admission tickets for SPO-CHA (“Sports Challenge”) and food and beverages consumed by SPO-CHA customers. SPO-CHA is only available at the company’s stadium format stores, which are larger than its standard store format. Nearly all stadium stores are standalone. Usually, the roof area and floor directly below are dedicated to SPO-CHA, which includes futsal, bubble soccer, three-on-three basketball, segway, batting practice, roller skating, and trampolining. Once customers enter the area, all these services (with the exception of some food services) are available at no additional cost within the time period specified by the ticket, distinguishing it from its competitors. Furthermore, Kid’s SPO-CHA targets families with children and includes play items such as slides, ball pools, and a children's only karaoke area.

SPO-CHA business performance (JPYmn) FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 SPO-CHA sales 9,278 8,963 8,748 9,400 10,300 10,900 11,500 12,190 12,270 13,280 YoY 0.9% -3.4% -2.4% 7.5% 9.6% 5.8% 5.5% 6.0% 0.7% 8.2% % of total sales 11.9% 10.9% 10.4% 10.5% 12.0% 12.9% 13.7% 14.6% 14.0% 13.8% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

SPO-CHA facilities

Source: Company data

Other (3.0% of sales in FY03/18) Sales mainly comprise rental income from tenants (food service operators, etc.) as well as revenue from such services as pool tables, dart boards and table tennis at standard stores.

Other business performance (JPYmn) FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 Other sales 2,466 2,918 2,613 3,000 2,900 2,700 2,700 3,040 2,920 2,900 YoY 26.3% 18.3% -10.5% 14.8% -3.3% -6.9% 0.0% 12.6% -3.9% -0.7% % of total sales 3.2% 3.6% 3.1% 3.3% 3.4% 3.2% 3.2% 3.6% 3.3% 3.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Development of new centers

As of end March 2018, the company had 129 amusement complex centers (standard stores: 61; stadiums: 47; US: 21). The company’s store-opening policy in Japan is to close unprofitable stores and to open one store a year based on careful location selection criteria. In North America the company’s policy is to open 10 stores per year while selecting more profitable projects and leveraging the lessons it has learned from existing stores. the company’s oldest store was opened in FY03/95. Through FY03/05 to FY03/08 Round One focused on stadium centers that include SPO-CHA. However, in FY03/09 the pace of stadium center openings slowed to an average of one per year. Implementing a decision to open a new center requires between six months and two years. Over the past few years, the company has maintained a policy of only opening new stores as a tenant. From FY03/06 to FY03/10, the company opened over 10 new stores annually, but since FY03/11, store openings have been around 1 to 10 per year (Domestic: 1 to 3; US:1 to 6).

Store count FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY 03/ 18

Store count (year end) 94 105 109 110 113 114 118 122 122 129 Openings 131141414587 Closures 2000100180 Owned 61696963582129282424 Rented 33 36 40 47 55 93 84 94 98 105 Japan 94 105 108 109 111 111 113 113 107 108 Standard 52 62 65 66 66 66 67 67 60 61 (Roadside) 45 55 57 58 57 57 58 57 50 51 (City center)7788999101010 Stadium 42434343454546464747 (Roadside) 42 43 43 43 44 44 45 45 46 46 (City center)- - - -111111 US - -1123591521 Source: Shared Research based on company data

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Cost structure analysis

According to the company, its marginal profit ratio is roughly 70–80%.

Round One’s business model is such that fixed costs per center have a tendency to decline in the medium or long term. The company’s typical model shows that the annual leasing expense through the first year to the third year is JPY203mn versus JPY123mn in the fourth year to the sixth year and JPY94mn in the seventh year and onward (see table below). When assuming constant sales levels, the leasing expenses equate to 16.9%, 10.3%, and 7.8% of sales, respectively, throughout the three periods. When other conditions remain unchanged, OPMs are expected to improve as leasing expenses decline.

Leasing costs by length of operation

(JPYmn) First 3 Years 4th to 6th 7th and Later Sales 1,200 1,200 1,200 Bowling 360 360 360 Amusement 340 340 340 Karaoke 60 60 60 SPO-CHA 440 440 440 Lease fees 203 123 94 Bowling 36 36 4 Amusement 150 77 79 Karaoke 17 10 11 SPO-CHA 77 18 19 Lease fees, % of sales 16.9% 10.3% 7.8% Bowling 10.0% 10.0% 1.1% Amusement 44.1% 22.6% 23.2% Karaoke 28.3% 16.7% 18.3% SPO-CHA 17.5% 4.1% 4.3% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Leasing costs are declining because of the gradual effects from initial investments. Leasing contract renewals, except for bowling, are signed every three years, and the costs of the fourth year decrease as initial investments aren’t required to renew a lease. For bowling, leasing costs remain stable for the first six to seven years, after which costs will decrease.

Bowling has the lowest leasing costs compared with other facilities, and it has the lowest variable costs (meaning high marginal profits), making it a key earnings pillar for the company. After the seventh year bowling leasing costs come down to 1.1%, with higher profit margins expected. Bowling requires almost no additional investments when renewing leasing contracts, unlike other categories, and therefore the rate of declines in leasing costs are large.

This analysis assumes constant sales; in reality comparable store sales significantly affect margins. Fluctuations in SPO-CHA sales mean leasing costs may account for a larger share of sales. But these numbers serve as a reference when analyzing Round One’s other services.

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Ages of centers

The number of centers in their first to third year continued increasing through FY03/09, but since the substantial slowdown of new store openings from FY03/11, centers four years or older are becoming more numerous, lowering overall costs.

Store breakdown by age

140 7 years+ 4-6 years 1-3 years

120

100

38 44 55 80 69 100 35 80 93 103 99 60 32 20 37 40 39 35 9 20 39 35 28 6 28 16 9 16 17 20 9 9 10 0 6 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18

Source: Shared Research based on company data

Group companies

The group is comprised of the parent and its five consolidated subsidiaries. With the exception of Round One Entertainment Inc., the remaining four subsidiaries are silent partnerships (Tokumei Kumiai) under the special-purpose company (SPC) scheme, established with the sole purpose of developing and renting stores for the parent.

In the past, the company had a consolidated subsidiary that issued point cards, but as it did not meet expectations, the business was liquidated in FY03/02 and from the following year the company excluded this subsidiary from its scope of consolidation. Meanwhile, in 2002 the company followed the suggestion of a leasing company and started to use SPCs. Under the prevailing accounting rules, development-type SPCs were off balance sheets and therefore did not require consolidated reporting. From FY03/07 the company began including all its SPC-related assets and liabilities in the scope of consolidation.

As a result, consolidated subsidiaries include silent partnerships. In addition, from FY03/11, US subsidiary Round One Entertainment Inc. has become included in consolidated results.

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Strengths and weaknesses

Strengths:

◤ Unique business model: Combining bowling, Amusement (game arcades), Karaoke, and SPO-CHA (not in all centers) into one large amusement center proves to be a unique business model. When these are further combined with such offerings as pool tables and dart boards, synergies increase to attract customers. Synergies also smooth out revenues as fluctuations in individual services have less effect on the overall business. While core markets gradually shrink and competitors withdraw, Round One reaps benefits of being the country’s sole nationwide operator of amusement complexes. In the past, large game machine manufacturers and developers have attempted similar operations, but these generally ended in failure due to lack of operational expertise and the need for a large level of capex.

◤ Strong brand name: “Round One” is well recognized by consumers nationwide due to advertising on the major TV networks.

◤ Strong cash-flow generating ability: Although the high earnings growth seen in the past has steadied to less-spectacular rates, it will be important for the company to maintain comparable store sales since the company’s ability to generate free cash flow will weaken if comparable store earnings stagnate.

Weaknesses:

◤ Compared with retailers, new store openings carry high risks: While many retailers can close their stores relatively easily, the company’s large-scale centers are unique and closures carry the risk of incurring major asset write-offs. However, from FY03/11, the company prioritized the leasing of vacant space in existing buildings. For example, the Fuchu Hommachi-ekimae store opened in FY03/11 in a building formerly occupied by a large supermarket operator. The company proved it was possible to hold down capex while sustaining growth. This also suggests that there may be room to reduce store-opening-related risks by using existing buildings.

◤ Shrinking market: Having a high presence in its market, it is harder for the company to find new venues of profitable growth, especially when only looking at its domestic operations. The company entered the North American market in 2010 as it looked to develop new markets that could sustain long term growth. Although overseas store openings carry country risk and face regulatory hurdles (e.g. medal games), it has been generating a positive recurring profit since FY03/16 in North America, demonstrating a certain level of success.

◤ Slower-than-expected industry shakeout: As Japan continues to see bowling and amusement markets shrink, the number of industry players is on a downward trend. Because of these players generating steady operating cash flows, the pace of market shrinkage is slow. If industry shakeout accelerates, the company can benefit from being a survivor.

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Market and value chain

Market overview

4000 bowling centers when the market was at its peak; presently 900 centers Bowling gained wide popularity in Japan in the 1960s when it was first imported. In those days, many companies with suitable idle land aggressively built bowling alleys for customers, who often lined up for hours to bowl. After peaking at around 4,000, the number of centers declined to about 900 as of June 2011. Japanese people now have access to a wide variety of entertainment options, leading to a smaller portion of disposable income for bowling.

Competition with other amusement or entertainment influences bowling demand The market for Round One’s services is no longer in a secular growth stage. It goes through other cycles more related to product innovation and emergence of competing entertainment options rather than responding to normal economic cycles. For instance, when automatic scoring was introduced in bowling alleys in Japan, it fueled a temporary boom. On the other hand, when mobile phone content started rapidly gaining acceptance among young people, handsets took away a portion of their disposable incomes and negatively impacted other amusement alternatives, including bowling. The impact tends to wear off after an initial surge, creating a “hindsight cycle.” Generally speaking, such cycles are short-lived, so Round One’s markets (bowling, games) seem to have a slow contraction trend arguably driven by changing demographics.

Market size and participating population for bowling, karaoke, and arcade games (JPYbn) 2001 2007 2008 2009 2010 2011 2012 2013 Bowling Market size 115.0 101.0 91.0 83.0 82.0 76.0 75.0 72.0 YoY -1.0% -9.9% -8.8% -1.2% -7.3% -1.3% -4.0% Number of participants (mn) 34.4 25.1 23.5 22.1 17.8 16.9 14.5 12.2 YoY 0.0% -6.4% -6.0% -19.5% -5.1% -14.2% -15.9% Karaoke Market size 451.0 427.0 421.0 385.0 379.0 385.2 391.2 396.0 YoY -2.1% -1.4% -8.6% -1.6% 1.6% 1.6% 1.2% Number of participants (mn) 51.5 43.1 44.3 50.0 46.8 39.1 36.5 33.6 YoY 0.5% 2.8% 12.9% -6.4% -16.5% -6.6% -7.9% Arcade games Market size 546.0 678.0 595.0 515.0 476.0 466.0 460.0 443.0 YoY 3.0% -12.2% -13.4% -7.6% -2.1% -1.3% -3.7% Number of participants (mn) 21.6 22.0 22.7 29.0 30.0 19.1 18.6 15.4 YoY -2.7% 3.2% 27.8% 3.4% -36.3% -2.6% -17.2% Source: Shared Research based on Japan Productivity Center (JPC) data

Round One has 30% of the domestic bowling market (by value) With 108 centers nationwide at end-FY03/18 (107 centers at end-FY03/17), the company’s domestic sales for bowling was JPY22.7bn (+4.9% YoY). Round One has approximately 30% of the market (by value). While its market share based on the number of bowling centers is only about 10%, it has a very high lane utilization rate compared with its peers. The company entered the market late, in the early 1980s, at the end of an era of such commercially successful entries. The company not only opened bowling alleys but also introduced a completely new model (under the Round One brand), combining bowling with games, karaoke, and other amusement options. The market size is about JPY60–70bn as of 2018 with approximately 10 centers closing each year, and expectations for continued contraction of the market. However, Round One has the potential to improve sales by increasing its share as smaller competitors exit the market.

Shrinking arcade games market The market for arcade games is saturated, due to relatively low entry barriers and over-expansion of market supply in the past. The total market size is just under JPY400bn, down from a peak of over JPY700bn. The contraction of the market has motivated some incumbents to reconsider participation, and some larger national operators are selling assets to smaller regional firms. The overcapacity has caused ripple effects through the value chain as game manufacturers reacted by limiting game title production. Smaller arcade operators are slow to replace machines due to financing challenges, and manufacturers respond by making fewer games, which in turn limits choices for larger arcade operators.

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US market The company plans to open more US stores. According to FY03/14 company materials, the US bowling market had the following characteristics (market size and other data were company estimates based on the Japan Productivity Center’s White Paper of Leisure 2014):

Overview

◤ Market size: USD7.0bn (approximately 9.7 times the size of the Japanese market, which is about JPY72.0bn)

◤ Number of centers: 5,350 centers (Private sector: about 4,800 centers; Others such as Military/Association-operated: about 550 centers)

◤ Bowling population: about 71mn people (people bowling at least once a year; 12.2mn people for Japan)

Other market features

◤ The two largest operators (Brunswick Corp. and AMF Bowling, Inc.) have approximately 400 stores with second-tier players having around 50 stores. Most of the other operators are family-owned businesses.

◤ Recession-resistant: the market has displayed continued stable growth over the past few years.

◤ Older bowling alleys have been closed down over the years and about 20–50 of these stores per year are then renovated into other facilities (such as go-kart tracks, video game arcades, and mini golf courses).

◤ Participation rates for bowling are very high compared to other leisure activities (such as golf, fishing, tennis, billiards, cycling, roller skating, ice skating and marathon running).

◤ Bowling alleys are viewed as social venues with increasing users with above-average incomes.

Customers

Customer breakdown by generations with the company is as follows: people in their teens and twenties collectively account for 50% of the total. The family segment with adults in their 40s accounts for about 30%. Other generations account for the remaining 20%. The population in Japan is unlikely to grow in the future, and the proportion of young people to the total population is likely to decline. Given this trend, the key customer base (younger people) should suffer proportionally larger declines than the overall Japanese population, and this could lead to future decreases in customers. However, current young customers (if they habitually come to amusement centers) could potentially become repeat customers even in their thirties and forties.

Suppliers

Round One sources equipment for its facilities, otherwise there are no major items to procure. All equipment is leased, not purchased. Suppliers of game machines include Sega Sammy Holdings Inc. (TSE1: 6460), Namco Bandai Holdings Inc. (TSE1: 7832), Taito Corporation, a subsidiary of Square Enix Holdings Co., Ltd. (TSE1: 9684), and Konami Corp. (TSE1: 9766). Excluding Konami, most game suppliers also operate their own arcade game chains, also making them competitors of the company. For these manufacturers, Round One is a major customer.

Barriers to entry

A mature market with limited growth potential makes a profitable entry less possible and therefore less attractive. Both the existence of a national Round One franchise and its expertise in managing this franchise create high barriers to entry for mid- and small-sized competitors. Additionally, several billion yen is required to invest in facilities, which is a significant barrier to entry. Some game manufacturers abandoned their attempts to enter the bowling market after they found that their expertise (arcade games) was not transferable to bowling.

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Competitors

There are no direct competitors that run national chains. Neighborhood operators of bowling centers, game arcades, and karaoke centers are all competitors to varying degrees. Sport Co., Ltd. (previously a subsidiary of Koshidaka Holdings Co., Ltd. (JASDAQ: 2157), sold in 2012 to Venus Fund Co., Ltd.) is considered a distant second runner in the industry, operating 14 plain-vanilla bowling centers as of May 2018. The second-largest operator in terms of store numbers is Next Co., Ltd. (formerly Tokori Global Co., Ltd.), which had around 40 centers under the T.T BOWL brand (as of March 2014). However, this operator filed for bankruptcy protection in March 2014 due to excessive price cutting and overextending itself in store openings.

No company has succeeded in replicating the national scale and highly standardized model that Round One has accomplished. In the words of management, “there is no Round 2” in the market using the same business model.

Arcade game operators such as Sega Sammy Holdings, Namco Bandai Holdings, and Taito are competitors, but none of them operate amusement complexes on a nationwide basis. Smaller players like Adores Inc. (Jasdaq 4712) and subsidiary of GEO Holdings Corp (TSE1:2681) Warehouse Co., Ltd., can also be cited as competitors, but they are not deeply involved in bowling operations and have a much smaller scale, so direct comparisons are not useful.

Substitutes

Essentially, Round One’s services provide customers with amusement and/or entertainment, and thus any other equivalents could be substitutes. However, the mainstay bowling has distinguished characteristics that make it popular—the rules are simple, skill is not required for enjoyment, and it is relatively inexpensive. Given these factors, it is unlikely that the market for bowling will quickly decline. The diversification of amusement and/or entertainment will most likely continue to progress, but bowling should survive as one of the key categories even in the long term.

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Historical financial statements

Summary

Q3 FY03/18 results

Earnings overview

▷ Sales: JPY68.7bn (+9.8% YoY) ▷ Operating profit: JPY5.3bn (+104.0%) ▷ Recurring profit: JPY5.0bn (+169.0%) ▷ Net income*: JPY3.0bn (+422.2%) *Net income is net income attributable to parent company shareholders.

Round One posted higher sales and profits on a strong performance from domestic comparable stores.

The group held collaborative events featuring popular band Golden Bomber, distributed original goods, and introduced its latest games and other new items. It also strived to win visitors by expanding the target of campaigns offering free entry of one schoolchild per accompanying adult to include children up to junior high-school and also expanded the target of the campaign to medal games at the Amusement segment, in addition to Bowling and Karaoke segments.

Factors that raised/lowered recurring profit In Japan, sales were JPY60.8bn (+5.1% YoY) and recurring profit was JPY4.7bn (+165.7%). In the US, sales were JPY7.9bn (+65.4%) and recurring profit was JPY290mn (+242.9%).

In Japan, sales rose because comparable store sales rose 6.3% YoY due to an increase in the number of customers and higher customer spend, even though the overall number of stores fell to 108 stores (a decrease of one store YoY).

With respect to customers, both families and the young people (age 18 to age 35) who comprise the company’s principal demographic both increased in number. The company increased the family demographic by running a campaign providing free entry to one elementary or junior high-school student per accompanying adult. Also, with respect to the youthful demographic, Shared Research thinks that the increase in the average hourly wage for young part-time workers contributed to the increase in the number of young customers because this means that young people had more disposable income. According to the company, the typhoon in October 2017 and other such weather-related factors also contributed to the increase in the number of customers.

Customer spend increased as Round One raised package prices for some of its bowling, karaoke and SPO-CHA offerings in May 2017 (a 4–9% increase). According to the company, these price revisions boosted overall sales by roughly 2–3% YoY.

In the US, sales rose because of a YoY increase in the number of stores (opened six additional stores for a total of 19 stores) due to store openings. Comparable store sales also rose by 8.2% in 1H FY03/18 (April–September) and by 0.3% in Q3 FY03/18.

Recurring loss in Q3 (October–December) in the US was JPY50mn (recurring loss of JPY10mn in Q3 FY03/17). Many locations were in their first year after opening, and the burden of upfront costs incurred in the opening of new stores contributed to this loss. The stores in the US in their first years after opening have low profit margins due to the expense of opening a business. Their profit structures allow for an increase in profit margins starting from the fourth year, when the costs of leasing amusement machines are reduced. According to the company, for stores in the US, average sales are JPY650mn, with a first year operating profit of about JPY20mn, second and third year operating profits of about JPY60mn, and operating profits after the fourth year of about JPY110mn. Of the 20 stores operating in Q3 FY03/18, nine were in their first year after opening. According to the company, the Q3 loss was part of the growth process and a temporary one, and there are no concerns about growth in the US in the medium-to-long term.

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Factors behind YoY earnings changes (recurring profit)

Domestic business Positive factors Negative factors Sales increase JPY3.0bn Increase in sales promotion costs (more prizes in the JPY590mn Amusement segment) Decline in forex-related losses (non-operating expense) JPY370mn Increase in labor costs (increased work hours, JPY380mn increased hourly wages) Lower communications costs (due to a decline in sales JPY280mn for game machines with communication function in the Amusement segment) Decline in water, electricity, and heating expenses (due JPY180mn to store closures in FY03/17) Other JPY130mn

US business Positive factor Negative factor Sales increase JPY3.1bn Cost increase JPY3.0bn Source: Shared Research based on company data

Results versus forecasts Recurring profit for Q3 FY03/18 exceeded the company’s forecast announced by the company in November 2017 by JPY1.7bn. Domestic sales were higher, while leasing expenses, supplies expenses, and other costs were lower than the forecasts. However, sales promotion costs, labor costs, and the costs associated with store openings in the US were higher than plan.

Versus forecasts

Domestic business Positive factors Negative factors Increase in domestic sales JPY1.7bn Increase in sales promotion costs (due to sales JPY400mn increase in the Amusement segment) Decrease in leasing expenses JPY130mn Increase in labor costs (increased work hours, JPY90mn increased hourly wages) Decrease in supplies expenses JPY120mn Decline in communications expenses JPY50mn Decline in water, electricity, and heating expenses JPY30mn Other JPY130mn

US business Positive factors Negative factors Increase in overseas sales JPY250mn Increase in open costs JPY60mn Unexpected booking of fixed asset tax JPY30mn Increased in giveaways expenses JPY30mn Other JPY80mn Source: Shared Research based on company data

The breakdown of sales by service is as follows.

Bowling: +7.2% YoY (in Japan, +4.7% YoY company-wide and +7.2% for existing stores) Sales increased YoY. The number of customers increased as a result of an ongoing JPY1,000 cash back campaign, and the expansion of the target of free entry of one schoolchild per accompanying adult to include children up to junior high-school. Also, the company raised prices (a 3–4% increase in May 2017).

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Amusement: +12.3% YoY (+5.7% YoY company-wide, +6.0% YoY for existing stores) Campaigns offering free entry for elementary and junior high-school students at medal game corners, which heretofore had been limited to bowling, led to a higher number of customers, resulting in YoY sales increase. The introduction of new games with prizes, and the use of prizes featuring characters from popular movies also contributed.

Karaoke: +5.3% YoY (-1.3% YoY company-wide, +1.7% YoY for existing stores) Sales increased YoY as a result of changing the food and drink menus and new campaigns offering free entry for elementary and junior high-school students, which had been limited to bowling in the past.

SPO-CHA: +9.8% YoY (+5.1% YoY company-wide, +6.3% YoY for existing stores) Sales increased YoY as the company installed popular air trampolines at all stores with SPO-CHA facilities.

1H FY03/18 results

Earnings overview

▷ Sales: JPY46.2bn (+8.4% YoY) ▷ Operating profit: JPY4.3bn (+58.5%) ▷ Recurring profit: JPY4.1bn (+97.5%) ▷ Net income*: JPY2.5bn (+154.0%) *Net income is net income attributable to parent company shareholders.

Round One posted higher sales and profits on a strong performance from domestic comparable stores.

The company worked to cultivate customers by holding collaborative events featuring popular band Golden Bomber, distributing original goods, continuing campaigns offering free entry of one schoolchild per accompanying adult, and actively introducing latest games and other new items.

Factors that raised/lowered recurring profit In Japan, sales were JPY41.1bn (+3.8% YoY) and recurring profit was JPY3.8bn (+90.9% YoY). In the US, sales were JPY5.1bn (+67.8% YoY) and recurring profit was JPY290mn (+262.5% YoY).

In Japan, sales rose because comparable store sales rose 5.5% YoY even though the overall number of stores fell to 108 stores (a decrease of one store YoY). The company ran a campaign providing free entry to one schoolchild per accompanying adult and offered a JPY1,000 cash-back discount. Shared Research is of the opinion that the company benefitted from an increase in the average hourly wage for part-time workers because this means that those between 18 and 35—the company’s primary customers—had more disposable income. Round One raised package prices for some of its bowling, karaoke and SPO-CHA offerings (increase 4-9% of spend per person). According to the company, these price revisions boosted sales by roughly 2% YoY. In the US, sales rose because of a YoY increase in the number of stores (opened six additional stores for a total of 17 stores) due to store openings. Comparable store sales also rose 8.2%.

Factors behind YoY earnings changes (recurring profit)

Domestic business Positive factors Negative factors Sales increase JPY1.5bn Increase in sales promotion costs (more prizes in the JPY300mn Amusement segment) Decline in forex-related losses (non-operating expense) JPY410mn Increase in labor costs (increased work hours, increased JPY280mn hourly wages) Lower communications costs (due to a decline in sales for JPY240mn Increase in advertising spending (more television JPY130mn game machines with communication function in the commercials)

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Amusement segment) Lower rent payments (due to store closures in FY03/17) JPY180mn Decline in water, electricity, and heating expenses (due to JPY140mn store closures in FY03/17) Other JPY40mn

US business Positive factor Negative factor Sales increase JPY2.1bn Cost increase JPY1.9bn Source: Shared Research based on company data

Results versus forecasts Recurring profit for 1H FY03/18 exceeded the company’s forecast by JPY970mn. Domestic sales were higher, while telecommunications, water, electricity, and heating costs were lower than the company’s forecasts. However, labor costs, advertisement and promotion expenses, repair costs, and the costs associated with store openings in the US turned out to be higher than plan.

Versus forecasts

Domestic business Positive factors Negative factors Increase in domestic sales JPY1.5bn Increase in labor costs (increased work hours, increased JPY350mn hourly wages) Decline in communications expenses (due to a decline in JPY200mn Increase in sales promotion costs (due to sales increase JPY190mn sales for game machines with communication function in the in the Amusement segment) Amusement segment) Decline in water, electricity, heating (due to store closures in JPY90mn Increase in repair costs JPY170mn FY03/17) Other JPY90mn

US business Positive factors Negative factors Increase in overseas sales JPY150mn Increase in labor costs JPY90mn Expenses carried forward due to opening of two stores JPY50mn Unplanned booking of fixed asset tax JPY30mn Source: Shared Research based on company data

The breakdown of sales by service is as follows.

Bowling: +6.2% YoY (in Japan, +3.6% YoY company-wide and +7.4% for existing stores) Sales increased YoY after the number of customers increased as a result of a JPY1,000 cash back campaign, ongoing campaign from last year that allowed free entry to one schoolchild per accompanying adult, and price revisions (the company raised prices by 3-4% in May 2017).

Amusement: +10.5% YoY (+3.8% YoY company-wide, +4.2% YoY for existing stores) As a result of updating popular game machines, and incorporating character goods of popular movies in the crane games, sales increased YoY. While the popularity of KanColle Arcade (introduced in April 2016) drove sales in Q1 FY03/17, its impact faded in Q2 FY03/18.

Karaoke: +3.5% YoY (-3.0% YoY company-wide, +1.3% YoY for existing stores) As a result of upgrading the screen size to a 65-inch monitor in all stores and running the JPY1,000 cash back campaign, sales increased YoY.

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SPO-CHA: +9.9% YoY (+9.9% YoY company-wide, +9.4% YoY for existing stores) As a result of introducing popular items that created a buzz, such as the self-balancing scooters, and EZ Roll, roller skates for children that makes it difficult to fall, sales increased YoY.

Q1 FY03/18 results

Earnings overview

▷ Sales: JPY21.4bn (+5.4% YoY) ▷ Operating profit: JPY975mn (+54.3%) ▷ Recurring profit: JPY881mn (+412.2%) ▷ Net income*: JPY355mn (net loss of JPY100mn in Q1 FY03/17) *Net income is net income attributable to parent company shareholders.

The company strived to cultivate customers by holding campaigns such as the free entry of one schoolchild per accompanying adult, and a JPY1,000 cash back discount, as well as installing the latest games and introducing new items.

Factors that raised/lowered recurring profit In Japan, sales were JPY19.0bn (+0.9% YoY) and recurring profit was JPY760mn (+347.1% YoY). In the US, sales were JPY2.4bn (+64.8% YoY) and recurring profit was JPY120mn (compared with a loss of JPY10mn in Q1 FY03/17).

In Japan, sales rose because comparable store sales rose 2.8% YoY even though the overall number of stores fell. The company ran a campaign providing free entry to one schoolchild per accompanying adult and offered a JPY1,000 cash-back discount. Moreover, Shared Research is of the opinion that the company benefitted from an increase in the average hourly wage for part-time workers because this means that those between 18 and 35—the company’s primary customers—had more disposable income. In the US, sales rose because of a YoY increase in the number of stores. Comparable store sales also rose 6.6%.

Profits rose in Japan because, in addition to a sales increase, a reduction in forex-related losses, rent payments, and water, electricity and heating costs offset some of the factors that otherwise would have pushed down overall profits. These negative factors included an increase in advertising spending, sales promotion costs, and labor expenses. In the US, an increase in expenses related to store openings was absorbed by an increase in sales. Profits rose as a result.

Factors behind YoY earnings changes (recurring profit)

Domestic business Positive factors Negative factors Sales increase JPY150mn Increase in advertising spending (more television JPY130mn commercials) Decline in forex-related losses (non-operating JPY360mn Increase in sales promotion costs (more prizes in JPY100mn expense) the Amusement segment) Lower rent payments (due to store closures in JPY140mn Increase in labor costs (increased work hours, JPY90mn FY03/17) increased hourly wages) Decline in water, electricity, and heating expenses JPY120mn (due to store closures in FY03/17) Lower communications costs (due to a decline in JPY110mn sales for game machines with communication function in the Amusement segment) Other JPY10mn

US business Positive factor Negative factor Sales increase JPY930mn Cost increase 790mn Source: Shared Research based on company data

31/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Results versus forecasts Recurring profit for Q1 FY03/18 missed the company’s forecast by JPY20mn. Domestic sales were higher, while water, electricity, heating, and telecommunications costs were lower, than the company’s forecasts. However, labor costs, repair costs, and the costs associated with store openings in the US turned out to be higher than forecast.

Domestic business Positive factors Negative factors Increase in domestic sales JPY70mn Increase in labor costs (increased work hours, JPY160mn increased hourly wages) Decline in water, electricity, heating (due to store JPY100mn Increase in repair costs JPY70mn closures in FY03/17) Decline in communications expenses (due to a JPY90mn Other JPY60mn decline in sales for game machines with communication function in the Amusement segment)

US business Positive factors Negative factors Increase in overseas sales JPY150mn Sales shortfall JPY10mn Additional expenses carried forward JPY20mn Increase in labor costs JPY60mn Source: Shared Research based on company data

The breakdown of sales by service is as follows.

Bowling: +3.2% YoY (in Japan, +0.6% YoY company-wide and +4.9% for existing stores) Sales increased YoY after the number of customers increased as a result of a JPY1,000 cash back campaign, ongoing campaign from last year that allowed free entry to one schoolchild per accompanying adult, and price revisions (the company raised prices by 3-4% in May 2017).

Amusement: +6.6% YoY (-0.2% YoY company-wide, +0.6% YoY for existing stores) As a result of updating popular game machines, and incorporating character goods of popular movies in the crane games, sales increased YoY. The popularity of KanColle Arcade (introduced in April 2016) contributed to sales in Q1 03/17. In Q1 03/18, KanColle Arcade declined in popularity, but UFO Catcher Triple (released by Sega) drove the segment’s earnings.

Karaoke: +0.4% YoY (-6.5% YoY company-wide, -2.0% YoY for existing stores) As a result of upgrading the screen size to a 65-inch monitor in all stores and running the JPY1,000 cash back campaign, sales increased YoY.

SPO-CHA: +10.4% YoY (+10.4% YoY company-wide, +9.4% YoY for existing stores) As a result of introducing popular items that created a buzz, such as the self-balancing scooters, and EZ Roll, roller skates for children that makes it difficult to fall, sales increased YoY.

FY03/17 results

Earnings overview

▷ Sales: JPY87.8bn (+5.1% YoY) ▷ Operating profit: JPY6.7bn (+4.9%) ▷ Recurring profit: JPY5.9bn (+8.4%) ▷ Net income*: JPY2.7bn (+509.1%) *Net income is net income attributable to parent company shareholders.

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Net income attributable to parent company shareholders significantly increased due to an increase in recurring profit as well as decreases in extraordinary losses (mainly impairment losses) and corporate taxes.

In the SPO-CHA and the Amusement segments, Round One sought to increase sales by introducing new items that create a buzz and new game machines, such as Ninebot by Segway, while striving to cultivate a wide range of customers, including a future fan base—this included measures such as holding a variety of bowling tournaments and opening and sponsoring bowling classes, and a campaign that allowed free entry to one schoolchild per accompanying adult.

Store performance In order to expand its operating base, the company accelerated openings in the US, opening six branches: one in the Grapevine Mills Mall (Texas) in May 2016, one in the Sun Valley Shopping Center (California) in August 2016, one in the Exton Square Mall (Pennsylvania) in December 2016, one in the Southwest Plaza Mall (Colorado) in January 2017, and one in The Mall At Stonecrest (Georgia) and one in the Fox Valley Mall (Illinois) in March 2017. It also opened domestic stores in Ario Kashiwa (Kashiwa city, Chiba) in April 2016 and Lalaport Shonan Hiratsuka (Hiratsuka city, Kanagawa) in October 2016. It closed eight stores because of expired leases and efforts to avoid cannibalization.

At the end of March 2017, there were a total of 107 stores nationwide, of which 105 were existing stores (as of end-FY03/16, there were a total of 113 stores throughout Japan with 112 existing stores). Round One closed a total of eight stores because of contract expirations and efforts to avoid cannibalization. According to the company, the closure of stores to avoid cannibalization will be limited to FY03/17 only. Existing stores in Japan increased 1.9% YoY due in part to a rise in entertainment costs caused by an increase in the hourly rate for part-time workers.

At the end of March 2017, there were a total of 15 stores in the US, of which nine were existing stores (as of end-FY03/16, there were a total of nine stores in the US with five existing stores). While maintaining the number of stores in Japan at the current level of a little more than 100, the company plans to continue its strategy of increasing the number of stores in North America for the next several years. In North America, existing stores increased 2.6% YoY.

Factors affecting recurring profit By region, domestic sales were JPY80.5bn (+2.8% YoY), operating profit was JPY6.2bn (+1.6% YoY), and recurring profit was JPY5.4bn (+5.0% YoY). US sales were JPY7.3bn (+40.5% YoY), operating profit was JPY490mn (+81.5% YoY), and recurring profit was JPY440mn (+83.3% YoY).

With regard to profits, domestic operations generated higher profits as the impact from higher sales and a reduction in utility expenses offset factors that negatively impacted profits. The main negative factors included increases in personnel expenses, leasing fees, sales promotion expenses, telecommunications costs, and procurement costs. US operations generated higher profits as the cost of new store openings was absorbed by the rise in sales.

Factors behind YoY earnings changes (recurring profit)

Domestic business Positive factors Negative factors Increase in sales JPY2.2bn Increase in personnel expenses (increased working JPY620mn hours, higher hourly wage) Reduction in utility expenses (declined after fuel JPY590mn Increase in leasing fees (introduction of new JPY440mn cost adjustments) amusement machinery) Increase in sales promotion expenses (increases in JPY370mn bowling goods and sales of card games) Telecommunication costs (in line with sales JPY280mn increase in the Amusement segment) Increase in procurement costs (improved selection JPY240mn of food and drinks; purchase from specialty stores) Increase in supplies expenses (purchased LED) JPY210mn

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Increase in repair expenses (replaced carpet) JPY170mn Other JPY170mn

US business Positive factor Negative factor Increase in sales JPY2.1bn Increase in expenses JPY1.9bn Source: Shared Research based on company data

The breakdown of sales by service is as follows.

Bowling: -0.5% YoY (in Japan, -1.8% YoY company-wide and -0.8% for existing stores) The company ran a campaign that allowed free entry to one schoolchild per accompanying adult, continued to hold “Bowling for Health,” a program organized by an industry association, and held an amateur bowling competition, Strikers, in which players competed not for scores, but for the number of strikes. It focused on acquiring a broad bowling fan base but segment sales were down YoY.

Amusement: +10.8% YoY (+7.5% YoY company-wide, +5.5% YoY for existing stores) As a result of working to acquire new customers by introducing new game machines and large medal game machines for core users, and updating popular titles, sales increased YoY.

Karaoke: +3.3% YoY (-0.3% YoY company-wide, +0.6% YoY for existing stores) The company ran a campaign that allowed free entry to one schoolchild per accompanying adult, and offered its karaoke rooms and goods for collaboration campaigns featuring popular music groups. This, in addition to the impact from “Dual monitor rooms,” where customers enjoy karaoke surrounded by large video images projected on the walls, and rooms for viewing DVDs and Blu-ray disc titles, caused sales to increase YoY. . SPO-CHA: +0.8% YoY (+0.6% YoY company-wide, -2.5% YoY for existing stores) The company introduced Ninebot by Segway at all stores. Further, it aggressively rolled out new items that created a buzz, such as self-balancing scooters, resulting in higher sales YoY.

FY03/16 results

▷ Sales: JPY83.5bn (-0.5% YoY) ▷ Operating profit: JPY6.4bn (-4.1%) ▷ Recurring profit: JPY5.4bn (-12.2%) ▷ Net income: JPY449mn (net loss of JPY4.6bn in FY03/15) *Net income is net income attributable to parent company shareholders.

In order to secure medium-to-long-term sources of revenue, the company focused on actively implementing policies to attract bowling customers, such as holding a variety of bowling tournaments and both opening and sponsoring a bowling class. It also bumped up prices to increase spend per customer, and worked to secure visitors by implementing a new project, Competitions for Everyone (Japanese: Minna no Konpe) offered prizes from sponsors, and installing state-of-the-art karaoke machines. However, sales at existing domestic stores remained sluggish.

In an effort to expand its operating base, the company also accelerated plans to start up operations in the US. It opened four branches in the US in 2015: one in the Santa Ana Main Place Mall (California) in May, one in Seattle Southcenter Mall (Washington) in July, one in San Jose Eastridge Shopping Center (California) in September, and one in Taunton Silver City (Massachusetts) in December. It also opened a domestic store in Sapporo Susukino (Chuo-ku, Sapporo) in December 2015.

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Looking at sales by service, while SPO-CHA saw revenue growth, bowling, amusement, and karaoke logged lower revenues. Although the company implemented cost reduction measures through rationalization, etc., lower revenues dragged profits down to negative territory.

Full-year FY03/16 results (YoY) (JPYbn) Plus Minus Domestic business Decrease in lease expenses 1.88 Decrease in sales 3.57 Decrease in advertising expenses (cuts to TV commercials) 0.86 Increase in rental expenses 0.75 Decrease in sales promotion expenses 0.48 Foreign exchange loss 0.33

Decrease in D&A 0.47 Taxes (change in external tax rates) 0.15

Other 0.01

US business New stores, increase in sales, etc. 0.37

Total 4.06 4.81 Source: Shared Research based on company data

Sales reached 99.8% of the company’s full-year forecast, operating profit 109.8%, recurring profit 105.9%, and net income 149.7%. Profits overshot forecasts despite the domestic sales decline and a foreign exchange loss, thanks to lower-than-expected leasing costs caused by the delay in installing new game machines. Operations in the US—a focus area—also surpassed expectations.

Full-year FY03/16 results (vs. forecasts) (JPYbn) Plus Minus Domestic business Decrease in lease expenses 0.65 Decrease in sales 0.35 Decrease in utility expenses 0.24 Foreign exchange loss 0.26 Increase in stocking of food, beverages, Decrease in communication (game machine communication) expenses 0.2 0.16 and proshops Increase in amusement promotional costs 0.09 (marketing giveaways) Other 0.07 US business New stores, increase in sales, etc. 0.14

Total 1.23 0.93 Source: Shared Research based on company data

The breakdown of sales by service, excluding US subsidiaries, is as follows (figures in parentheses are based on sales by existing stores).

Bowling: -6.1% YoY (-9.4% YoY) In FY03/16, Round One worked to attract bowling customers by holding a variety of bowling tournaments, such as the Round One Cup and the Bowling World Open, and both opening and sponsoring ‘Teaching Bowling for Health’, a bowling class (offered by an industry organization). It also focused on securing core customers by offering special services for My Bowler members (members of the Round 1 Bowlers Club). Despite this, sales declined YoY.

Amusement: +0.2% YoY (-7.2% YoY) In FY03/16, the company held game tournaments at set periods throughout the year as a networking event for stores, aiming to attract gaming customers as well as to secure core customers. It also worked to attract customers by introducing new machines, such as large token-operated game machines, and updating popular games.

Karaoke: +0.2% YoY (-7.4% YoY) The company introduced its latest karaoke machines, LIVE DAM STADIUM and JOYSOUND MAX, at all its stores. In addition, it installed Dual Monitor Rooms at all its stores, which casts a large screen on the wall to provide customers with a sense of immersion. It also added “DVD and Blu-Ray viewing room”, which allows customers using the Dual Monitor Rooms to bring in and use media that they own.

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SPO-CHA: +6.0% YoY (+5.0% YoY) The company reviewed and changed its pricing structure, and began to offer an early-morning weekday package to encourage use by students and families.

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Income statement

Income statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales 77,983 82,113 84,303 89,568 85,903 84,272 83,905 83,516 87,776 95,910 YoY 0.0% 5.3% 2.7% 6.2% -4.1% -1.9% -0.4% -0.5% 5.1% 9.3% Cost of sales 62,622 68,302 71,030 71,779 72,575 72,549 75,509 75,090 78,840 83,067 Gross profit 15,361 13,810 13,273 17,789 13,328 11,723 8,395 8,426 8,935 12,842 GPM 19.7% 16.8% 15.7% 19.9% 15.5% 13.9% 10.0% 10.1% 10.2% 13.4% SG&A expenses 1,750 1,779 1,856 1,753 1,762 1,634 1,754 2,058 2,253 2,304 SG&A-to-sales ratio 2.2% 2.2% 2.2% 2.0% 2.1% 1.9% 2.1% 2.5% 2.6% 2.4% Operating profit 13,611 12,031 11,416 16,036 11,565 10,088 6,641 6,367 6,681 10,537 YoY -25.6% -11.6% -5.1% 40.5% -27.9% -12.8% -34.2% -4.1% 4.9% 57.7% OPM 17.5% 14.7% 13.5% 17.9% 13.5% 12.0% 7.9% 7.6% 7.6% 11.0% Non-operating income 222 357 511 296 388 315 745 281 234 270 Non-operating expenses 4,036 4,540 4,999 4,850 3,736 2,585 1,236 1,246 1,058 540 Recurring profit 9,798 7,848 6,929 11,481 8,217 7,818 6,150 5,402 5,858 10,267 YoY -38.7% -19.9% -11.7% 65.7% -28.4% -4.9% -21.3% -12.2% 8.4% 75.3% RPM 12.6% 9.6% 8.2% 12.8% 9.6% 9.3% 7.3% 6.5% 6.7% 10.7% Extraordinary gains 5 40 0 373 434 2,515 204 - 124 - Extraordinary losses 2,758 1,822 27,280 5,710 7,387 34,059 5,230 3,508 2,396 1,098 Pre-tax profit 7,045 6,065 -20,351 6,144 1,264 -23,725 1,125 1,894 3,586 9,168 Income taxes 3,068 2,668 -7,677 3,362 663 -4,044 5,693 1,444 850 757 Net income 3,977 3,396 -12,673 2,781 601 -19,681 -4,568 449 2,735 8,411 YoY -56.5% -14.6% - - -78.4% - - - 509.1% 207.5% Net margin 5.1% 4.1% - 3.1% 0.7% - - 0.5% 3.1% 8.8% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Balance sheet

Balance sheet FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash and deposits 21,525 30,815 22,773 29,487 25,324 25,172 27,777 23,199 20,197 23,439 Accounts receivable 292 361 414 557 605 648 671 647 744 932 Inventories 1,058 1,141 1,347 1,422 1,185 1,121 1,228 1,576 1,598 1,863 Other 6,166 6,846 12,637 3,764 4,143 4,099 2,416 2,295 2,893 2,692 Current assets 29,043 39,163 37,171 35,230 31,257 31,040 32,092 27,717 25,432 28,926 Tangible fixed assets 178,133 202,298 202,599 179,317 160,065 72,919 61,773 60,417 61,016 62,358 Intangible fixed assets 133 169 231 209 177 143 101 167 179 213 Investment securities, others 8,749 9,609 12,104 13,479 14,717 23,033 17,621 16,232 15,082 15,399 Fixed assets 187,015 212,076 214,934 193,005 174,960 96,097 79,496 76,817 76,279 77,972 Total assets 216,059 251,240 252,106 228,236 206,217 127,138 111,588 104,535 101,712 106,898 Accounts payable 137 156 189 211 196 257 337 477 676 960 Short-term debt 21,799 25,569 36,289 19,621 31,147 8,789 8,440 7,212 5,596 6,305 Other 17,548 13,516 15,007 15,857 16,003 15,460 15,409 13,401 15,460 17,526 Current liabilities 39,484 39,241 51,485 35,689 47,346 24,506 24,186 21,090 21,732 24,791 Long-term debt 96,121 113,318 99,870 91,293 59,077 28,025 18,652 15,614 10,844 7,408 Other 8,060 13,051 21,722 21,370 21,080 17,074 17,123 18,100 18,262 17,979 Fixed liabilities 104,181 126,369 121,592 112,663 80,157 45,099 35,775 33,714 29,106 25,387 Total liabilities 143,665 165,611 173,078 148,353 127,503 69,606 59,961 54,805 50,839 50,178 Shareholders' equity 72,941 86,177 79,950 80,825 79,519 57,443 50,967 49,508 50,336 56,838 Capital stock 15,324 20,924 25,021 25,021 25,021 25,021 25,021 25,021 25,021 25,021 Capital surplus 15,799 21,399 25,496 25,496 25,496 25,496 25,496 24,543 22,638 22,638 Retained earnings 42,130 44,169 29,749 30,625 29,321 7,249 775 272 3,007 9,513 Treasury stock -313 -315 -317 -318 -319 -323 -326 -328 -330 -334 Valuation and translation adjustments -548 -548 -922 -943 -805 88 659 221 535 -156 Total shareholders' equity 72,393 85,629 79,028 79,882 78,714 57,531 51,626 49,730 50,872 56,683 Net assets 72,393 85,629 79,028 79,882 78,714 57,531 51,626 49,730 50,872 56,720 Total liabilities and net assets 216,059 251,240 252,106 228,236 206,217 127,138 111,588 104,535 101,712 106,898 Working capital 1,213 1,346 1,572 1,768 1,594 1,512 1,562 1,746 1,666 1,835 Total interest-bearing debt 117,920 138,887 136,159 110,914 90,224 36,814 27,092 22,826 16,440 13,713 Net debt 96,395 108,072 113,386 81,427 64,900 11,642 -685 -373 -3,757 -9,726 ROA (RP-based) 5.0% 3.4% 2.8% 4.8% 3.8% 4.7% 5.2% 5.0% 5.7% 9.8% ROE 5.6% 4.3% - 3.5% 0.8% - - 0.9% 5.4% 15.6% Total asset turnover 0.40.30.30.40.40.70.80.80.90.9 Inventory turnover 59.2 59.9 52.7 50.5 61.2 64.7 61.5 47.6 49.3 44.6 Days in inventory 6.2 6.1 6.9 7.2 6.0 5.6 5.9 7.7 7.4 8.2 Quick ratio 55.3% 79.4% 45.0% 84.2% 54.8% 105.4% 117.6% 113.1% 96.4% 98.3% Current ratio 73.6% 99.8% 72.2% 98.7% 66.0% 126.7% 132.7% 131.4% 117.0% 116.7% Equity ratio 33.5% 34.1% 31.3% 35.0% 38.2% 45.3% 46.3% 47.6% 50.0% 53.0% Net debt / Equity 133.2% 126.2% 143.5% 101.9% 82.5% 20.2% -1.3% -0.8% -7.4% -17.2% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Assets The bulk of fixed assets were tangible fixed assets associated with the company's operations of amusement complex centers. Tangible fixed assets are trending downward owing to depreciation and sale-and-leaseback agreements.

Liabilities Interest-bearing debt as of the end-FY03/18 stood at JPY13.7bn, significantly down from the FY03/10 figure of JPY138.9bn. Net interest-bearing debt deducting cash and deposits was JPY108.1bn (JPY139.0bn including guarantee liability) at end-FY03/10. The company reported a net cash position at the end of FY03/17, with cash and deposits at JPY23.4bn, against interest-bearing debt of JPY13.7bn. This meant the company achieved its goal of effectively becoming debt-free one year early.

Shareholders’ equity Shareholders’ equity as of end FY03/17 was JPY56.7bn. While Shareholders’ equity continued to decline from FY03/14 to FY03/16 owing to the booking of losses and dividend payments from surplus funds, it started to increase from FY03/17 due to stronger profits.

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Shareholder returns Round One generally pays a dividend per share of JPY20, and it plans to do the same in FY03/18. It has not disclosed any official target dividend payout ratio, but it plans to continue paying a dividend per share of JPY20 for the time being.

Cash flow statement

Cash flow statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities 13,978 22,175 22,418 32,852 26,418 20,456 22,576 15,955 17,217 24,210 Cash flows from investing activities -25,762 -35,616 -23,563 24,036 4,371 46,611 592 -5,082 -3,527 -7,448 FCF -11,784 -13,441 -1,145 56,888 30,789 67,067 23,168 10,873 13,690 16,762 Cash flows from financing activities 10,625 24,881 -4,551 -45,981 -34,564 -66,200 -20,820 -15,309 -16,964 -13,286 Pre-tax profit (A) 7,045 6,065 -20,351 6,144 1,264 -23,725 1,125 1,894 3,586 9,168 Depreciation (B) 10,243 14,358 18,824 19,702 18,960 15,928 12,956 11,444 11,940 11,843 Working capital changes (C) -137 -134 -226 -196 174 82 -50 -184 80 -169 Income taxes (D) -6,740 -2,603 -2,488 780 -361 -2,361 1,528 -97 -803 -628 Capital expenditures (E) -26,955 -33,787 -6,259 -2,587 -5,241 -3,752 -4,818 -5,636 -5,237 -7,721 Simple FCF (A+B+C+D+E) -16,544 -16,101 -10,500 23,843 14,796 -13,828 10,741 7,421 9,566 12,493 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Cash flows from operating activities The company’s cash flows from operating activities are mostly influenced by pretax profit and depreciation. In other words, changes in working capital have a limited impact. This is due to unique features of the company’s business model, whereby customers largely pay in cash, there are no major procurement items, and the level of inventory is very low.

Cash flows from investing activities Round One has exhibited meaningful outflows in free cash flows from FY03/07 to FY03/10. However, since FY03/12 the company has generated a positive free cash flow thanks to performance improvements, slower store openings, and sale-and-leaseback of existing stores.

Cash flows from financing activities From FY03/11, when it started improving its financial standing through its strategy of store sale-and-leaseback, the company has actively reduced interest-bearing debt, and consequently has negative cash flows from financing activities.

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Other information

History

Sugino Kosan (the predecessor to Round One) was founded in 1980. It was running a roller skating business but the company soon realized that sales were too concentrated on weekends, making the business unattractive. The company was going to close the rink and transform it into a warehouse until current CEO Sugino (at that time still a university student) suggested opening a bowling alley instead. Sugino set out to construct a bowling alley that he, the same age as his target consumer group, would enjoy. His bowling alley proved to be very successful and he proceeded to open similar centers across Japan. He formed Round One (the former one) in March 1993. Later he added other amusement services such as arcade games and karaoke, making Round One stand out from other game centers even today. Dec. 1980 Sugino Kosan, the precursor of Round One, founded to manage a roller skating court in Izumi-Otsu city, Osaka.

Mar. 1993 Round One established by the current President & CEO, Masahiko Sugino.

Aug. 1997 Listed on the Second Section of the Osaka Stock Exchange, ticker 4680.

Dec. 1998 Listed on the Second Section of the Tokyo Stock Exchange.

Sep. 1999 Moved to the First Section of the Tokyo Stock Exchange and Osaka Stock Exchange.

Mar. 2001 Acquired top shareholder (at the time), Wiz Co., Ltd. in absorption-type merger.

Jul. 2004 Opened first combined indoor leisure and SPO-CHA facility in Fushimi, Kyoto.

Sep. 2009 Established Round One Entertainment, Inc. (now a consolidated subsidiary).

Aug. 2010 Opened first overseas store in Los Angeles.

News and topics February 2018 On February 9, 2018, the company announced revisions to its earnings forecast.

Revisions to the FY03/18 full-year earnings forecast

▷ Sales: JPY95.8bn (previous forecast: JPY93.9bn) ▷ Operating profit: JPY9.7bn (JPY8.1bn) ▷ Recurring profit: JPY9.3bn (JPY7.7bn) ▷ Net income*: JPY5.6bn (JPY4.3bn) ▷ EPS: JPY58.73 (JPY44.89) *Net income is net income attributable to parent company shareholders.

Reasons for revisions Cumulative Q3 sales at existing stores were robust. In the revised forecast, the company added the differences between cumulative Q3 results and the previous forecast for cumulative Q3. The initial forecast for Q4 remained unchanged due to uncertainties surrounding future projections.

November 2017 On November 10, 2017, the company announced differences between its 1H forecast and actual results, and revisions to its full-year earnings forecast.

Revisions to the FY03/18 full-year earnings forecast

▷ Sales: JPY93.9bn (previous forecast: JPY92.2bn) ▷ Operating profit: JPY8.1bn (JPY7.2bn)

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▷ Recurring profit: JPY7.7bn (JPY6.7bn) ▷ Net income*: JPY4.3bn (JPY3.6bn) ▷ EPS: JPY44.89 (JPY37.79) *Net income is net income attributable to parent company shareholders.

Reasons for revisions In 1H, due to robust sales at existing stores, sales exceeded the company’s forecast by JPY1.7bn, operating profit by JPY935mn, recurring profit by JPY974mn, and net income attributable to parent company shareholders by JPY676mn.

The revisions for full-year forecast only reflect 1H results as there are uncertainties surrounding future projections.

Top management

President Masahiko Sugino (born 1961) is also the founder of the company. He is the key driving force for the massive growth of Round One. He has been and is likely to remain a key player in all important decision making. According to the company, he has made it absolutely clear that he is prepared to take full responsibility for his decisions.

Managing director Shinji Sasae (born in 1956) joined Sumitomo Bank (now part of SMBC) in 1975, and joined the company in 2009. After serving as executive officer responsible for the corporate management division, he was appointed director and general manager of corporate affairs in 2012, and moved to the position of managing director in 2014.

Managing director Naoto Nishimura (born in 1963) joined Takii Kogyo Co., Ltd. in 1987, and joined the company in 1994. After serving as executive officer responsible for the comprehensive operations division, he was appointed director and general manager of operations, and moved to the position of managing director and vice general manager of comprehensive operations in 2014.

Managing director Tamiya Sakamoto (born in 1971) joined the company in 1996. After serving as vice general manager of comprehensive operations responsible for AM planning, he was appointed director and general manager of operational planning, and moved to the position of managing director and general manager of operational planning in 2014.

Employees

At the end of FY03/17, the company reported a total of 7,173 employees on a consolidated basis (2,072 full time employees and the equivalent of 5,101 part-time workers). At the parent level the company employed 6,346 employees with 1,245 full-time and 5,101 part-time workers.

At the parent level, on average, employees were about 34.2years old, earning an average salary of JPY5.5mn. It requires about 10 to 15 full-time employees and 100 to 250 registered part-time employees on a registration basis to open a new center.

Major shareholders

As of the end of FY03/17, the ten largest shareholders collectively accounted for 55.62% of shares outstanding, according to the annual report. The top shareholder is Masahiko Sugino, the current CEO, President and founder, holding 20.84% of the company and 33.08% when the holdings by his eldest son Kosuke Sugino (12.24%) are added.

41/43 Round One / 4680 RCoverage LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Top shareholders Shareholding ratio

Masahiko Sugino 20.84% Kosuke Sugino 12.24% The Master Trust Bank of Japan, Ltd. (Trust account) 7.48% Japan Trustee Services Bank, Ltd. (Trust account) 5.23% Trust & Custody Services Bank, Ltd. (Pension trust account) 2.41% Japan Trustee Services Bank, Ltd. (Trust account 9) 1.77% Goldman Sachs International 1.72% JP MORGAN CHASE BANK 385632 1.47% Japan Trustee Services Bank, Ltd. (Trust account 5) 1.25% STATE STREET BANK AND TRUST COMPANY 505103 1.22% SUM 55.62% Source: Shared Research based on company data As of March 31, 2017

Investor relations

Results meetings for analysts and institutional investors are currently held on a quarterly basis in Tokyo and on a half-year basis in Osaka. IR contact is Eishin Ikeda, General Manager of Financial Division (Phone: +81-72-224-5115).

“Quiet Period.” The company’s quiet period begins approximately two weeks before earnings announcements, during which the company’s IR will not be available for investor interviews.

Company profile

Company Name Head Office Portus Center Building ROUND ONE Corporation 4-45-1 Ebisujima-Cho Sakai-Shi Sakai-ku Osaka, Japan 590-0985 Phone Listed On +81-72-224-5115 Tokyo Stock Exchange 1st Section Established Exchange Listing December 25, 1980 August 28, 1997 Website Fiscal Year-End http://www.round1.co.jp/ March IR Contact IR Web Eishin Ikeda, General Manager http://www.round1.co.jp/company/ir/english.html IR Mail IR Phone - +81-72-224-5115

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