12 July 2016 Asia Pacific/Japan Equity Research Internet CyberAgent (4751 / 4751 JP) Rating OUTPERFORM* Price (11 Jul 16, ¥) 6,420 INITIATION Target price (¥) 8,000¹ Chg to TP (%) 24.6 Market cap. (¥ bn) 403.27 (US$ 3.96) Initiate at OUTPERFORM; downside risk near term, Enterprise value (¥ bn) 467.13 Number of shares (mn) 62.81 but growth potential in existing, new businesses Free float (%) 70.0 52-week price range 6,570 - 4,235 ■ Action: We initiate coverage of CyberAgent with an OUTPERFORM rating *Stock ratings are relative to the coverage universe in each and a ¥8,000 target price (potential return 24.6%). Despite the risk of a analyst's or each team's respective sector. ¹Target price is for 12 months. share-price dip in 2H from seasonality and other factors, we see significant potential for earnings growth over the medium term. Research Analysts Keiichi Yoneshima ■ Investment case: CyberAgent's online ad agency business is growing 81 3 4550 9740 faster than the online ad market. Its game business, which develops and [email protected] hosts some of Japan's most popular game apps, looks strong. In the media business, AbemaTV, which is in a cost-intensive startup phase, will likely contribute to future earnings. Near term, we flag downside share-price risk from a 2H FY9/16 earnings slowdown due to seasonality and up-front expenses. Over the medium term, however, we look for valuation gains driven by earnings growth from existing and new businesses and therefore assign an OUTPERFORM rating. ■ Catalysts/risks: Catalysts include: (1) sales contributions from new game titles (2) the AbemaTV business's earnings contribution. Risks include: (1) a slowdown in the Internet ad market and business growth, (2) contraction in existing game titles' sales, and (3) a greater-than-expected increase in up- front investment in the AbemaTV business. ■ Valuation: We calculate our target price with a DCF model, using a forecast horizon of FY9/20, an assumed WACC of 8.45% and, an EV/EBITDA of 7.5x (to calculate terminal value from FY9/21) applied to our FY9/20 estimates. Share price performance Financial and valuation metrics Year 9/15A 9/16E 9/17E 9/18E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 254.4 304.2 340.9 369.9 8000 180 Operating profit (¥ bn) 32.7 32.2 32.8 35.1 6000 Recurring profit (¥ bn) 32.3 30.7 31.2 33.5 130 4000 Net income (¥ bn) 14.8 14.3 15.5 17.0 EPS (¥) 235.5 228.4 246.7 270.1 2000 80 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 270.2 311.7 349.2 The price relative chart measures performance against the EPS growth (%) 54.8 -3.0 8.0 9.5 TOPIX which closed at 1255.79 on 11/07/16 P/E (x) 19.8 28.1 26.0 23.8 On 11/07/16 the spot exchange rate was ¥101.76/US$1 Dividend yield (%) 1.1 0.8 0.8 0.8 EV/EBITDA(x) 10.1 10.3 9.6 8.8 Performance over 1M 3M 12M P/B (x) 3.8 4.5 3.9 3.4 Absolute (%) 12.2 22.5 17.6 ROE(%) 24.4 20.1 19.0 18.1 Relative (%) 17.9 25.9 38.3 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 12 July 2016 Table of contents Key charts 3 Investment opinion 4 Initiate at OUTPERFORM with ¥8,000 TP 4 Maintain OUTPERFORM; set for medium-term profit growth 4 (1) Near-term downside risk due to weak 2H earnings 4 (2) AbemaTV, a potential earnings driver; watch its progress 4 (3) Steady growth in online ads, poor visibility for game earnings 4 Views on CyberAgent's earnings outlook 5 Rationale behind our OUTPERFORM rating 5 Valuation 7 Risks 8 Company profile 9 Corporate history 9 Executives 10 Shareholders 11 Corporate group 11 Business segments 12 Reporting segments changed; media likely to grow 12 Internet ads: Lion's share of domestic market (52% of sales) 13 Games: One of the few providers of smartphone games in Japan (32% of sales) 14 Media: Upfront investment in video business (8% of sales) 15 Outlook 16 Earnings trends: likely to flatten in FY9/16–17 16 Media: Opening up video business via AbemaTV 17 Expecting major titles to keep game business stable 18 Focus on shedding image as Internet ad agency 18 Shareholder returns 20 Earnings forecasts 21 CyberAgent (4751 / 4751 JP) 2 12 July 2016 Key charts Figure 1: Quarterly OP trends Figure 2: Annual OP trends OP OP 14,000 45,000 42,781 12,535 12,986 40,631 40,000 12,000 11,253 35,114 9,955 35,000 32,747 32,224 32,819 10,000 8,652 8,390 8,194 30,000 8,000 7,346 6,550 6,254 5,764 5,823 25,000 22,220 (JPYmn) 6,000 4,535 4,263 (JPYmn) 20,000 3,628 4,061 4,000 3,500 3,449 15,000 1,543 1,647 10,318 2,000 10,000 0 5,000 6/13 9/13 3/14 6/14 9/14 3/15 6/15 9/15 3/16 3/13 0 12/12 12/13 12/14 12/15 6/16E 9/16E 3/17E 6/17E 9/17E 12/16E FY9/13 FY9/14 FY9/15 FY9/16E FY9/17E FY9/18E FY9/19E FY9/20E Note: FY12/14 OP includes ¥4.8bn profit from investment Source: Company data, Credit Suisse estimates development Source: Company data, Credit Suisse estimate Figure 3: Game business sales trends Game business 160,000 141,000 142,000 142,000 140,000 135,000 117,421 120,000 100,000 87,109 80,000 (JPYmn) 60,000 40,000 20,000 0 FY9/15 FY9/16E FY9/17E FY9/18E FY9/19E FY9/20E Source: Company data, Credit Suisse estimates Figure 4: Video ads market by device Figure 5: AbemaTV: sales PC SP AbemaTV sales 250 30 200.9 25 24.0 200 171.8 20.5 20 139.7 150 114.9 109.3 93.6 15 (JPYbn) (JPYbn) 100 76.6 60.1 10 9.0 50.6 80.0 50 31.7 23.4 78.2 86.0 5 8.6 40.3 49.2 63.1 2.5 23.1 27.2 0 9.7 0 0 CY2014 CY2015 CY2016E CY2017E CY2018E CY2019E CY2020E FY9/16E FY9/17E FY9/18E FY9/19E FY9/20E Source: CyberAgent press release (estimates), Credit Suisse Source: Company data, Credit Suisse estimates CyberAgent (4751 / 4751 JP) 3 12 July 2016 Investment opinion Initiate at OUTPERFORM with ¥8,000 TP Figure 6: CyberAgent (4751) – Earnings summary CyberAgent (4751) Earnings Summary EV 11-Jul-16 Sales Operating profit Recurring profit Net profit EPS P/E /EBITDA ¥6,420 ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) (x) (x) Consolidated FY Sep-15 A 254,380 23.9% 32,747 47.4% 32,314 45.6% 14,792 54.8% 235.5 54.8% 10.1 19.8 Sep-16 CS E (new) 304,223 19.6% 32,224 -1.6% 30,718 -4.9% 14,345 -3.0% 228.4 -3.0% 10.3 28.1 CoE 300,000 17.9% 28,000 -14.5% 27,400 -15.2% 14,000 -5.4% 222.9 -5.4% NA 28.8 IBES E 300,162 18.0% 36,157 10.4% 35,133 8.7% 16,969 14.7% 270.2 14.7% 8.3 23.8 Sep-17 CS E (new) 340,913 12.1% 32,819 1.8% 31,212 1.6% 15,496 8.0% 246.7 8.0% 9.6 26.0 IBES E 326,692 8.8% 38,653 6.9% 38,062 8.3% 19,336 13.9% 311.7 15.4% 7.8 20.6 Sep-18 CS E (new) 369,861 8.5% 35,114 7.0% 33,513 7.4% 16,969 9.5% 270.1 9.5% 8.8 23.8 IBES E 350,237 7.2% 42,936 11.1% 42,324 11.2% 21,810 12.8% 349.2 12.0% 7.2 18.4 Source: Company data, I/B/E/S, Credit Suisse estimates Maintain OUTPERFORM; set for medium-term profit growth CyberAgent operates a number of Internet-related businesses. It is distinguished by having built all of its businesses from scratch without relying on M&A. It aggressively pursues new business opportunities and has amassed a track record of both successes and failures with various new businesses. Through this process, it has been expanding its operations. We are bullish not only on CyberAgent's earnings performance but also its corporate culture, HR policies/practices, and strategic flexibility. We flag downside risk for CyberAgent shares due to profit deterioration in 2H FY9/16, but we see comparatively strong upside given the company's medium-term potential for earnings growth.