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Glorious prospects for Super Mario & Co. in infinite battle for gaming industry

- Equity Valuation of Nintendo Co., Ltd.

Nintendo maintains a valuable competitive edge over its rivals by dominating the rapidly growing video game market for aged and female players

Nintendo is financially healthy and stable with negligible leverage and low cost of equity

Growth prospects remain positive for Nintendo due to introduction of new products, and existing products performing strongly

Recovering global economy is expected to boost video gaming industry pushing up Nintendo’s sales figures and share price

March 25, 2010Research Analysts

Li [email protected]

Amaury [email protected]

Ralf [email protected]

Neo Siong [email protected]

Anthony Chan Chiu [email protected]

Carlos Lopez [email protected]

Christoph [email protected]

Key Data

Recommendation Strong Buy

Target Price 40824.67 Yen

Issued Shares 127.88M

Market Cap 4.08 Trill. Yen

52-week-range 20.130 – 31.900

Current Price 31.900

Object 2

Disclaimer & DisclosuresThis report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Nintendo’s Corporate Profile:Nintendo Co., Ltd. is a Japan-based company mainly engaged in the leisure machine business. The Company operates in two business segments. The Leisure Machine segment is engaged in the development, manufacturing and sale of portable and console game machines as well as game software. The Others segment is engaged in the manufacture and sale of poker cards and karuta (Japanese-style playing cards), the sale of Pokémon (a Japanese animation character) goods, the management of intellectual property rights and the provision of electronic registration services of home use console machines, among others.

Equity ResearchAsia25.03.2010

SMU INTERNATIONALSMU INTERNATIONALVALUE INVESTORS INC.VALUE INVESTORS INC.

Nintendo Co. Ltd



Industry and Sector Analysis

Market for Video Games 2009

Along with every other sector, the video games sector has

harshly been affected by the economic crisis over the past

2 years. Growth in sales in video games globally was

lethargic, reaching more than US$66.2 billion in 2009,

with just an increase of only 0.4% over the prior year. On

the positive side, the emerging regions of Asia Pacific,

Middle East and Africa saw sales increase of more than

7% to 21%. In contrast, all other major regions

experienced rough declines in sales in 2009.

Figure 1 underlines the abrupt halt in software as well as

hardware sales in 2009:

2004 2005 2006 2007 2008 20090

10

20

30

40

50

60

70

-10%

0%

10%

20%

30%

40%

50%

10 12.5 1724 28.5 30.5

19.5 2021.5

28

36.5 35.5

Video Games Value Sales Performance by Type

video games harware retail value RSP video games software retail value RSP

Hardware y-o-y value growth (%) Software y-o-y value growth (%)

Bill. U

S $

Figure 1

Largest Markets for Video Games

Despite the recent sales growth in emerging markets, the

video game industry is still highly dependent on the

developed countries. The fact that the 10 largest markets

accounted for more than 74% of total sales worldwide in

2009 clearly supports that diagnosis. In fact, the “Big

Five” (US, UK, France, Japan, China) solely accounted for

more than 60% of total global Video Game sales last year.

Consequently the economic setback has affected these

core markets most severely, with Japan’s real GDP growth

rate for instance dropping from -0.7% in 2008 to -6.4% in

2009. US real GDP growth fell to -3.15% in 2009, down

from growth of 1.1% in 2008.

Figure 2 displays the most important markets in regards

to consumption per capita:

UK USA France Australia Canada Italy Japan Spain Germany China0

20

40

60

80

100

120

140

160

180

Per Capita Toy Consumption in 10 Largest Markets

2009

US $

per c

apita

Figure 2

Key Trends

One key market issue for the future of the video games

and consoles industry is the challenge of changing

demographics, which has undeniable implications to the

industry structure. The industry players are beginning to

see the aging population as an opportunity: Financially

comfortable baby boomer grandparents are increasingly

targeted to buy video games for their grandchildren. At the

same time, pioneer video-gamers of the first generation,

mainly 35-40 year olds, continue to spend their increasing

incomes on video games. On the other end of the

spectrum, children are getting exposed to video games

younger, caused by strong growth in both pre-school and

Nintendo Co. Ltd



infant games-subsectors. Additionally, women are broadly

beginning to enjoy video gaming, reflected by newly

introduced “customized” products such as “Project

Runway” by Nintendo and female advertisement leaders

like the “Frag Dolls”, an all-girl team of gamers recruited

by Ubisoft to promote women in the gaming industry.

Another recently observed trend in the industry are

collaboration strategies among game manufacturers to

lighten the cost-pressure of game development and open

strategically relevant, new markets. Examples for this

tendency are Nintendo’s cooperation with local TV-

networks on the creation of new characters as well as

Electronics Arts partnership with Hasbro to develop online

version on current Hasbro products.

Video gaming consoles typically have a life-cycle of

around 5 to 6 years from introduction to retreat. Generally,

after a burst of sales at their initial adoption, hardware

sales tend to slow down over the years and console

manufacturers and software companies benefit largely

from long-term revenues in game sales.

In the past, Nintendo has been highly successful with its

interactive, natural gesture interface console “Wii”, which

propelled it to the top of global toy and game

manufacturers in the recent years, capturing an overall

market share of almost 10%. Consequently all three

dominating leaders in the video gaming industry –

Nintendo, Sony and Microsoft – are aiming to develop

cutting-edge motion sensor technology for their next

generation consoles. Microsoft is expected to release its

long promised “Project Natal” in the recent future – a

ground-breaking motion sensor console – while Nintendo

announced a follow-up for its “DS” coming with an

innovative 3D control panel by the end of 2010.

Considering the usual product life-cycles, we are

expecting the release of additional features and devices for

Nintendo’s Wii plus a “next-gen” successor before the end

of 2011. Sony also remains on path to developing new

control schemes for a natural gesture interface for its

games

Besides new control schemes, interactive gaming will

continue to be among the key selling points of new

products. At the same time, success would rely greatly on

the popularity of the characters, upon which blockbuster

games are based on.

Nintendo Co. Ltd



Nintendo Company Analysis

Brief History

Nintendo Co., Ltd. is a multinational corporation located

in Kyoto, Japan. Founded on September 23, 1889 by

Fusajiro Yamauchi, it produced handmade hanafuda

(playing) cards. According to Nintendo's Touch!

Generations website, the name "Nintendo" is translated

from Japanese to English, meaning "Leave Luck to

Heaven".

Nintendo developed into a video game company in the

1970s, becoming one of the most influential in the

industry and Japan's third most valuable listed company,

with a market value of over US$85 billion.

Nintendo is also currently the majority owner of the

Seattle Mariners, a Major League Baseball team in Seattle,

Washington.

Satoru Iwata, president and CEO of Nintendo, managed to

pick up the pace of competition through the launch of the

Wii console in 2006 and announced further breakthrough

releases for the coming years.

Nintendo Co., Ltd.

Nintendo is one of the leading global market players for

both video hardware, and software games. Products

include Game Boy, Mario, Donkey Kong, Pokémon and

The Legend of Zelda.

Although Nintendo is purely focused on the production

and distribution of hardware and software for the video

games market, it offers a wide product portfolio ranging

from Nintendo Game Boy Advance, Game Cube,

Nintendo DS and Nintendo Wii. It also positions itself in

the higher end of market, being one of the innovators in

the video games market operating both in Japan and

abroad.

The Nintendo DS already is becoming the best-selling

portable console ever with 80 million units sold globally,

and is expected to beat the 100 million-unit console record

set by Sony's PlayStation 2.

Nintendo supplies the local market with game consoles

and software manufactured in its three major Japanese

manufacturing plants located in Uji, Okubo and Ogura.

Nintendo distributes their products through its subsidiary

companies based in North and Latin America, Western

Europe and Australasia, making it a prominent market

leader in the video games market abroad. Products are sold

through mixed retailers worldwide, as well as Nintendo's

flagship specialty stores.

SWOT Analysis

Strengths

• Nintendo is one of the major innovators in the market of

video games and achieved great success through launching

new products like the Wii console

• Nintendo was able to expand its customer base by

releasing products that target women and older customers

such as Wii Fit and Big Brain Academy

• Formidable television advertising campaigns

successfully enticed many gamers to choose Nintendo

game consoles rather than their competitors

Weaknesses

Nintendo Co. Ltd



• Although being above competition in delivering gaming

experience, Nintendo fails to meet up to date technical

standards like graphics.

• Nintendo guards against market saturation and

implemented a rule on five games that a licensee may

produce for a Nintendo system. This prevented Konami

from collaborating with Nintendo for the development of

new game software due to its strict limitation control. In

the final analysis, this becomes a limiting factor for

Nintendo to expand much wider marketability of its game

consoles.

Opportunities

• The video game industry continued to show growth,

driven by expansion of software sales, a growing base for

the new generation of console hardware as well as

favorable sales of handheld hardware.

• Nintendo announced the release of a new console for

2011 with new features that might make an even bigger

customer base accessible.

Threats

• Competing companies like Microsoft and Sony

announced to release new consoles that will have a similar

game play as Nintendo’s Wii combined with better

graphics.

• Strong censorship and restrictions implemented on new

software games developed for Nintendo consoles frustrate

other game developers who may otherwise have

considered collaborating.

• Piracy is expected to remain an issue for the games

industry and manufacturers are expected to continue

developing and implementing new strategies to overcome

this problem.

• The growth in online and mobile gaming is expected to

remain a potential threat to value sales growth in the video

games sector

Financial Overview

Nintendo has been performing well in the past years. The

growth boost through the Wii console has been slowing

down, and a negative growth is expected for 2010.

A closer look at the balance sheet shows that Nintendo is,

and has been 100% equity financed.

Further information can be found in the full company

report.

Relative Valuation of Nintendo

Major Competitors

In order to back up and cross-check the DCF-valuation

(FCFE) with a complementary approach we compiled a

relative valuation based on the most relevant multiples of

Nintendo, and other comparable companies with similar

business activities and characteristics.

Nintendo’s main areas of business can be summarized as

production of video-gaming consoles, development and

distribution of video-gaming software, and manufacturing

of electronic toys mainly for the Asian market, especially

Japan.

For that reason we have identified Microsoft, producer of

the “Xbox” and Sony Computer Entertainment with the

“Playstation” as Nintendo’s main competitors in its core

Nintendo Co. Ltd



market of gaming consoles. However, since both

companies are operating in several other industry sectors

besides video games, a Relative Valuation based only on

multiples of Nintendo’s top competitors is not feasible,

especially as Microsoft for instance maintains a

significantly higher market capitalization with an approx.

$250 Billion. (3.37 Trill. Yen; Sony: 3.16 Trill. Yen).

Peer Group

Nintendo is also a major developer and distributer of video

gaming software and (electronic) toys. Consequently,

other game development companies and Japan-based toy-

producers are regarded as Nintendo’s competitors in a

reasonable peer-group.

Choosing a Multiple

Due to the worldwide financial crisis many companies in

the video gaming industry were still suffering from

negative earnings in 2009. To avoid any bias in the peer

group selection – to exclude companies with a negative

P/E ratio – we chose the “Expected Price to Earnings

Ratio” (forward P/E) for next year based on analyst

forecasts as the most relevant multiple for our Relative

Valuation. As a counter check, we also examined the

current Price to Sales (P/S) and Price to Book (P/B) ratio,

as well as the Price/Earnings-to-Growth ratio. In order to

eliminate extreme statistical outliers and distortion, we

have composed a reference group of 16 companies, which

reflects Nintendo’s areas of business to derive average

industry figures.

Based on Nintendo’s results for 2009, the obtained

industry averages were calculated a “base value” for

Nintendo, with 2 additional scenarios for variant market

conditions. (See figures below as well as attaches spread

sheets)

Peer Group and Multiples for Relative Valuation:

Name of

Company

Forward

P/EP/E P/S P/B PEG*

NINTEDO 14,98 12,68 2,44 2,35 0,91

Sony

Corporation 35,13 -81,32 0,44 1,04 -

Microsoft 13,48 14,75 4,34 5,77 1,56

Sega Sammy 19,01 - 0,75 1,18 -

Mattel 12,87 13,99 1,48 1,49 1,66

HappiNet 9,42 10,48 11,67 0,64 -

Nihon 32,81 77,31 1,78 1,35 -

Apple 16,57 18,98 4,43 5,79 1,31

LeapFrog 13,18 21,57 1,23 2,42 0,35

Konami 14,21 18,29 0,84 1,23 0,63

Electronic Arts 29,81 54,25 1,56 2,12 0,66

THQ 20,68 52,15 0,47 1,23 0,37

Take- 7,35 -20,65 0,81 1,53 -

Activision

Blizzard 14,45 16,38 3,24 1,29 -

Navarre 6,44 6,37 - - -

Nokia 12,56 14,66 0,90 2,82 0,89

GameStop 8,13 9,34 0,32 1,09 0,62

* (Cur. PE/One year forward Growth)

Figure 3: Current P/E (x-axis) to one-year Forward Growth (y-

axis)

Nintendo Co. Ltd



0.00 10.00 20.00 30.00 40.00 50.00 60.000%

25%

50%

75%

100%

125%

150%

PEG (Cur. PE/1 year forward Growth) Linear (PEG (Cur. PE/1 year forward Growth))

Current P/E

One-y

ear f

orwa

rd gr

owth

Figure 3

Relative Valuation regarding three scenarios:

Market Price Estimates

Relative

Valuation Based

On:

Pessimistic

(assume

median)

Base

Optimistic

(assume 90th

percentile)

Forward P/E ¥26.245,30 ¥30.538,34 ¥57.274,04

P/S ¥15.365,23 ¥26.020,41 ¥49.747,37

P/B ¥16.764,27 ¥24.575,57 ¥50.652,89

Valuation According to Multiple

Using the P/E ratio and the PEG multiple, Nintendo

currently is clearly undervalued since its market value is

significantly lower than the resulting base value (27 000

Yen < 30 500 Yen). Assuming positive conditions for a

future scenario, all multiples computed underline the

finding that Nintendo is undervalued compared to its

peers. Regarding the relevant Forward P/E, a target value

of 35 000 Yen to 45 000 Yen is a reasonable objective for

the share-course.

Figure 4: Displays the expected range of fair prices for Nintendo according to possible scenarios (grey: pessimistic, red: optimistic)

Forward P/E

P/S

P/B

0.00 ¥ 20,000.00 ¥ 40,000.00 ¥ 60,000.00 ¥

Figure 4

Please notice:

The calculations outlined in the previous paragraphs are based on

the data set obtained on 10th of March 2010 from Google Finance,

Marketwatch.com as well as Company Reports and WebPages.

Recent developments on the stock market strongly indicate that the

tendency of our assessments is correct, as Nintendo’s stock is

currently trading slightly above 31,000 Yen and Multiples and

averages for the entire industry have moved upwards noticeably.

FCFE Valuation

1. Choice of Model

We examined Nintendo’s Capital structure and dividend

spending habits to determine a model for valuation. One of

the most remarkable characteristics of Nintendo’s

corporate financial strategy is that it maintains a very low

debt-to-equity structure, a ratio close to zero for many

years. (Total interest expenses on debt amounted to 0 Yen

in 2007, 0 Yen in 2008 and only 1 Yen (millions) in 2009,

indicating that Nintendo operates with almost no leverage

at all. There is no hint that Nintendo might deviate from

this policy in the near- and mid-future.

Nintendo Co. Ltd



Nintendo constantly paid out a certain portion of its

earnings as dividends to shareholders in the past 10 years.

However the payout-ratio has been fluctuating

considerably in accordance with increasing and decreasing

annual earnings. On top of that Nintendo’s cash-payments-

to-FCFE ratio has been far from 1 during the last periods.

Therefore a valuation based on Dividends would

underestimate the value of equity for Nintendo.

Additionally, corporate governance in Japan tends to be

weak, thus dividends therefore do not reflect the real

FCFE.

Historical Cash Flow statements have been available for a

relevant period of time, which - in combination with an

examination of the overall macroeconomic environment as

well as Nintendo’s current product portfolio – can best be

used in a Free Cash Flow model. Since Nintendo’s level

of debt has been very stable over time we decided to apply

a FCFE model in order to evaluate Nintendo.

Figure 5 illustrates the decisive input-factors utilized in

our FCFE valuation model for Nintendo. We will further

elaborate on the derivation of the figures in the following

parts.

Figure 5

2. Growth Stages and duration of growth

Looking at Nintendo’s historical growth pattern over a

period of 10 to 15 years, it is obvious that a limited

number of crucial drivers have mainly determined

Nintendo’s growth. First, Nintendo’s main products –

video gaming hardware and software – typically can be

categorized as consumer discretionary. Consequently

Nintendo’s growth and its market success are highly

dependent on the general global economic situation. Since

business cycles usually fluctuate in intervals of three to

five years, Nintendo’s prospects for growth of sales and

earnings are directly liable to these macroeconomic

factors.

One of the most essential drivers influencing Nintendo’s

growth clearly is the introduction of new products,

especially “next generation” consoles and the market

appreciation of these releases. It is no coincidence that

earnings were low and growth rates negative from 2002 to

2004 with Nintendo’s rather unsuccessful “GameCube”

console taking a beating from Sony’s top-selling

“Playstation 2”. In contrast, net income and growth rates

have almost been doubling from year on year since 2005

due to the introduction and remarkable market success of

Nintendo’s “Wii”.

Taking into account of worldwide economic downturn in

2009, and that Nintendo’s blockbuster products “Wii” and

handheld console “DS” are approaching their sales-peak,

Nintendo’s sales and income figures turned down sharply

from 2009, resulting in a negative growth rate. Looking

forward into the future, Nintendo, currently coming from a

relatively low sales and growth level, has huge potential

for increasing growth rates in the next few years after

excessive boom periods from 2005 to 2008.

Nintendo Co. Ltd

Nintendo‘s Road-Map to Valuation

Sales

Growth Forecast (%)

Operatin

g Margin (%)

Equity

Reinvestmen

t Rate (%)

Tax Rate (%) &

Interest

Expenses

Adjustments

EBIT

Net Income

FCFECost

of Equi

ty (%)

Equity

Value of

Operating Asset

s

+ Value

of Cash and ST

Securities

= Value

of Equit

y

Number of Share

s

Fair Value

per Share

Main Value DriversValue DeterminantsCash Flow FiguresValue of Equity



One major, and frequently underestimated factor when it

comes to future growth potential in the video gaming

industry, is the “demographic progression” – kids acting

older than their actual age – and the increasing number of

female and older-age players grabbing a joystick or a

gamepad. By introducing social- and health-oriented

gaming concepts (e.g. “Wii-fitness”, “Dr. Kiwashima’s

Train Your Brain”), Nintendo has succeeded opening the

market of video games and attracting large groups of new

customers. Particularly among these recently “acquired”

customers – mainly female or of advanced age – Nintendo

has a unique competitive edge over its rivals, which might

be sustainable for Nintendo for a few years since its “life-

style and family brand-image” are difficult to duplicate.

Hence, we believe that Nintendo will be able to benefit

from its current market position, and realize extraordinary

growth rates during the upcoming years, especially when

the economy starts to recover on a global level. To

precisely account for Nintendo’s historically fluctuating

growth pattern and its strong correlation to the success of

its innovations and business cycles, we decided to apply

three particular stages of growth:

1. Extraordinary Growth Rate:

Increasing growth rates are expected in the next three

years as a result of an economical recovery, and a

persistent market expansion into new areas of business

by Nintendo (female and aged customers) with existing,

successful products (Wii, DS) and promising product

innovations such as the recently announced “Nintendo

3DS”.

To account for the high variability in growth rates and

the compounding effect, we have smoothed out the

predicted growth for the next three years by applying

the Expected Compound Annual Growth Rate (CAGR)

in our calculations. (Please refer to figure 7 and the

attached appendixes for further elaboration)

2. Transition:

Three to four years of decreasing growth rates would

follow, when the current product portfolio has exceeded

their life-cycles, and when competitors compensate and

offset Nintendo’s competitive edge regarding

interactive family games and motion-capturing (e.g.

expected introduction of Microsoft’s “Project Natal”

for the Xbox by the end of 2010).

3. Stable growth rate:

Terminal value is computed with stable growth rate

based on the level of global growth rate, since Nintendo

is an internationally well-diversified company.

Figure 6 illustrates the expected growth periods explained

above. For detailed figures please refer to the attached

spreadsheets.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021-20%

0%

20%

40%

60%

80%

Historical Growth Rate Extraordinary Growth Rate Transition 2

Stable Growth Rate

Figure 6

Figure 7: Illustration of smoothed out growth rate for

2011 to 2013

Nintendo Co. Ltd



2011 2012 20130%

5%

10%

15%

20%

25%

30%

35%

Net Income Growth rate Av. Growth Nint.: CAGR Nintendo:

Figure 7

3. Forecast of Growth

3.1. Growth Rate for year-end 2009 to year-end 2010

To forecast future growth rates for the expected

extraordinary growth period from 2011 to 2013, we first

estimated Nintendo’s past growth rate for the most recent

financial year from March 09 to March 10. Examining

Nintendo’s historical sales based on quarterly figures since

2003, there is an apparent pattern regarding the proportion

of annual sales throughout the four quarters. Generally the

4th quarter is the weakest period of the year after a usually

very strong 3rd quarter, most probably due to worldwide

festive sales. On average, the 4th quarter accounted for

18.51 % of annual incomes over the last few years.

Extrapolating Nintendo’s recently released sales figures

for the first three quarters of 2009 we expect total annual

revenue of 1.45 Bill. Yen, corresponding to a growth rate

in sales of -21.09 percent, and an expected Net Income of

232,751.41 Mill. Yen in 2009.

Figure 8 shows the quarterly numbers in sales, net- and

operating income (in million Yen) and the proportion of

annual Net sales per quarter:

1st 033rd 03

1st 043rd 04

1st 053rd 05

1st 063rd 06

1st 073rd 07

1st 083rd 08

1st 093rd 09

0 ¥

100,000 ¥

200,000 ¥

300,000 ¥

400,000 ¥

500,000 ¥

600,000 ¥

700,000 ¥

0%

10%

20%

30%

40%

50%

60%

Proportion of Net Sales Net Income Net Sales Operating Income

Figure 8

3.2. Forecast of Growth 2011 to 2013

To come up with an adequate rate of growth for Nintendo

in the upcoming years, we have decided to take into

consideration 4 main factors:

a) Historical Results of the Company according to their

usual growth trends

b) The current worldwide economical situation

c) Prediction on Nintendo’s launch of new console

d) Impact of competitors on Nintendo’s Historical and

projected financial performances

a) Historical Results and trends

As observed in the graph below and as explicitly detailed

in our 3-stage growth model analysis, Nintendo’s

performances follow a recurrent pattern. Basing our

Nintendo Co. Ltd



growth rate estimation on this first factor leads us to

assume the following forecasts:

- Based on their product launch patterns, Nintendo’s

growth rate should increase consequently within the

next 3 years.

- In 2013, Nintendo’s growth rate should reach its peak

and start decreasing before experiencing the final

stage of stabilization.

b) Worldwide Economic Situation.

Over the years, Nintendo’s sales growth trend has been

highly correlated to the world GDP growth rate.

Nintendo’s performances have therefore always perfectly

matched the world’s economy. Hence, we have decided to

compute Nintendo’s future growth rate by taking into

consideration the expert forecasts from IMF (International

Monetary Fund), and additional sources on the world

economy for the next 3 years. Based on these expert

analyses regarding the performances of the worldwide

economy, we have attempted to extract a general trend in

order to be accurate and realist in our calculation. For the

next 3 years, our forecasts for the world GDP real growth

rate will be around 3.10% for 2011, 4.00% for 2012 and

lastly 4.50% for the year 2013.

Figure 9 highlights the impressive correlation and puts

into perspective the performances of Nintendo in relation

with the global economy for the upcoming years:

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130%

1%

2%

3%

4%

5%

6%

-100%

-50%

0%

50%

100%

150%

200%

World GDP Real Growth Rate (%) Net Income Growth rate Net Sales Growth Rate

NDS 2Wii 2

Xbox Natal

Wii

Xbox 360/PS 3/

PSP

NDS

Figure 9

c) Success of Nintendo’s launch of new console

According to various sources and concordent with

Nintendo’s product innovation cycle, the video-game firm

would release an update of the successful Wii beginning

of 2011. The “Wii 2” would offer both better graphics by

providing an HD resolution and more sensitivity in its

captors. The release would is predicted to bump

Nintendo’s performance as it would respond to the critisim

and complaints of many of its users. Moreover, the launch

of a new Nintendo DS would also be in the pipeline for

2011.

The juxtaposition of both events would have a direct

positive impact on the firm’s revenue. However, because

those two events represents simple update of existing

products, their impact on Nintendo’s growth rate would

not be as significant as the one experienced in 2005

(163.35%).

Nintendo Co. Ltd



d) Impact of competitors on Nintendo’s historical and

projected financial performances

The release of competing products have always somewhat

affected Nintendo’s trend to a certain extent. In the last 4

years (since the release of the “Wii “), the impact of

Nintendo’s competitor’s products on its performances has

been rather low, as Nintendo has succeeded in positioning

its product on a different level of entertainment and

therefore conquering a quite different target market.

However, prior to the “Wii” success, Nintendo’s main

competitor, Sony, was dominating the market with the

PlayStation 2, which impacted Nintendo’s finances in the

years 2003, 2004. Therefore based on past experiences, we

can assume that the future launch of Microsoft’s “Project

Natal” will have a negative impact on Nintendo’s financial

statements.

Figure 9 emphasizes both the historical trends and the

forecast for the next three years in terms of new product

releases.

e) Growth rate figures from 2011 to 2013

Based on the four above factors and on their high

correlation with Nintendo’s financial performances we

have computed the forecasted rate of growth for the three

upcoming years. While the first figure of 2011 resembles

results of the raw calculation of the growth rate formula

(Expected Growth Rate for 2011 = Equity Reinvestment

Rate 2010 * Return on Equity 2010) 8.14% vs. 6.29%, we

observe some disparities in the computations for the two

remaining years. These latter differences can be explained

through the constant aspect of the Return on Equity

figures (around 18.5% for the three years). Therefore, we

have decided to base our computations on the factors

explained above, as they tend to be in precise concord

with the market reality. The results of our estimation give

us a rate of growth of 8.14% for 2011, around 20.00%

for 2012, and close to 30% for the year 2013. The 3

mentioned rates fall under a fair evaluation of the four

factors’ evolution over the next 3 years and are on top of

that in perfect accordance with the projected growth

pattern of the firm.

4. Discount Rate for Nintendo

To determine the value of Nintendo using the FCFE

model, the discount rate for future cash flows is an

important factor. We would examine Nintendo’s costs of

capital the cost of equity, since there we use FCFE and

there is no debt in Nintendo’s books. To figure out the cost

of equity, three major input factors have to be determined:

the risk-free rate, the market risk premium for Nintendo’s

home market Japan, and the respective beta. The risk free

rate for Japan can be derived from the yield of a 30-year

treasury bond.

According to Bloomberg the currently 2.34% are a good

estimate:

Nintendo Co. Ltd



Figure 10

http://www.bloomberg.com/markets/rates/japan.html

The market risk premium is rather difficult to define.

According to Prof. Damodaran from New York

University’s Stern School of Business, 5.40% are a good

estimate as of January 2010. To come up with that

number, he started with Japan’s country rating (from

Moody's: www.moodys.com), and estimated the default

spread for its rating (based upon traded government

bonds) over a default free government bond rate. This

became a measure of the added country risk premium for

Japan. He added this default spread to the historical risk

premium for a mature equity market (estimated from US

historical data) to estimate the total risk premium.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/

ctryprem.html

Lastly, we extracted Nintendo’s beta from Bloomberg at

0.93. Comparing it with other sources like Financial Times

and Reuters we believe that this is a reasonable estimate.

Plugging those three numbers in the following equation,

we derive a cost of equity for Nintendo of 7.35%.

Cost of Equity=R f +β∗Rmrp

5. Adjustments

5.1. Research & Development Expenses

As a major player in the console video game industry, the

bulk of Nintendo’s annual reinvestment budget goes into

research and development on research and development to

continue innovating new products for the rapidly changing

technological market with shorter product life cycles. Due

to the conservative accounting measures that require R&D

expenses to be expensed in the same period of occurrence,

the value of the assets created by research does not show

up on the balance sheet, resulting in understating the

amount of assets that Nintendo actually has. To provide a

more accurate view of Nintendo, we have capitalized the

research assets, and adjusted the balance sheets and

income statements accordingly.

Due to the lack of financial information available, we are

only able to perform adjustments to the years 2007-2009.

The assumption made about the time taken for Nintendo’s

research and development to be converted into

commercial products is 5 years, the average time for

Nintendo to come up with a new product line. Thus, 5

years is the amortizable life of the research assets. The

respective adjustments and the adjusted financial

statements could be viewed in the appendix. The graphs

below show the effect of the adjustments on the net

income and return on equity for the years 2007-2009.

Net Income Adjustments 2007-2009:

Nintendo Co. Ltd

http://www.moodys.com/



2007 2008 20090 ¥

100,000 ¥

200,000 ¥

300,000 ¥

400,000 ¥

500,000 ¥

174,290.00

257,342.00279,089.00

162,685.80

367,896.20

430,096.80

Original Adjusted

Figure 11

Return on Equity 2007-2009:

2007 2008 20090.00%

5.00%

10.00%

15.00%

20.00%

25.00%

11.22%

14.20%15.14%

9.86%

19.27%

22.00%

Original Adjusted

Figure 12

5.2. Forecasting Financial Statements

The adjusted earnings growth for 2008 and 2009 are

126.14% and 9.5% respectively, mainly due to the sales of

the Nintendo Wii doubling from 2007 to 2008. Though

earnings growth rates is believed to slow down to 5%

according to the recent economic growth forecast of 5%,

Nintendo’s continuous expansion plan allows the investors

to believe in the optimistic growth momentum. Hence, the

forecast for the Nintendo’s earnings growth for 2010-2013

years is adjusted to 13.5% due to the forecasted release of

the 2nd generation Nintendo Wii, featuring high definition

resolution. The forecasted financial statements are

attached in the appendix. The forecast financial statements

are also adjusted to capitalize on their research and

development expenses.

Forecasted Items AssumptionsForecast

Ratios

Income Statement

Revenue3-Stage Growth

Model

As per

assumptions in

model

Operating

ExpenseProportion to Sales 72.00%

Depreciation/

Amortization

Proportion to Other

Assets30.00%

Tax Rate Marginal Rate 44.79%

Balance Sheet

Current Assets Proportion to Sales 101%

Current Liabilities Proportion to Sales 31.00%

Research Asset Proportion to Sales 8.00%

Common Equity Remain Constant $21,700.00

Treasury Stock Remain Constant $(155,400.00)

Minority Interest Remain Constant $25.00

Cash & ST Inv. Plug Figure

6. Equity Reinvestment Rate:

In the past few years, Nintendo’s Equity Reinvestment

Rate closely followed an explicit pattern, reaching high

reinvestment rates in high growth periods, up to more than

a 100% for example in 2007. In contrast, requirements for

capital reinvestment have been rather small during years

of moderate growth like 2009 amounting to only 9,56%.

As a closer look to the figures unveils, Nintendo has a

distinct need for massive increases in working capital in

high-growth years – change in working capital for instance

ballooned by 380% from ‘06 to ‘07 – leading to a

relatively low Free Cash Flow to Equity compared to Net

Income. Excluding additional adjustments for

Nintendo Co. Ltd



amortizations and depreciations from the FCFE

calculation, the picture gets even clearer: Capital

expenditures increased considerably in boom years like

2007 to 2009 as well.

As mentioned earlier, we anticipate a strong boost in sales

and revenues for Nintendo from 2011 to 2013. Due to

2009 and 2010 being exceptional years for the global

economy in general, forecasting the Equity Reinvestment

Rate by simply putting last years’ ROE and growth rate in

relation is not an appropriate, realistic assumption.

Instead, to achieve the predicted increase in sales and new

product introductions, large capital expenditures and a

sharp increase in working capital will be inevitable. To

reflect that, we apply the average of the last 5 years’

Equity Reinvestment Rate as an estimated input figure for

the upcoming extraordinary growth periods, because these

years best match the capital needs Nintendo will

experience.

Figure 13 demonstrates how FCFE and Net Income

developed over the last five years and underlines the core

finding, “high-growth years and equity reinvestments

strongly correlate”:

2010 (forecast)

20092008200720062005-100,000 ¥

0 ¥

100,000 ¥

200,000 ¥

300,000 ¥

400,000 ¥

500,000 ¥

-30%

-10%

10%

30%

50%

70%

90%

110%

130%

150%

11.51%

49.36%

131.52%

40.91%

9.56%

48.57%

Net Income = FCFE Equity reinvestment rate

Figure 13

7. Stable Growth Inputs:

In the long run, we do not expect Nintendo to maintain

either extraordinary growth rates or exceptional Returns

on Equity figures. Long-term ROE – based on a smoothed

out average of past boom and baisse years since 1999 – is

therefore estimated to amount to 11.58 % as soon as

Nintendo reaches its stable growth period. This number

reflects Nintendo’s unique position as one of Asia’s most

prominent companies, taking into account that typical

ROE figures for the sector, and the industry average,

fluctuates around 10 percent, a benchmark for Nintendo.

Having no negative earnings and a relatively stable size of

the company in the past, this supports the approach of

applying the historic 10-year average ROE as an

estimation of stable return on equity.

Nintendo Co. Ltd



As Nintendo is operating globally and expanding to

emerging markets of late, its long-term growth rate will be

determined by the growth rate of the world economy. In

accordance with IMF forecasts and historical figures from

the last 10 years, we assume the GDP of 1st world

countries and emerging markets – Nintendo’s main sales-

regions – to grow with 4.50 percent per year on average.

Since Nintendo’s business is highly exposed to

traditionally low-growth markets such as Japan, its growth

rate will stabilize slightly below world economy growth at

4.00 percent from 2017 onwards.

Figure 14 illustrates the exposure of Nintendo to the world markets:

2006 2007 2008 20090%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Japan Americas Europe Other

Figure 14

As a consequence of the growth and ROE figures

explained above, a constant Equity Reinvestment Rate to

Equity of 30.76 percent will be necessary in the stable

growth period according to the standard growth formula:

Growth g=ROE∗Equity Reinvestment Rate

→ ERR= gROE

= 4.00 %11.58 %

=30.76 %

Regarding prospective, long-term discount rates and risk-

premiums, the current worldwide national debt problems

are a major factor from our point of view.

Please refer to figure 15 for a detailed illustration of

recent developments in terms of national debt in the US

and Europe:

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (est.)

2011 (est.)

0 $

2,000 $

4,000 $

6,000 $

8,000 $

10,000 $

12,000 $

14,000 $

16,000 $

18,000 $

0%

20%

40%

60%

80%

100%

120%

US Gross Debt in Billions undeflated European Union (27 countries, in Billion EUR) as % of US GDP

as % of EURO GDP

Figure 15

The urgent debt problems in the USA, Europe and Japan

are likely to cause rising inflation in the upcoming years

on a worldwide level. Since Federal Reserve (FED) in the

US, as well as the European Central Bank (ECB), is

predicted to take measures to oppose inflationary

tendencies, higher risk-free rates are the logical

consequence. As a side effect of increased inflation and

debt troubles, we expect the country risk premium for

Japan as well as the equity risk premium to increase

slightly.

Scenario Analysis

Nintendo Co. Ltd



To account for the dynamic nature of the current economic

environment, we have formulated scenario analyses to

account for extreme conditions on either sides of our base

valuation of Nintendo.

Bear Bull

Years of Extraordinary Growth 1 5

ROE (Extraordinary) 3.27% 32.33%

ROE (Stable) 11.57% 11.57%

Risk Free Rate 6.00% 5.00%

Growth Rate (Extraordinary) 0.93% 18.93%

Growth Rate (Stable) 3.50% 4.50%

1. Valuation in the Bear Scenario

Nintendo’s growth will be adversely affected if the world

economy fails to sustain its recovery. Credit conditions are

still tight in major developed economies, where the

rebound in domestic demand seems more tentative than

self-sustaining. Moreover, the widely debated prophecy of

a world economic crisis in 2012 is anticipated, with China

being speculated as the next greatest bubble to burst with

massive misallocation of wealth. Taking into account

these factors, we have reduced growth rates to 0.93% for 1

year of extraordinary growth stage and 3.50% for the

stable stage. Risk free rate is at 6.00% due to world debt

crisis and inflation causing increased level of interest

rates.

2. Valuation in the Bull Scenario

Global production and trade have bounced back and

confidence rebounded strongly on the financial and real

fronts with immense policy support. There has been

stabilization of both money and equity markets, with

tightening of bank lending standards. If policymakers are

able to make astute policy decisions to sustain recovery,

the world economy can well be on the mend. The

spectacular growth prior to 2007 could be seen again, with

Nintendo enjoying 5 years of extraordinary growth of

18.93% and a stable growth rate of 4.50%. Risk free rate is

at 5.00% considering a stable boom scenario.

Taking into account our current stock price of ¥31,900.00,

this represents a -15.89%% downside for the bear scenario

and an impressive 39.11%% upside for the bull case.

Recommendation and Summary

In hindsight, Nintendo has endured a tough time in the

past two years of worldwide meltdown. As a consumer

discretionary company running operating globally,

Nintendo has been affected by reduced consumer

confidence, unemployment and wage-cuts. Still, Nintendo

has maintained a strong overall position. As the world

continues to show signals of economic recovery, optimism

and a stabilizing equity markets, prospects are nothing but

glorious for Nintendo.

Despite sales of Nintendo’s blockbuster console “Wii” are

clearly slowing down and growth rate even has turned

negative since March 2009, the outlook for Nintendo is

generally positive. In relative to its rivals, Nintendo

maintains a valuable competitive edge by dominating the

rapidly growing video game market for aged and female

players. In addition, Nintendo has several promising

product innovations coming up such as the 3D handheld

console “3DS” and furthermore in the pipeline. Besides

Nintendo Co. Ltd



that, existing products are performing on a surprisingly

stable level.

Looking forward, the results of our estimation give us a

rate of growth of 8.14% for 2011, around 20.00% for

2012, and close to 30% for the year 2013.

As a fully equity financed company, Nintendo is currently

in a stable and healthy economic condition eliminating or

lowering risk factors such as default risk or the probability

of bankruptcy. On the other hand this policy of totally

avoiding leverage limits Nintendo’s Return on Equity and

increases cost of capital. However, since Nintendo is a

highly regarded, low-beta company, fund raising has never

been a problem.

Taking all major factors into consideration – growth,

margins, R&D and discount rates – our target price for

Nintendo is ¥40,824.67. We therefore recommend a

“strong buy” position for Nintendo. With a current share

price of ¥ 31.900 it is significantly undervalued by 21.86

%.

Furthermore Nintendo’s shares have been trading at a

Forward P/E of 14.98x as of 10th of March 2010, which

clearly emphasizes our assessment of Nintendo. Holding

slightly optimistic assumptions, a share price ranging

between ¥35.000 and ¥45.000 is most likely according to

Relative Valuation.

Analyzing the bear scenario – dominated by a negligible

worldwide recovery and exploding debt and inflation

problems – Nintendo’s downside risk appears to be limited

with a projected value of ¥27,527.04 and 15.89 %

overvaluation. On the opposite end of expectations, the

bull scenario shows splendid prospects for the company,

dangling a 39.11 % upside at an anticipated stock price of

¥52,397.02. Overall, the scenario analysis apparently

reinforces our recommended “strong buy” position for

Nintendo Company Ltd.

Nintendo Co. Ltd



Disclosure appendix

Analyst certification

The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject

security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no

part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in

this research report: Li Zhi, Anthony Chan Yu, Ralf Dreischaerf, Neo Siong Sze, Carlos Palacios, Amaury Guillement and

Christoph Schiller

Basis for financial analysis

This report is designed for, and should only be utilized by, institutional and private investors. Furthermore, SMU

INTERNATIONAL Value Investors Inc. believes an investor's decision to make an investment should depend on individual

circumstances such as the investor's existing holdings and other considerations.

SMU INTERNATIONAL Value Investors Inc. believes that investors utilize various disciplines and investment horizons when

making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk

tolerance and other considerations.

SMU INTERNATIONAL Value Investors Inc. believes an investor's decision to buy or sell stock should depend on individual

circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as

well as different systems to describe their recommendations. Investors should carefully read the definitions of the

recommendations used in each research report. In addition, because research reports contain more complete information

concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the

recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.

Nintendo Co. Ltd Page 1



Appendix I - Adjustments

Adjusted Income Statement

Forecast

Growth -21,09% 13,93% 13,93% 13,93% 11,45% 8,97% 6,48% 4,00%

Year Ended 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Sales or Revenues 966.534,00 1.672.423,00 1.838.622,00 1.450.785,46 1.652.943,32 1.883.270,61 2.145.692,57 2.391.391,11 2.605.831,61 2.774.783,14 2.885.774,46

Cost of Goods Sold 565.399,00 968.403,00 1.040.274,00 870.471,28 991.765,99 1.129.962,37 1.287.415,54 1.434.834,66 1.563.498,97 1.664.869,88 1.731.464,68

Gross Margin 401.135,00 704.020,00 798.348,00 580.314,18 661.177,33 753.308,25 858.277,03 956.556,44 1.042.332,64 1.109.913,25 1.154.309,78

Depreciation, Depletion & Amortization 25.633,20 31.214,80 36.434,20 35.242,56 36.995,03 42.150,05 48.023,40 54.715,16 60.980,47 66.448,71 70.756,97

Selling, General & Admin Expenses 131.418,00 172.436,00 192.772,00 145.078,55 165.294,33 188.327,06 214.569,26 239.139,11 260.583,16 277.478,31 288.577,45

Operating Expenses – Total 722.450,20 1.172.053,80 1.269.480,20 180.321,11 202.289,36 230.477,12 262.592,66 293.854,27 321.563,63 343.927,02 359.334,42

Operating Income 244.083,80 500.369,20 569.141,80 399.993,08 458.887,97 522.831,13 595.684,37 662.702,17 720.769,01 765.986,23 794.975,37

Non-Operating Interest Income 33.987,00 44.158,00 30.181,00 21.761,78 24.794,15 28.249,06 32.185,39 35.870,87 39.087,47 41.621,75 43.286,62

Earnings Before Interest And Taxes (EBIT)

278.070,80 544.527,20 599.322,80 421.754,86 483.682,12 551.080,19 627.869,76 698.573,04 759.856,48 807.607,98 838.261,99

Interest Expense On Debt 0,00 0,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00

Pretax Income 278.070,80 544.527,20 599.321,80 421.755,86 483.683,12 551.081,19 627.870,76 698.574,04 759.857,48 807.608,98 838.262,99

IncomeTaxes 115.348,00 176.532,00 169.134,00 188.904,45 216.641,67 246.829,26 281.223,31 312.891,31 340.340,17 361.728,06 375.457,99

Minority Interest -37,00 -99,00 -91,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00

Net Income Before Extra Items/Preferred Div

162.685,80 367.896,20 430.096,80 232.751,41 266.941,45 304.151,92 346.547,45 385.582,73 419.417,32 445.780,92 462.704,99

Extr Items & Gain(Loss) Sale of Assets 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00

Net Income Before Preferred Dividends 162.685,80 367.896,20 430.096,80 232.751,41 266.941,45 304.151,92 346.547,45 385.582,73 419.417,32 445.780,92 462.704,99

Preferred Dividend Requirements 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00

Net Income Available to Common 162.685,80 367.896,20 430.096,80 232.751,41 266.941,45 304.151,92 346.547,45 385.582,73 419.417,32 445.780,92 462.704,99

EPS 1.271,89 2.876,54 3.363,12 1.819,99 2.087,33 2.378,30 2.709,81 3.015,04 3.279,61 3.485,76 3.618,09




Adjusted Balance Sheet

Year-ended 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Assets

Cash And ST Investments 1.220.060,00 1.414.491,00 1.408.634,00 1.483.567,53 1.629.851,43 1.796.526,21 1.986.433,20 2.229.910,57 2.504.816,31 2.807.572,01 3.132.652,11

Receivables (Net) 87.780,00 145.611,00 135.149,00 121.571,39 138.511,61 157.812,33 179.802,49 200.391,28 218.360,74 232.518,36 241.819,09

Total Inventories 88.609,00 104.842,00 144.752,00 112.723,26 128.430,54 146.326,53 166.716,22 185.806,53 202.468,14 215.595,36 224.219,17

Other Current Assets 140.116,00 144.060,00 148.676,00 150.866,56 171.888,86 195.840,50 223.129,65 248.679,73 270.979,31 288.548,50 300.090,44

Current Assets - Total 1.536.565,00 1.809.004,00 1.837.211,00 1.868.728,74 2.068.682,45 2.296.505,58 2.556.081,56 2.864.788,10 3.196.624,50 3.544.234,23 3.898.780,82

Other Assets 16.498,00 3.209,00 6.687,00 7.253,93 8.264,72 9.416,35 10.728,46 11.956,96 13.029,16 13.873,92 14.428,87

Research Asset 97.633,40 96.909,40 110.788,20 116.062,84 132.235,47 150.661,65 171.655,41 191.311,29 208.466,53 221.982,65 230.861,96

Total Assets 1.650.696,40 1.909.122,40 1.954.686,20 1.992.045,50 2.209.182,63 2.456.583,58 2.738.465,43 3.068.056,35 3.418.120,19 3.780.090,79 4.144.071,65

Liabilities

Accounts Payable 301.080,00 335.820,00 356.774,00 290.157,09 330.588,66 376.654,12 429.138,51 478.278,22 521.166,32 554.956,63 577.154,89

ST Debt & Current Portion of LT Debt 0,00 0,00 9,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00

Income Taxes Payable 90.013,00 112.450,00 83.551,00 72.539,27 82.647,17 94.163,53 107.284,63 119.569,56 130.291,58 138.739,16 144.288,72

Other Current Liabilities 75.564,00 117.104,00 98.650,00 87.047,13 99.176,60 112.996,24 128.741,55 143.483,47 156.349,90 166.486,99 173.146,47

Current Liabilities - Total 466.657,00 565.374,00 538.984,00 449.743,49 512.412,43 583.813,89 665.164,70 741.331,24 807.807,80 860.182,77 894.590,08

Long Term Debt 0,00 786,00 15,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00

Other Liabilities 698,00 3,00 5.660,00 7.253,93 8.264,72 9.416,35 10.728,46 11.956,96 13.029,16 13.873,92 14.428,87

Total Liabilities 467.355,00 566.163,00 544.659,00 456.997,42 520.677,15 593.230,24 675.893,16 753.288,20 820.836,96 874.056,69 909.018,96

Shareholders' Equity

Minority Interest 138,00 98,00 25,00 25,00 25,00 25,00 25,00 25,00 25,00 25,00 25,00

Preferred Stock 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00

Common Equity 21.791,00 21.705,00 21.651,00 21.700,00 21.700,00 21.700,00 21.700,00 21.700,00 21.700,00 21.700,00 21.700,00

Retained Earnings 1.220.295,00 1.380.431,00 1.432.959,00 1.552.660,25 1.689.945,02 1.846.366,69 2.024.591,86 2.257.131,86 2.522.491,70 2.817.726,45 3.137.865,74

Treasury -156516 -156184 -155396 -155.400,00 -155.400,00 -155.400,00 -155.400,00 -155.400,00 -155.400,00 -155.400,00 -155.400,00

Adjustment for Research Asset 97.633,40 96.909,40 110.788,20 116.062,84 132.235,47 150.661,65 171.655,41 191.311,29 208.466,53 221.982,65 230.861,96

Total Equity 1.183.341,40 1.342.959,40 1.410.027,20 1.535.048,08 1.688.505,48 1.863.353,34 2.062.572,27 2.314.768,15 2.597.283,23 2.906.034,10 3.235.052,70

Total Liabilities & Shareholders' Equity

1.650.696,40 1.909.122,40 1.954.686,20 1.992.045,50 2.209.182,63 2.456.583,58 2.738.465,43 3.068.056,35 3.418.120,19 3.780.090,79 4.144.071,65




Appendix II – FCFE Input figures

Adjusted Equity Reinvestment Rate

2010 (forecast) 2009 2008 2007 2006 2005

Net Income ¥232.751,41 ¥430.096,80 ¥367.896,20 ¥162.685,80 ¥98.378,00 ¥87.416,00

Current Assets ¥1.837.211,00 ¥1.809.004,00 ¥1.536.565,00 ¥1.018.730,00 ¥993.891,00

Current Liabilities ¥538.984,00 ¥565.374,00 ¥466.657,00 ¥182.274,00 ¥205.449,00

- Change in Working Capital ¥54.597,00 ¥173.722,00 ¥233.452,00 ¥48.014,00 ¥10.928,00

- CAPEX ¥22.956,00 ¥7.992,00 ¥6.144,00 ¥4.139,00 ¥2.061,00

- Acquisitions ¥0,00 ¥0,00 ¥0,00 ¥0,00 ¥0,00

+ Amortization Depreciation ¥36.434,20 ¥31.214,80 ¥25.633,20 ¥3.591,00 ¥2.931,00

- Net capital expenditure -¥13.478,20 -¥23.222,80 -¥19.489,20 ¥548,00 -¥870,00

= FCFE ¥119.701,25 ¥388.978,00 ¥217.397,00 -¥51.277,00 ¥49.816,00 ¥77.358,00

Dividend Pay-outs ¥227.458,00 ¥97.110,00 ¥49.857,00 ¥34.943,00 ¥18.455,00

Cash to stockholder to FCFE ratio 58,48% 44,67% -97,23% 70,14% 23,86%

Note: Payout ratio is not stable over time. Therefore a valuation based on Dividends would underestimate the value of equity for Nintendo. Additionally Corporate Governance in Japan tends to be weak and dividends therefore do not reflect the real FCFE, which is why we chose a FCFE model.

Equity reinvestment rate = 9,56% 40,91% 131,52% 49,36% 11,51%

(Net Income - FCFE)/Net Income

Average Equity reinvestment rate 48,57%




Growth Rate 09 to 10 – Quarterly Sales, Net- and Operating Income Figures

1st 03 2nd 03 3rd 03 4th 03 1st 04 2nd 04 3rd 04 4th 04 1st 05 2nd 05 3rd 05 4th 05 1st 06 2nd 06 3rd 06 4th 06

Net Income (accumulated per year) 11450 2885 34545 67267 22635 46445 67757 87416 14115 56824 92185 98378 15551 94676 131916 174290

Net Income 11450 -8565 31660 32722 22635 23810 21312 19659 14115 42709 35361 6193 15551 79125 37240 42374

Net Sales (accumulated per year) 83821 211382 439489 504135 82153 188009 439589 515292 70684 176364 412339 509249 130919 298817 712589 966534

Net Sales 83821 127561 228107 64646 82153 105856 251580 75703 70684 105680 235975 96910 130919 167898 413772 253945

Operating Income (accumulated) 7245 28771 102627 100120 17467 40013 102627 111522 3754 19613 82783 90349 28802 67111 167633 226024

Operating Income 7245 21526 73856 -2507 17467 22546 62614 8895 3754 15859 63170 7566 28802 38309 100522 58391

Proportion of Annual Income 17,02% -12,73% 47,07% 48,64% 25,89% 27,24% 24,38% 22,49% 14,35% 43,41% 35,94% 6,30% 8,92% 45,40% 21,37% 24,31%

Proportion of Net Sales 16,63% 25,30% 45,25% 12,82% 15,94% 20,54% 48,82% 14,69% 13,88% 20,75% 46,34% 19,03% 13,55% 17,37% 42,81% 26,27%

Proportion of Operating Income 7,24% 21,50% 73,77% -2,50% 15,66% 20,22% 56,14% 7,98% 4,15% 17,55% 69,92% 8,37% 12,74% 16,95% 44,47% 25,83%

1st 07 2nd 07 3rd 07 4th 07 1st 08 2nd 08 3rd 08 4th 08 1st 09 2nd 09 3rd 09 4th 09

Net Income (accumulated per year) 80251 132421 258929 257342 107267 144828 212524 279089 42316 69492 192601 243272,95

Net Income 80251 52170 126508 -1587 107267 37561 67696 66565 42316 27176 123109 50671,954

Net Sales (accumulated per year) 340439 694803 1316434 1672423 423380 836879 1526348 1838622 253498 548058 1182177 1450785,46

Net Sales 340439 354364 621631 355989 423380 413499 689469 312274 253498 294560 634119 268608,46

Operating Income (accumulated) 90631 188784 394036 487220 119192 252183 501330 555263 40401 104360 296656 334901,09

Operating Income 90631 98153 205252 93184 119192 132991 249147 53933 40401 63959 192296 38245,09

Proportion of Annual Income 31,18% 20,27% 49,16% -0,62% 38,43% 13,46% 24,26% 23,85% 17,39% 11,17% 50,61% 20,83%Proportion of Net Sales 20,36% 21,19% 37,17% 21,29% 23,03% 22,49% 37,50% 16,98% 17,47% 20,30% 43,71% 18,51%Proportion of Operating Income 18,60% 20,15% 42,13% 19,13% 21,47% 23,95% 44,87% 9,71% 12,06% 19,10% 57,42% 11,42%

Average share of income in 4th quarter 20,83%Average Net Sales in 4th quarter 18,51% Expected sales growth rate 2009 to 2010

Average Operating Income 4th quarter 11,42% -21,09%




Forecast of Growth Rates 2011 to 2013

Current IMF-Forecast

Year: 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

World GDP Real Growth Rate (%) 2,70% 3,80% 4,90% 4,70% 5,30% 5,20% 3,10% 2,70% 3,10% 4,00% 4,50%

Net Sales Growth Rate -9,14% 2,12% 0,11% -1,20% 89,77% 73,20% 9,94% -21,09% 8,02% 20,00% 30,00%

Net Sales 503,75 514,41 514,99 508,83 965,61 1672,42 1838,62 1450,79 1567,10 1880,52 2444,68

Net Income Growth rate -36,81% -50,65% 163,35% 12,54% 77,16% 47,65% 8,45% -16,60% 14,69% 13,94% 13,94%

Net Income 67,27 33,19 87,42 98,38 174,29 257,34 279,09 232,75 266,94 304,15 346,55

Average. Growth Rate (2011-13): 19,34% Av. Growth Nint.: 19,34% 19,34% 19,34%

Compound Annual Growth Rate CAGR (2010-13):

13,93% CAGR Nintendo: 13,93% 13,93% 13,93%




Stable Growth Input Figures

Expected terminal growth 4,00%

2010 (exp.) 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Return on Invested Capital 22,46% 22,06% 16,79% 10,38% 9,65%

Return on Equity 18,56% 22,47% 23,14% 17,70% 10,37% 9,65% 3,73% 7,55% 11,38% 11,57% 7,40% 12,25%

Arithmetic Average ROE (as Proxy for future) 12,98%

Geometric Average ROE (as Proxy for future) 11,57%

Reinvestment Rate to Equity: 30,81%

(Terminal growth/ROE)

Note:

Historic Average growth applicable since there were no negative earnings and relatively stable size of the company in the past




Appendix III – Valuation

FCFE Valuation (1/2)

History

Extraordinary Growth Transition

Stable Growth

(¥ in millions except for per share data) 2010 2011 to 2013 2014 2015 2016

2017 Onwards

3 2 1

Company Data:

Historical beta 0,89 0,92 0,95 0,97 1

Adjusted beta 0,93 0,95 0,96 0,98 1,00Value of cash (including short term investments and marketable securities) ¥1.408.634,00

Share price (11 March 2010) ¥31.900,00

Shares outstanding (in millions) 127,885

Value of equity ¥4.079.522,60

Discount Rate calculation:

Beta of operating assets 0,93 0,96 0,98 0,99 1,00

Risk-free rate 2,34% 5,00%

Japan Country Premium 0,90% 1,00%

Additional risk premium 4,50% 5,00%

Cost of equity 7,34% 8,26% 9,17% 10,09% 11,00%

Cash Flow calculation:

Duration (years) 3 1 1 1 (Expected Compound Annual) Growth Rate for period -16,60% 13,93% 11,45% 8,97% 6,48% 4,00%

Return on Equity 18,56% 28,69% 28,85% 24,41% 19,20% 11,57%

Reinvestment rate 48,57% 48,57% 39,69% 36,73% 33,77% 30,81%

Cost of equity 7,34% 8,3% 9,17% 10,09% 11,00%

Tax rate 37,74% 39% 40% 40% 40,69%Adjusted Net income in previous year ¥430.096,80 ¥232.751,41

¥344.236,27 ¥383.654,01 ¥418.056,98 ¥445.162,09

Adjusted Net Income in current year ¥232.751,41 ¥265.183,86

¥383.654,01 ¥418.056,98 ¥445.162,09 ¥462.968,57

FCFE in current year (based on Adj Net Income and Reinvestment rate) ¥119.701,25 ¥136.380,86

¥231.376,81 ¥264.499,18 ¥294.824,91 ¥320.321,65

PV of future Free Cash Flows to Equity ¥461.468,95

¥172.793,14 ¥223.796,38 ¥245.313,14

Net income in first year of stable growth ¥462.968,57Terminal value (no change in tax rate) ¥4.576.023,61

Terminal value (change in tax rate) ¥4.359.343,06

PV of cash flows in stable growth ¥2.708.846,31




FCFE Valuation (2/2)

Value of operating assets ¥3.812.217,92Value of cash and ST marketable securities ¥1.408.634,00

Value of equity ¥5.220.851,92

Shares outstanding (in millions) 127,885

Share price ¥40.824,67

Over/undervalued by 21,86%

Recommendation strong buy




Relative Valuation (1/3)

Dataset obtained on 10th of March 2010

Name of Company Forward P/E P/E P/S P/B Beta NINTEDO 14,94 12,46 2,40 2,27 0,89

Pee

r-G

roup

(E

nter

tain

men

t-E

lect

roni

cs a

nd V

ideo

Gam

es)

Sony Corporation 35,13 -81,32 0,44 1,04 1,44

Microsoft 13,48 14,75 4,34 5,77 0,98Sega Sammy 19,01 - 0,75 1,18 0,87Mattel 12,87 13,99 1,48 1,49 1,15HappiNet Corporation 9,42 10,48 11,67 0,64 0,45Nihon 32,81 77,31 1,78 1,35 0,71Apple 16,57 18,98 4,43 5,79 1,57LeapFrog 13,18 21,57 1,23 2,42 2,17Konami 14,21 18,29 0,84 1,23 1,10

Electronic Arts Inc. 29,81 54,25 1,56 2,12 1,30

THQ 20,68 52,15 0,47 1,23 2,26

Take-Two Interactive 7,35 -20,65 0,81 1,53 1,24Activision Blizzard 14,45 16,38 3,24 1,29 0,64Navarre Corporation 6,44 6,37 - - 1,75Nokia 12,56 14,66 0,90 2,82 1,42GameStop 8,13 9,34 0,32 1,09 0,96

Minimum 6,44 -81,32 0,32 0,64 0,45 Median 14,21 14,71 1,35 1,42 1,15 Maximum 35,13 77,31 11,67 5,79 2,26 Mean 16,53 14,94 2,29 2,08 1,23 Std. Deviation 858,71% 3421,28% 282,34% 155,51% 50,29% 90th percentile 31,00989501 53,2 4,385 4,295 1,918 (¥ in millions of YEN) Forecast Earnings 2010 ¥232.751,41 Forecast Sales 2010 ¥1.450.785,46 Current Book Value ¥1.535.048,08 Common Stock Outstanding ¥127,88 Forecast Earnings per share ¥1.820,08 Forecast Sales per share ¥11.344,90 Forecast Book Value per share ¥12.003,82 Current Share Price ¥27.200,00





Market Price Estimates

Relative Valuation Based OnPessimistic

(assume median)Base

Optimistic (assume 90th percentile)

Forward P/E ¥25.863,29 ¥30.089,88 ¥56.440,39

P/S ¥15.365,23 ¥25.991,04 ¥49.747,37

P/B ¥17.063,30 ¥24.953,70 ¥51.556,39

P/E ¥26.764,23 ¥27.188,27 ¥96.828,08

Forward P/E

P/S

P/B

0.00 ¥ 10,000.00 ¥ 20,000.00 ¥ 30,000.00 ¥ 40,000.00 ¥ 50,000.00 ¥ 60,000.00 ¥





Name of CompanyPEG

(Cur. PE/1 year forward Growth)

Forward P/EProjected Growth

(10-11)EPS Next

FYP/E

EPS Cur. FY

NINTEDO 0,86 14,98 14,69% 2087,33 12,68 1819,99

Microsoft 1,56 13,48 9,45% 2,20 14,75 2,01

Mattel 1,66 12,87 8,43% 1,80 13,99 1,66

Konami 0,63 14,21 28,97% 1,38 18,29 1,07

Electronic Arts Inc. 0,66 29,81 82,35% 0,62 54,25 0,34

THQ 0,37 20,68 141,67% 0,29 52,15 0,12

Activision Blizzard 1,18 14,45 13,89% 0,82 16,38 0,72

Navarre Corporation - 6,44 0,00% 0,32 6,37 0,32

Nokia 0,89 12,56 16,50% 1,20 14,66 1,03

LeapFrog 0,35 13,18 62,07% 0,47 21,57 0,29

Apple 1,31 16,57 14,52% 13,41 18,98 11,71

GameStop 0,62 8,13 15,04% 2,60 9,34 2,26

0.00 10.00 20.00 30.00 40.00 50.00 60.000.00%

25.00%

50.00%

75.00%

100.00%

125.00%

150.00%

PEG (Cur. PE/1 year forward Growth) Linear (PEG (Cur. PE/1 year forward Growth))

Current P/E

On

e-y

ear

fo

rwar

d g

row

th




Appendix IV – Diagrams

Figure 1

Figure 1 underlines the abrupt halt in software as well as hardware sales in 2009:

2004 2005 2006 2007 2008 20090

10

20

30

40

50

60

70

-10%

0%

10%

20%

30%

40%

50%

10 12.5 17 24 28.5 30.519.5 20

21.5

2836.5 35.5

Video Games Value Sales Performance by Type

video games harware retail value RSP video games software retail value RSP

Hardware y-o-y value growth (%) Software y-o-y value growth (%)

Bil

l. U

S $

Figure 16

Figure 2

Figure 2 displays the most important markets in regards to consumption per capita:

UKUSA

France

Austra

lia

Canada

Italy

Japan

Spain

Germany

China0

20406080

100120140160180

Per Capita Toy Consumption in 10 Largest Markets2009

US

$ p

er

cap

ita

Figure 17




Figure 3

Figure 3: Current P/E (x-axis) to one-year Forward Growth (y-axis)

0.00 10.00 20.00 30.00 40.00 50.00 60.000%

25%

50%

75%

100%

125%

150%

PEG (Cur. PE/1 year forward Growth)Linear (PEG (Cur. PE/1 year forward Growth))

Current P/E

On

e-y

ea

r fo

rwa

rd g

row

th

Figure 18

Figure 4

Figure 4: Displays the expected range of fair prices for Nintendo according to possible scenarios (grey: pessimistic, red: optimistic)

Forward P/E

P/S

P/B

0.00 ¥ 20,000.00 ¥ 40,000.00 ¥ 60,000.00 ¥

Figure 19




Figure 5

Figure 5 illustrates the decisive input-factors utilized in our FCFE valuation model for Nintendo. We will

further elaborate on the derivation of the figures in the following parts.

Figure 20

Figure 6

Figure 6 illustrates the expected growth periods explained above. For detailed figures please refer to the

attached spreadsheets.

20062007

20082009

20102011

20122013

20142015

20162017

20182019

20202021

-20%

0%

20%

40%

60%

80%

Historical Growth Rate Extraordinary Growth Rate

Transition 2 Stable Growth Rate

Figure 21


Nintendo‘s Road-Map to ValuationSales

Growth Forecast (%)

Operating Margin (%)

Equity Reinvestment Rate (%)

Tax Rate (%) &

Interest Expenses

Adjustments

EBIT

Net Income

FCFE

Cost of Equity (%)

Equity Value of Operating

Assets

+ Value of Cash and ST

Securities

= Value of Equity

Number of Shares

Fair Value per Share

Main Value DriversValue Determinants Cash Flow Figures Value of Equity



Figure 7

Figure 7: Illustration of smoothed out growth rate for 2011 to 2013

2011 2012 20130%

5%

10%

15%

20%

25%

30%

35%

Net Income Growth rate Av. Growth Nint.: CAGR Nintendo:

Figure 22

Figure 8

Figure 8 shows the quarterly numbers in sales, net- and operating income (in million Yen) and the

proportion of annual Net sales per quarter:

1st 03

3rd 0

3

1st 04

3rd 0

4

1st 05

3rd 0

5

1st 06

3rd 0

6

1st 07

3rd 0

7

1st 08

3rd 0

8

1st 09

3rd 0

90 ¥

100,000 ¥

200,000 ¥

300,000 ¥

400,000 ¥

500,000 ¥

600,000 ¥

700,000 ¥

0%

10%

20%

30%

40%

50%

60%

Proportion of Net Sales Net Income Net Sales Operating Income

Figure 23




Figure 9

Figure 9 highlights the impressive correlation and puts into perspective the performances of Nintendo in

relation with the global economy for the upcoming years:

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130%

1%

2%

3%

4%

5%

6%

-100%

-50%

0%

50%

100%

150%

200%

World GDP Real Growth Rate (%) Net Income Growth rateNet Sales Growth Rate

NDS 2Wii 2

Xbox Natal

Wii

Xbox 360/PS 3/

PSP

NDS

Figure 24

Figure 10

According to Bloomberg the currently 2.34% are a good estimate:

Figure 25






Figure 11

Net Income Adjustments 2007-2009:

2007 2008 20090 ¥

100,000 ¥

200,000 ¥

300,000 ¥

400,000 ¥

500,000 ¥

174,290.00

257,342.00279,089.00

162,685.80

367,896.20

430,096.80

Original Adjusted

Figure 26

Figure 12

Return on Equity 2007-2009:

2007 2008 20090.00%

5.00%

10.00%

15.00%

20.00%

25.00%

11.22%

14.20% 15.14%

9.86%

19.27%

22.00%

Original Adjusted

Figure 27




Figure 13

Figure 13 demonstrates how FCFE and Net Income developed over the last five years and underlines the

core finding, “high-growth years and equity reinvestments strongly correlate”:

2010 (forecast)

20092008200720062005-100,000 ¥

0 ¥

100,000 ¥

200,000 ¥

300,000 ¥

400,000 ¥

500,000 ¥

-30%

-10%

10%

30%

50%

70%

90%

110%

130%

150%

11.51%

49.36%

131.52%

40.91%

9.56%

48.57%

Net Income = FCFE Equity reinvestment rate

Figure 28

Figure 14

Figure 14 illustrates the exposure of Nintendo to the world markets:

2006 2007 2008 20090%

10%20%30%40%50%60%70%80%90%

100%

Japan Americas Europe Other

Figure 29




Figure 15

Please refer to figure 15 for a detailed illustration of recent developments in terms of national debt in the

US and Europe:

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (est.)

2011 (est.)

0 $2,000 $4,000 $6,000 $8,000 $

10,000 $12,000 $14,000 $16,000 $18,000 $

0%

20%

40%

60%

80%

100%

120%

US Gross Debt in Billions undeflated European Union (27 countries, in Billion EUR)

as % of US GDP as % of EURO GDP


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