J.P.. Morgan

J.P.. Morgan Seven & i Holdings (3382) Seven-Eleven Japan's Aggressive Moves, Steady Progress on Omni-Channel Strategy Raising price target to Y4,600, reiterating Overweight rating Adjusting our earnings estimates and price target, still bullish: We adjust our forecasts and raise our price target from ¥4,400 to ¥4,600 (see page 2 for valuation details). We raise our assumptions for the convenience store, financial services, and restaurant segments and lower our assumptions for the superstore segment. We slightly lower our FY2014 profit growth estimate because demand is likely to decline after the consumption tax hike. We adjust our consolidated estimates and expect operating profit to rise 7% on an adjusted basis (15% on a nominal basis) in FY2013 and 6% in FY2014. We consider the stock attractive relative to other large retail stocks, in light of profitability, growth, and valuation, and see 22% upside potential. We maintain our bullish stance. • Earnings outlook reassuring, mainly in convenience store business: We expect operating profit in 3Q to grow 7.6% on an adjusted basis and 17.7% on a nominal basis. As in 2Q, likely sales shortfalls for Ito-Yokado (IY) and the department store business will probably be offset by the convenience store and financial services segments, resulting in solid consolidated earnings. Improved profit growth in the convenience store segment should have a particularly strong impact in 3Q onward, with a slight slowdown in the rise in Seven-Eleven Japan's adjusted SG&A costs, following a peak in IQ, and solid results in dollar terms for 7-Eleven, Inc. The post-consumption tax hike outlook is uncertain, but we expect solid profit growth in FY2014, with structurally stable growth for Seven-Eleven Japan, driven by the meeting of normal-use demand from middle- aged and older consumers and women, offsetting likely profit declines for Ito- Yokado and the department store business. • Series of forward-looking strategic financial moves: Following the December 2 announcement of a tender offer for Nissen Holdings, the company announced the acquisition of stakes in Bamey's Japan (on December 4) and Tenmaya (on December 10). For Seven & i, these companies complement its omni-channel strategy, and the stake in Tenmaya is probably aimed at boosting its market share in local areas. We think these moves represent solid progress on the company's forward-looking, longer-term strategy. The three deals are likely to amount to a total investment of more than V2I billion, which the company expects to cover with cash or other liquid assets. • Potential catalysts: (1) Reassessment of the growth and profitability of the convenience store business, (2) a dividend hike or expectations that RoE will reach management's target, and (3) steps to bolster IY and department stores. Seven & I Holdings Co., Ltd. (Reuters: 3382.7, Bloomberg: 3382 JT) 2012/2 201312 201412 E 2015/2 E °paroling Revenue (V mn) 4186344 4,991,642 5,625,600 5.890.000 Operating ProM (V mn) 292.060 295,685 Recurring Profit (V rim) 293.171 295,836 Net Profit rm) 129.838 138,064 EPS (V) 141.0 156.3 PIE(x) 25.6 24.0 PIBV (x) • EWEBITDA (x) 7.6 1.3 Source: Company data. Mantel. J.P. Morgan estimates. 340,800 341,200 181,300 205.2 18.3 1.1 6.6 360.200 360.800 193.400 2181 17.2 1.6 6.3 2016/2 E 6,178,600 388,800 389,600 211,100 238.9 15.7 1.5 5.9 Japan Equity Research 12 December 2013 Overweight 3382.T, 3382 JT Price: 113,755 A Price Target: 84,800 Previous: $4,400 Japan Retail palm Murata AC Bloomberg JPMA MURATA <GO, JPMorgan Securities Japan Co.. Ltd. Price Pot/ einem* 3 MN MOO IMO ZOO 2.110 Pat Vint; MPH itpli 0.443 - max Am pike 00 TOPIX (robasoci) YTD 1m 3m 12m Abe 50.7% GA% 4.2% 53.8% Rel 100% 0.9% -01% -5.3% Company Data Price (V) Date Of Price Market Cap (V bn) Shares 0/S (mn) 52-week Range (V) TOPIX DPS Dividend Yield ROE 3,755 11 Dec13 3,328.59 886 4,115-2,371 1,250.45 70.00 1.9% 9.3% See page 18 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. Asa 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. www.jpmorganmarkets.com EFTA01148966 Dairo Murata Japan Beult/ Research 12 Dezember 2013 Seven & i Holdings (3382) J.P.Morgan Company Profile Yokado was established in 1951. A holding company was established in 2005 through the swap of tommon stock among Seven-Elcven Japan, Ito-Yokado, and Denny's Japan. The group encompasses seven business arens. The convenience store business rolled out the "meal solution" concept to attract customers in the 30 and over segments, expanding its Seven Premium offerings and taking other measures. The superstore and department store businesses aro currently undergoing structural reform. OP Composition by Segment, FY2012 Source: Company date. Investment Thesis Risk Analysis Upside Scenario to Target Price/Rating • End of bear market prompts reassessment of share valuations • Growing customer base continues to drive stronger-than- expected earnings in the CVS segment • Clarification of growth strategy and stronger-than- expected eamings at SEI • Enhanced shareholder return policies aimed at attaining 10% RoE target • Improved eamings at Ito-Yokado and department store segment via cost cutting and new product strategies • Expansion of group synergies through development of private-label merchandise Downside Scenario to Target Price/Rating • Increased competition in the CVS segment • Stalled recoveries in the Ito-Yokado and department store segments due to deterioration in the operating environment and/or a slowdown in cost-cutting initiatives • Concems about the company's ability to manage the group and execute its strategies Operating Profit Forecasts: J.P. Morgan versus Consensus V billan J.P. Morgan FY2013E 340.8 FY2014E 360.2 Source: J.P. Morgen esunates. Bornberg. Consensus 344.2 367.7 Assumptions 8 Sensitivity Metrics (Impact on FY2013 Profits) Factor Cuwent Assurnption Charme Impact Total chaIn aalet OP WS rate SEJ SSS IY SSS 98.0 0.8% .3.5% 41 1.0% 1.0% 842.3 bn 810.2 to 40.6 bn V6.8 bn V2.6 bn Source: J.P. Morgen esunates Valuation We change the horizon of our price target from December 2013 to December 2014 and now use our FY2014 rather than FY2013 estimates. We base our price target on a P/E of 21x, derived from the eight-year average P/E of 18x for 18 major retailers and the stock's average P/E relative to the group of I.2x over the past five years, during which time eamings experienced both strong and weak years and the convenience store business was clearly on a growth path. Peer Valuations Based on Bloomberg Consensus Bloomberg Market Cap P/E(x) PANS) ROE(%) Company name Ticker Currency Price Date (Smn) 13E 14E 15E 13E 14E 15E 13E Lawson Inc 2651 JT JPY 7.720 Dec-11 7.529 21.0 19.4 17.9 3.17 - 2.97 2.78 15.5 Sem 8I Holdings 3382 JT JPY 3,755 Dec-11 32.364 19.0 17.6 16.1 1.62 1.53 1.44 8.7 FamilylAan 8028 JT JPY 4.645 Dec-11 4.412 18.9 17.3 16.2 1.75 1.65 1.55 9.4 Casey's GS CASY.O USD 70.27 Dec-10 2,704 19.0 17.8 17.1 3.81 3.27 20.8 Alimentation Cootte Tard ATD/B CN CAD 76.82 Dec-10 13.678 18.2 16.4 14.4 3.69 3.04 2.52 21.2 Source: Bbomberg. Note: fAarketcaps are seceblei usng torex reifes es of Dec 10. 2 EFTA01148967 Dairo Murata Japan Equity Research 12 December 2013 Figure 1: Consolidated Earnings Forecasts J.P.Morgan Operating revenue Operating profit Recurring profit Net profit V mn YoY% Ymn YoY% Ynn YoY% V mn YoY% 2113 Full year Actual 4,991,642 4.3 295.685 1.2 295.836 0.9 138.064 6.3 2./14 Full year JP1/1 E New 5,625,600 12.7 340,800 15.3 341,200 15.3 181,300 31.3 JPME Old 5.620.600 12.6 340,800 15.3 341,200 15.3 181.300 31.3 CcE 5.640.000 13.0 340,000 15.0 337.000 13.9 170.000 23.1 Consensus E 5 658 237 13.4 344,219 16.4 343.995 16.3 174,885 26.7 2/15 Full year JPIA E New Al 5,890,000 4.7 360,200 52 360,87:0 5.7 193,400 62 JPM E Old 5.884.800 4.7 361,700 6.1 362.300 6.2 194,300 7.2 Consensus E 5.857.350 3.5 367.769 6.8 368.525 7.1 188,739 7.9 2/16 Full year MIME New ■ 6,178,600 4.9 388,10 7.9 389,600 8.0 211,100 9.2 JPIA E Old 6,161,400 4.7 395.000 92 395,800 9.2 214.800 10.6 Consensus E 6.025.563 2.9 392,590 6.7 397.402 7.8 206.095 92 Source: Cavern/ data. Mcomberg consensus.J.P. Morgan summates. Laying groundwork for future with capital tie-up strategy Following the December 2 announcement of a tender offer for Nissen Holdings, the company announced a number of strategic financial moves, including the acquisition of stakes in Barney's Japan and Tenmaya. For Seven & i, these companies complement its omni-channel strategy, and the stake in Tenmaya is probably aimed at boosting its relatively low market share in local areas of western Japan (except Seven-Eleven Japan's). The three companies' contributions would be limited, given Seven & i's size, but the forward-looking strategy, encompassing omni-channel retailing and other aspects, is a step forward. The three deals am likely to amount to a total investment of more than ¥21 billion, which the company plans to cover with cash and other liquid assets. Nissen consistent with (mini-channel strategy Nissen is Japan's largest mail order company, with annual sales of ¥I76.6 billion. Seven & i's disclosures show a tender offer price of ¥410 and plans to acquire up to 50.1% of the voting rights, or 30,786,000 shares. The deal would be worth ¥12.6 billion, implying a P/B of 0.8x (based on FY6/13 data). Nissen would not contribute much earnings in the near term; it expects to be unprofitable in the fiscal year through December 2013. If the acquisition goes as planned, Nissen would be a consolidated subsidiary starting next fiscal year. Seven & i said the investment is aimed at cooperation in terms of finding new customers, marketing, promotion, expanding the product lineup, developing products, manufacturing/retailing (SPA), and using supporting operations, such as logistics, systems, and billing/payments. Nissen has a base of about 32 million customers, mainly those in their 30s and 40s with families. Specific possibilities for product development include distinctive clothing and other products, and possibilities for marketing/promotion and supporting operations include the development of websites for smartphone access and e-commerce technologies. Potential benefits for Nissen include an expanded product lineup, new customers, and enhanced logistics and IT systems. 3 EFTA01148968 Dairo Murata Japan Equity Research 12 December 2013 J.P.Morgan It remains to be seen to what extent synergies are generated and earnings rebound as part of the company's omni-channel strategy, one of its most important longer-term strategies. Barney's Japan likely to generate synergies with department store business Seven & i plans to acquire 49.9% of Barney's Japan (127,800 shares) from Tokio Marine Capital, a fund unit of the Tokio Marine group. The deal is reportedly valued at around ¥6 billion, according to the December 4 Nihon Keizai Shimhun (the company did not disclose a figure). Barney's Japan generated ¥19.5 billion in sales and was profitable in FY2012. It would become an equity-method affiliate starting next fiscal year, but its impact on Seven & i Holdings' earnings would be limited. Its strengths and resources that might be useful for Seven & i include (I) the ability to develop very fashionable, high-quality clothing; (2) a base of prime customers, mainly fashionable, well-to-do consumers; and (3) a strong brand image and prime store locations. The department store segment is likely to benefit from direct synergies. However, online sales of fashionable clothing are rapidly gaining market share and the addition of differentiated, high value-added products to its product line through this deal is likely to become an increasingly important aspect of the company's omni-channel strategy Partnership with Tenmaya would bolster dominance in Chugoku region Seven & i unit Ito-Yokado plans to acquire 20% (2.31 million shares) of Tenmaya for an undisclosed amount, but the value would be about ¥3 billion based on Tenmaya's current share price. If the acquisition proceeds as planned, Tenmaya would become an equity-method affiliate starting next fiscal year, but we think its contribution to earnings would be limited. The investment's strategic implications include market share gains in the Chugoku region and the effective use of resources in such areas as logistics and IT systems, personnel development, product purchasing, and financial-related businesses. The strategic ties arc likely to strengthen longer term. Start of initiatives on omni-channel strategy, the most important longer-term strategy Challenges include e-commerce profitability and increased synergies E-commerce accounts for just over 4% of Japan's total retail market. This percentage is lower than in other countries but is likely to rise gradually. A growing number of established major retailers are launching full-fledged online initiatives and aiming to use both established brick-and-mortar stores and the online channel (omni-channel strategy). It is not difficult for retailers to set up their own sites or participate in existing online shopping malls, but it is a challenge for them to let consumers know about the advantages of both channels and generate decent earnings. Specific financial issues include intense price competition online (particularly in the area of commodity products), shipping charges (in many cases, retailers raise prices to all for free shipping), and the fees for participating in online 4 EFTA01148969 Dairo Murata Japan Equity Research 12 December 2013 J.P.Morgan shopping malls. For companies selling from their own websites, obtaining knowhow related to website development and operation will be a critical issue. Among established major retailers, Seven & i is pursuing an online strategy that has some relative strengths in terms of advantages for customers, operational efficiency, and overall group capabilities (competitiveness and offerings of original products). In search of strengths in the last mile We think the group has a clear advantage in terms of logistics infrastructure for the last mile, getting goods to customers' homes. For example, deliveries to homes in the areas of Seven-Eleven Japan's approximately 16,000 stores around the country could be done jointly with the stores rather than handled solely by the headquarters. The company is working with Toyota to develop small electric vehicles for deliveries from Seven-Eleven Japan stores to nearby homes and is also leasing or partially subsidizing stores' costs for electric bicycles and motorbikes. We think the company has advantages and the lead over other major retailers in terms of product and logistics projects and specific initiatives. Figure 2: 7&l Steadily Expands Its Omni-Channel Strategy Seven Net Shopping Name of Websee Main products Sales Net Supermarket Fresh food. food. bewrage. comrrodoes. pet product 40 blIcn JPY Seven Net SenenAleel e.depast Madan Honpo Books. Stage:mos. &books. CODVD. general. toys Berm. deicatessen. ready made meal. fresh food Fashion. cosmebcs. Irtencr goods Open. tow. babes' near. mammy dohng 60 ham JPY 43. Order Data niltribldat 150 bases across Japan I EC Citstributkan Center I base ri Karm-area Itovokado stows Net Supermarket Delivery Seven Eleven Japan stores Seven Net. Sewn-Meal etlec.art llmced prcduds Delivery OTC Sago/550BU gicebuituro flagship store) e lecar. OTC Customers Source: Company data Note. FY2012 Wes are JP. Morgan essmate. Image used will perrrisson. EFTA01148970 Deiro Murata Japan Equity Research 12 December 2013 J.P.Morgan Consolidated 2H results likely to be solid We expect operating profit in 3Q to grow 7.6% on an adjusted basis and 17.7% on a nominal basis. As in 2Q, likely sales shortfalls for Ito-Yokado (IY) and the department store business will probably be offset by the convenience store and financial services segments, resulting in solid consolidated earnings. Seven-Eleven Japan's aggressive moves on store openings, products, and costs In the convenience store segment, Seven-Eleven Japan's key indicators, such as same-store sales, new-store openings, and gross margin, are all solid. Same-store sales have benefited from the meeting of demand for normal use, with strengthened offerings of private-labeled products, contributions from coffee and other strategic, new products, and aggressive promotional moves. Its strengths relative to the other two majors are growing. New-store openings are on track to slightly exceed 1,500 for the full year. The company is uniformly bolstering its dominance, mainly in the three major urban areas. The number of new stores in FY2014 is likely to top 1,600, as indicated by management. New stores' daily sales in 2Q slipped 5% YoY to V552,000 mainly because of a shift in the timing of new-store openings, according to management (new stores' daily sales tended to be high because of grand opening sales at the many new stores opened late in the fiscal year, but this year the new-store openings have been more spread out). The investment in each new store is sizable, with no overemphasis on Rol, but the company looks for strategically important locations. For example, it is developing stores along major roads in the Setagaya area and stores with large parking lots. We think gross margins are on track to improve by 0.5ppt YoY, as management expects, thanks to (I) an improved product mix from fast foods and (2) integrated lineups of core products. SG&A rose 13% on an adjusted basis in 2Q, partly because of electricity rate increases in the summer. We think the increase will slow somewhat in 2H onward. 7-Eleven, Inc. is likely to swing to double-digit operating profit growth (dollar terms) in 2H on an absence of the one-time factors in 1H. The growth in yen terms should be stronger than management expects because the yen has been weaker than management's assumption of V924. Slight weakness for Ito-Yokado and department store business likely to be offset by convenience store and financial services businesses As a result, we expect nominal operating profit growth of 17.7% (adjusted growth of 7.6%) in the convenience store segment in 3Q. As in 1H, Ito-Yokado's profit contributions are likely to be low because of weak food and clothing sales (the latter in October). The department store business is likely to fall slightly short again. However, we expect offsets from strong results in the convenience store and financial services businesses to result in solid consolidated results. Improved profit growth in the convenience store segment should have a particularly strong impact in 3Q onward, with a slight slowdown in the rise in Seven-Eleven Japan's adjusted SG&A costs, following a peak in IQ, and solid results in dollar 6 EFTA01148971 Dairo Murata Japan Equity Research 12 December. 2013 J.F!Morgan terms for 7-Eleven, Inc. The post-consumption tax hike outlook is uncertain, but we expect solid profit growth in FY2014, with structurally stable growth for Seven- Eleven Japan, driven by the meeting of normal-use demand from middle-aged and older consumers and women, offsetting likely profit declines for Ito-Yokado and the department store business especially after the consumption tax hike. Figure 3: Quarterly Results and J.P. Morgan Forecasts V million. % 2113 2114 1H 2H Full yea 10 20 1H 113' 30E 30E' 40E 2HE Ful yew E SEJ SSS 2.0% 1.5% 1.3% 0.9% 2.5% 1.7% 1.6% 1.5% 1.5% 1.6% of which tobacco -0.3% -0.5% 4.4% 1.0% -1.6% -0.3% -1.0% 0.0% -0.7% -0.5% of which excl. tobacco 2.3% 2.0% 2.2% -0.1% 4.7% 2.3% 0.6% 1.0% /.3% 1.8% SEJ product gross margin 30.0% 30.0% 30.0% 30.7% 30.5% 30.6% 30.8% 30.0% 30.4% 30.5% SE INC SSS 3.7% 2.1% 2.9% 0.7% 2.5% 1.6% 4.9% 1.9% 3.4% 2.5% FOREX rate (P/L, 14=4) 79.8 79.9 79.6 92.5 99.0 95.7 50.3 126.2 88.3 92.0 IY SSS -4.3% 4.3x -4.3% .44% -22% -3.6% -2.5% -5.0% -2.0% -2.8% IY product gross margin 29.5% 30.3% 29.9% 30.3% 29.3% 29.8% 30.1% 31.1% 30.6% 30.2% YoY change -0.4% 0.8% 0.2% 0.3% 4.2% 0.3% 4.6% 0.3% 0.3% Sogo SSS -1.5% 4.314 -2.4% 4.8% -1.6% -1.2% 4.3% 9.5% 1.6% 0.2% Salt SSS 1.3% 0.5% 0.9% 1.0% 1.2% 1.1% -7.0% 14.0% 3.5% 2.3% Operating profit (old basis) 147,195 148,490 295,685 Operating profit (new basis) 73,692 90,891 164,583 150,520 81.500 74,500 94,717 176.217 340.800 %YoY -2.0% 4.7% 1.2% 9.5% 13.8% 11.8% 2.3% 17.7% 7.6% t9.5% 18.7% 15.3% CVS 116,505 105,259 221,764 53,196 75,579 128,775 121,758 65.000 61,500 58,725 123,725 252,500 %YoY 6.1% 0.4% 3.3% 5.5% 14.3% 10.5% 4.5% 16.15 19.1% 17.5% 13.9% SEJ 100.048 86,115 186,763 49,298 82,036 111,334 104,317 51.000 46.666 97.666 209.000 %YoY 2.7% 1.2% 2.0% 8.6% 13.5% 11.3% 4.3% 134'5 11.8% 12.6% 11.9% SEI 17.766 20,409 38,175 5.696 15,082 20,778 16.000 14.222 30.222 51.000 %YoY 35.9% 3.8% 16.8% 0.7% 24.6% 17.0% 36.15 64.4% 48.1% 33.6% Other, goodwill -1,309 -1.865 -3,174 -1.798 -1.539 4.337 -2.CCO -2.163 -4,163 -7,500 Superstore 9,264 16,227 25,491 7,408 4,402 11,810 6,989 4.900 2,500 17,990 22,890 34,700 %YoY -56.0% 42.5% -21.4% 8.1% 82.4% 27.5% -24.6% 35.5% 42.6% 41.1% 36.1% Ito Yokado 728 8,291 9,009 2,721 -118 2.603 -297 1 580 9.097 10.597 13.200 %YoY -88.0% 841% -14.6% 16.7% - 257.6% - 134.4% 19.1% 28.0% 46.5% York Benimaru 5.836 6.018 11,854 3.182 3,321 6.503 5,803 2.400 5.097 7,497 14.000 %YoY -39.1% 11.9% -20.7% 7.4% 15.6% 11.4% -0.6% 16.0% 29.1% 24.6% 18.1% Other, goodwill 2,700 1.928 4,628 1,505 1.199 2.704 1.483 1.000 3.796 4,796 7,500 Department store 1,288 8,743 8,029 872 -1,222 -550 485 -1.000 9,850 8,850 8,300 %YoY 41.9% -12.8% -19.3% -41.5% 20.4% 31.2% 3.4% Sogo Seibu 2,219 7,821 10,040 1217 286 1.563 863 0 8,937 8,937 10,500 %YoY •27.7% 4.3% -10.0% 8.4% -71.9% -29.6% -61.1% 7.8% 14.3% 4.6% Other, goodwill -933 -1.078 -2,011 -605 -1.508 -2.113 -1,548 -1.000 913 -87 -2,200 Food services 451 270 721 286 579 865 777 100 735 835 1,700 Financial services 18,595 18,830 37,425 11,220 11,636 22,856 21,247 11,500 10,700 8,044 19,544 42,400 %YoY 14.1% 7.7% 10.8% 29.9% 16.9% 22.9% 14.3% 121% -6.2% 3.8% Others 1.094 1.161 2.255 910 -83 827 434 1.000 427 373 1,200 Sources: Company data. J.P. Morgan essmates 7 EFTA01148972 ()Biro Murata Japan Equity Research 12 December 2013 Figure 4: Quarterly Results and Company Guidance million. % J.P.Morgan V13 2/14 1H 2H Full yea 10 20 1H 1H' 2HCoE 2HCoE' Full tern CoE Operating revenue 2,450,662 2,540,980 4,991,642 1,364,939 1,442,725 2,807,664 2,832,336 5,640,000 4.0% 4.6% 4.3% 13.1% 16.0% 14.6% 11.5% 110% Operating profit 147,195 148490 295.685 73,692 90.891 164.583 150,520 175,417 164,680 340,000 %YoY -2.0% 4.7% 1.2% 9.5% 13.8% 11.8% 2.3% 18.1% 10.9% 15.0% OP margin 6.01% 5.84% 5.92% 5.40% 6.30% 5.86% 6.19% 6.03% <OP by Segment> CVS 116,505 105,259 221,764 53,196 75.579 128.775 121,758 120,225 -121.758 249,000 %YoY 6.1% 0.4% 3.3% 5.5% 14.3% 10.5% 4.5% 14.2% -215.7% 12.3% Superstore 9.264 16,227 25,491 7,408 4.402 11,810 6,989 27,790 -6.989 39,600 %YoY -56.0% 42.5% -21.4% 8.1% 82.4% 27.5% -24.6% 71.3% -143.1% 55.3% Department store 1.286 6,743 8,029 672 -1.222 -550 -685 9.450 685 8,900 %YoY 41.9% -12.8% -19.3% -41.5% -992.0% -142.8% -153.3% 40.1% 49.8% 10.8% Food services 451 270 721 286 579 865 777 535 -777 1,400 Financial services 18.595 18,830 37,425 11.220 11.636 22,856 21,247 18,544 -21.247 41,400 %YoY 14.1% 7.7% 10.8% 29.9% 16.9% 22.9% 14.3% -1.5% -212.8% 10.6% Others 1,094 1,161 2,255 910 -83 827 434 -1,127 314,766 -300 Non-operating income 5,573 5,491 11,064 3.907 4.161 8,074 Non-operating expenses 5.642 5,271 10,913 3,918 3.921 7,845 Non-operating profit -69 220 151 -11 241 230 -3,230 -3.003 Recurring profit 147,128 148,710 295,836 73,881 91,132 184,813 172,187 337.000 %YoY -2.5% 4.5% 0.9% 10.1% 13.6% 12.0% 15.8% 13.9% RP margin 6.00% 5.85% 5.93% 5.40% 6.32% 5.87% 6.08% 5.98% Extra-ordinary PA. -16.114 -17,000 -33,114 -6,281 -1.513 -13,860 Pretax profit 131,012 131,110 262,722 67,394 83.559 15R953 Tax expense 51.818 53,022 110,840 26,791 34.316 61,107 Tax rate 44.1% 40.3% 42.2% 39.8% 41.1% 40.5% Minority mterest 6.282 7,536 13,818 3.170 3.324 6,494 Net profit 66,912 71,152 138,064 37,433 45,919 83,352 88,848 170.000 %YoY 26.8% -7.1% 6.3% 14.9% 33.8% 24.6% 21.8% 23.1% NP margin 2.73% 2.80% 2.77% 2.74% 3.18% 2.97% 3.08% 3.01% Scums: Ccenpanydata. 8 EFTA01148973 Dego Murata Japan Equity Research 12 December 2013 Figure 5: Consolidated Earnings Results and Estimates (Full Year) V million. % J.F!Morgan FY2111 FY2J12 FY2113 FY2114E FY2(15E FY2/16E Operating Revenue 5,119,739 4,786,344 4,991,642 5,625,600 5.890,000 6.178.600 YoY % 0.2% -6.5% 4.3% 12.7% 4.7% 4.9% SEJ SSS 2.2% 6.7% 1.3% 0.5% 0.5% 0.8% IY SSS -2.5% -2.6% -4.3% -3.5% -3.5% -2.0% Goodwill amortization 16,145 12,915 14,430 17,500 17,800 18.200 EBITDA 391,912 444,969 465,781 514,300 541,800 580.600 YoY % 3.7% 13.5% 4.7% 10.4% 5.3% 7.2% Operating profit (old basis) 243,346 292,060 295,685 Operating profit (new basis) 262,500 315,000 318,900 340,800 360,200 388.800 YoY % 7.4% 20.0% 1.2% 6.9% 5.7% 7.9% As a % of Sales 4.75% 6.10% 5.92% 6.06% 6.12% 6.29% OP by segment (new basis. JPM assumption) CVS operations 205,100 225,100 232,400 252,500 270,200 292.100 YoY % 6.4% 9.8% 3.2% 8.6% 7.0% 8.1% Superstore operations 17,300 34,900 27,600 34,700 34,400 38.100 YoY % 102% 101.7% -20.9% 25.7% -0.9% 10.8% Department store operations 5,622 9,948 8,029 8,300 8,300 9.300 YoY % 311.6% 76.9% -19.3% 3.4% 0.0% 12.0% Food Services -193 -95 721 1,700 1,300 1.500 Financial Services 30.500 36,400 40,300 42.400 44,500 46.700 Other -1,611 1,360 2,255 1,200 1,500 1500 Non.operating income and expenditure -439 1,111 151 351 551 751 Non-cveraling income 10,390 10,150 11.064 11,264 11.464 11.664 Interest and dividends received 6,048 5,801 6,123 6,323 6.523 6.723 Non-operating expenses 10,829 9,039 10.913 10,913 10.913 10.913 Interest payable. etc 5.258 4.114 5.113 5.263 5.413 5.563 Recurring profit 242,907 293,171 295,836 341,200 360,800 389.600 YoY % 7.0% 20.7% 0.9% 15.3% 5.7% 8.0% As a % of Sales 4.74% 6.13% 5.93% 6.07% 6.13% 6.31% Extraordinary profit 22,655 10,428 2,147 2,000 2.000 2.000 Extraordinary loss 42,271 72,782 35261 28,000 28.000 28.000 Pretax profit 223,291 230,817 262,722 315,200 334,800 363,600 Tax 102,298 90,251 110.839 119.340 126.200 136.600 Tax rate 45.8% 39.1% 42.2% 39.7% 39.5% 39.3% Minority Interest 9,031 10.722 13.818 14.518 15.218 15.918 Net profit 111,962 129,838 138,064 181,300 193,400 211,100 YoY % 149.5% 16.0% 6.3% 31.3% 6.7% 9.2% Asa % 04 sates 2.19% 2.71% 2.77% 3.22% 3.28% 3A2% Dividend paid 50,570 54,780 56.550 61.850 67.150 74.220 a of shares outstanding ('000) 887.109 883,492 883.553 883.553 883.553 881553 Treasury shares (term-end. '000) 0 0 0 0 0 EPS (V) 126.2 147.0 156.3 205.2 218.9 238.9 BPS (il) 2.033.3 2,130.5 2 229.5 2,357.7 2.500.5 2.655.5 DPS (V) 57.0 82.0 64.0 70.0 76.0 84.0 Payout ratio 45.2% 42.2% 41.0% 34.1% 34.7% 35.2% Sources:Calvary data J.P. Morgan FOAMS. 9 EFTA01148974 Dairo Murete Japan Equity Research 12 December 2013 i~~ Figure 6: CVS Business PIL (1) million. % FY2/11 FY2/12 FY2/13 FY2/14E FYV15E FY2J16E Operating Revenue 2,036464 1,890,924 1,899,573 2,480.100 2,664,900 2,859,700 Operating Profil tad basis) 195.477 214.637 221.764 Operating Profil (new basis) 205,100 225,100 232,400 252,500 270,200 292,100 % YoY &3% 9.8% 3.3% 13.9% 7.0% 8.1% Sreakdown a Operating Profil SEJ (new basis) 178,800 193,600 197.400 205.500 217,000 231,300 7-Eleven Inc 33,328 32,737 38.175 53.000 59.800 67.600 Others (Deling end Hawaii) 215 2.360 1.721 1.600 1.800 2.000 Amortization of goodwill amount -7,218 4,620 4,895 4,000 4,400 4,800 SEJ Sales Data Total club sales 2,947,606 3,280,512 3,508,444 3,722,500 3,960,700 4,230,000 % YoY 5.8% 11.3% 6.9% 6.1% 6.4% 6.8% Average daily sales (61000) All Stores average daily sales 829 669 668 650 640 636 New Stores daily sales 554 570 527 531 534 540 ExIsting store salet revenue ratio 2.2% 6.7% 1.3% 0.5% 0.5% 0.8% SEJ Shops related Data Natter of stores in the befinning 12.753 13,232 14,005 15.072 16.302 17.582 Stie cpening 939 1,201 1.354 1.550 1,600 1.600 Cbsure 460 428 287 320 320 300 Net Slusese in number of stores 419 773 1.067 1.230 1,280 1,300 % YoY 3.8% 5.8% 7.6% 8.2% 7.9% 7.4% Nanbet of stores at the end of me period 13.232 14,005 15,072 16.302 17.582 18.882 Nanber of direet management stores 442 397 433 453 473 493 Number el FC stores 12,720 13,538 14,569 15,779 17,039 18,319 Sources:Ccenpany data.J.P. Hagan issonmes. J.P.Morgan 10 EFTA01148975 Deiro Murata Japan Equity Research 12 December 2013 J.P.Morgan Figure 7: CVS Business P/L (2) V million, % SEJ Income Statement FY2/11 FY2/12 FY2113 FYI/14E FY2/15E FY2/16E FC tetal sales A 2839880 3.189.317 3.416.986 3.625.790 3,859.120 4.123.180 % YoY 6.8% 12.3% 7.1% 6.1% 6.4% 6.8% Income form FC (Charge and Participating amount) B 435873 479.825 521.863 563.810 607,810 656.820 Income from FC/FC sales 15.35% 15.04% 15.29% 15.55% 15.75% 15.93% Sales at directory managed stores 107.926 91.195 90.146 96.710 101,580 106.820 Sales per direct management stores 207.0 217.4 2172 218.3 219.4 221.2 Other ttOme 5.312 5,165 5.549 5,950 6,350 6.750 Sales 549,111 576,185 617,558 686,500 715,700 770,400 % YoY 2.6% 4.9% 7.2% 7.9% 7.4% 7.6% Products Gross margin Ratio C 30.5% 29.7% 30.0% 30.5% 30.8% 31.1% Gross Profit for FC stores At 866.102 947.227 1,025,096 1,105,866 1,188,609 1.282309 Charge %B/(A'C) 50.3% 50.7% 50.9% 51.0% 51.1% 51.2% Gross Profit at drettory managed stores 29.506 24.386 24.244 26.490 28.130 29.900 Gross Profit margin at directory managed stores 27.3% 26.7% 26.9% 27.4% 27.7% 28.0% Gross Operating Profit 470,691 509,376 551,656 596,250 642,290 693,470 % YoY 6.5% 8.2% 8.3% 8.1% 7.7% 8.0% SG8A (old basis until FY2/2013) 301,539 326,216 364,893 390,760 425,290 462,180 % YoY 5.5% 8.2% 11.9% 7.1% 8.8% 8.7% Labor Expenses 50,505 50,710 51.907 56.250 60.330 64,870 Operating Revenue/ Labor Expenses 9.20% 8.80% 8.41% 8.44% 6.43% 8.42% Advertising expense 28,209 36318 45.059 53.600 56240 59.640 Asa % of Chain Sales ratio 0.96% 1.11% 1.28% 1.44% 1.42% 1.41% Demeoation 8 ancrtizabon 30,831 38.368 46.292 42.000 47.350 52.940 As a ¶4 of C + number of directly managed stores 3.41 3.94 428 3.84 3.86 3.88 Rent 79,424 87,199 98.832 104,350 117,300 130840 ROM per store (Directly managed 4.0 type) 8.93 8.95 9.13 9.55 9.57 9.58 UtitleS Cost 31,799 33,124 38.098 45.220 49.810 sasso As a % of number of stores 2.45 2.43 2.62 2.88 2.94 3.03 Others 80,171 80,497 84,705 89,340 94260 99.410 Asa % of Chain Sales ratio 2.74% 2.45% 2.41% 2.40% 2.38% 2.35% Operating Profit (old basis) 169.152 183.160 186.763 Operating Profit (new basis) 178,800 193,600 197,400 205,500 217,000 231,300 % YoY 8.3% 8.3% 2.0% 4.1% 5.6% 6.6% 7Eleven, Inc FY12/10 FY12/11 FY12112 FY17.113E FY17.114E FY12.115E Currency Exchange Rate 87.79 79.80 79.81 98.00 98.00 98.00 % YoY 4.3% 4.1% 0.0% 22.8% 0.0% 0.0% Gasoline Cost 2.38 2.50 2.50 2.50 2.50 2.50 Same store product sales growth (USD Basis) 1.5% 2.81/t 2.9% 2.5% 2.0% 2.0% Retail Sales 1,470,588 1.624,095 1.852.162 2.639.300 2,837.200 3,041,500 % YoY 5.4% 104% 14.0% 42.5% 1.5% 1.2% Product Sales 859,632 876.672 954.100 1,508.986 1,695.583 1,888,467 Gasoline Sales 585,939 147.423 898.062 1,130.314 1,141.617 1,153,033 % c4 sales 39.8% 46.0% 48.5% 42.8% 40.2% 37.9% Operating Profit 33,328 32,737 38,175 53,000 59,800 67,600 % YoY 4.2% -1.8% 16.6% XS% 12.8% 13.0% Operating Profit Ratio 2.27% 2.02% 2.06% 2.01% 2.11% 2.22% Total number of stores (North America) 6.610 1,149 8,118 8,518 8,918 9,318 Area License 20,296 23385 26223 21.323 28.423 29,523 Product gross margin ratio 35.1% 34.7% 35.2% 35.4% 35.6% 35.8% Sources: Company data. J.P. Morgan esbrretes. 11 EFTA01148976 Deiro Murata Japan Equity Research 12 December 2013 J.P.Morgan Figure 8: Super Store Business PA. V million. % FY2/11 FY2/12 FY2I13 FY2114E FY2115E FY2/16E Operating Revenue 1,961,604 1,992,298 1,994,588 2,010,800 2,017,800 2,035,900 Operating Profit 17,300 34,900 27,600 34,700 34,400 38,100 Operating Revenue Domestic SuperStore Volta Mall Japan 1,373,670 1.361.060 1,332,292 1,320,000 1,300,000 1,290,000 Yoka Mall China 79,000 82.200 87,100 92,300 97,800 103,700 Yorkbeni mall 343,379 348.600 363,862 385,000 404,300 424,500 Ycrkmarl 120000 125.000 128.003 130.000 132.000 134,000 Akachan Head Office 77.000 78.000 78.603 78.900 79.200 79200 Others -11.445 -2.562 4.734 4.639 4.547 4.456 Operating Profit Yoka Mall Japan 3,300 16,200 13,800 14,000 12,200 14.200 Yoka Mall China 1,750 1,150 200 0 400 1,000 Yorkbent (Including Life Foods) 13,100 20,900 17.700 18,800 19,600 20,400 Akachan Head Office 500 1,200 1.100 1250 1.400 1.500 Yorkmart and others 2.001 -1.153 -1.795 4.005 4.205 4.405 Amortization of goodwill -3,371 -3,372 4,372 -3,372 4.372 -3,372 <Ito-Yokado P?L Estimates> Operating revenue 1,373,670 1,361,060 1,332,292 1,320,000 1,300,000 1,290,000 %YoY -1.0% -0.9% -2.1% -0.9% -1.5% -0.8% halter of Stores Nwnber of stores opened during the year 6 5 3 6 6 6 Ow Ano 3 3 1 3 1 1 Mots of stores dosed during the year 10 2 2 3 1 3 Net increase of stores -4 3 1 3 1 3 Mintier of Stores at the end of the year 170 173 174 177 180 183 Mots of Stores during the year 172 172 174 176 179 182 Stores Area Stores Area at the end of the year 1.678.730 1.665268 1,642,954 1.660.954 1.660.954 1.660.954 Stores Area dunng Ihe year 1.701.155 1.671.999 1,654,111 1.651.954 1.660.954 1.660.954 Increase of area durng the area -44.850 -13.462 -22,314 18.000 0 0 Growth rate of area during the year -1.7% -1.7% -1.1% -0.1% 0.5% 0.0% Area per store 9,84/1 9,749 9,534 9.413 9.305 9.151 Sales per sq meter(in 10.000 Yen) 645 636 613 592 577 571 New Store sales -28.946 -8,564 -13,678 10.647 0 0 Products Total 1,101,024 1,061,624 1,015,295 990,410 955,750 936,640 %YoY -2.1% -16% 44% -2.5% 4.5% -2.0% Tenant 233.056 252.709 271,258 284.820 296.210 306.580 Others 15,264 19,964 16,369 14,400 12,960 11,920 Revenue from real-estate lease 19.435 ,7 073 24,322 25.050 25.300 25,300 Other Operating revenue 4,8es 4,540 5,046 5.300 5.540 5,760 Existing-stores sales -2.5% -2.6% 43% 4.5% -3.5% -2.0% Gross Margin 29.10% 2930% 29.90% 30.05% 30.15% 30.25% Difference 0.10% 0.60% 010% 0.15% 0.10% 0.10% Gross Profit 331.714 314.773 322,143 333.370 328.250 326.960 Gross Profit Ratio 24.58% 25.09% 24.72% 25.85% 25.95% 26.05% Gross Profit 356,040 361,536 351,511 353,720 348,990 347,920 Growth Rate %YoY -2.1% 1.5% -2.8% 0.6% -1.3% -0.3% Operating Profit Ratio 25.9% 26.6% 26.4% 26.8% 26.8% 27.0% Sources Company data. J.P. Horgan mammas. 12 EFTA01148977 Dago Murata Japan Equity Research 12 December 2013 IRMorgan Figure 9: Super Store Business PIL(2) Ito-Yokado <SG&A Estimates> FY2/11 FY2/12 FY2,13 FY2I14E FY2/15E FY2116E SG&A Expenses 353,884 350,981 342,500 339,749 336,778 333.734 Growth Rate % YoY -2.2% -0.8% -2.4% 4.8% -0.9% -0.9% SG8A Expenses Ratio 25.8% 258% 25.7% 25.7% 25.9% 25.9% Advertising Expenses 33.083 32,562 30.891 31,100 31,100 30.800 Asa% of sales 2.45% 244% 2.37% 2.41% 2.46% 2.45% Labor Expenses 142.946 142,452 137.380 136,700 134.600 132.600 As a % of sales 10.59% 10.68% 10.54% 10.60% 10.64% 10.56% Rent 69.281 67,900 66.968 67.550 66.560 66A30 Area per store (sq.m) 40.7 40.6 40.5 40.9 40.1 40.0 Depreciation Expenses 14.573 16,822 15.937 10.359 10.748 10914 Area per store (sq.m) 8.6 10.1 9.6 6.3 6.5 6.6 Utility Cost 18.943 18,480 19.849 21.440 21.870 22.090 Area per store (sq.m) 11A 11.1 12.0 13.0 13.2 13.3 Others 75.058 72,765 71.475 72.600 71.900 70.900 Asa % of sales 5.56% 5.45% 5.49% 5.63% 5.68% 5.65% Operating profit (old basis) 2,155 10.554 9.009 Operating profit (new basis) 3,300 16,200 13.800 14,000 12,200 14,200 % YoY 22.7% 389.7% -14.6% 1.4% -12.9% 16.4% Operating ofit margin 0.2% 0.8% 07% 1.1% 0.9% 1.1% Sources Ccenpany data. J.P.M0fpn estrreies. 13 EFTA01148978 Cairo Murata Japan Equity Research 12 December 20i3 Figure 10: Financial Indicators and Balance Sheet V million, % FY2/11 FY2112 FYV13 FY2/14E FY2115E FYV16E ROA 6.70% 7.80% 7.38% 7.84% 7.84% 8.10% Net margin on sales 4.85% 6.21% 6.03% 6.16% 6.22% 6.40% Turnover rate 1.38 1.26 1.22 1.27 1.26 1.27 ROIC 6.3% 7.1% 6.7% 7.3% 7.4% 7.7% ROE 6.5% 7.5% 7.6% 9.3% 9.3% 9.6% Debtfequity ratio 32.3% 33.5% 34.8% 33.4% 31.4% 29.1% Liquidity turnover period 1.60 1.89 1.97 1.97 1.97 1.97 Receivables turnover period 0.29 0.68 0.69 0.69 0.69 0.69 Inventory turnover period 0.38 0.38 0.39 0.39 0.39 0.39 Other liquid assets anover period 1.04 0.85 0.93 0.93 0.93 0.93 Payables turnover period 0.67 0.79 0.79 0.79 0.79 0.79 Other current liabilities turnover period 2.24 2.33 2.55 2.55 2.55 2.55 Capex 338.656 255.426 334.216 340.000 340.000 340.000 Depredation 132.421 139.994 155.666 156.000 163.800 173.600 Invested capital 1.151 237 1.248.164 1.329.088 1.442.691 1.589.531 1.723.883 Consolidated Balance Sheet Ci.trent assets 1,406,594 1.516.584 1.655.528 1,782,080 1,807.394 1,849,873 Cash 8 other equivalents 654.833 711.629 710068 731,531 712,641 706.869 Accounts receivable 122.411 270.953 285.817 322,117 337256 353,781 Short-term Marketable securities 26.534 43.025 110024 110.024 110.024 110,024 Inventories 161.110 152.204 162.285 182.896 191,492 200.875 Other einem assets 441.706 338.773 386.434 435.513 455,981 478.324 Fixed assets 2.325.459 2.372.364 2.606.564 2.790.563 2866.763 3.133.163 Tangible fixed assets 1.247.823 1.320.174 1.482.514 1,666,514 1,842,714 2.009.114 Intangible fixed assets 324.655 333.156 415.413 415.413 415.413 415,413 Investments and other fixed assets 752.979 719.034 708636 708.636 708.636 708.636 Total assets 3,732,111 3,889,358 4262,397 4,572,643 4,774,157 4,983,036 Guarantees 418,585 412.098 400867 400.867 400,867 400.867 Current liabilities 1,348.728 1,385,728 1.534.579 1,725,216 1,798,780 1,869,077 Accounts payable 284.795 316.072 328800 370.559 387.975 406.985 Shon-term borrowings 108.330 139.690 145.750 160.000 160.000 150.000 Other current liabilities 955.603 929.966 1,060029 1,194,657 1250,805 1,312,092 Non-current liabilities 606.871 642.675 733077 734.077 735.077 736.077 Corporate bonds 263.973 253.978 229.983 229.983 229.963 229.983 Long-term borrowings 177225 198.167 281.893 281,893 281,893 281,893 Other non-current liabilities 165.673 190,530 221201 222,201 223201 224.201 Total 'Jabal's 1,955,599 2,028,403 2267,656 2,459,293 2,533,857 2,605,154 Shareholders' equity 1,803,783 1,882,287 1,963,666 2,083,116 2,299,366 2,346,246 Capital 50.000 50.000 50.000 50.000 50.000 50.000 Capital &tutus 526.899 526.886 526.873 526,873 526.873 526.873 Treasury slodxs -7.320 -7212 -7.142 -7.142 -7.142 -7,142 Valuation 8 Exchange difference. etc -101.268 -116.303 -72.503 -72.503 -72.503 -72.503 Minority interest 73.016 93.748 102038 102.738 103.438 104.138 Shareholder's equity 1.702,515 1.765.984 1,891.164 2.010.613 2.136.863 2.273.743 Total net assets 1.776,512 1,860,954 1,994,740 2.113.351 2240.301 2,377,881 Total liabilities + shareholders' equity 3,732,111 3,889,358 4262,397 4,572,644 4,774,158 4,983,035 Interest-bearing debt 549.528 591.835 657.626 671.876 671.876 661,876 Sources: Company data. J.P. Morgan eserretes. J.P.Morgan 14 EFTA01148979 Dairo Murata Japan Equity Research 12 December 20i3 J.P. Morgan Figure 11: Consolidated Statement of Cash Flows V million. % Cash now statement FY2/11 FY2I12 FY2/13 FY2I14E FY2/15E FY2/16E Cash flow from operating aaMties After-tax profit 111.962 129.838 138.064 181.300 193.400 211,100 Depreciabon 132.421 139.994 155.666 156.000 163.800 173,600 Change in wakil capital 244.560 -47.554 3.186 70.397 29.360 32,047 Change in other long-term liabilities -16.082 24.857 30.671 1.000 1.000 1,000 Other 0 0 0 0 0 0 Subtotal (A) 472.861 247.135 327.587 408.697 387.560 417,747 Cash kw from investing aaivlbes Investment in plant 8 equipment -338.656 -255.426 -334.216 -340.000 -340,000 -340,000 Investments and lending (fa subsidiary shares. etc) 0 0 0 0 0 0 Other 0 0 0 0 0 0 Subtotal (8) -338.656 -255.426 -334.216 -340.000 -340,000 -340,000 Free cash flow (A)* (8) 134.205 -8.291 -6.629 68.697 47,560 77.747 Cash Now from financing activities (C) Change in borrowings -209.655 52.302 89.786 14.250 0 -10,000 Change in corporate bonds 73.9r)5 -9.995 -23.995 0 0 0 Inaease in equity capital 0 0 0 0 0 0 Dimdends pad -50.570 -54.780 -56.550 -61.850 -67.150 -74.220 Other 0 0 0 0 0 0 Total -186.320 -12.473 9.241 47.600 -67.150 -84.220 Total cash Now (A) + (B) + (C) -52.115 -20.764 2.612 21.097 -19.590 -6.473 Sources: Company data. J.P.M3f9311esbmaies. 15 EFTA01148980 Cairo Murata Japan Equity Research 12 December 2013 JPM Q-Profile Seven 6I Holdings Co.. Ltd. (JAPAN! Consumer Staples) Ya 14.0er,././P3 Local Share Prim 6MOM OM 3034 MM OM on cow& 371500 Earnings Yield (6 local bond Yield) OI PE (1W Forward) Ate ran Ish 31d tid d JJNorgan Global Equity Quantitative Analysis- 12 Nth Forward EPS 21:0 Mot I"'. IRO SOO all rataar.r.posaaanatistaaap:: ::ovv.o 313 2 2,1 , 1rnigiglHnirnigiS Cu 211.45 • Implied Value 010rowth• Currant: ilia pd}. 41 4., At/ 'Irk! it° ti altS2725/16:2a5SSItitMIZZgattbg.N.V a;» anati,la ilia 12 ROE (Trailing) 14) 0) ?CO Ito S00 0) Sb 10) 0) OW SSISSZUSS3aSSSII S SS S,WES., 3a 4I;g3gWzg Current: 510 011 011 OM ell OM OII oM PrIcelBook Value Se 24 IOi IA ab Current: 1.02 Dividend Yield (Trailing) Is Gwent: 620% Current 1.Oa illilititillgillgIlliarksii Summary Seven 61 MOE Saw] JAPAN SECIOL BOFSS06 local Pd W: 3.71500 MowoMmin EPS: 211.45 Lunt Min Max Malian Average 2M.4. 2M.. %talk %Mike %tolled %to Avg I2m10 FOra9N PE 17.57a 1256 3233 17.10 1791 2575 10.06 -29% 84% -3% 2% RBI/ (Tralick Max 097 270 1.23 1M 219 0.62 -41% 64% -25% CIAMM1 Mid anlale01 1.02 060 300 235 210 348 0.73 -67% 65% 29% 15% ROE (Trallnk 0.10 266 Mt 571 623 936 2.11 47% 6% .17% .23% worse VA* et Grant 6.2% -030 053 008 000 0.47 -0.30 -670% 912% 57% 69% Scott Eticantorg Mom WWI FoMmoals. 1933 COSOWSLO..M Mxpo Cats • 01YIbd VaLe 0 Wm.) ( EYCosId WOW IOW CM Of War Mood Yield • SWAMP./ 16 EFTA01148981 Japan Equity Research 12 December 20t3 Seven & i Holdings (3382): Summary of Financials J.P.Morgan Income statement V In millions 201312 201412E 201512E 201612E Cash Flow statement V in millions 2013/2 201412E 201512E 201612E Revenues 4,991,642 5,625.600 5.890.000 6.178.600 Operating CF 327,587 408,697 387,560 417,747 Cost of revenue -3,218,271 4,622.500 -3.788.000 -3.968.700 155,666 156,000 163,800 173,600 Operating expenses -4,695,957 -5,284.800 -5.529.800 -5.789.800 Net change in working capital 3,186 70,397 29,360 32,047 EBITDA 451,351 496,800 524.000 562.400 Investment CF -334,216 -340,000 -340,000 -340,000 Depreciation -155,666 -156,000 -163.800 -173.600 Capex -334,216 -340,000 -340,000 -340,000 Operating profit (EBIT) 295,685 340,800 360.200 388.800 Net change in investments • • • • Other income • Free cash flow -6,723 68,469 47,202 77,260 Other expenses • Financing CF 9,241 47,600 47,150 -84,220 Pretax income 282,722 315,151 334,751 363.551 Net debt (cash) -163,366 -169,679 -150,789 -155,017 Abnormal items (net) 43,114 -26,000 -26,000 -26,000 Change in Net debt (cash) -547 -6,313 18,890 -4,228 Income taxes -110,839 -119,340 -126,200 -136,600 ilincribes -13,819 -14,511 -15,151 -15,851 Net income - GAAP 138,064 181,300 193,400 211,100 Dieted shares outstanding (mn) 884 884 884 884 Balance Sheet V in millions 201312 201412E 201512E 2016/2E Ratio Analysis 201312 201412E 201572E 201612E Total assets 4,262,397 4,572,643 4,774,157 4,983,036 Gross Margin 35.5% 35.6% 35.7% 35.8% Cash and cash equivalents 710,968 731,531 712,641 706,869 EBITDA margin 9.0% 8.8% 8.9% 9.1% Trade receivable 285,817 322,117 337,256 353,781 ROCS 7.5% 8.5% 8.5% 8.8% Other current assets 386,434 435,513 455,981 478,324 Rehm on emity (ROE) 7.6% 9.3% 9.3% 9.6% Net Tangible fixed assets 1,482,514 1,666,514 1,842,714 2,009,114 D/E ratio 33.0% 31.8% 30.0% 27.8% Net intangible fixed assets 415,413 415,413 415,413 415,413 Div payout ratio 41.0% 34.1% 34.7% 35.2% Investments/other assets 708,636 708,636 708,636 708,636 Total liabilities 2,267,656 2,459,293 2,533,857 2,605,154 Short term debt 145,750 160,000 160,000 150,000 Other short term habilibes 1,060,029 1,194,657 1,250,805 1,312,092 Long term debt 511,876 511,876 511,876 511,876 Other long term liabilibes 221,201 222,201 223,201 224,201 Minority interests 102,038 102,738 103,438 104,138 Total Equity 1,993,202 2,113,351 2,240,301 2,377,881 Source: Companydata and J.P. Morgan estimates Note: V in mittens (except per-share data).Fiscal year ends Feb 17 EFTA01148982 !Niro Murata Japan Equity Research 12 December 2013 J.P.Morgan Analyst Certification: The research analyst(s) denoted by an "AC" on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an "AC" on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that (I) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures • Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Seven & i Holdings (3382). • Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-relate& Seven & i Holdings (3382). • Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Seven & i Holdings (3382). • Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Seven & i Holdings (3382). Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan- covered companies by visiting https://jpmm.contfresearch/disclosures calling 1-800-477-0406, or e-mailing research.disclosure.inquiriesilidpmorgan.com with your request. J.P. Morgan's Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail research.disclosure.inquiries@jpmorgan.com. Seven 8 1 Holdings (3382) (3382.T. 3382 APR's!' Chart ease 5,999 5.142 4.285 Pnce(YI 3.428 2,671 1,714 857 0 I IOW N Y2.140 I I OW Y4A00 l I OW v3./31 OW Ova v h Y2.300 - N Y2.4 OW 72.900j OW 73.700 I I I I I I I I /Y6.000 OY/ Y OW OW CV, OY/YI N N • U V i N +I Y2.330 111111 NY OW OW Y .300 II-- IVAIS4.4 iie p\fissitioxs etpanboteopie l fr Sep 06 Mar 08 Sep 09 Mar 11 Source: (Womb., and JP, Mercian: pnce data adjusted for No* spins and dividends metaled caewege Ocl 16.2006 Sep 12 Date Rating Share Price Price Target IT) 0 9) 16-Oct-06 OW 3880 6.000 22-Oct-07 OW 2790 4000 11-Jan-08 OW 3080 3800 24-Apr-08 OW 2985 4100 09-Oct-08 OW 2410 3800 15-Oct-08 OW 2580 3640 03-Mar-09 OW 2040 3300 04-Mar-09 OW 2040 3200 13-Apr-09 OW 2220 3100 03-Jul-09 OW 2305 2900 01-Sep-09 N 2250 2300 13-Oct-09 N 2115 2140 24-Dec-09 N 1845 2050 20-Apr-10 N 2405 2100 13-Sep-10 UVV 1974 1870 27-Jan-11 N 2171 2200 24-Jun-11 N 2126 2330 28-Sep-11 N 2231 2400 11-Apr-12 N 2407 2700 07-May-12 OW 2429 2900 14-Sep-12 OW 2323 2800 28-Feb-13 OW 2706 3300 05-Apr-13 OW 3090 3700 04-Jun-13 OW 3515 4400 The chards) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW Overweight, Na Neutral, UW is Underweight, NR a Not Rated 18 EFTA01148983 Dairo Murata Japan Equity Research 12 December 2013 J.P.Morgan Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight (Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral (Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight (Over the next six to twelve months, we expect this stock will underperfonn the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock's expected total return is compared to the expected total return of a benchmark country market index, not to those analysts' coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst's coverage universe can be found on J.P. Morgan's research website, www.jpmorganmarkets.com. Coverage Universe: Murata, Dairo: ABC-Mart (2670) (26701), AEON (8267) (8267.T), Adastria Holdings (2685) (2685.1), COSMOS Pharmaceutical (3349) (3349.1), Don Quijote (7532) (7532.T), FAST RETAILING (9983)(9983.1), FamilyMart (8028) (8028.T), Ise= Mitsukoshi Holdings (3099) (3099.1), K's Holdings (8282) (8282.1), KOMERI (8218) (8218.1), Lawson (2651) (2651.T), Nitori (9843) (9843.1), RYOHIN KEIKAKU (7453) (7453.1), SHIMAMURA (8227) (8227.T), SUGI HOLDINGS (7649) (7649.T), SUNDRUG (9989) (9989.1), Seven & i Holdings (3382) (3382.1), TSURUHA HOLDINGS (3391) (3391.T), Xebio (8281) (82817), YAMADA DENKI (9831) (98311) J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2013 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 43% 44% 12% 1B clients* 57% 49% 39% JPMS Equity Research Coverage 42% 50% 8% 1B clients* 76% 65% 57% ',Percentage of investment banking clients in each rating category. 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