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JPM_2432@JP_072815_141245

Asia Pacific Equity Research

24 July 2015

Game Sector

Still Not Too Late; Console Game Cycle Recovery Should Not Be Missed

Near-to medium-term investment views; top picks are Capcom and Square Enix: We favorCapcom, Square Enix, DeNA, and Bandai Namco, in that order. Japan Equity Research

We expect Capcom and Square Enix to fully benefit inFY2016 from a recovery Internet, Media, Games, Leisurein the console game cycle driven by a strong PS4 performance. We downgradeHaruka Mori

AC

our ratings on both Nexon and Gree from Neutral to Underweight, the former (81-3) 6736-8632

from the standpoint of earnings visibility and valuation, and the latterbecause haruka.mori@http://doc.xuehai.netBloombergJPMA MORI <GO>we expect earnings to remainatlowlevels. As forNintendo, we are concerned JPMorgan Securities Japan Co., Ltd.

about a decline in medium-term earnings visibility, but we maintainour Neutral rating because we expect the share price to remain firm in the near term ahead of the launch of smartphone games.

Current cycle somewhat different; focus on download sales growth: Sony’s and Microsoft’s console game machines target hardcore gamers and are penetrating the market at a combined pace that is 1.7x thatduring the previous cycle. Additionally, earnings at overseas competitorscontinue to expand as profitability improves, especially at US-basedElectronic Arts, due to an increase in internet connection rates and expansion ofdownload content. Japanese software makers have been slow to support new hardware butwill ramp up the release of major franchise titles from 2H FY2015 to FY2016. At our focus companies Capcom and Square Enix, we look for an expansion of download sales similar to overseas companies.

Sector events to watch toward year-end: 1) China Joy (from July 30 in China): Whether there is any new information on Capcom and Tencent’s Monster Hunter Online. 2) Gamescom (from August 5 in Germany): News flow for Square Enix’s Final Fantasy XV. 3) Tokyo Game Show (from September 17): Recent years have not been very newsworthy. 4) Possibility of PS4 price cuts.

We expect 1Q (April–June) to be a good start overall:Wethink console game

makers could confirm better-than-expected progress toward full-year guidance, and we will be watching fora possible increase in consensus estimatesafter results (especially for Square Enix and Capcom). On the other hand, we think expectations for 1Q earnings improvement at Nintendo may be excessiveand will focus on anytrendshere. At Nexon, momentum is slowing for closely watched mobile games, and we think 3Q (July–September) guidancecould fall short of expectations owing to upfrontcosts. We expect DeNA and Gree to perform in line with guidance, as trends appear largely unchanged.

Equity Ratings and Price TargetsMkt CapRating

Price TargetCompany

Ticker(¥bn)Price (¥)CurPrevCurPrevSQUARE ENIX HOLDINGS (9684)9684 JT385.643,155OWn/c3,9002,900CAPCOM (9697)

9697 JT150.982,685OWn/c3,3002,900BANDAI NAMCO Holdings (7832)7832 JT578.092,604OWn/c2,900n/cKONAMI (9766)9766 JT369.802,577Nn/c2,300n/cNintendo (7974)7974 JT3,099.7221,880Nn/c19,00016,000DeNA (2432)2432 JT357.432,368OWn/c3,000n/cGree (3632)3632 JT177.13736UWN650740Nexon (3659)

3659 JT

781.49

1,778

UW

N

1,6001,500

Source: Bloomberg, J.P. Morgan estimates. n/c = no change.All prices as of 23 Jul 15.

See page 82 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. As a result, investors should be aware that

the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

JPM_2432@JP_072815_141245

JPM_2432@JP_072815_141245

factor in making their investment decision.

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