Fields / 2767 COVERAGE INITIATED ON: LAST UPDATE:

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

2 Research Report by Shared Research Inc. INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Executive summary Key financial data Recent updates Highlights Trends and outlook Full-year company forecasts Long-term outlook Medium-term plan (FY03/18 20) announced in May Factors in profits slump over past five years and medium-term plan focus points Pachinko and pachislot business in medium-term plan Business Summary Business description Business model Profitability snapshot and financial ratios Strengths and weaknesses Market and value chain Historical financial statements Summary Income statement Balance sheet Cash flow statement Other information History News and topics Top management (as of June 21, 2017) Employees Major shareholders Shareholder returns Investor relations By the way /57

3 Research Report by Shared Research Inc. Executive summary Changing focus from pachinko and pachislot to IP The company s main businesses are planning, developing, and selling pachinko and pachislot machines, as well as intellectual property (IP). The company works to maximize earnings by commercializing IP, incorporating it in various businesses (on a cross media business platform) including pachinko and pachislot machines. For long-term growth and expansion, Fields is shifting its focus from pachinko and pachislot machines (its focus since listing) to IP. The company aims at further expansion through a new growth-oriented business model, with seamless, cyclical synergies between comics, animation, movie/tv, and merchandising businesses. Fluctuations in the company s results are mainly due to the development and sales of pachinko and pachislot machines. The company creates contents or acquires merchandising rights to promising contents. It then adds value through product planning, outsources development and manufacturing to partners, and sells finished pachinko/pachislot machines as a distributor. As Fields is an independent machine distributor with a nationwide network, pachinko halls can purchase titles from various makers solely from the company. Trends and outlook For FY03/18, Fields reported sales of JPY61.1bn (-20.4% YoY), operating loss of JPY5.7bn (operating loss of JPY5.4bn in FY03/17), recurring loss of JPY5.2bn (recurring loss of JPY9.1bn), and net loss attributable to parent company shareholders of JPY7.7bn (net loss of JPY12.5bn). For FY03/19, the company forecasts sales of JPY95.0bn (up 55.6% YoY), operating profit of JPY2.0bn (operating loss of JPY5.7bn in FY03/18), recurring profit of JPY2.5bn (recurring loss of JPY5.2bn), and net income attributable to parent company shareholders of JPY1.5bn (net loss of JPY7.7bn). In May 2015, the company announced a medium-term plan covering FY03/ Numerical targets for FY03/20 are sales of JPY81 88bn, operating profit of JPY5 7bn, and net income attributable to parent company shareholders of JPY bn. From FY03/14 to FY03/18, sales declined from JPY114.9bn to JPY61.1bn and operating profit declined from JPY9.8bn to an operating loss of JPY5.7bn. According to the company, this downturn in performance was due to delayed responses to market changes, poor functioning of the business value chain, and struggles in monetizing its original IP. The medium-term plan aims to resolve these issues and turn around performance by focusing on restoring profits in the short term, rebuilding the business value chain, and developing a business model that combines IP and business platforms. Strengths and weaknesses Shared Research sees the company s strengths as its strong sales force, its game planning and development, its brand creativity, and alliances with top game makers. Weaknesses include its reliance on the amusement business, which is regulated, and lack of a track record and experience in in-house IP creation. 03/57

4 Research Report by Shared Research Inc. Key financial data Income statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 73,035 66, ,593 92, , ,904 99,554 94,476 76,668 61,055 95,000 YoY -28.3% -9.2% 56.1% -11.0% 17.3% 6.3% -13.4% -5.1% -18.8% -20.4% 55.6% Gross profit 24,024 26,889 35,129 31,330 33,279 33,812 28,468 25,480 17,641 13,400 GPM 32.9% 40.5% 33.9% 34.0% 30.8% 29.4% 28.6% 27.0% 23.0% 21.9% SG&A expenses 22,063 18,764 21,993 22,803 22,964 24,020 23,724 24,069 23,015 19,138 Operating profit 1,960 8,124 13,136 8,527 10,314 9,791 4,743 1,411-5,374-5,738 2,000 YoY -85.1% 314.5% 61.7% -35.1% 21.0% -5.1% -51.6% -70.3% OPM 2.7% 12.2% 12.7% 9.2% 9.5% 8.5% 4.8% 1.5% % Recurring profit 991 7,761 13,684 8,661 10,268 9,765 5,491 1,380-9,068-5,204 2,500 YoY -91.5% 683.1% 76.3% -36.7% 18.6% -4.9% -43.8% -74.9% RPM 1.4% 11.7% 13.2% 9.4% 9.5% 8.5% 5.5% 1.5% % Net income -1,481 3,289 7,520 5,991 4,720 5,370 3, ,483-7,691 1,500 YoY % -20.3% -21.2% 13.8% -43.8% -96.1% Per share data (JPY, adjusted for stock splits) Shares issued (year end; '000) ,700 34,700 34,700 34,700 34,700 34,700 EPS Book value per share 1, , , , , , , , , ,055.0 Dividend per share Balance sheet (JPYmn) Cash and deposits 11,181 15,916 15,873 18,344 23,314 29,583 15,823 32,200 23,190 24,473 Accounts receivable 4,324 33,088 27,948 34,402 42,017 29,155 45,888 8,562 12,727 7,019 Inventories 963 1,519 1,357 3,134 2,343 3,133 1,736 3,020 1,423 4,093 Total current assets 25,135 56,694 51,051 62,811 72,709 66,921 71,014 52,934 45,856 42,651 Total assets 52,064 81,329 78,971 93, , , ,316 92,478 80,397 72,357 Accounts payable 1,981 26,610 17,939 29,100 36,604 33,105 33,850 12,749 12,792 11,358 Interest-bearing debt 3,011 2,230 1,834 1,507 1, ,064 11,422 15,488 16,158 Total liabilities 12,568 40,141 31,949 42,046 51,529 46,116 50,070 34,186 37,170 36,847 Shareholders' equity 40,420 41,741 47,601 51,895 54,957 58,670 60,171 58,298 44,156 34,391 Net debt -8,170-13,686-14,039-16,837-22,262-28,841-11,759-20,778-7,702-8,315 Working capital 3,306 7,997 11,366 8,436 7, ,774-1,167 1, Cash flow statement (JPYmn) Cash flows from operating activities 4,147 8,429 8,005 10,015 13,570 16,322-9,086 13,353-7,319-1,094 Cash flows from investing activities -6,182-1,011-4,356-4,798-6,263-8,018-6,297-2,191-3,927 4,399 Cash flows from financing activities 602-2,687-3,915-2,565-2,277-2,018 1,624 5,214 2,136-2,021 Financial ratios ROA (RP-based) 1.6% 11.6% 17.1% 10.0% 10.3% 9.2% 5.1% 1.4% -10.5% -6.8% ROE -3.5% 8.2% 17.1% 12.2% 8.9% 9.5% 5.1% 0.2% -25.1% -19.9% Equity ratio 77.6% 51.3% 60.3% 55.4% 51.5% 55.9% 54.5% 63.0% 54.9% 47.5% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Starting in FY03/16, business contract fee previously listed under other in non-operating profit is included in SG&A as a deduction. Note: Net Income from FY03/16 onward refers to net income attributable to parent company shareholders. 04/57

5 Research Report by Shared Research Inc. Recent updates Highlights On May 22, 2018, Fields Corporation announced the nationwide launch of STREET FIGHTER V PACHISLOT EDITION, a pachislot machine. This machine is scheduled to be installed in pachinko halls from July. On May 11, 2018, the company announced earnings results for full-year FY03/18; see the results section for details. On the same day, the company announced posting of an extraordinary loss on valuation of investment securities and dividends of surplus. Extraordinary loss Fields posted a JPY2.2bn extraordinary loss on valuation of investment securities owing to impairment of investment securities. Dividends of surplus The company reduced its FY03/18 dividend forecast, lowering its year-end dividend to JPY5 per share (JPY25 per share in the previous forecast). This resulted in an annual dividend of JPY30 (JPY50 in the previous forecast). On the same day, the company announced reassignment of representative directors. Name New position Previous position Hidetoshi Yamamoto Chairman/CEO and COO Chairman/CEO Tetsuya Shigematsu Director President & COO On April 24, 2018, the company announced its subsidiary s victory in a lawsuit regarding Ultraman rights in the US. In the copyright-related case between the company s consolidated subsidiary Tsuburaya Productions Co., Ltd. (TPC) and UM Corporation (UMC), the US District Court (Central District of California) ruled on April 18, 2018 (local time) affirming TPC s entire claim that an agreement dated March 4, 1976, which UMC asserts as valid, was not an authentic contract. In addition to confirming TPC s ownership of all rights to introduce and promote outside of Japan any creative works or products featuring the Ultraman characters, the court demanded UMC to compensate for the damages (copyright infringement) incurred by TPC. Background On May 18, 2015, UMC filed a lawsuit against TPC in the above court, seeking confirmation of its alleged rights to use outside of Japan the Ultraman series and characters created by TPC. UMC claimed TPC was infringing its rights and sought compensation for damages. On September 11, 2015, TPC filed a countersuit against UMC and its licensees to retain its rights in Ultraman and to recover damages from UMC and its licensees for their infringements. In support of its assertion of rights, UMC claimed that there was an agreement signed in 1976 by Noboru Tsuburaya (then representative of TPC), which gave Thai businessman Sompote Saengduenchai the rights to use Ultraman worldwide, excluding Japan, and that UMC had obtained the alleged rights from Mr. Sompote. TPC asserted that the 1976 agreement was a forgery. Therefore, the principal point of dispute in this lawsuit was whether the agreement was an authentic contract signed and sealed by Noboru Tsuburaya or was forged. 05/57

6 Research Report by Shared Research Inc. On April 16, 2018, the company announced the nationwide launch of Pachislo Okami, a pachislot machine. This machine is scheduled to be installed in pachinko halls from June. On March 27, 2018, Shared Research updated the report following interviews with the company. On March 26, 2018, the company announced the nationwide launch of CR INUYASHA JUDGEMENT (infinity), a pachinko machine. This machine is scheduled to be installed in pachinko halls from this summer. On March 23, 2018, the company announced the nationwide launch of PACHISLOT Tengen Toppa Gurren Lagann -KIWAME, a pachislot machine. This machine is scheduled to be installed in pachinko halls from this summer. For previous releases and developments, please refer to the News and topics section 06/57

7 Research Report by Shared Research Inc. Trends and outlook Quarterly trends and results Cumulative FY03/17 FY03/18 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est. Sales 15,295 26,659 42,626 76,668 12,446 35,213 45,266 61, % 62,500 YoY -10.8% -47.0% -40.5% -18.8% -18.6% 32.1% 6.2% -20.4% -18.5% Gross profit 2,487 5,186 10,038 17,641 1,961 6,944 10,719 13,400 YoY -49.8% -62.6% -50.4% -30.8% -21.1% 33.9% 6.8% -24.0% GPM 16.3% 19.5% 23.5% 23.0% 15.8% 19.7% 23.7% 21.9% SG&A expenses 5,485 11,461 17,433 23,015 4,864 9,724 14,332 19,138 YoY -7.9% -4.2% -3.6% -4.4% -11.3% -15.2% -17.8% -16.8% SG&A ratio 35.9% 43.0% 40.9% 30.0% 39.1% 27.6% 31.7% 31.3% Operating profit -2,997-6,275-7,394-5,374-2,902-2,780-3,612-5,738-6,000 YoY OPM Recurring profit -3,241-6,828-7,945-9,068-3,055-3,288-3,858-5,204-6,000 YoY RPM Net income -2,340-4,856-9,072-12,483-2,752-3,289-4,133-7,691-6,600 YoY Net margin Quarterly FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 15,295 11,364 15,967 34,042 12,446 22,767 10,053 15,789 YoY -10.8% -65.7% -25.3% 49.0% -18.6% 100.3% -37.0% -53.6% Gross profit 2,487 2,699 4,852 7,603 1,961 4,983 3,775 2,681 YoY -49.8% -69.7% -24.3% 45.6% -21.1% 84.6% -22.2% -64.7% GPM 16.3% 23.8% 30.4% 22.3% 15.8% 21.9% 37.6% 17.0% SG&A expenses 5,485 5,976 5,972 5,582 4,864 4,860 4,608 4,806 YoY -7.9% -0.5% -2.5% -6.6% -11.3% -18.7% -22.8% -13.9% SG&A ratio 35.9% 52.6% 37.4% 16.4% 39.1% 21.3% 45.8% 30.4% Operating profit -2,997-3,278-1,119 2,020-2, ,126 YoY OPM % - 0.5% - - Recurring profit -3,241-3,587-1,117-1,123-3, ,346 YoY RPM Net income -2,340-2,516-4,216-3,411-2, ,558 YoY Net margin Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Starting in FY03/16, business contract fee previously listed under other in non-operating profit is included in SG&A as a deduction. Note: Net Income from FY03/16 onward refers to the net income attributable to parent company shareholders. SG&A expenses Cumulative FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 SG&A expenses 5,485 11,461 17,433 23,015 4,864 9,724 14,332 19,138 YoY -7.9% -4.2% -3.6% -4.4% -11.3% -15.2% -17.8% -16.8% Advertising expenses 562 1,901 3,175 3, ,143 1,554 2,059 Salaries 1,564 3,076 4,558 6,033 1,468 2,882 4,266 5,639 Outsourcing expenses 560 1,102 1,649 2, ,441 1,851 Depreciation , ,060 Rents 522 1,031 1,501 1, ,329 1,793 Goodwill amortization Other 1,894 3,583 5,399 7,322 1,652 3,129 4,710 6,414 Quarterly FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 SG&A expenses 5,485 5,976 5,972 5,582 4,864 4,860 4,608 4,806 YoY -7.9% -0.5% -2.5% -6.6% -11.3% -18.7% -22.8% -13.9% Advertising expenses 562 1,339 1, Salaries 1,564 1,512 1,482 1,475 1,468 1,414 1,384 1,373 Outsourcing expenses Depreciation Rents Goodwill amortization Other 1,894 1,689 1,816 1,923 1,652 1,477 1,581 1,704 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. 07/57

8 Research Report by Shared Research Inc. Pachinko and Pachislot Machine earnings Pachinko and pachislot machine sales (Cumulative; units) Q1 FY03/17 Q2 Q3 Q4 Q1 FY03/18 Q2 Q3 Q4 Pachinko and pachislot machines 36,782 73, , ,584 27,102 99, ,717 YoY -17.2% -45.7% -40.7% -15.8% -26.3% 36.2% 12.3% Total pachinko machines 24,677 44,712 78, ,614 14,531 30,254 69,425 YoY 57.3% -31.2% -38.5% -4.3% -41.1% -32.3% -11.0% Bisty 2,798 19,239 47,916 98,637 1,605 7,332 43,339 OK 2,345 2,345 3,304 22,897 9,207 15,317 15,327 Mizuho Daichi 14,015 14,015 14,015 14, NANASHOW 2,396 2,396 2,396 3, Others 3,050 6,644 10,300 16,261 3,054 6,940 10,094 Total pachislot machines 12,105 28,341 52,687 87,970 12,571 69,239 77,292 YoY -57.9% -59.3% -43.7% -30.7% 3.8% 144.3% 46.7% Rodeo - - 4,416 4, Bisty ,010 1,272 1,272 1,272 OK ,755 7,039 7,039 NANASHOW 1,995 2,168 6,321 6,321 2,087 3,558 10,983 Enterrise 5,537 20,548 35,670 57,848 4,171 22,326 22,326 Mizuho ,000 4,000 D-light 3,167 3,169 3,169 3,185 2,316 3,357 3,357 Others 1,401 2,451 3,106 4, ,058 27,686 Titles Pachinko Pachislot Pachinko and pachislot machine sales (Quarterly; units) Q1 FY03/17 Q2 Q3 Q4 Q1 FY03/18 Q2 Q3 Q4 Pachinko and pachislot machines 36,782 36,271 57, ,893 27,102 72,391 47,224 YoY -17.2% -59.8% -33.0% 63.9% -26.3% 99.6% -18.1% Total pachinko machines 24,677 20,035 33,292 77,610 14,531 15,723 39,171 YoY 57.3% -59.3% -46.3% 117.9% -41.1% -21.5% 17.7% Bisty 2,798 16,441 28,677 50,721 1,605 5,727 36,007 OK 2, ,593 9,207 6, Mizuho Daichi 14, NANASHOW 2, , Others 3,050 3,594 3,656 5,961 3,054 3,886 3,154 Total pachislot machines 12,105 16,236 24,346 35,283 12,571 56,668 8,053 YoY -57.9% -60.3% 1.3% 6.1% 3.8% 249.0% -66.9% Rodeo - - 4, Bisty ,005 1, OK ,755 5,284 - NANASHOW 1, ,153-2,087 1,471 7,425 Enterrise 5,537 15,011 15,122 22,178 4,171 18,155 - Mizuho ,000 - D-light 3, ,316 1,041 - Others 1,401 1, , , Titles Pachinko Pachislot Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. 08/57

9 Research Report by Shared Research Inc. Pachinko and pachislot market trends Market trends (cumulative) FY03/17 FY03/18 ('000 units) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total pachinko and pachislot machines 459 1,114 1,983 2, ,193 1,698 YoY -41.1% -28.7% -16.5% -16.0% 26.4% 7.1% -14.4% Pachinko ,300 1, ,129 YoY -46.4% -33.0% -15.7% -16.6% 47.6% 3.8% -13.2% Pachislot YoY -31.7% -20.2% -18.0% -14.8% -3.1% 12.5% -16.7% Market trends (quarterly) FY03/17 FY03/18 ('000 units) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total pachinko and pachislot machines YoY -41.1% -16.3% 6.8% -13.7% 26.4% -6.4% -41.9% Pachinko YoY -46.4% -20.6% 19.2% -20.0% 47.6% -23.8% -32.3% Pachislot YoY -31.7% -7.2% -14.2% 0.6% -3.1% 25.5% -64.2% Source: Shared Research based on company data Full-year FY03/18 results In FY03/18, the company reported sales of JPY61.1bn (-20.4% YoY), an operating loss of JPY5.7bn (versus loss of JPY5.4bn in FY03/17), a recurring loss of JPY5.2bn (versus loss of JPY9.1bn in FY03/17), and a net loss attributable to parent company shareholders of JPY7.7bn (versus loss of JPY12.5bn in FY03/17). Sales fell due to a decrease in the number of amusement machine units sold. Although SG&A expenses declined due to improved management efficiency, operating profit fell due to lower sales. With regard to non-operating income, profit at equity-method subsidiaries was JPY306mn (loss of JPY3.9bn in FY03/17). The company posted an extraordinary loss of JPY3.1bn (loss of JPY1.5bn in FY03/17), including a JPY2.2bn loss on the valuation of investment securities. In the pachinko/pachislot market, the Regulations on the Partial Revision of Regulations Regarding the Enforcement of the Act on Control and Improvement of Amusement Business (enacted in February 2018) impacted manufacturers product development and sales schedules, and attributed to a declining propensity for pachinko halls to buy amusement machines. As a result, sales of amusement machines in FY03/18 fell by 400,000 units to 2,080,000 units (statistics from Fields). In FY03/18,190,000 amusement machines were sold (-50,000 units YoY). While amusement machine sales were in line with forecast until cumulative Q3 FY03/18 (April-December), in Q4 (January-March) sales declined as several amusement machines Fields had planned to release, including some large titles, had not received compliance testing results. To improve and strengthen management, Fields continued to restructure its cross media business, including at the group, and open new offices. At the same time, it pursued measures to reduce costs by improving management efficiency, resulting in a drop in SG&A expenses by JPY3.9bn YoY to JPY19.1bn. For details on previous quarterly and annual results, please refer to the Historical financial statements section. 09/57

10 Research Report by Shared Research Inc. Full-year FY03/19 company forecasts FY03/19 estimates (JPYmn) 1H Act. FY03/18 2H Act. FY Act. FY03/19 FY Est. Sales 35,213 25,842 61,055 95,000 YoY -54.1% -48.4% -20.4% 55.6% Cost of sales 28,269 19,386 47,655 78,000 Gross profit 6,944 6,456 13,400 17,000 YoY 33.9% -48.2% -24.0% 26.9% GPM 19.7% 25.0% 21.9% 17.9% SG&A expenses 9,724 9,414 19,138 15,000 SG&A ratio 27.6% 36.4% 31.3% 15.8% Operating profit -2,780-2,958-5,738 2,000 YoY OPM % Recurring profit -3,288-1,916-5,204 2,500 YoY RPM % Net income -3,289-4,402-7,691 1,500 YoY Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Net income from FY03/16 onward refers to net income attributable to parent company shareholders. The company s forecasts for FY03/19 are as follows: Sales: JPY95.0bn (up 55.6% YoY) Operating profit: JPY2.0bn (operating loss of JPY5.7bn in FY03/18) Recurring profit: JPY2.5bn (recurring loss of JPY5.2bn) Net income: JPY1.5bn (loss of JPY7.7bn) *Net income refers to net income attributable to parent company shareholders. The year-end dividend (forecast) is set at JPY10.0 per share. 10/57

11 Research Report by Shared Research Inc. Long-term outlook Medium-term plan (FY03/18 20) announced in May 2017 In May 2015, Fields announced a medium-term plan covering FY03/ Numerical targets for FY03/20 are sales of JPY81 88bn, operating profit of JPY5 7bn, and net income attributable to parent company shareholders of JPY bn. Numerical targets in medium-term plan (JPYmn) FY03/17 Act. FY03/18 Est. FY03/19 Plan FY03/20 Sales 76,668 82,000 85,000 71,000 74,000 81,000 88,000 Operating profit 5,374 1,000 2,000 2,000 3,000 5,000 7,000 Recurring profit 9, ,000 2,000 3,000 5,000 7,000 Net income 12, ,000 1,000 1,500 2,500 3,500 Source: Shared Research based on company data Plan Factors in profits slump over past five years and medium-term plan focus points From FY03/13 to FY03/17, sales declined from JPY108.1bn to JPY76.7bn and operating profit declined from JPY10.3bn to an operating loss of JPY5.4bn. According to the company s analysis, this downturn in performance was due to delayed responses to market changes, the poor functioning of the business value chain, and struggles in monetizing its original IP. The medium-term plan aims to resolve these issues and turn around performance by focusing on restoring profits in the short term, rebuilding the business value chain, and developing a business model that combines IP and business platforms. Factors in earnings downturn and medium-term plan focus points Factors in earnings downturn Delayed response to market changes Dysfunction in business value chain Struggle to monetize original IP Medium-term plan focus points Focus on short-term earnings recovery Rebuild business value chain Develop IP and business platform business model Focus on short-term earnings recovery The company aims to continue strengthening the distribution platform and expanding products handled by the pachinko and pachislot business, selection and focus on IP projects in the cross media business, and working to manage more efficiently. The company expects sales to grow in the mainstay pachinko and pachislot business. Fields plans to launch at least 24 titles in pachinko and pachislot machines in FY03/18 (as of May 2017). Further, the company also forecasts higher sales due to an increased number of sales branches and more marketing visits by sales staff. In 1H FY03/17 it did not have enough new pachinko and pachislot titles for sale, but it is taking initiatives to expand product lineup over the whole of FY03/18. Rebuild business value chain Fields said that it had grown profits in the past by forecasting future market developments and considering what sort of planning and IP would be necessary in light of this, and entering into partnerships with other companies, developing products, and conducting sales promotion activities. After evaluating the results, it would once again conduct market analysis which it again incorporated into the value chain. However, over the past five years there were delays in machine launches and the company supplied some products that did not suit market needs as dysfunctions arose in sections of the business value chain. Relationships with partner companies deteriorated, the partner companies actions were not in line with the company s thinking and in cases, planning took a back seat to IP during product development. 11/57

12 Research Report by Shared Research Inc. In the medium-term plan, Fields aims to plan with a focus on market and customer tastes. Based on these, the company will procure IP, structure partnerships, commercialize products, conduct sales promotion activities, and rebuild its organizational structure reflecting feedback from this process. Conceptual view of rebuilding value chain Source: Company data Developing a business model that combines IP and business platforms IP and business platform matrix model The company works to maximize earnings by commercializing IP, incorporating it in various businesses (on a cross media business platform) including pachinko and pachislot machines. Shared Research understands that the IP and business platform matrix model has the following characteristics: It enables expanded earnings sources by developing each IP over numerous business platforms Making a series out of the individual combinations of IP and business platforms enables growth in customer numbers, improved market awareness, and stable earnings Developing IP for varying media within individual business platforms enables an increase in earnings sources. For example, it is possible to roll out games as consumer games, social games, virtual/augmented reality, and comics on paper media and e-books IP and business platform matrix model Source: Company data 12/57

13 Research Report by Shared Research Inc. In the medium-term plan, the rebuilt value chain will consist of an IP and business platform matrix model. The company will also aim to conduct IP portfolio management and operations and introduce management indicators to focus on select IP and clarify measurement of investment returns. IP portfolio management Due to timing differences in their creation, the company classifies its IP as recent/current, legendary, and challenge. IP types IP types Definition Examples Recent/current Widespread among young people BERSERK, Gantz, AKB Legendary Widespread among middle-aged and Ultraman, Atom: The Beginning older Challenge Company s original Killing Bites, Hero Mask Source: Shared Research based on company data According to the company, when IP starts to stagnate after being highly popular, there is still strong market awareness. It is possible to refresh the market value and reboot the property by producing new TV/movies or modernizing the story. In the medium-term plan, the company aims to monetize recent and current IP in particular through the rebooting process. For legendary IP, the company will be aggressive in monetizing its Ultraman franchise and others. In its challenge IP sector, the company plans to select and focus, shifting from IP that does not have strong prospects to IP that has recently been filmed, that the company has decided to film, or has been published. Under this strategy, the company aims to have at least 80% of its IP in the categories of recent/current and legendary by FY03/20. Shared Research thinks that selecting and focusing on IP should lead to effective cost allocation and improved profitability in the cross media business platform, particularly by concentrating on recent/current and legendary IP with prospects of high returns on investment. Further, we understand that these initiatives are aimed in the long term at building an earnings structure with stability and strong growth prospects by creating a profit platform that does not depend on a small number of intellectual properties or the pachinko/pachislot business. IP lineup Source: Company data Management and return on invested capital for IP As part of its IP management, the company established an IP marketing office in April Previously, management functions such as copyright selection, acquisition, and permissions in the pachinko and pachislot business, and IP management functions in 13/57

14 Research Report by Shared Research Inc. the cross media business were separate. However, the new IP marketing office will be in charge of managing all IP activities across the group. Previously each business had its own P&L management, but going forward investment returns and earnings management following an investment will be centrally managed. ROI for each IP will be the key indicator in management accounting. Investment decisions will require an ROI of at least 130%, and the company will aim for an ROI of at least 130% on the IP that it invests in. Plans for Tsuburaya Productions Since making Tsuburaya Productions Co., Ltd. a subsidiary in 2010, the company increased customer engagement and worked to grow earnings by developing IP, especially in the Ultraman series. In FY03/12, just after becoming a company subsidiary, Tsuburaya Productions had sales of JPY2.9bn and gross profit of JPY1.1bn. In FY03/17 this had grown to sales of JPY3.7bn and gross profit of JPY1.7bn. In the medium-term plan, the company aims for the unit to have sales of at least JPY6.0bn and operating profit of JPY2.6bn in FY03/20. Pachinko and pachislot business in medium-term plan Assumptions for pachinko and pachislot market in medium-term plan In the three-year medium-term plan, Fields forecasts the pachinko and pachislot market to shrink in FY03/18 and FY03/19 before recovering in FY03/20. The company said that in the early 2000s, when there was a shift from Regulation 4 to Regulation 5 pachislot machines, it took about three years for the impact of the regulations to settle down, after which the market recovered. Company assumptions for pachinko and pachislot market FY03/17 Act. FY03/18 Est. FY03/19 Target FY03/20 Target Number of pachinko machines sold 1.66mn 1.58mn 1.53mn mn Number of pachislot machines sold 810, , , , ,000 Amusement machine market JPY860.0bn JPY782.1bn JPY731.7bn JPY bn Total pachinko/pachislot market JPY2.77tn JPY2.72tn JPY2.68tn JPY tn Source: Shared Research based on company data Strategies for pachinko and pachislot business earnings turnaround in medium-term plan Fields said that the major reasons for the downturn in earnings for the pachinko and pachislot business were a slow response to regulations, timing issues with product supply, and a declining propensity for pachinko halls to buy machines that met the new standards. However, the company said the key factor was poor communications with manufacturers and that it was currently making all-out efforts to strengthen partnerships with each individual manufacturer. In light of this, the company s plans to turn around earnings in the pachinko and pachislot business entail increasing the number of visits to and interactions with customers, adding more branches, and expanding its product range. It also plans to expand the addressable market by offering solutions in addition to sales of amusement machines. Increasing number of visits to and interactions with customers Fields has around 300 marketing personnel in the pachinko and pachislot business. When earnings slumped, the number of visits by marketing personnel decreased. In the medium-term plan, the company aims to increase the number of interactions with customers by raising the number of visits and thereby boosting transactions. Increasing branch numbers As of May 2017, Fields had seven regional offices and 26 branch offices in the pachinko and pachislot business. In FY03/18 the company plans to open showrooms in nine locations in regions where it has no branches, particularly in those with large numbers of pachinko halls that have good buying potential. 14/57

15 Research Report by Shared Research Inc. Expanding title lineup The company did not have enough titles to sell in 1H FY03/17. In the medium-term plan, Fields plans to increase the number of titles it sells as well as a balanced distribution in its releases throughout a particular year. As shown in the following figure, the company aims to release titles per year. Planned pachinko and pachislot title releases in medium-term plan FY03/17 Act. FY03/18 Est. FY03/19 Target FY03/20 Target Pachinko 6 7 or more 7 or more 9 or more Pachislot 9 16 or more 13 or more 14 or more Total or more 20 or more 23 or more Source: Shared Research based on company data Expanding addressable market According to the company, while the amusement machine market is worth JPY860bn, the overall pachinko and pachislot market including ancillary equipment and solutions such as data analysis is worth JPY2.7tn. In its medium-term plan, Fields plans to grow earnings by providing data services and offering digital signage as well as visual media distribution and equipment, in addition to sales of machines, to its pachinko hall customers. 15/57

16 Research Report by Shared Research Inc. Business Summary The company has two main businesses: the planning, development, and distribution of pachinko/pachislot machines; and the planning, development, and distribution of intellectual property (IP). Up until FY03/12, the company had four reportable segments: Pachinko/Pachislot (PS) Field, Mobile Field, Sports Entertainment Field, and Other Field. However, the company has announced its decision to shift away from its traditional business model focusing on the PS Field and move into a new model underpinned by IP. In line with that decision, the company aims to grow further by rebuilding strategies based on the growth-oriented business model (seamlessly synergistic business development involving Comics, Animation, Movie/TV, and Merchandising). Accordingly, in FY03/13, the company consolidated the previous four segments to form a single segment centered on IP. Developing Business Model Source: Company data 16/57

17 Research Report by Shared Research Inc. Business description Fields operates a circular business, based on four categories of product that interact with each other. Comics Comics are the source of the company s IP. Through the Comics business, the company creates and acquires original work, stories, and characters. HERO S Inc., a joint venture with Shogakukan Creative Inc., publishes the comic Hero s Monthly. First launched on November 1, 2011, the company distributes Hero s Monthly through convenience stores run by Seven-Eleven Japan Co., Ltd., a subsidiary of Seven & i Holdings Co., Ltd. (TSE1: 3382). The magazine creates is the source of heroes and other characters, and the company develops related IP, such as comics and films, through collaborations with partner companies and networks. Plans to produce movies or other visual products are already underway for several IP items created from Hero s Monthly. In particular, ATOM THE BEGINNING in the magazine is to be broadcasted on the NHK general TV channel from spring of Animation In this business, the company makes animation films based on popular comics and other media. The company tries to strengthen its IP by joining planning and production and supporting renditions and effects that feature characters of products. Movie/TV Through movies and TV series, the company increases the market recognition for related works and maximizes values. For example, movie production subsidiary Tsuburaya Productions Co., Ltd. produces movies and TV programs for the Ultraman series while spreading the use of Ultraman characters in many forms of media. The company aims to grow Ultraman a global-scale character, and to this end it plans to cooperate with powerful business partners. Merchandising across media the lateral development of IP Fields generates revenue from IP by merchandising it in interactive media such as games, mobile content, social network services, in addition to consumer products and pachinko and pachislot machines. Interactive Media The company develops and operates social games and provides pachinko/pachislot-related contents. Consumer Products The company plans, develops, and sells IP-based goods. Planning, Development, and Distribution of Pachinko/Pachislot Machines This is the stable cash-flow source in the company s Merchandising business. As a fabless entity, the company creates contents or acquires merchandising rights to promising contents in Japan and overseas. It then adds value through product planning, outsources development and manufacture to partners, and sells finished pachinko/pachislot machines as the sales agent or distributor. Although it does sell machines made by non-partners, most machines are made by partners. 17/57

18 Research Report by Shared Research Inc. Fields added value comes from its ability to obtain and combine proprietary content to plan and develop pachinko/pachislot machines. Because the company is the largest independent distributor with a national sales network of seven regional offices and 26 branch offices, its customers enjoy the benefit of purchasing titles from several different manufacturers through a single sales contact. Its sales force has compiled a database about market trends and best practices. The company shares this accumulated knowledge with pachinko halls, fostering customer loyalty. Pachinko/pachislot machines require roughly two to three years from content search, study, and acquisition to finished product delivery. Usual flow of merchandising rights in product planning and development and how sales are booked Source: Company data *MG (minimum guarantee) is minimum guaranteed usage fee paid by the licensee to the licensor when concluding a license business agreement *OR (over royalty) payments are variable royalty payments (sliding scale usage fee) for rights such as copyright or industrial property rights when a specific sales volume is exceeded Distribution and agent sales The company sells pachinko/pachislot machines in two ways. In distribution sales, the company sells directly to pachinko halls via its regional and branch offices. It uses this sales method for most of the pachislot machines and some of pachinko machines it sells. In the agency sales method used for pachinko machines, the company serves as sales broker. In distribution sales the company purchases machines from machine makers and sells them to pachinko halls. In agency sales, acting as a sales broker for machine makers, the company creates transaction agreements between machine makers and pachinko halls, collects payments from pachinko halls, prepares for pachinko hall openings, and provides after-sales services. By doing so, the company receives commissions from machine makers. Sales are booked differently in the two methods. This means that the company s sales are a function of the composition of distribution and agency sales. Distribution sales Machine sales to pachinko halls are booked as sales in the month of sales. Payments for machines purchased are booked as CoGS. 18/57

19 Research Report by Shared Research Inc. Distribution sales (revenue and profit based on purchase) Source: Company data Agency sales Commissions received from machine makers upon machine sales are booked as sales in the following month of sales. Agent sales (revenue and profit based on commissions) Hiroya Oku, Shueisha. Hiroya Oku, Shueisha GANTZ: O Production Committee, OK Co., Ltd. All Rights Reserved. Capcom Co., Ltd. All Rights Reserved. Khara, Sankyo, Bisty Source: Company data Sales structure As of end March 31, 2017, the company had around 300 sales staff at seven regional offices and 26 branch offices nationwide. The company s salespeople cover approximately 30 accounts each. Salespeople employ a consulting sales approach where they contribute to efficient pachinko hall management. The company has machine showrooms in all of its branch offices. Fields utilizes two distribution channels. The first is a direct channel (selling directly to hall operators); around 70% of machines are sold using the direct channel. The second is sales through resellers; this channel is lower margin than the direct channel, but sometimes makes economic sense due to the small size or geographic location of end customers. The company has been expanding its distribution channels since FY03/13. From FY03/15, Fields has established a structure of seven regional and 26 branch offices nationwide. The number of pachinko and pachislot halls under a salesperson s coverage will 19/57

20 Research Report by Shared Research Inc. be reduced, and access time to such hall operators shortened. The company aims to strengthen its sale support to affiliated pachinko and pachislot machine manufacturers. Machine units installed and the company s earnings Machine volumes are the main swing-factor for earnings (see chart below). Operating profit vs. unit sales (JPYmn) FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 Operating profit 12,348 8,944 13,158 1,960 8,124 13,136 8,527 10,314 9,791 4,743 1,411-5,374 Pachinko/Pachislot sales ('000 units) Source: Shared Research based on company data Strategic partnerships The company partners with key machine manufacturers to jointly promote wide-ranging machine brands. For these manufacturers, the company acts as the sole distribution agent. Sammy Inc.: Group company of Sega Sammy Holdings Inc. (TSE1: 6460). Fields concluded a basic agreement on sales transactions with Sammy Inc. in 2017 to become an exclusive distributor to sell certain amusement machines developed and manufactured by Sammy Group companies as specified in the agreement. Bisty Co., Ltd.: Subsidiary of SANKYO Co., Ltd. (TSE1: 6417), Fields partner pachinko/pachislot machine manufacturer. Since its tie-up in 2003, Bisty has developed a variety of titles including the Evangelion series. OK Co., Ltd.: Tie-up with KYORAKU SANGYO (unlisted) in February Fields and KYORAKU SANGYO jointly launched new brand OK to create a new pachinko market and expand the pachinko fan base. It owns hit titles such as Pachinko GANTZ. Enterrise Co.: Subsidiary of Capcom Co., Ltd. (TSE1: 9697), a leading video game company, Fields partner. Fields began sales of Enterrise pachislot machines in 2010, as the exclusive retailer. Hit titles include the Pachislot Biohazard series and Pachislot Monster Hunter series. Mizuho Corp.: Fields and signed a joint business agreement with Universal Entertainment Corp. (JASDAQ: 6425) and Mizuho in Fields acquired a 49.8% stake in Mizuho in 2012, and will begin retailing Mizuho pachislot machines in D-light Co., Ltd.: Founded in 2000 as a second brand for Daiichi Shokai Co., Ltd. (unlisted). Business alliance agreed upon with Fields in In 2015, D-light began producing and selling pachislot and pachinko machines. NANASHOW Corp.: Established in Fields bought a stake in NANASHOW in 2014 (38.9%). Business alliance agreed upon with Fields in It launched sales of Pachislot BERSERK, a top title in /57

21 Research Report by Shared Research Inc. Main strategic partners and group companies Source: Company data *1: Spiky Corporation (wholly owned subsidiary of CROSSALPHA (formerly Aristocrat Technologies) became a subsidiary when the company made CROSSALPHA a subsidiary. 21/57

22 Research Report by Shared Research Inc. Machine sales by brand Sales by brand FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (Units) Total 484, , , , , , , , , ,584 YoY -5.2% -31.6% 35.8% 6.8% -14.1% -20.4% 19.8% 1.7% -27.6% -15.8% Rodeo 127,670 41,536 28, ,691 81, ,549 26,505 42,566-4,431 YoY 60.2% -67.5% -30.8% 323.1% -32.8% 27.8% -74.6% 60.6% - - % of sales 12.5% 6.4% 25.3% 19.8% 31.9% 6.7% 10.6% - - Bisty 329, , , , , , , , , ,647 YoY -10.0% -20.6% 38.5% -15.6% -14.0% -56.7% 52.2% -8.0% -9.2% -23.7% % of sales 79.1% 80.7% 63.8% 63.9% 34.8% 44.2% 40.0% 50.1% 45.4% Enterrise - - 2,498 16,119 7,264 47,889 72,085 24,467 42,825 57,848 YoY % -54.9% 559.3% 50.5% -66.1% 75.0% 35.1% % of sales - 0.6% 3.4% 1.8% 14.6% 18.3% 6.1% 14.8% 23.7% OK ,437 28, ,597 5,010 22,897 YoY % 298.0% -95.6% 357.0% % of sales % 7.3% 28.7% 1.7% 9.4% Mizuho ,127 4,964 39, YoY % 698.2% -99.8% % of sales % 1.2% 13.7% 0.0% NANASHOW ,084 14,990 10,052 YoY % -32.9% % of sales % 5.2% 4.1% Daiichi/D-light ,767 17,200 YoY % of sales % 7.1% Others 26,899 27,582 55,564 35,878 59,776 29,143 37,845 33,235 24,175 20,436 YoY -58.6% 2.5% 101.5% -35.4% 66.6% -51.2% 29.9% -12.2% -27.3% -15.5% % of sales 5.6% 8.3% 12.4% 7.5% 14.5% 8.9% 9.6% 8.3% 8.4% 8.4% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Major hit titles, such as the Evangelion series developed jointly with SANKYO subsidiary Bisty, are significant earnings drivers for Fields. By the end of FY03/17, Fields had sold more than 2.2mn machines based on Evangelion-related IP. Evangelion is a hit animation franchise that has gained further popularity since the release of a four-part movie series, Rebuild of Evangelion in The series rose to popularity in when 26 episodes of the show were broadcast on TV Tokyo. As of May 2017, the first three series have been produced and released. 22/57

23 Research Report by Shared Research Inc. Business model The company aims to grow earnings by constructing a matrix business model of IP over business platforms. This entails taking IP such as characters and stories and developing them on business platforms such as pachinko/pachislot machines, movies and TV, comics, games, and merchandise. By turning its IP into series the company aims to stabilize sources of earnings. Shared Research understands that the IP and business platform matrix model has the following characteristics: It enables expanded earnings sources by developing each IP over numerous business platforms Making a series out of the individual combinations of IP and business platforms enables growth in customer numbers, improved market awareness, and stable earnings Developing IP for varying media within individual business platforms enables an increase in earnings sources. For example, it is possible to roll out games as consumer games, social games, virtual/augmented reality, and comics on paper media and e-books IP and business platform matrix model Source: Company data Some examples of how the company is working to acquire and generate IP include Hero s Monthly, BERSERK and Ultraman. BERSERK was originally a comic with over 40mn issues sold. Fields acquired movie rights for BERSERK, produced and released three movie adaptations from 2012 to 2013, created a game adaptation and launched pachinko machines in 2013, and launched pachislot machines in Though the company posted a recurring loss of several hundred million yen in the process of producing the movie and game adaptations, it generated a recurring profit of several billion yen during the first development stage as 23,000 pachinko machines and 20,000 pachislot machines (totaling 43,000 units) were sold. Fields started the second development stage in 2016, which includes broadcasting an anime adaptation on television and producing a game. Group companies Fields Group companies operate in a variety of areas, such as comics, animation, mobile, and pachinko/pachislot machines. As of December 2017, the company had 13 consolidated subsidiaries and 8 equity-method affiliates. Main group companies are listed below (when joined the group; Fields stake). Comics HERO S Inc. (April 2010; 49.0%): Plans, produces, and manages comic magazines and character contents Animation Lucent Pictures Entertainment, Inc. (October 2007; 100.0%): Plans and produces animation films 23/57

24 Research Report by Shared Research Inc. Digital Frontier Inc. (April 2010; 86.9%): Plans and produces computer graphics Movie/TV SPO Inc. (March 2008; 31.8%): Plans, produces, and distributes movies Merchandising Interactive Media FutureScope Corp. (October 2006; 94.4%): Provides mobile content-related and online shopping services. Consumer Products Tsuburaya Productions Co., Ltd. (April 2010; 51.0%): Plans and produces movies and TV shows. Plans, produces, and sells character merchandise Total Workout Premium Management Inc. (May 2011; 95.0%): Runs fitness clubs Pachinko/Pachislot Machines Fields Jr. Corp. (March 2002; 100.0%): Provides maintenance services Shin-Nichi Technology Co. (January 2008; 100.0%): Develops machines BOOOM Corp. (May 2009; 100.0%): Plans and develops machines Sogo Media Inc. (March 2010, 35.0%): Advertising agency business Microcabin Corp. (January 2011; 100.0%): Plans and develops software Mizuho Corp. (February 2012, 49.7%): Develops and manufactures pachinko/pachislot machines NANASHOW Corp. (January 2014, 38.8%): Develops and manufactures pachinko/pachislot machines Cross Alpha (May 2015, 100.0%): Develops and manufactures pachislot machines Spiky Corporation: (May 2015, 100.0%): Develops and manufactures pachislot machines 24/57

25 Research Report by Shared Research Inc. Profitability snapshot and financial ratios Profit margin FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. GPM 33.9% 32.9% 40.5% 33.9% 34.0% 30.8% 29.4% 28.6% 27.0% 23.0% OPM 12.9% 2.7% 12.2% 12.7% 9.2% 9.5% 8.5% 4.8% 1.5% -7.0% RPM 11.5% 1.4% 11.7% 13.2% 9.4% 9.5% 8.5% 5.5% 1.5% -11.8% Net margin 5.2% -2.0% 5.0% 7.3% 6.5% 4.4% 4.7% 3.0% 0.1% -16.3% Financial ratios FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ROA (RP-based) 17.3% 1.6% 11.6% 17.1% 10.0% 10.3% 9.2% 5.1% 1.4% -10.5% ROE 11.9% -3.5% 8.2% 17.1% 12.2% 8.9% 9.5% 5.1% 0.2% -25.1% Total asset turnover Inventory turnover Days of inventory Quick ratio 130.4% 205.4% 136.7% 158.8% 139.1% 137.9% 140.8% 134.8% 136.7% 175.4% Current ratio 204.7% 333.0% 158.2% 185.1% 165.6% 153.5% 160.4% 155.1% 177.6% 224.0% Equity ratio 64.8% 77.6% 51.3% 60.3% 55.4% 51.5% 55.9% 54.5% 63.0% 54.9% Net debt / Equity -17.5% -20.2% -32.8% -29.5% -32.4% -40.5% -49.2% -19.5% -35.6% -17.4% OCF / Current liabilities OCF / Total liabilities Source: Shared Research based on company Note: Figures may differ from company materials due to differences in rounding methods. While true peer analysis is not possible due to the company s unique business model, the company had high profitability, with its ROE exceeding 10% in FY03/08, FY03/11, and FY03/12. 25/57

26 Research Report by Shared Research Inc. Strengths and weaknesses Strengths Strong sales force: Game makers use Fields to take advantage of the company s large and skilled sales force, enabling them to extend geographic reach and accelerate getting games on the market. Game planning and development: The company develops games not dependent on a sense of gambling, but on strong content. Brand creativity: The ability to create new, distinct brands gives the company's partners more bandwidth to sell product while defraying their marketing costs. (Operators tend to allocate hall-space per brand; distinct labels enable manufacturers to backdoor additional machines into one venue.) Alliances with top game makers: The company s partners include game makers with notable technology and development capabilities, as well as leading entertainment companies Weaknesses: Dependency on pachinko/pachislot business in a regulated industry: Earnings are highly dependent on the pachinko/pachislot business, which is easily affected by legal and voluntary restrictions. Lack of track record and experience in creating original IP: The creation of original IP is indispensable for growth, but it takes three to four years and considerable costs. Main facilities Fields Corporation s operational backbone is based on its national sales network. This includes 7 regional offices, and 26 branch offices (as of end March 2017) located in Hokkaido-Tohoku (3), North Kanto (3), Tokyo (6), Nagoya (4), Osaka (3), Chugoku-Shikoku (3) and Kyushu (4). 26/57

27 Research Report by Shared Research Inc. Market and value chain This section focuses on the pachinko/pachislot machine market. Market overview The Japan Productivity Center estimated the total domestic leisure market at JPY70.9tn (-2.0% YoY) in fiscal 2016 (source: White Paper on Leisure 2017). Pachinko/pachislot market (total lending charge of pachinko balls) was estimated at JPY21.6tn (-6.9%). The pachinko/pachislot market has created a large presence to account for 30.5% of the overall leisure market. The market as measured by sales for pachinko halls was JPY21.6tn. Of that amount, JPY18.5tn was returned to players in prizes. The remaining JPY3.1tn became gross profit for pachinko halls. Operators invested about JPY0.9tn into the purchase of new machines and replacements. Industry trend Shared Research focuses on the following indicators to gauge the state of the pachinko/pachislot industry. Key indicators for pachinko/pachislot industry Indicator Key figures Growth rate Reference Player base 9.4mn (2015) -5.5% annual average (past 10 years) Long-term downtrend Pachinko/pachislot market JPY21.6tn Declining since 2005 along with game-playing -4.3% annual average (past 10 years) size (2015) population Pachinko hall numbers 10,986 Shrinking with pachinko/pachislot market -2.9% annual average (past 10 years) (2016) Average number of machines installed per hall rising Number of machines 4.52mn installed (2016) -0.9% annual average (past 10 years) In a downtrend Number of machines sold 2.44mn (2016) -7.8% annual average (past 10 years) Declining along with replacement rates Value of machines sold JPY882.1bn Declining more slowly than number of machines as -4.4% annual average (past 10 years) (2016) average prices rise Replacement rates 0.54x (2016) Half of 2006 levels Declining tendency Source: Shared Research based on various sources Note: replacement rate = number of machines sold number of machines installed Downward trend in player population and declining number of pachinko halls As of November 2017, the pachinko industry has been experiencing a gradual long-term decline in the player base and market size. The player base fell to 9.4mn in 2016 compared to 29.0mn in Until 2005, the market size grew despite a shrinking player population as average annual spend per player was growing. The market size (total lending charge of pachinko balls) peaked in 2005 at JPY34.8tn, and fell to JPY21.6tn in /57

28 12,937 12,652 12,479 12,323 12,149 11,893 11,627 11,310 10,986 R Research Report by Shared Research Inc. Pachinko players and market size 27.6 Market size (JPYtn) 23.1 Player population (mn people) Player population (mn people) Market size (JPYtn) Source: Shared Research based on White Paper on Leisure Diverging trends among halls The number of pachinko halls declined to 10,986 in 2016 from 18,164 in 1996 (source: National Police Agency). However, despite the growing downward trend in the number of pachinko halls, the number of installed machines has remained generally unchanged at 4.52mn in 2016 and 4.67mn in On the other hand, hall sizes have become larger, increasing to an average of 411 installed machines per hall in 2016 from 268 machines in A decrease in the amount of cash flow available for new investments has forced some smaller operators to sell or shut operations, while larger chains appear to be gaining scale, highlighting continued polarization of the market. Number of pachinko halls and installed pachinko machines per hall Number of pachinko halls Installed machines per hall ,164 17,773 17,426 17,173 16,988 16,801 16,504 16,076 15,617 15,165 14,674 13, Number of pachinko halls 18,164 17,773 17,426 17,173 16,988 16,801 16,504 16,076 15,617 15,165 14,674 13,585 12,937 12,652 12,479 12,323 12,149 11,893 11,627 11,310 10,986 Installed machines per hall Source: Shared Research based on National Police Agency Players turnover Order trends for Fields are tied to the financial health of its pachinko hall customers. Logically, the higher the cash flows of pachinko halls, the more funds they can spend on new equipment. Industry new machine investment is broadly defined by the average number of times halls turn their machine lineup per year. After peaking in 2005, turnover rates (aggregate for pachislot and pachinko) entered a downtrend. In 2016, turnover was 0.55 times for pachinko, 0.52 times for pachislot, and 0.54 for game machines overall (source: Yano Research Institute, National Police Agency). 28/57

29 Research Report by Shared Research Inc. Machines sales and players turnover 12,000 10,000 8,000 Installed pachinko machine ('000 units) Installed pachislot machine ('000 units) Pachislot machine turnover (right axis; times) Pachinko machine turnover (right axis; times) Total machine turnover (right axis; times) , , , ('000) Total machines Installed ('000 units) 4,670 4,730 4,690 4,690 4,740 4,780 4,850 4,880 4,960 4,890 4,930 4,590 4,520 4,500 4,550 4,580 4,590 4,610 4,590 4,580 4,520 Installed pachislot machine ('000 units) ,000 1,130 1,320 1,450 1,600 1,660 1,880 1,930 2,000 1,630 1,440 1,340 1,390 1,470 1,540 1,600 1,640 1,660 1,690 Installed pachinko machine ('000 units) 3,900 3,850 3,680 3,550 3,420 3,320 3,250 3,220 3,070 2,960 2,930 2,950 3,070 3,150 3,160 3,100 3,040 3,000 2,950 2,910 2,830 Total machine turnover (right axis; times) Pachislot machine turnover (right axis; times) Pachinko machine turnover (right axis; times) Source: Shared Research based on data from Yano Research Institute and National Police Agency Machines sales The number of machines sold is in a downtrend. Replacement rates are declining as pachinko halls earnings and cash flows decline accompanying the shrinking of the pachinko market. In terms of the machine market, pachinko machine sales rose from 3.9mn machines in 1996 to a peak of 4.0mn machines in But since then, pachinko machine sales have been declining. Pachislot machine sales expanded five-fold to 1.8mn in 2005 off a low base of 420,000 machines in Following the introduction of stricter regulation in 2007, demand for pachislot machines fell before recovering from the second half of However, it dived in 2015 and 2016 under the impact of a series of regulations since Machines sales; units and value 12,000 10,000 8,000 Pachislot machine sales units ('000 units) Pachinko machine sales units ('000 units) Pachinko market size (right axis; JPYbn) Pachislot market size (right axis; JPYbn) 1, , , , Total Pachislot machine sales units ('000 units) ,130 1,290 1,500 1,840 1,670 1,780 1,640 1, ,250 1,320 1,390 1, Pachinko machine sales units ('000 units) 3,930 2,840 2,350 3,120 3,360 3,230 3,170 3,680 4,010 4,040 3,830 3,170 3,330 3,330 2,900 2,600 2,490 2,060 2,010 1,880 1,560 Total , , , , , , , , , , , , Pachislot market size (right axis; JPYbn) Pachinko market size (right axis; JPYbn) Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods 29/57

30 Research Report by Shared Research Inc. Manufacturer share As the size of the market has changed, competition between manufacturers has intensified. Well-known manufacturers that have worked their way into the top ranks tend to generate repeat sales by developing a series of machines based on a popular theme, but smaller manufacturers have been struggling. Today, while top-selling blockbusters may still garner over 100,000 machines in sales, less popular titles may not even sell 10,000 machines. The chart below illustrates market share per manufacturer on a machine basis (source: Yano Research Institute, Trends of Pachinko Related Manufacturers and Market Share 2012). As of the end of November 2017, there were a total of 36 pachinko machine manufacturers versus more than 60 manufacturers of pachislot machines, an indication that there is less competition in the pachinko industry than in the pachislot industry. Across both segments, Shared Research believes the success of the company is partly due to its ability to partner with key players at the development stage. Manufacturers, in turn, have reason to partner with Fields as it enables the creation of secondary brands and higher penetration per account resulting in a higher market share. Pachinko market share (sales unit basis) FY2012 FY2013 FY2014 FY2015 FY2016 Rank Company Share Company Share Company Share Company Share Company Share 1 Sanyo 21.8% Kyoraku Sangyo 16.9% Sanyo 16.3% Sansei R&D 15.9% Sanyo 19.5% 2 Kyoraku Sangyo 20.3% Sanyo 15.3% SANKYO 16.3% SANKYO 15.7% Sansei R&D 13.3% 3 Heiwa/Olympia 10.1% SANKYO 14.1% Kyoraku Sangyo 15.3% Sanyo 14.6% Heiwa/Olympia 12.3% 4 newgin 10.0% Sammy 9.7% Heiwa/Olympia 12.5% Heiwa/Olympia 12.4% SANKYO 11.0% 5 Sammy 8.7% Heiwa/Olympia 9.5% Sammy 12.0% newgin 11.7% newgin 10.2% Pachislot market share (sales unit basis) FY2012 FY2013 FY2014 FY2015 FY2016 Rank Company Share Company Share Company Share Company Share Company Share 1 Universal 17.8% Sammy 21.7% Sammy 16.8% Universal 17.0% Sammy 24.3% 2 Sammy 15.3% Universal 15.4% Universal 16.6% Sammy 14.7% Universal 22.9% 3 Yamasa 14.6% Heiwa/Olympia 8.6% Daito Giken 10.4% Heiwa/Olympia 11.8% Kita Denshi 10.2% 4 Daito Giken 14.0% SANKYO 8.4% Yamasa 8.8% Kita Denshi 10.3% Heiwa/Olympia 9.1% 5 Kita Denshi 8.3% Daito Giken 7.3% Heiwa/Olympia 7.5% SANKYO 8.3% Enterrise 6.4% Source: Yano Research Institute, Trends of Pachinko Related Manufacturers and Market Share For pachinko machines, SANKYO includes Bisty. Sammy includes Ginza and Taiyo Elec. For pachislot machines, Sammy includes Rodeo, IGT, TRIVY, and Taiyo Elec. SANKYO includes Bisty. Universal includes Eleco, Mizuho, and Macy. Olympia includes machines sold by Heiwa; total all Olympia and Heiwa brands. The company believes a recent move away from dependency on high gambling nature machines toward healthier and more entertainment-oriented machines should resume growth for the pachinko industry in the near future. While it is difficult to provide solid proof of this view, consumers average leisure time has been increasing and the company believes the evolution and growth of the pachinko industry into one of the choices of entertainment to fill this increased leisure time is a likely scenario. In addition, the pachinko market appears to be relatively impervious to the economic cycle. The company thinks that the decline of the playing population is related more to the peculiarities of the pachinko and pachislot markets themselves. Market growth potential and cyclicality Subject to change due to regulations The market is mature and arguably in secular decline due to Japan's declining population and emerging forms of passive entertainment. However, industry innovation could reverse or slow what has been a gradual decline. The key cyclical drivers are government regulation and the industry's growth as a distinct type of popular entertainment. The industry is regulated by the National Public Safety Commission. Rules on the approval and certification of machines are set in accordance with the Entertainment Business Control Law per each prefecture. Historically, regulators have tended to change the technical specifications regarding gambling nature limits every several years. The goal has been to prevent excessive gambling and trends in high-gambling nature machines have been easing. For instance, a change in regulations in July 2004 led to a de-emphasis in the gambling aspect of pachislot machines, and to a big wave of replacement sales (shift from Regulation 4 to Regulation 5 pachislot machines) from 2006 through 2007 as the machines that met 30/57

31 Research Report by Shared Research Inc. the previous criteria were removed. Pachislot machine sales then declined as some players gravitated to pachinko. However, as manufacturers compete to develop machines compliant with the newest regulations and increase the entertainment aspect of new machines there has been an acceleration in both hardware and software innovation. In the early 2000s under Regulation 4, pachislot machines emerged with a jackpot that could result in a payout of more than 700 medals at a time, so a single player could acquire tens of thousands of medals in a day (worth JPY20 each in exchange). There was a boom in machines with a strong gambling element. In order to curb excessive gambling, in July 2004 there were changes to pachislot machine testing methods (Regulation 5) and the first Regulation 5 pachislot machines went on sale in October Machines that met Regulation 4 standards were sold until December However, in June 2006, pachislot machines that passed Regulation 4 tests whose installation period had expired (three years from inspection date for pachislot machines) were removed. By September 2007, all of the Regulation 4 pachislot machines were out of date. According to Fields, the gambling aspect has an influence on players and thus potentially on market growth. Since the late 2000s, many pachinko manufacturers have focused on so-called "max-type" machines where average spend per player tends to be higher when compared with other types of machines, but the expected return is also likely to be higher (which can be appealing to serious players). This means on average a player loses money faster on these types of machines. Although max-type machines could mean higher cash flow for pachinko halls in the short run, Fields was concerned this trend might alienate casual players and could be an unhealthy trend for the overall market. However, from November 2015, max-type machines will no longer be sold due to voluntary restrictions adopted by the industry. Classification of pachinko specifications (i.e., jackpot-probabilities) is based on explanations from the company. Probabilities: max-type is 1/370 1/399; middle-high is 1/320 1/369; middle-low is 1/280 1/319; light-middle is 1/150 1/279; amadeji class is between 1/40 and 1/149+. Shared Research thinks Fields could be a long-term beneficiary from the rise and fall in popularity of different machines. Regulatory revisions can upstage market leaders and give manufacturers a short window when they need to scramble for new innovative products. The company helps manufacturers plan and develop new product lines to sell to halls that could be otherwise reluctant to increase dependence on a particular maker. Industry regulations Looking over the last five years, the industry association implemented voluntary regulations for pachinko machines in November 2015 and for pachislot machines in December New voluntary pachislot regulations were adopted in October Furthermore, in September 2017, the National Police Agency publicly announced the Law on Control and Improvement of Amusement and Entertainment Businesses and the revisions to sections of the Regulations Concerning Authorization and Model Approval for Amusement Machines to reduce the gambling aspect. The revisions took effect in February On the other hand, in January 2018 the pachislot machine manufacturers industry association announced voluntary restrictions on regulation 6.0 machines, which are considered as the rules for the development of machines under the Regulations on the Partial Revision of Regulations Regarding the Enforcement of the Act on Control and Improvement of Amusement Business. Compared to regulation 5.9 machine, regulation 6.0 machines have lower limit of ball payout and the output ratios while they have higher flexibility in developing machines by easing certain rules for regulation 5.9 machines as a result of changes of internal regulation. Measures to curb gambling nature of pachinko machines (changes to lower limit of jackpot probability and probability fluctuation rate) In an effort to reduce the attraction of pachinko as a form of gambling and restore its popularly as a form of entertainment, Nikkoso, the pachinko machine manufacturers association (the Japan Game Machine Industry Association) agreed to change the lower limit of the pachinko machine jackpot probability range from the previous level of 1/400 to 1/320 (from 1/400 as of May 2015). Effective November 2015, this self-imposed regulatory change means that game machine manufacturers will no longer be able to sell max-type machines (jackpot probability of 1/370 1/399) that were the mainstay at pachinko halls prior to October /57

32 Research Report by Shared Research Inc. From May 2016, Nikkoso is also likely to voluntary introduce a lower maximum occurrence of a game feature called probability fluctuation (the jackpot rate after a successful a jackpot) from around 80% to 65%.This latest self-regulatory move was precipitated by the growing demand for max-type machines (jackpot probability of 1/370 1/399) among hard-core pachinko players, which had led pachinko parlors to install more and more of these machines to the point that max-type machines now account for more than 40% of all machines in pachinko parlors. As this pushed up the average cost of playing pachinko, the number of people playing game machines declined and the industry sought to tighten industry standards to reduce the appeal of pachinko as a form of gambling with the hope of bringing back more players into pachinko halls. Impact of voluntary industry restrictions on pachislot machines (Regulation 5.5 machines) In September 2014, the Security Communication Association changed its testing methodology for pachislot machines. Previously, pachislot machines had to register a ball put-out ratio of 55% (11 out of 20) or better during a random test run. The new standard called for the same minimum ball put-out ratio to be scored during testing for the lowest possible ball put-out ratio. That same month, the pachinko machine manufacturers association (the Japan Game Machine Industry Association) adopted a new standard that would prohibit penalty features in machines and also mandated that machine makers switch to motherboards with AT/ART functionality. Prior to this change, pachislot machines incorporated a main circuit board and a sub board, both of which controlled the payout rate of game tokens. Effective December 2015, the new industry standard requires the sub-board program that controls ball discharge to be incorporated into the main circuit board. AT Machine: An abbreviation of Assist Time, an AT Machine is a type of pachislot machine. During regular play, even if the user selects the winning icons, they do not match up on the screen because of the push-order rule. However, when the AT function is installed, if the machine selects the AT mode, a display screen on the pachislot machine will indicate the order of the buttons to press to match up the icons on the screen, allowing the user to increase their coins. ART Machine: An abbreviation of Assist Replay Time, an ART Machine is a type of pachislot machine. When this function is installed, if the machine enters ART mode, the odds of a replay increase, allowing the user to continue playing without using up coins. Impact of voluntary industry restrictions on pachislot machines (Regulation 5.9 machines) In June 2016, Liaison Conference of Pachislot Machine Manufacturers explained that they would implement voluntary regulations, which limit ART functions for pachislot machines installed after October 2017, and classified pachislot machines that comply with these voluntary regulations as 5.9 models. New units of 5.5 machine models can only be installed until the end of September Shared Research understands that there will be two sections related to indicated functions (navigation function, such as the push-order) for 5.9 models: a regular section, which will prohibit the ART mode, and a section in which ART mode is enabled. Machines randomly select the transition from the regular to the ART mode per play, and the ART mode section will limit the total amount of balls released to 3,000 by ending the game after a maximum of 1,500 games. The chance of the ART mode being selected is limited to under 70% of the total. Inviting public comments on proposed amendment including changes to number of game balls released In July 2017, the National Police Agency began inviting public comments prior to formalizing a partial amendment to the Law on Control and Improvement of Amusement and Entertainment Businesses and the Regulations Concerning Authorization and Model Approval for Amusement Machines. The proposed amendment includes a change in the number of pachinko balls released per play. The proposed amendment, which aims to reduce the addiction of pachinko as a form of gambling, limits the game ball-releasing capacity of amusement machines as well as the maximum number of game balls released per jackpot. It also introduced a settings feature for pachinko machines. 32/57

33 Research Report by Shared Research Inc. Tightening regulations on the number of balls released: The proposed amendment newly stipulates a rule, which curbs the ball-releasing capacity of amusement machines over a set playing span of four hours. Under this rule, the total number of game balls released during a four-hour play must be less than 1.5 times the total number of game balls shot by the player. Existing technical specifications and standards for one hour and 10 hours will also be tightened to the same degree so that the total number of game balls released may be reduced to about 2/3 of the current level. For pachislot machines, a new regulation similar to that of pachinko machines also for a four-hour playing span (1,600 shots in the case of pachislot machines) will be put in place. Regulations on the number of game balls released per jackpot: For pachinko machines, the maximum number of game balls released per jackpot will be reduced from the current upper limit of 2,400 to 1,500. For pachislot machines, the maximum number of game tokens will be reduced from 480 to 300. Changes to regulations on the number of balls released by pachinko machines (test values) Play duration Current limit on balls released Revised limit on balls released One hour Under 300% Over 33% and under 220% Four hours - Over 40% and under 150% 10 hours Over 50% and under 200% Over 50% and under 133% Changes to regulations on the number of balls released per jackpot Current Revised Pachinko 2,400 (equivalent to JPY9,600) 1,500 (JPY6,000) Changes to the number of rounds permitted in pachislot Current Revised Number of rounds Up to 16 Up to 10 Changes to regulations on the number of medals released by pachislot machines (test values) Test Current limit on medals released Revised limit on medals released 400 games Under 300% Over 33% and under 220% 1,600 games - Over 40% and under 150% 6,000 games Under 150% Over 50% and under 126% 17,500 games Over 55% and under 120% Over 60% and less than 115% Changes to regulations on the number of medals released per jackpot Current Revised Pachislot 480 (equivalent to JPY9,600) 300 (equivalent to JPY6,000) Addition of a standard for amusement machines to facilitate the checking of ball/medal release information to prevent machines from becoming too gambling-oriented Addition of management requirement: A new regulation to require managers of pachinko halls, etc., to provide information to customers and take other necessary action to prevent excessive play Introduction of a settings feature to pachinko machines: Allows up to six pachinko machine settings defining jackpot probabilities for more operational flexibility as in the case with pachislot machines 33/57

34 Research Report by Shared Research Inc. As a transitional measure, amusement machines certified under the current regulations and those belonging to the same model type as the tested and approved models can remain in operation at pachinko parlors for a period of three years from the initial date launched as outlined in the supplementary provisions. Impact of voluntary industry restrictions on pachislot machines (Regulation 6.0 machines) In January 2018 the Liaison Conference of Pachislot Machine Manufacturers, organized by pachislot machine manufacturers, announced voluntary restrictions (on regulation 6.0 machines), which are considered as the rules for the development of pachislot machines corresponding to the Regulations on the Partial Revision of Regulations Regarding the Enforcement of the Act on Control and Improvement of Amusement Business. Voluntary restrictions on regulation 6.0 machines are based on the intent of the revised regulations, and while they lower the maximum output of balls and the payout rate than standard for regulation 5.9 machines, they give more flexibility in pachislot machine development by removing regulations on the net increase of medals per game: for Regulation 5.9 machines the net increase of balls per game must stay below two) and AT function regulations. Further, with Regulation 6.9 machines the section with ART mode enabled limited games at 1,500 plays; with Regulation 6.0 machines the enabled section will limit games at 1,500 plays or a maximum ball differential of 2,400. According to the company the payout rate for Regulation 6.0 pachislot machines is lower than that or Regulation 5.9 machines, but game types will diversify due to the heightened flexibility in development. Timeline of regulation revisions For pachislot, the sale of Regulation 5.5 machines came to an end in September Regulation 5.9 pachislot machines went on sale in October The rules limiting the number of medals issued to 300 (down from 480) went into force in February 2018, but Regulation 5.9 machines which passed model testing from before January 2018 can be sold until January The company expects Regulation 5.9 models to be sold in total based on the certification testing schedule. Applications will open in April 2018 for model testing for Regulation 6.0 pachislot machines based on the rules of the Regulations on the Partial Revision of Regulations Regarding the Enforcement of the Act on Control and Improvement of Amusement Business, and it is expected that Regulation 6.0 pachislot machines will enter the market in autumn For pachinko, previous regulation machines that passed model testing from before January 2018 (which can release up to 2,400 balls) can be sold until January The company expects around 80 models to be sold between August 2017 and January Timeline of regulation revisions Source: Company data 34/57