Mitsui Fudosan (8801 / 8801 JP)

Transcription

1 Asia Pacific/Japan Equity Research Real Estate Management & Development (Real Estate (Japan)) / OVERWEIGHT Rating OUTPERFORM* Price (30 Sep 16, ) 2,136 Target price ( ) (from 3,000) 2,500¹ Chg to TP (%) 17.1 Market cap. ( bn) 2, (US$ 20.82) Enterprise value ( bn) 4, Number of shares (mn) Free float (%) week price range 3,524-2,039 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Research Analysts Masahiro Mochizuki masahiro.mochizuki@credit-suisse.com Yasuko Fukuda yasuko.fukuda@credit-suisse.com 4000 Price (LHS) Rebased Rel (RHS) Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 The price relative chart measures performance against the TOPIX which closed at on 30/09/16 On 30/09/16 the spot exchange rate was /US$ Performance over 1M 3M 12M Absolute (%) Relative (%) Mitsui Fudosan (8801 / 8801 JP) DECREASE TARGET PRICE Imperative clear; maintain OUTPERFORM Action: We revise our forecasts for Mitsui Fudosan and lower our target price from 3,000 to 2,500 (potential return 17.1%) as we also update our base valuation year from FY3/17 to FY3/18 and raise the assumed EBITDA yield from 5.25% to 6.0%. We maintain our OUTPERFORM rating. Investment case: We expect the share price to reflect (1) prospects for 5% ROE in FY3/19 and out, (2) clarity on losses on tilting condos in Yokohama, (3) a profit contribution from overseas, and (4) a contribution from newly developed assets. We believe the share price could rise if management were to strengthen corporate governance by making Mitsui Home a wholly owned unit and buying back shares. The company is working to increase enterprise value from a longer-term perspective, and we believe the shares could rebound in response to a management commitment to ROE of at least 5% in FY3/19 and beyond. We believe the imperative here is clear and will be watching for progress under President Masanobu Komoda. Catalysts/risks: Catalysts include (1) inclusion in FY3/18 guidance of confirmation of losses on tilting condominiums in Yokohama, (2) a profit contribution from the UK, and (3) higher margins on the back of stronger governance. Risks include (1) worsening margins on built for sale condos and income properties, (2) a decline in office rents, and (3) worsening profitability overseas. Valuation: We base our 2,500 target price on a FY3/18E EBITDA yield of 6.0% (previously 5.25%). Financial and valuation metrics Year 3/16A 3/17E 3/18E 3/19E Sales ( bn) 1, , , ,799.1 Operating profit ( bn) Recurring profit ( bn) Net income ( bn) EPS ( ) Change from previous EPS (%) n.a IBES Consensus EPS ( ) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA(x) P/B (x) ROE(%) Net debt/equity (%) Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Reiterate OUTPERFORM Shares look undervalued We revise our forecasts and lower our target price from 3,000 to 2,500. We reiterate our OUTPERFORM rating, though, as potential upside remains substantial at 17.1%. We also update our base valuation year from FY3/17 to FY3/18. Reduce TP to 2,500 but reiterate OUTPERFORM We believe the shares are undervalued, and see catalysts for share price gains in profit growth and the resolution of operational issues. Figure 1: Consolidated earnings summary Sales Operating profit Recurring profit Net profit EPS mn YoY (%) mn YoY (%) mn YoY (%) mn YoY (%) YoY (%) Consolidated Mar-16 Actual 1,567, , , , Mar-17 1Q Actual 356, , , , Q CS E 510, , , , H CS E 866, , , , Mar-17 CS E (new) 1,782, , , , CS E (prev) 1,752, , , , CoE 1,750, , , , Shikiho E 1,750, , , , IBES E 1,737, , , Mar-18 CS E (new) 1,853, , , , CS E (prev) 1,829, , , , Shikiho E 1,750, , , , IBES E 1,751, , , Mar-19 CS E (new) 1,799, , , , CS E (prev) 1,819, , , , IBES E 1,760, , , Source: Company data, Toyo Keizai "Shikiho"(Japan Company Handbook), I/B/E/S, Credit Suisse estimates Factors that could be reflected in the share price We expect the share price to reflect (1) prospects for 5% ROE in FY3/19 and beyond, (2) clarity on losses associated with the tilting condo building in Yokohama, (3) profit contributions from overseas, and (4) earnings contributions from newly developed assets. Investor expectations We believe the shares could rise if management were to strengthen corporate governance by making Mitsui Home a wholly owned unit and buying back shares. At present, we believe the likelihood of either happening is limited; however, we believe management has a clear imperative to be proactive in this respect. We also see potential for share price gains if management were to express at its results briefings a commitment to ROE of at least 5% in FY3/19 and beyond. We believe Mitsui Fudosan is greatly undervalued from both a P/NAV and P/B perspective. To us, this indicates that investors already have priced in falling asset values and declining ROE. We believe the risk premium would decline if the company committed to ROE of 5% or greater. Mitsui Fudosan (8801 / 8801 JP) 2

3 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug October 2016 Share price performance Mitsui Fudosan s stock has declined on an absolute basis since mid-2015, matching the performance of the TSE real estate sector. Since mid-2016, though, the shares have underperformed Mitsubishi Estate (8802), Sumitomo Realty & Development (8830), and the entire TSE real estate sector. Over this period we believe the share price has come to reflect investor concern over corporate governance and the tilting condominium building sold by the company in Yokohama, as well as the risk to earnings from Brexit, given that Mitsui Fudosan has about 140bn in assets in London. Figure 2: Absolute share prices (Dec 2012=100) Figure 3: Relative share prices (Dec 2012=100) Mitsui Fudosan TSEREAL vs Mitsubishi Estate vs Sumitomo R&D vs TSEREAL vs TOPIX Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse Core businesses in Japan solid, but we see issues elsewhere Currently, we believe Mitsui Fudosan has four main challenges: (1) running its core businesses in Japan (leasing, subdivision, and management); (2) doing business overseas; (3) rebuilding the structurally deficient tilting condominiums sold in Yokohama; and (4) reversing the slide in earnings at consolidated subsidiary Mitsui Home. With regard to (1), Mitsui Fudosan is faring well in Japan in its core business of land procurement and subsequent development for lease or sale or management. The company announced a new share offering in May 2014, and since this capital increase it has achieved healthier finances and sustained growth in profit. Looking ahead, though, expectations concerning profit growth are likely to be scaled back. With an end to quantitative easing, it seems increasingly likely that property prices will fall, in doing so affecting margins on built-for-sale condos and capital gains on incomegenerating real estate. What is needed to boost the share price? Mitsui Fudosan shares have fallen persistently since the announcement of a capital increase, in spite of a solid performance at core businesses in Japan. The stock has been on a downtrend since May 2015, also underperforming the TSE real estate index, and the decline has been especially sharp since June Since June the shares also have underperformed Sumitomo R&D, which has greater financial leverage. It seems to us that the stock is falling for reasons other than financial leverage and the aforementioned operational issues. For improvement in share price performance vis-à-vis other real estate sector stocks, we believe Mitsui Fudosan management must use the 2Q results briefing to provide a detailed update on the development pipeline in the UK. On a local currency basis, we believe the development business in London is performing solidly. Earnings solid, but operational issues have been weighing on share price Mitsui Fudosan (8801 / 8801 JP) 3

4 Within the next six months we believe all negatives associated with the tilting condo building are likely to be played out, potentially lifting the share price. We believe conversion of Mitsui Homes into a wholly owned subsidiary also would be effective in improving relative share price performance, as would the repurchase of treasury stock. Investment in UK amounts to roughly 140bn The Brexit vote was followed by a decline in Mitsui Fudosan s share price. Currently, the company has some 140bn invested in the UK. While we surmise investors have been pricing in the risk of future losses, at the same time we believe a profit contribution from the UK could act as a catalyst for share price gains. Share price tumbled following Brexit In the Television Centre redevelopment project, Mitsui Fudosan is converting the BBC s old studios and offices into residential units; it is planning two stages, of 900 units each. As at end-march 2016 the company had 5,374.2bn in total assets, with Japan accounting for 88.9% and overseas markets 11.1%. The latter breaks down as 58% for the US ( 346bn), 23% for Europe ( 137.2bn), and 19% in Asia ( 113.3bn). Bad news associated with tilting condominium building may soon be played out Mitsui Fudosan has decided to rebuild a complex of four condo buildings in Yokohama, after one was discovered to be tilting. We would consider the bad news played out if FY3/18 guidance includes costings for the rebuild. We assume the cost of rebuilding will be about 40bn, and believe the construction companies involved will need to shoulder most of this burden. In this case, the stakeholders are Mitsui Fudosan, the primary contractor, and subcontractors. In our earnings forecasts, we conservatively assume that in FY3/18 Mitsui Fudosan will book extraordinary losses of 12bn, or 30% of the estimated rebuilding cost. The company is targeting ROE of about 7% in FY3/18, and if the booking of such losses causes ROE to fall short of 7%, we believe Mitsui Fudosan could book gains on the sale of investment securities equivalent to its share of rebuilding costs. Should consider making Mitsui Home a wholly owned subsidiary Stock market participants have become more sensitive to the quality of corporate governance. Subsidiary Mitsui Home reported inappropriate accounting in the past two years, and corrected its summary of accounts and securities filings. The company used inappropriate accounting to make it appear it had hit profit guidance for its refurbishment business. Although the amount of OP involved was modest ( 62mn), the inappropriate accounting by a listed subsidiary has made the company's shareholders wonder about the economic benefits of both the parent and subsidiary being listed. Stock market participants are checking whether management has fully realized the potential of the business leveraging the assets the company owns. Mitsui Fudosan and subsidiary Mitsui Home are both listed companies. The inappropriate accounting treatment and earnings suggest that having both the parent and subsidiary listed does not yield any economic benefits. Other homebuilders have realized profit growth by expanding real estate business and operations overseas, and via growth in apartment orders. However, earnings at Mitsui Home have been sluggish. The share price has been falling since 2H 2015, and P/B is now around 0.7x. Making Mitsui Home a wholly owned subsidiary would make it possible to secure negative goodwill, and stock market participants would probably see governance as having improved. Negatives likely exhausted if share of rebuilding cost is determined, and provisions made Probably should consider making Mitsui Home a wholly owned subsidiary given accounting fraud issue, sluggish earnings Mitsui Fudosan (8801 / 8801 JP) 4

5 1997/ / / / / / / / / / / / / / / / / / / /03 Mitsui Home's OP have been sluggish 03 October 2016 Figure 4: Operating profit for Mitsui Home 12,000( mil) 10,000 8,000 6,000 4,000 2,000 0 (2,000) (4,000) (6,000) (8,000) Source: Company data, Credit Suisse A share buyback would be in line with management policy and would make sense The company has ruled out the possibility of a share buyback since it implemented a capital increase. However, its share price has been low in absolute terms and has also been lower than rivals' share prices. Stock market participants could well consider the ruling out of a share buyback as evidence that management believes the stock is not undervalued. Given the company has ruled out the possibility of a share buyback to date, we believe the announcement of one, even if the amount involved were modest, would be an upside catalyst. The company could use treasury stock to finance acquisitions. The company is striving to boost enterprise value from a longer-term perspective. In principle it uses funds raised via capital increases for real estate development. However, the company is implementing a capital increase when P/NAV is around 1.2x, so stock market participants will likely welcome a share buyback when P/NAV is 0.6x, as it is at present. The company has sold a string of buildings in its investment property sales business (commercial property). From the perspective of actual real estate and arbitrage trading on the stock market, we believe a share buyback would be a suitable use of funds raised via property sales. We believe high domestic real estate prices have made it more difficult to acquire land for development. Arbitrage trading based on property/stock market price spreads is certainly not a bad idea. Mitsui Fudosan (8801 / 8801 JP) 5

6 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Dec-99 Aug-00 Apr-01 Dec-01 Aug-02 Apr-03 Dec-03 Aug-04 Apr-05 Dec-05 Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 Aug-16 Dec-99 Aug-00 Apr-01 Dec-01 Aug-02 Apr-03 Dec-03 Aug-04 Apr-05 Dec-05 Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 Aug October 2016 Valuation Target price calculation We base our target price on an EBITDA yield of 6.0% applied to our FY3/18E. The EBITDA yield of 6.0% is the upper end of the range in It is the level when share prices reflected concerns about deterioration in the business climate. Our previous valuation used a yield of 5.25% Raise EBITDA yield from 5.25% to 6.0% Figure 5: Implied EBITDA yields Figure 6: Risk premium (implied EBITDA yield minus 10- year JGB yields) 8.5% 7.5% 8.0% 7.0% 7.5% 6.5% 7.0% 6.0% 6.5% 5.5% 6.0% 5.0% 5.5% 4.5% 5.0% 4.0% 4.5% 3.5% 4.0% 3.0% 3.5% 2.5% 3.0% 2.0% FY1 EBITDA yield FY2 EBITDA yield FY1 risk premium (EBITDA yield) FY2 risk premium (EBITDA yield) Source: Thomson Reuters, Credit Suisse P/NAV Source: Thomson Reuters, Credit Suisse P/NAV has been tracking around x. This is on par with in The company is striving to boost enterprise value via development and increase the quality of existing assets. Stock market participants at present do not rate the company's assets very highly. The P/NAV does not reflect assets under development or unrealized gains on inventories. The stock looks undervalued from a breakup value perspective. Figure 7: P/NAV 2.00 (X) Source: Thomson Reuters, Credit Suisse Mitsui Fudosan (8801 / 8801 JP) 6

7 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13 3/14 3/15 3/16 CS.E 3/17 CS.E 3/18 CS.E 3/19 CS.E 12/31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ October 2016 P/B P/NAV is based on breakup value plus unrealized profits. However, real estate developers do not just own real estate. They are also non-financial companies that pursue profit growth via development. Viewed as non-financial companies, increases in ROE boost P/B. P/B is currently 1.0x, a historically low level. Figure 8: P/B (X) Source: Thomson Reuters, Credit Suisse The share price reflects ROE falling to 5% or lower. Figure 9 shows our ROE forecast and what might happen if OP at the property sales business was zero in FY3/19. In such case, ROE would be 5% or lower. Taking into account the historical relationship between ROE and P/B, when P/B falls to around 1.0x, the share price reflects ROE falling to 5% or lower. We believe the share price might rise if stock market participants recognize that the company can maintain ROE of at least 5% from FY3/19. Figure 9: ROE 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% ROE(Risk scenario) ROE(CS.E) 7.0% 6.4% 4.8% 4.6% Source: Company data, Credit Suisse estimates Mitsui Fudosan (8801 / 8801 JP) 7

8 Earnings forecasts We forecast OP of 227.7bn for FY3/17 (guidance 220.0bn, our previous forecast 227.4bn, I/B/E/S consensus 220.9bn), 250.7bn for FY3/18 (previously 247.1bn, I/B/E/S 233.7bn), and 243.9bn for FY3/19 (previously 249.6bn). We lower our OP forecast for FY3/19 to reflect a lower profit forecast for the property sales business. We forecast FY3/19 OP at the property sales business of 55.0bn (previously 62.3bn). We forecast NP of 131.0bn for FY3/17 (guidance 125.0bn, our previous forecast 128.5bn, I/B/E/S 220.9bn), 148.4bn for FY3/18 (previously 145.9bn, I/B/E/S 233.7bn), and 144.0bn for FY3/19 (previously 147.2bn). Our forecasts reflect the booking in FY3/18 of extraordinary losses of 12.0bn arising from the leaning apartment block in Yokohama. This might be booked as expenses in FY3/17 if agreement is reached with those concerned on how to allocate the costs. Leasing business operating profit Office building and retail complex development should contribute to OP at the leasing business. We expect rental revenue from existing properties to increase in FY3/18. Figure 10: Operating profit for leasing business FY3/14 FY3/15 FY3/16 FY3/17 FY3/17 FY3/18 FY3/19 ( mn) Co.E CS.E CS.E CS.E Sales 449, , , , , , ,000 (Increase/decrease) 7,987 15,100 44,336 34,822 35,222 8,300 18,300 Full year contribution of new buildings 20,000 6,200 18,300 Existing buildings 4,200 2,100 0 Others 11, Operating profit 109, , , , , , ,200 (Increase/decrease) 4,853 (1,300) 16,249 6,888 11,788 7,200 10,100 Full year contribution of new buildings 7,300 5,100 10,100 Existing buildings 8,000 2,100 0 Others (3,512) 0 0 Source: Company data, Credit Suisse estimates Mitsui Fudosan (8801 / 8801 JP) 8

9 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3CSE 18/3CSE 19/3CSE 03 October 2016 Rental revenue from existing properties Figure 11: Rental revenue from existing properties ( mn) 15,000 10,000 8,700 5, ,100 3,700 1,400 4,200 2,100 0 (5,000) (10,000) (8,000) (15,000) (20,000) (17,900) (11,600) Source: Company data, Credit Suisse estimates Property sales business operating profit We forecast FY3/19 OP at the property sales business of 55.0bn (previously 62.3bn). This breaks down into housing 25.5bn ( 27.3bn), investor property sales 30.0bn ( 35.0bn). We lower our forecast for earnings from housing business due to a downward revision to our forecast for condominium sales volume (from 5,500 units to 5,000 units). Figure 12: Operating profit for property sales business FY3/14 FY3/15 FY3/16 FY3/17 FY3/17 FY3/18 FY3/19 ( mn) CoE CS.E CS.E CS.E Sales 409, , , , , , ,100 Housing sales 345, , , , , , ,100 Unit (dwelling) 7,473 5,757 5,142 6,150 6,100 5,700 5,700 Unit price( mn) Detached-house Sales ( mn) 49,689 48,598 41,845 44,000 44,100 44,100 44,100 Unit (dwelling) Unit price( mn) Condominiums Sales ( mn) 295, , , , , , ,000 Unit (dwelling) 6,557 4,858 4,391 5,450 5,400 5,000 5,000 Unit price( mn) Property for investors 64, ,315 96, , , , ,000 Operating profit 27,099 45,493 44,525 60,000 61,100 74,400 55,500 (increase/decrease) 4,040 18,394 (968) 10,000 16,600 13,300 (18,900) Housing 22,781 26,730 23,934 27,000 28,100 34,400 25,500 (Operating profit ratio) 6.6% 9.0% 8.1% 8.1% 8.5% 10.0% 8.0% Property for investors 4,317 18,763 20,591 33,000 33,000 40,000 30,000 (Operating profit ratio) 6.7% 14.7% 21.4% 17.2% 14.8% 16.0% 15.0% Source: Company data, Credit Suisse estimates Mitsui Fudosan (8801 / 8801 JP) 9

10 Forecasts and valuations Figure 13: Financial summary In JPY bn, unless otherwise stated Profit & Loss 3/16A 3/17E 3/18E 3/19E Key Financials 3/16A 3/17E 3/18E 3/19E Sales revenue 1, , , ,799.1 Growth(%) COGS 1, , , ,375.2 Sales SGA EBIT R&D Net Income Other op income(expense) EPS EBITDA Margins(%) Depr. & Amort EBITDA Goodwill amort EBIT EBIT Pretax profit Net interest expense Net income Associates Valuation(x) Net other non-op income(exp.) EV/Sales Recurring profit EV/EBITDA Extraordinary gain & loss EV/EBIT Profit before tax PER Income tax PBR Minorities ROE analysis(%) Net Income ROE Balance Sheet 3/16A 3/17E 3/18E 3/19E ROIC Cash & equivalents Asset turnover Receivables Tax burden Inventories 1, , , ,447.7 Financial leverage(x) Other current assets Credit ratio(%) Current assets 1, , , ,796.8 Net debt/equity Property, plant & equipments 2, , , ,313.5 Net debt/ebitda Intangibles Interest converage ratio(x) Other non-current assets Per share data 3/16A 3/17E 3/18E 3/19E Non-current assets 3, , , ,265.0 No. of shares(millions) Total assets 5, , , ,061.8 EPS( ) Payables BPS( ) 1, , , ,269.9 Short term debt DPS( ) Other current liability Dividend payout ratio(%) Total current liability Quarterly analysis Q1 Q2 Q3 Q4 Long term debt 1, , , , /16A Other non-current liability 1, , , ,012.6 Sales Total liabilities 3, , , ,753.2 Operating Income Shareholders equity 1, , , ,242.9 Recurring Profit Minority interests Net Income Total shareholder funds 5, , , , /17E Cashflow 3/16A 3/17E 3/18E 3/19E Sales EBIT Operating Income Depr & Amortisation Recurring Profit Chage in working capital Net Income Other /18E Operating cashflow Sales Capex Operating Income Disposal of PPE Recurring Profit Acquisitions & Investments Net Income Asset sale proceeds /19E Other Sales Investing cashflow Operating Income Equity raised Recurring Profit Dividends paid Net Income Net borrowings Other Financing cashflow Effect of exchange rates Net Change in Cash Free cash flow Note : Reported year may include estimated data Source: Company data, Credit Suisse estimates Mitsui Fudosan (8801 / 8801 JP) 10

11 Figure 14: Consolidated income statement FY3/14 FY3/15 FY3/16 FY3/17 FY3/17 FY3/18 FY3/19 ( mn) CO.E CSE CSE CSE Sales 1,515,252 1,529,036 1,567,969 1,750,000 1,782,900 1,853,800 1,799,100 Leasing 449, , , , , , ,000 Property Sales 409, , , , , , ,100 Management 297, , , , , , ,000 Mitsui Home 237, , , , , , ,000 Other 104,787 78,782 85,104 92,000 92,000 92,000 92,000 Operating profit 172, , , , , , ,900 Leasing 109, , , , , , ,200 Property Sales 27,099 45,493 44,525 60,000 61,100 74,400 55,500 Management 49,945 49,317 52,446 52,000 54,000 56,000 58,000 Mitsui Home 4,192 4,017 4,724 4,200 4,200 4,700 4,700 Other 3,071 5,186 7,163 7,000 7,000 7,000 7,000 Eliminations or corporate -20,947-25,804-30,490-34,200-34,500-34,500-34,500 Operating profit margin 11.4% 12.2% 12.9% 12.6% 12.8% 13.5% 13.6% Leasing 24.3% 23.2% 24.4% 24.1% 25.0% 25.9% 26.8% Property Sales 6.6% 10.7% 11.4% 11.4% 11.0% 12.5% 10.7% Management 16.8% 15.5% 15.7% 15.3% 15.7% 15.3% 15.8% Mitsui Home 1.8% 1.7% 1.9% 1.7% 1.7% 1.9% 1.9% Other 2.9% 6.6% 8.4% 7.6% 7.6% 7.6% 7.6% Nonoperating income and expense -27,980-22,702-19,961-22,000-22,000-18,500-19,200 Recurring profit 144, , , , , , ,700 (% of sales) 9.5% 10.7% 11.6% 11.3% 11.5% 12.5% 12.5% Extraordinary profit and expense -17,877 3,467-1,203-10,000-10,000-11,000-10,000 Extraordinary profit 13,189 5,603 2, ,000 16,000 5,000 Extraordinary expense 31,066 2,136 3, ,000 27,000 15,000 Income before income tax 126, , , , , , ,700 Income tax 47,035 61,693 62,011 60,000 61,700 69,800 67,700 (Tax rate) 37.1% 37.0% 34.2% 31.9% 31.5% 31.6% 31.5% Minority interests 2,832 4,962 1,583 3,000 3,000 3,000 3,000 Net income 76, , , , , , ,000 Source: Company data, Credit Suisse estimates Mitsui Fudosan (8801 / 8801 JP) 11

12 Figure 15: Consolidated balance sheet FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 ( mn) CSE CSE CSE Current assets 1,316,170 1,374,892 1,520,585 1,676,000 1,795,300 1,796,800 Cash and deposits 127, , ,156 87, , ,500 Notes and accounts receivable 34,399 34,760 36,093 35,700 37,100 36,000 (% of sales) 2.3% 2.3% 2.3% 2.0% 2.0% 2.0% Marketable securities , Inventories 961,449 1,027,889 1,167,743 1,347,700 1,447,700 1,447,700 Others 192, , , , , ,500 Fixed assets 3,232,651 3,702,255 3,853,691 4,013,700 4,140,800 4,265,000 Tangible fixed assets 2,467,642 2,721,519 2,902,171 3,062,200 3,189,300 3,313,500 Intangible fixed assets 58,497 67,113 66,803 66,800 66,800 66,800 Investments and other assets 706, , , , , ,700 Total assets 4,548,822 5,077,148 5,374,277 5,689,700 5,936,100 6,061,800 Current liabilities 846, , , , , ,800 Notes and accounts payable 130,695 98,247 95,876 89,100 92,700 90,000 (% of sales) 8.6% 6.4% 0.0% 5.0% 5.0% 5.0% Short-term loans repayable 188, , , , , ,100 Non-recourse short-term loan 95,216 6,213 17,894 17,900 17,900 17,900 CP , , , ,000 Current portion of long term interest-bearing debt Current portion of bond/cb 30,000 30,000 40,000 40,000 40,000 40,000 Others 381, , , , , ,000 Fixed liabilities 2,377,089 2,472,633 2,544,579 2,768,400 2,898,400 2,918,400 Bonds 270, , , , , ,000 Non-recourse bonds 26, ,587 94,055 94,100 94,100 94,100 Long-term loans 1,314,972 1,231,244 1,322,072 1,545,800 1,675,800 1,695,800 Non-recourse long-term bonds 94, , , , , ,300 Deposits received from tenants 345, , , , , ,100 Others 325, , , , , ,100 Total liabilities 3,223,401 3,145,064 3,385,235 3,602,300 3,735,900 3,753,200 Total net assets 1,325,420 1,932,084 1,989,041 2,087,400 2,200,200 2,308,600 Total liability and shareholders' equity 4,548,822 5,077,148 5,374,277 5,689,700 5,936,100 6,061,800 Source: Company data, Credit Suisse estimates Mitsui Fudosan (8801 / 8801 JP) 12

13 Figure 16: Consolidated cash flow statement FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 ( mn) CSE CSE CSE Operating activities 189,903 30,343 32,154 14, , ,200 Net income 76, , , , , ,000 Depreciation 56,030 61,242 67,460 70,000 72,900 75,800 Write-down of inventories Trade receivable -5, , ,400 1,100 Inventories -46,228-66, , , ,000 0 Accounts payable 29,990-32,448-2,371-6,800 3,600-2,700 Others 78,401-31,835-9, Investing activities -44, , , , , ,000 Tangible fixed assets -43, , , , , ,000 Investment securities -11,283-8,261 6, Others 10,872 46,516-49, Financing activities -123, , , ,200 94,400-15,600 Loan payable -65,327-63, , , ,000 20,000 Bond -33, , Equity issuance 0 329, Dividends -19,332-20,537-27,673-32,600-35,600-35,600 Others -5,511-23,156-21, Source: Company data, Credit Suisse estimates Figure 17: Consolidated valuations FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 ( mn) CSE CSE CSE Net working capital 865, ,402 1,107,960 1,294,300 1,392,100 1,393,700 Fixed assets 3,232,651 3,702,255 3,853,691 4,013,700 4,140,800 4,265,000 Estimated invested capital 4,097,804 4,666,657 4,961,651 5,308,000 5,532,900 5,658,700 Operating profit 172, , , , , ,900 Tax rate (%) 37.1% 37.0% 34.2% 31.5% 31.6% 31.5% NOPAT 108, , , , , ,993 ROIC (%) 2.6% 2.5% 2.7% 2.9% 3.1% 3.0% Common shares outstanding (mn) Current share price ( ) 3,149 3,529 2,136 2,136 2,136 2,136 Market capitalization 2,765,306 3,487,220 2,110,133 2,110,133 2,110,133 2,110,133 Interest-bearing debt 2,040,071 1,976,148 2,226,233 2,450,000 2,580,000 2,600,000 Cash and marketable securities 127, , ,156 87, , ,500 Net debt 1,912,189 1,868,997 2,115,077 2,363,000 2,475,100 2,492,500 Enterprise value 4,677,495 5,356,217 4,225,210 4,473,133 4,585,233 4,602,633 EBITDA 228, , , , , ,700 EV/EBITDA (X) EV/Sales (X) EPS ( ) EPS growth (%) Dividend yield (%) 0.7% 0.7% 1.4% 1.5% 1.7% 1.7% ROE (%) 6.0% 5.3% 6.1% 6.5% 7.0% 6.4% ROA (%) 1.7% 2.0% 2.2% 2.3% 2.5% 2.4% PER (X) P/NAV PBR (X) NAVPS 2,351 2,923 3,261 3,400 3,514 3,623 BPS 1,452 1,895 1,946 2,046 2,160 2,270 Debt / equity DPS ( ) Dividend payout ratio (%) 25.1% 24.7% 25.2% 24.9% 24.0% 24.7% Source: Company data, Credit Suisse estimates Mitsui Fudosan (8801 / 8801 JP) 13

14 Companies Mentioned (Price as of 30-Sep-2016) Mitsubishi Estate (8802.T, 1,888) Mitsui Fudosan (8801.T, 2,136, OUTPERFORM, TP 2,500) Sumitomo Realty & Development (8830.T, 2,598) Important Global Disclosures Disclosure Appendix Masahiro Mochizuki and Yasuko Fukuda each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Mitsubishi Estate (8802.T) 8802.T Closing Price Target Price Date ( ) ( ) Rating 03-Oct-13 2,814 3,500 N 07-Jan-14 3,045 3, Mar-14 2,370 2, Sep-14 2,389 2, Jan-15 2,426 2, Mar-15 2,896 2, Jun-15 2,733 2, Sep-15 2,518 2, Dec-15 2,644 2, Mar-16 2,190 2,200 U 15-Jun-16 1,961 1,900 * Asterisk signifies initiation or assumption of coverage. N EU T RA L U N D ERPERFO RM 3-Year Price and Rating History for Mitsui Fudosan (8801.T) 8801.T Closing Price Target Price Date ( ) ( ) Rating 03-Oct-13 3,225 4,500 O 23-Jan-14 3,593 4, Mar-14 3,076 4, May-14 3,340 3, Aug-14 3,264 3, Jun-15 3,526 4, Dec-15 3,177 3, Mar-16 2,768 3, Jun-16 2,484 3,000 * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM Mitsui Fudosan (8801 / 8801 JP) 14

15 3-Year Price and Rating History for Sumitomo Realty & Development (8830.T) 8830.T Closing Price Target Price Date ( ) ( ) Rating 03-Oct-13 4,420 6,500 O 07-Jan-14 5,050 5, Mar-14 4,046 4, Jun-14 4,309 4,700 N 22-Sep-14 3,948 4, Jan-15 3,988 4, Mar-15 4,316 4, Jun-15 4,633 5,400 O 03-Dec-15 3,817 4, Mar-16 3,299 3,500 N 15-Jun-16 2,748 3,000 * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM N EU T RA L The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where a n ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. Mitsui Fudosan (8801 / 8801 JP) 15

16 Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 53% (53% banking clients) Neutral/Hold* 29% (24% banking clients) Underperform/Sell* 18% (44% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Target Price and Rating Valuation Methodology and Risks: (12 months) for Mitsui Fudosan (8801.T) Method: Our 2,500 target price for Mitsui Fudosan is based on an EBITDA yield of 6.0% applied to our FY3/18E. The EBITDA yield of 6.0% is the upper end of the range in It is the level when share prices reflected concerns about deterioration in the business climate. We expect the share price to reflect (1) prospects for 5% ROE in FY3/19 and out, (2) clarity on losses on tilting condos in Yokohama, (3) a profit contribution from overseas, and (4) a contribution from newly developed assets. Our OUTPERFORM rating is based on a comparison of the company's potential total return over a 12-month period versus our coverage universe. Risk: Risks to our 2,500 target price and OUTPERFORM rating for Mitsui Fudosan include (1) worsening margins on built for sale condos and income properties, (2) a decline in office rents, and (3) worsening profitability overseas. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (8801.T, 8802.T, 8830.T) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (8801.T). For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (Japan) Limited... Masahiro Mochizuki ; Yasuko Fukuda Mitsui Fudosan (8801 / 8801 JP) 16

17 To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited... Masahiro Mochizuki ; Yasuko Fukuda For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877) Mitsui Fudosan (8801 / 8801 JP) 17

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