FPG / 7148 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 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 Business Business Strengths and weaknesses Group companies Market and value chain Historical performance Income statement Balance sheet Cash flow statement Other information News and topics History Major shareholders Shareholder returns policy Corporate governance and top management Operating leases Profile /73

3 Executive Summary Overview and other information Core business: Tax Leasing Arrangement. Financial Products Group (FPG) is an independent financial services company. Its main business is Tax Leasing Arrangement (90.0% of revenues in FY09/17). In this business, for each lease, the company puts together an SPC (special purpose company) that manages an operating lease business, and then places equity in the SPC s silent partnerships with investors (primarily SMEs). The SPCs raise funds to purchase aircraft, shipping vessels, and marine shipping containers by placing stakes with investors and from bank loans. The partnerships lease the aircraft, shipping vessels, and marine shipping containers to lessees such as airlines and shipping companies. Commissions (explained in more detail below), which the company receives from SPCs, are included in the equity funding from investors. Deferred tax benefits for investors; low leasing payments for lessees. By opting for the declining balance depreciation method in their income statements, the SPCs tend to have net losses in the first half of the leasing period, before becoming profitable in the second half. Investors are able to defer taxes owed, as their overall earnings are reduced when their share of losses from the silent partnership offsets profits in other companies that comprise the main businesses of the investors. Investors can also expect to receive investment returns with a similar interest rate to that on ordinary bank deposits. FPG s investors are primarily concerned with tax deferrals, not returns, so capping expected investment returns with a similar interest rate to that on ordinary bank deposits allows FPG to offer competitive leases to lessees. This gives it an advantage in arranging leasing deals. Main revenue sources: arrangement fees and commissions. Arrangement fees for arranging operating lease deals, and commissions received from the SPC for placing equity in the silent partnerships with investors are the main sources of income for FPG. Arrangement fees plus commissions are around 15% of the total amount of equity placement in operating leases. Earnings structure features fixed costs and high margins. FPG s cost ratio is around 15%, and fixed costs are the main component of SG&A expenses, so incremental profit margin is high. OPM was 63.7% in FY09/17. Limited impact from economic fluctuations. In previous economic downturns, such as FY09/09 following the global financial crisis, revenues fell 5.1% YoY, but growth resumed in FY09/10, with revenues rising +89.3%. Large potential market. In FY09/17, the total amount of equity placement in operating leases at the Tax Leasing Arrangement business was JPY115.7bn. In fiscal 2016, there were 980,000 SMEs in Japan with aggregate recurring profit of JPY29.4tn (Shared Research estimates based on Ministry of Finance s fiscal 2016 Financial Statement Statistics of Corporations). On the supply side, in FY09/17 the total amount of assets arranged by FPG in operating leases was JPY276.1bn compared with a 2016 market for aircraft, the main type of lease asset, worth roughly JPY26tn (Shared Research estimates). Only three specialists. There are only around 10 companies involved in the Japanese Operating Lease market. Many are reluctant to expand in this area, so there are only three specialists including FPG. (See Market and value chain section for details.) Based on various materials, Shared Research estimates FPG s share of the Japanese Operating Lease market (in terms of equity placement) at about 30% in FY09/17. From 2016, FPG has been selected as a constituent stock for the JPX-Nikkei Index 400 and JPX-Nikkei Mid and Small Cap Index, stock indexes composed of companies that meet the requirements of global investment standards, such as the efficient use of capital and investor-focused management. Trends and outlook In FY09/17, revenues were JPY21.0bn (+11.5% YoY), operating profit was JPY13.4bn (+13.2%), recurring profit was JPY13.7bn (+15.2%) and net income attributable to owners of parent was JPY9.5bn (+25.3%). Revenues in the core Tax Leasing Arrangement business were JPY18.9bn (+11.2%). The total amount of equity placement in operating leases was JPY115.7bn (+5.8%). In October 2017, FPG formulated a medium-term management plan (covering the period from FY09/18 to FY09/20), under which the company will aim to (1) further cement its leading position in the Japanese Operating Lease market, (2) position the real estate, insurance brokerage, and M&A advisory businesses as core businesses, (3) develop businesses with a focus on 03/73

4 assets under management, and (4) promote IT-driven sales. Numerical targets are not disclosed in the plan but Shared Research believes the company looks to achieve double-digit profit growth over the medium term. We see growth in the Tax Leasing Arrangement business continuing to drive earnings, and believe other businesses particularly the real estate, insurance brokerage, and M&A advisory businesses will contribute to earnings growth. Strengths and weaknesses Shared Research believes the company s strengths are its leading market share from a track record in Japanese Operating Lease, being in a promising market with few competitors, and an efficient, high-margin earnings structure. Weaknesses: product structures may have to be reviewed due to tax system reform, the entire equity underwritten has to be placed within one year of origination, and the company is yet to establish a distribution network with financial institutions other than regional banks and securities firms, such as city banks and shinkin banks. (For details see Strengths and weaknesses section.) 04/73

5 Key financial data Income statement FY09/08 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 FY09/18 (JPYmn) Par. Par. Par. Par. Par. Cons. Cons. Cons. Cons. Cons. Est. Revenues ,621 1,992 2,802 4,012 6,257 15,313 18,894 21,071 23,701 YoY 100.8% -5.1% 89.3% 22.8% 40.7% 43.2% 55.9% 144.7% 23.4% 11.5% 12.5% Gross profit ,399 1,733 2,397 3,411 5,384 13,374 16,357 18,497 YoY 100.0% -4.2% 104.6% 23.9% 38.3% 42.3% 57.8% 148.4% 22.3% 13.1% GPM 79.1% 79.8% 86.3% 87.0% 85.5% 85.0% 86.0% 87.3% 86.6% 87.8% Operating profit ,035 1,438 2,084 3,461 10,081 11,853 13,417 14,753 YoY 95.3% -36.9% 166.8% 26.0% 38.9% 44.9% 66.1% 191.3% 17.6% 13.2% 10.0% OPM 54.0% 35.9% 50.7% 52.0% 51.3% 52.0% 55.3% 65.8% 62.7% 63.7% 62.2% Recurring profit ,392 1,961 3,263 10,051 11,906 13,711 14,928 YoY 89.7% -44.3% 219.0% 25.1% 43.9% 40.8% 66.4% 208.0% 18.4% 15.2% 8.9% RPM 48.2% 28.3% 47.7% 48.6% 49.7% 48.9% 52.2% 65.6% 63.0% 65.1% 63.0% Net income ,185 1,988 6,343 7,644 9,580 10,313 YoY 84.7% -56.9% 344.8% 25.4% 42.3% 49.5% 67.7% 219.0% 20.5% 25.3% 7.6% Net margin 25.7% 11.7% 27.4% 28.0% 28.3% 29.6% 31.8% 41.4% 40.5% 45.5% 43.5% Per share data (JPY, adjusted for stock splits) Shares issued (year end; '000) 1 1 1,231 2,471 7,502 26,017 31,271 94,300 94,462 94,624 EPS EPS (fully diluted) Dividend per share Book value per share Balance sheet (JPYmn) Cash and cash equivalents ,226 1,987 3,840 4,092 7,384 8,671 12,602 Total current assets 1,687 1,279 2,053 6,209 5,492 19,185 42,278 66,032 78,338 79,213 Tangible fixed assets Investment and other assets ,170 1,023 1,160 1,584 Intangible fixed assets ,627 1,259 1,640 Total assets 1,881 1,539 2,366 6,589 5,919 20,240 44,016 69,087 81,222 82,799 Accounts payable ,186 Short-term debt ,667 1,748 12,306 21,580 29,425 38,091 37,268 Total current liabilities 1, ,539 3,096 15,355 31,968 50,030 59,242 48,344 Long-term debt ,301 2,664 3,937 8,585 Total fixed liabilities ,497 2,880 4,170 8,830 Total liabilities 1, ,630 3,368 15,751 33,466 52,910 63,412 57,174 Net assets ,553 1,958 2,551 4,489 10,549 16,176 17,809 25,624 Total interest-bearing debt 1, ,738 1,998 12,636 22,882 32,089 42,029 45,853 Statement of cash flows (JPYmn) Cash flows from operating activities ,679 1,842-8,952-13,024-3,250-1,692 3,030 Cash flows from investing activities , Cash flows from financing activities ,493-2,010 11,230 14,000 7,888 3, Financial ratios ROA (RP-based) 33.6% 14.2% 39.6% 21.6% 22.3% 15.0% 10.2% 17.8% 15.8% 16.7% ROE 66.8% 19.0% 41.6% 31.7% 35.2% 33.7% 26.4% 47.6% 45.2% 45.5% Equity ratio 24.6% 38.1% 65.6% 29.7% 43.1% 22.2% 24.0% 23.4% 21.9% 30.9% Note: Results consolidated from Q2 FY09/13, but values for prior periods are parent earnings 05/73

6 Recent updates Highlights On January 31, 2018, Financial Products Group Co., Ltd. (FPG) announced earnings results for Q1 FY09/18; see the results section for details. On December 22, 2017, the company made an announcement regarding the conclusion of committed credit line agreements. Regarding the committed credit line agreement of JPY12.0bn in funds for arranging aircraft leases using the trust function in the Tax Leasing Arrangement business, FPG has decided to enter into new committed credit line agreements that expand the funding facilities to JPY15.0bn. The total amount of the company s funding facilities based on its committed credit line agreements, overdraft agreements, and other agreements, is scheduled to be JPY111.7bn as of January 9, 2018 (JPY106.2bn as of end- FY09/17). On December 19, 2017, Shared Research updated this report following interviews with the company. For corporate releases and developments more than three months old, please refer to the News and topics section. 06/73

7 Trends and outlook Quarterly trends and results Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of 1H 1H Est. % of FY FY Est. Revenues 4,743 12,136 17,155 21,071 4, % 10, % 23,701 YoY -18.2% 14.5% 16.7% 11.5% -7.3% -13.3% 12.5% Gross profit 4,192 10,666 15,026 18,497 3,676 YoY -18.8% 14.7% 17.6% 13.1% -12.3% GPM 88.4% 87.9% 87.6% 87.8% 83.7% SG&A expenses 1,171 2,403 3,689 5,079 1,407 YoY 9.0% 9.6% 11.6% 12.8% 20.1% SG&A ratio 24.7% 19.8% 21.5% 24.1% 32.0% Operating profit 3,020 8,262 11,336 13,417 2, % 6, % 14,753 YoY -26.2% 16.3% 19.6% 13.2% -24.9% -25.5% 10.0% OPM 63.7% 68.1% 66.1% 63.7% 51.6% 58.5% 62.2% Recurring profit 3,240 8,464 11,677 13,711 2, % 6, % 14,928 YoY -22.7% 18.7% 21.7% 15.2% -35.4% -28.3% 8.9% RPM 68.3% 69.7% 68.1% 65.1% 47.7% 57.7% 63.0% Net income 2,227 5,843 8,073 9,580 1, % 4, % 10,313 YoY -19.1% 28.6% 30.7% 25.3% -35.7% -28.4% 7.6% Net margin 47.0% 48.2% 47.1% 45.5% 32.6% 39.8% 43.5% Quarterly (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenues 4,743 7,392 5,019 3,915 4,394 YoY -18.2% 54.0% 22.5% -6.7% -7.3% Gross profit 4,192 6,474 4,360 3,470 3,676 YoY -18.8% 56.7% 25.1% -3.0% -12.3% GPM 88.4% 87.6% 86.9% 88.6% 83.7% SG&A expenses 1,171 1,231 1,286 1,389 1,407 YoY 9.0% 10.2% 15.5% 16.0% 20.1% SG&A ratio 24.7% 16.7% 25.6% 35.5% 32.0% Operating profit 3,020 5,242 3,074 2,080 2,268 YoY -26.2% 74.0% 29.6% -12.5% -24.9% OPM 63.7% 70.9% 61.2% 53.1% 51.6% Recurring profit 3,240 5,223 3,213 2,033 2,094 YoY -22.7% 77.9% 30.4% -12.1% -35.4% RPM 68.3% 70.7% 64.0% 51.9% 47.7% Net income 2,227 3,616 2,229 1,507 1,431 YoY -19.1% 102.1% 36.3% 2.8% -35.7% Net margin 47.0% 48.9% 44.4% 38.5% 32.6% Note: YoY rises of over 1,000% are shown by - Tax Leasing Arrangement business performance FY09/17 FY09/17 FY09/18 FY09/18 Cumulative FY09/17 FY09/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total amount of assets arranged in operating leases 46, , , , ,473 YoY -64.3% -42.1% -38.5% -27.1% 129.8% Total amount of equity placement in operating leases 29,358 71,540 95, ,746 30,251 YoY 6.0% 26.4% 17.7% 5.8% 3.0% Aircraft 10,723 34,813 46,943 59,231 19,212 YoY 30.2% 69.7% 30.3% 7.9% 79.2% % of total 36.5% 48.7% 48.9% 51.2% 63.5% Shipping vessels 8,802 25,668 37,861 43,216 4,276 YoY -46.9% 9.0% 57.2% 43.8% -51.4% % of total 30.0% 35.9% 39.5% 37.3% 14.1% Marine shipping containers 9,831 11,057 11,157 13,298 6,761 YoY 244.0% -11.6% -48.0% -45.7% -31.2% % of total 33.5% 15.5% 11.6% 11.5% 22.4% Tax Leasing Arrangement business revenues 4,271 11,085 15,491 18,968 3,826 YoY -20.9% 13.7% 16.7% 11.2% -10.4% Commission rate (revenues / equity placement) 15.6% 16.6% 17.0% 17.1% 14.2% Note: YoY rises of over 1,000% are shown by - Note: Commission rate excludes full equity deals, whereby funds are exclusively raised from investor equity without any bank loans. FY09/18 FY09/18 07/73

8 Revenues of other businesses Cumulative FY09/17 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Other businesses 472 1,050 1,664 2, YoY 18.6% 24.1% 16.7% 14.4% 20.3% Insurance brokerage business YoY 150.3% 36.1% 40.4% 37.8% 97.7% Real estate business YoY 5.9% 113.8% 215.1% 102.5% 38.0% M&A advisory business YoY -58.4% 57.9% -59.7% -60.6% 610.4% Securities business YoY 28.1% 13.2% -52.3% -40.6% -28.0% Aircraft investment management services YoY 9.1% -11.7% -7.9% -5.8% -41.1% Note: Aircraft investment management services were launched during Q3 FY09/15. FY09/18 Q1 FY09/18 results In Q1 FY09/18, revenues were JPY4.3bn (-7.3% YoY), operating profit was JPY2.2bn (-24.9%), recurring profit was JPY2.0bn (-35.4%) and net income attributable to owners of parent was JPY1.4bn (-35.7%). Revenues Revenues were JPY4.3bn (-7.3% YoY). Revenues fell in Tax Leasing Arrangement while they rose in other businesses. Tax Leasing Arrangement Tax Leasing Arrangement revenues were JPY3.8bn (-10.4% YoY). Despite an increase in the total amount of equity placement in operating leases, revenues were down YoY as the commission rate fell on large-scale full equity deals during the period. Total amount of assets arranged in operating leases was JPY107.4bn (+129.8% YoY). Total amount of equity placement in operating leases finished at JPY30.2bn (+3.0% YoY), showing an increase due to a strong investor demand. Other businesses Revenues from businesses other than Tax Leasing Arrangement were JPY568mn (+20.3% YoY). Real estate revenues were JPY194mn (+38.0%), insurance brokerage revenues were JPY158mn (+97.7%), and M&A advisory revenues were JPY10mn (+610.4%). Revenues in the aircraft investment management services business operated by FPG Amentum Limited were JPY99mn (-41.1%) and those of securities business JPY54mn (-28.0%). Cost of revenues Cost of revenues was JPY718mn (+30.4% YoY). Commission fees for customer referrals increased due to large-scale transactions where fee rates are high. SG&A expenses SG&A expenses were JPY1.4bn (+20.1% YoY). Due to operational expansion, personnel expenses came to JPY736mn (+31.2%), and other expenses to JPY671mn (+9.9%). Operating profit Operating profit was JPY2.2bn (-24.9% YoY). Non-operating income and expenses Non-operating income was JPY242mn (-21.8% YoY). Interest income was JPY67mn (-60.3%) because interest income for the period of equity underwriting decreased. Share of profit of entities accounted for using equity method was JPY62mn (-11.9%). Rental income on real estate for arrangement was JPY82mn (+583.0%). 08/73

9 Non-operating expenses were JPY416mn (+365.4% YoY). Interest expenses were JPY191mn (+211.0%). Commission fee rose to JP187mn (+603.5%). Recurring profit and net income Recurring profit was JPY2.0bn (-35.4% YoY) and net income attributable to owners of parent was JPY1.4bn (-35.7%). For previous quarterly earnings, see Historical performance section. 09/73

10 Full-year company forecasts Note: Net income is net income attributable to owners of parent Tax Leasing Arrangement business forecasts FY09/17 (JPYmn) 1H Act. 2H Act. FY Act. 1H Est. 2H Est. FY Est. 1H Est. 2H Est. FY Est. Revenues 12,136 8,935 21,071 10,519 13,182 23, % 47.5% 12.5% Tax Leasing Arrangement business 11,085 7,882 18,968 8,684 11,165 19, % 41.6% 4.6% Others 1,050 1,053 2,103 1,834 2,016 3, % 91.5% 83.1% Cost of revenues 1,469 1,105 2,574 Gross profit 10,666 7,830 18,497 GPM 87.9% 87.6% 87.8% SG&A expenses 2,403 2,675 5,079 SG&A ratio 19.8% 29.9% 24.1% Operating profit 8,262 5,155 13,417 6,156 8,596 14, % 66.8% 10.0% OPM 68.1% 57.7% 63.7% 58.5% 65.2% 62.2% Recurring profit 8,464 5,247 13,711 6,066 8,862 14, % 68.9% 8.9% RPM 69.7% 58.7% 65.1% 57.7% 67.2% 63.0% Net income 5,843 3,737 9,580 4,186 6,127 10, % 64.0% 7.6% Net margin 48.2% 41.8% 45.5% 39.8% 46.5% 43.5% FY09/17 FY09/18 FY09/18 (JPYmn) 1H Act. 2H Act. FY Act. 1H Est. 2H Est. FY Est. 1H Est. 2H Est. FY Est. Total amount of assets arranged in operating leases 105, , , , % Total amount of equity placement in operating leases 71,540 44, , , % YoY YoY For FY09/18, FPG forecasts revenues of JPY23.7bn (+12.5% YoY), operating profit of JPY14.7bn (+10.0%), recurring profit of JPY14.9bn (+8.9%) and net income attributable to owners of parent of JPY10.3bn (+7.6%). For the mainstay Tax Leasing Arrangement business, it forecasts revenues of JPY19.8bn (+4.6%) and from businesses other than the Tax Leasing Arrangement business, revenues of JPY3.8bn (+83.1%). Revenue Tax Leasing Arrangement business FPG forecasts FY09/18 revenue of JPY19.8bn (+4.6% YoY) in the Tax Leasing Arrangement business, which breaks down as JPY8.6bn in 1H (-21.7%) and JPY11.1bn in 2H (+41.6%). The outlook for a decline in revenue in 1H reflects the fact that the company booked strong revenue of JPY11.0bn in 1H FY09/17 (+13.7% YoY from 1H FY09/16) and that the total amount of assets arranged (total amount for equity underwritten, money held in trust [aircraft for arrangement], and containers for arrangement) declined to JPY52.3bn at end-fy09/17 (-8.3% YoY from end-fy09/16), and inventory declined accordingly. The forecast for a sharp increase in revenue in 2H reflects the booking of low revenue of JPY7.8bn in 2H FY09/17 and the prospect of an increase in inventory through origination in FY09/18. The company forecasts JPY387.4bn in assets arranged in operating leases (+40.3% YoY). In 1H FY09/17, leasing demand was temporarily sluggish due to the timing of lessees capital investment, and the total amount of assets arranged in operating leases therefore finished at JPY105.4bn (-42.1% from 1H FY09/16). In 2H FY09/17, it recovered to a quarterly level of about JPY100.0bn (after excluding impact from Q4 deals that slipped into the next fiscal year) due to a major aircraft leasing project and repeated deals with newly contracted lessees. The company looks for JPY157.2bn in equity placement in operating leases (+35.8% YoY). It expects growth to be driven by strong demand from investors and ongoing expansion in partner accounting firms and business matching financial institutions. In addition, the company will strengthen origination and sales of Japanese Operating Leases (JOL: transactions under which lessees are not granted a purchase option), a business it entered in FY09/14. Accordingly, it intends to raise sales to major investors with a higher risk tolerance than its regular customers (investors). 10/73

11 FPG forecasts a 35.8% YoY increase in equity placement in operating leases, but it only looks for a 4.6% rise in revenue in the Tax Leasing Arrangement business based on the following reasons. In FY09/17, the commission rate (revenues divided by total amount of equity placement in operating leases) was 17.1% (excluding full equity deals, under which funds are exclusively raised from investor equity without any bank loans), which was high compared to historical levels. In FY09/18, the company looks for a commission rate of about 15%. Commissions received from the leasing business (mainly arrangement fees and sales commissions) average about 5% of the total amount of assets arranged in operating leases. In Japanese Operating Leases with Call Option (JOLCO: transactions under which lessees are granted a purchase option), the commission rate is roughly 15% because about 30% of the total amount of assets arranged in operating leases is procured by placing equity with investors. In the case of JOL however, the commission rate is around 5% since JOL deals are 100% funded by investor equity. The company plans to increase JOL origination and sales in FY03/18, so the growth rate of revenue in the Tax Leasing Arrangement business will be lower than the rate at which the total amount of equity placement in operating leases will increase. This is essentially an issue of commissions as percentage of total amount of equity placement in operating leases, so there is no change to profitability from before. Other businesses The company forecasts JPY3.8bn in revenues from businesses other than Tax Leasing Arrangement (+83.1% YoY). It apparently looks for higher revenues particularly in the real estate, insurance brokerage, and M&A advisory businesses. In the real estate business, procurement of real estate for the purpose of originating small-lot real estate products with trust beneficiary interests is proceeding smoothly, and an increase in the product lineup is expected to boost revenues. On the sales front, the company plans to deploy small-lot real estate product specialists to branches, mirroring the strategy used for the insurance brokerage business. In addition, it intends to push online marketing such as listing ads. In FY09/17, the insurance brokerage business recorded revenues of JPY688mn (+37.8% YoY). In the past, the company dispatched insurance specialists from the headquarters to meet with investors interested in insurance products. In FY09/17, it managed to attract potential customers by deploying an insurance specialist to each key branch, and this led to revenue growth. In FY09/18, FPG aims to expand revenues by deploying an insurance specialist to all branches and increasing the number of such specialists at key branches. According to the Yano Research Institute, the market for corporate life insurance was worth JPY608.2bn in FY03/15 (CAGR in the five years through FY03/15 was 4%). The market is expanding because life insurance policies afford companies deferred tax benefits (premiums can be partially or fully booked as expenses and cancellations may result in payouts of cash surrender value). Operating profit FPG forecasts operating profit of JPY14.7bn (+10.0% YoY), and sees OPM declining 1.5pp from the 63.7% recorded in FY09/17 to 62.2%. Although it looks for effects from revenue growth, the company intends to expand personnel to drive growth in the insurance brokerage, real estate, and M&A advisory businesses. This will increase SG&A expenses, and the company therefore expects the rate of profit growth to be lower than that of revenue expansion. Recurring profit and net income The company forecasts recurring profit of JPY14.9bn (+8.9% YoY) and net income attributable to owners of parent of JPY10.3bn (+7.6%). 11/73

12 Dividend FPG targets a year-end dividend per share in FY09/18 of JPY49.25 (43.0% consolidated dividend payout ratio). In October 2017, the company announced its dividend policy for FY09/18 and beyond, raising its consolidated payout ratio target from the previous generally over 30% to generally over 40%. 12/73

13 Medium-term outlook 16 years after founding: revenues of JPY21.0bn, operating profit of JPY13.4bn FPG has grown primarily by expanding its Tax Leasing Arrangement business. In FY09/17, 16 years after the company s founding, revenues reached JPY21.0bn (+11.5% YoY) and operating profit JPY13.4bn (+13.2% YoY). Since listing on JASDAQ in September 2010, FPG has strengthened its fundraising capacity and this has made it possible to increase the amount of equity underwritten held on its balance sheet. This has enabled it to meet investor needs and avoid missing sales opportunities due to a lack of inventory (equity underwritten). As a result, CAGR from FY09/10 to FY09/17 was 44.2% for revenues and 49.0% for operating profit. FPG: growth in revenues, operating profit, and net income (JPYmn) 25,000 20,000 15,000 10,000 5,000 - Revenues Operating profit (right axis) Net income (right axis) 2, ,036 1,438 1, , ,622 1,992 2,803 4,013 6,257 15,313 18,895 21,072 Note: Company adopted consolidated reporting from Q2 FY09/13; prior figures are for the parent. 3,462 10,082 6,344 11,853 FY09/05 FY09/06 FY09/07 FY09/08 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 Listed on JASDAQ (Sep-10) Listed on TSE2 (Oct-11) Listed on TSE1 (Oct-12) 7,645 (JPYmn) 13,418 14,000 9,581 12,000 10,000 8,000 6,000 4,000 2, ,000 Growth in Tax Leasing Arrangement business to date Growth through expanded equity placement in operating leases Revenues in the Tax Leasing Arrangement business are calculated by multiplying the total amount of equity placement in operating leases by commission rate (revenues divided by total amount of equity placement in operating leases). FPG s growth in revenues has mainly been driven by an increase in the total amount of equity placement in operating leases, rather than higher commission rate. As noted above, since the company s JASDAQ listing in FY09/10, due to a strategy of holding equity underwritten (inventory), which it then places in line with investor needs, it has seen a sharp increase in the volume of equity placed. Thereafter, to reduce the risk of holding equity underwritten for longer than one year after origination, FPG adopted a cautious approach in building up its volume of equity underwritten through FY09/14. In FY09/15, however, following an increase in its volume of equity underwritten, equity placement in operating leases grew substantially. 13/73

14 Tax Leasing Arrangement business revenues and total amount of equity placement in operating leases (JPYmn) 18,000 16,000 14,000 Tax Leasing Arrangement revenues Total amount of equity placement in operating leases (right axis) 84, , ,746 (JPYmn) 120, ,000 12,000 80,000 10,000 8,000 6,000 4,000 2, ,785 13,407 5,020 7, ,616 1,926 2,665 25,617 3,747 37,899 5,444 14,127 17,055 18,968 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 Listed on JASDAQ (Sep-10) Listed on TSE2 (Oct-11) Listed on TSE1 (Oct-12) 60,000 40,000 20,000 0 Shared Research believes that the growth in equity placement in operating leases has reflected an increase in the volume of equity underwritten, a higher number of partners in the distribution network, and an expansion in the company s funding facilities. Growth drivers: referral partners and origination capacity FPG receives referrals from accounting firms and financial institutions (regional banks and securities firms). At end-fy09/17, the company had partnership agreements with 3,466 partner accounting firms and business matching agreements with 127 financial institutions. As shown in the following figure, equity placement in operating leases has increased in line with expansion of the company s distribution network of accounting firms and financial institutions. Equity placement in operating leases by channel (JPYmn) 140,000 Direct 120, ,000 Financial institutions Accounting firms 3,430 3,275 80,000 3,511 63,931 63,834 60,000 38,233 40,000 20, ,796 1, ,419 9, , ,311 4,656 6,390 9,676 12,177 14,730 2,098 14,456 21,344 42,433 42,055 48,635 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 Listed on JASDAQ (Sep-10) Listed on TSE2 (Oct-11) Listed on TSE1 (Oct-12) 14/73

15 Equity placement in operating leases via accounting firm referrals and partnership agreements with accounting firms (JPYmn) 50,000 Equity placement in operating leases via accounting firm referrals 3,466 (Companies) 3,500 40,000 Number of partnership agreements (right axis) 2,814 3,000 2,304 2,500 30,000 20,000 10, ,847 1,440 48,635 42,433 42,055 1, , ,730 12,177 6,390 9,676 4,656 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 2,000 1,500 1, Listed on JASDAQ (Sep-10) Listed on TSE2 (Oct-11) Listed on TSE1 (Oct-12) Equity placement in operating leases via financial institution referrals and business matching agreements with financial institutions (JPYmn) 80,000 Equity placement in operating leases via financial institution referrals Number of business matching agreements (right axis) (Companies) , , ,931 63, , ,311 5,810 9,045 14,456 38,233 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 Listed on Listed on Listed on JASDAQ TSE2 TSE1 (Sep-10) (Oct-11) (Oct-12) Expanding fundraising capacity When the company arranges an operating lease in the Tax Leasing Arrangement business, it needs to raise funds via bank loans or investments from investor customers to buy assets. The company sometimes makes a temporary acquisition of equity in operating leases on the assumption that it will eventually be transferred to investors. Funds for these temporary advances come either from the company s own funds or from financial institutions. As such, if the company expands its fundraising capacity, it is easier to put together several deals simultaneously, and facilitates the arrangement of larger deals, contributing to profit growth. The aggregate value of committed credit line contracts and overdraft facilities was around JPY1.5bn before FPG was listed. Following its listing on the JASDAQ in 2010, TSE Second Section in 2011, and TSE First Section in 2012, its credit standing with financial institutions improved, and the value of committed credit line contracts and overdraft facilities reached JPY106.2bn in FY09/17 (committed credit line financing facility of JPY89.4bn at end-fy09/16). 15/73

16 Fundraising capacity, equity underwritten, and total amount of equity placement in operating leases (JPYmn) 140, , ,000 Fundraising capacity Equity placement in operating leases 84,178 89, , , ,746 80,000 74,450 60,000 40,000 20,000 0 Listed on JASDAQ (Sep-10) 3,000 13,407 9,850 19,785 25,617 21,950 45,000 37,899 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 Listed on TSE2 (Oct-11) Listed on TSE1 (Oct-12) Medium-term targets: expansion in earnings via growth in the Tax Leasing Arrangement business and by positioning the insurance brokerage, real estate, and M&A advisory businesses as core businesses In October 2017, the company formulated a new medium-term management plan (covering the period from FY09/18 to FY09/20). The key points of the plan are shown below. Further cement leading position in Japanese Operating Lease market Position the real estate, insurance brokerage, and M&A advisory businesses as core businesses: Decisively introduce management resources, and accelerate growth of diversified businesses* Operate businesses with a focus on assets under management**: Rapidly achieve assets under management of JPY1tn Push IT-driven sales: Expand online marketing and build third sales channel * Diversified businesses refer to businesses other than the Tax Leasing Arrangement ** Assets under management refer to assets entrusted by customers in the Tax Leasing Arrangement business and the real estate business Numerical targets are not disclosed in the medium-term management plan, but Shared Research believes the company looks to achieve double-digit profit growth over the medium term. We see growth in the Tax Leasing Arrangement business continuing to drive earnings, and believe other businesses particularly the real estate, insurance brokerage, and M&A advisory businesses will contribute to earnings growth. Strategies to strengthen Tax Leasing Arrangement business outlined in the medium-term plan The medium-term management plan calls for a further strengthening of the company s leading position in the Japanese Operating Lease market and business development focused on assets under management in the Tax Leasing Arrangement business, but it does not disclose earnings indicators for the business such as numerical targets or specific measures. Shared Research believes this business will continue to be the company s earnings driver, and the company plans to undertake measures to bolster its placement and origination capacity given the significant size of the potential market. Aims for leading position in Japanese Operating Lease market Japanese Operating Leases are broadly divided into transactions under which lessees are not granted a purchase option (JOL) and transactions under which a purchase option is granted (JOLCO; JOL with Call Option). (See the Operating leases section for details). The company originally focused mainly on origination and sales of JOLCO, but it added JOL to its portfolio from FY09/14. As of November 2017, JOLCO continued to account for a large portion of the deals arranged in the leasing business. Over the medium term, the company aims to expand deals not only in the JOLCO business but also in the JOL business. 16/73

17 Shared Research s understanding is that in JOLCO transactions, the amount at which a lessee can purchase a leased property is fixed, which means that there is no fluctuation in leasing business profits or losses due to changes in asset sales prices. In the case of JOL transactions, however, after the lease term has expired, assets are either sold in the market or the term is extended through a lease renewal. Because the asset sales price at the end of the lease term changes depending on market fluctuations, JOL transactions tends to have higher risks and returns than JOLCO transactions. FPG believes it can win new customers among major investors with a high risk tolerance through JOL origination and sales. In JOL transactions, after a lease term expires, assets need to be sold in the market or the term extended through a lease renewal, which means remarketing ability is indispensable. FPG Amentum Limited, a consolidated subsidiary of the company, has been involved in aircraft lease remarketing operations for a long time, and FPG plans to leverage this function to expand JOL business deals. Bolstering sales capabilities FPG has a nationwide distribution network of accounting firms and financial institutions. By developing and expanding this distribution network, which provides it with customer referrals, the company has driven earnings growth in the Tax Leasing Arrangement business. In order to bolster its selling capabilities, Shared Research believes the company aims to increase its sales force and expand and deepen its partnership agreements with accounting firms and business matching agreements with financial institutions. In FY09/17, the company had partnership agreements with 3,466 accounting firms (2,814 in FY09/16) and business matching agreements with 127 financial institutions (110). There are 31,505 CPA and tax accountancies nationwide (source: 2014 Economic Census), so Shared Research believes the company plans to increase the number of firms with which it has business matching agreements by roughly 400 per year over the medium term. The company plans to increase equity placement via accounting firms in FY09/18 by deepening relationships with accounting firms with which it has already established partnerships. FPG has established partnerships with 91 of the 105 first- and second-tier regional banks (data as of March 2016) in Japan, and therefore plans to expand its partnerships to include shinkin banks. Potential market cannot be ignored When comparing the size of the asset arrangement and equity placement market and the company s Tax Leasing Arrangement business as of November 2017, the size of the potential market can be described as significant. On the origination side, the market for aircraft (one of the key leased asset categories) was worth roughly JPY26tn in 2015 (Shared Research estimates). In contrast, the company s total amount of assets arranged in operating leases in FY09/17 was JPY276.1bn (aggregate purchase price of leased assets for aircraft, shipping vessels, and marine shipping containers), so the market for leased assets for aircraft alone is massive. In terms of equity placement in operating leases, there are approximately 980,000 SMEs (companies with capital of JPY10mn 1.0bn) that the company can target to purchase equity from the Tax Leasing Arrangement business. The aggregate recurring profit of these SMEs was approximately JPY29.4tn (Shared Research estimates based on Ministry of Finance s fiscal 2016 Financial Statement Statistics of Corporations). Compared to these figures, the total amount of equity placement in operating leases at the company reached JPY115.7bn in FY09/17. Strengthening other businesses FPG plans to leverage the sales network it has developed in the Tax Leasing Arrangement business (namely referrals from partner accounting firms and business matching financial institutions) to offer small-lot real estate products, life insurance for corporations, and M&A advisory services to company owners and high net worth individuals such as doctors and attorneys. By doing so, it aims to achieve revenue growth and diversification. 17/73

18 Revenues in other businesses in FY09/17 were JPY2.1bn (+14.4% YoY) and CAGR over the last five years was 72.7%. The main drivers of revenue growth were the real estate and the insurance brokerage businesses. The medium-term management plan calls for positioning not only the real estate and insurance brokerage businesses but also the M&A advisory business as core businesses, and deploying management resources accordingly. Revenues in other businesses FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Act. Act. Act. Act. Act. Other businesses ,185 1,839 2,103 YoY 92.9% 206.1% 45.8% 55.2% 14.4% Real estate business YoY % 6.2% 64.1% 102.5% Insurance brokerage business YoY 62.4% 39.3% 15.7% 77.3% 37.8% M&A advisory business YoY % 133.5% -60.6% Real estate business: targets growth fueled by increase in real estate for arrangement, deployment of specialists, and online marketing The real estate business receives compensation for providing small-lot real estate products to investors (high net worth individuals and others). The business was launched in FY09/13, and generated revenues of JPY555mn in FY09/17 (+102.5% YoY). Real estate product sales and real estate business revenue FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Act. Act. Act. Act. Act. Real estate product sales 780 1,972 2,028 3,258 5,805 YoY % 2.8% 60.6% 78.2% Real estate business revenue YoY % 6.1% 64.1% 102.5% Revenue / Product sales 7.6% 8.0% 8.2% 8.4% 9.6% In FY09/17, the company made steady progress with the acquisition of real estate for the purpose of originating small-lot real estate products with trust beneficiary interests, and it looks for medium-term growth in revenues through expansion of the product lineup. On the sales side, it also plans to deploy specialists in small-lot real estate products to branches. In addition, the company intends to push online marketing such as listing ads. Aims to expand revenues by deploying specialists to branches in the insurance brokerage businesses The insurance brokerage business leverages its independent positioning from insurers to provide optimal insurance products to customers (SMEs). When an insurance contract is established, it receives a predetermined commission from the relevant insurance company. In FY09/17, the insurance brokerage business recorded revenues of JPY688mn (+37.9% YoY) and CAGR over the last five years was 45.4%. In the past, FPG dispatched insurance specialists from the headquarters to meet with investors interested in insurance products. In FY09/17, it increased its ability to attract potential customers by deploying an insurance specialist to each key branch. In FY09/18, the company aims to expand revenue by deploying an insurance specialist to all branches and increasing the number of such specialists at key branches. According to the Yano Research Institute, the market for corporate life insurance was worth JPY608.2bn in FY03/15 (CAGR in the five years through FY03/15 was 4%). The market is expanding mainly because life insurance policies afford companies deferred tax benefits (premiums can be partially or fully booked as expenses and cancelations lead to payouts of cash surrender value). 18/73

19 Aims for growth in the M&A advisory business by increasing personnel The M&A advisory business originally focused on providing advisory services to companies looking to sell their businesses. Over the medium-term, the company aims to enter the M&A intermediary field, which entails the matching of potential sellers and buyers. SMEs are expected to struggle with the problem of succession over the medium term, and the company accordingly projects an increase in M&A activity aimed at business succession. In anticipation of such a trend, it will increase personnel involved in M&A intermediary, build up a track record in the business, and aim to expand earnings accordingly. 19/73

20 Business Business Independent financial services company: main business is Tax Leasing Arrangement FPG is an independent financial services company. It is involved in Tax Leasing Arrangement, real estate, insurance brokerage, M&A advisory, securities, trust, and aircraft investment management services. Its main business is Tax Leasing Arrangement (90.0% of revenues in FY09/17). Tax Leasing Arrangement business sets up SPCs and places equity in the SPCs with investors FPG s Tax Leasing Arrangement business differs from typical leasing businesses in that FPG does not own the leased assets. For each deal, FPG forms an SPC (special purpose company) to run an operating lease business, and places stakes in the silent partnerships of the SPC with investors (mainly SMEs). The SPCs use funds from investors and bank loans to buy aircraft, shipping vessels, and marine shipping containers. Through an operating lease business, these assets are leased to lessees such as airlines and shipping companies. Commissions, which the company receives from the SPCs, are included in the equity funding from investors. Deferred tax benefits for investors; low leasing payments for lessees By opting for the declining balance depreciation method in their P&Ls, operating lease SPCs tend to have net losses in the first half of the leasing period before having profits in the second half. Investors are able to defer taxes as their overall earnings are reduced because their share of losses from the SPC offsets profits in the other companies that are the main businesses of the investors. They can also expect to receive investment returns with a similar interest rate to that on ordinary bank deposits. FPG s investors are primarily concerned with tax deferral, so by capping expected investment returns at a low level similar to the interest rate on ordinary bank deposits, the company is able to offer competitive leases to lessees, giving it an advantage in arranging leasing deals. Main sources of earnings: arrangement fees and placement commissions FPG s main sources of earnings are arrangement fees for setting up operating lease deals, and placement commissions received for placing equity in the SPCs silent partnerships to investors. The company also receives management fees for operating the SPCs. The commission and management fees are paid by the SPCs to the company. The sum of arrangement fees and placement commissions is around 15% of the total amount of equity placement in operating leases. Earnings structure: high fixed cost ratio, high margins The company s cost ratio is around 15%, and fixed costs such as personnel expenses are the main component of SG&A expenses, so incremental profit margin is high. The OPM was 63.7% in FY09/17 (62.7% in FY09/16). Profits grow after listing owing to enhanced credibility among investors, expanding distribution network and fundraising capacity The company has grown primarily through the Tax Leasing Arrangement business. In FY09/17, 16 years after its establishment, revenues reached JPY21.0bn and operating profit reached JPY13.4bn. After listing on the JASDAQ market in September 2010, revenues grew at a CAGR of 44.2% from FY09/10 through FY09/17 and operating profit at a CAGR of 49.0%. This was due to an expanded distribution network and increased fundraising capacity. From FY09/10 through FY09/16, the number of partner accounting firms grew at a CAGR of 62.3%, and the number of partner financial institutions grew at a CAGR of 40.1%. Before the company was listed, its credit lines totaled around JPY1.5bn, and this grew to JPY106.2bn in FY09/17. Limited impact from economic fluctuations According to FPG, the impact of economic fluctuations on the Tax Leasing Arrangement business is limited. In previous economic downturns, such as in FY09/09 following the global financial crisis, revenues fell 5.1% YoY but the company returned to growth in FY09/10 with revenue growth of 89.3% YoY. 20/73

21 Tax Leasing Arrangement business (90.0% of FY09/17 revenues) Overview of Tax Leasing Arrangement business Main players in a Tax Leasing Arrangement transaction: FPG, SPCs, investors, and lessees. Each role is outlined below. (For details on operating leases refer to Other information page.) FPG creates an SPC (special purpose company) to operate an operating lease business and places equity in the SPC s silent partnership with investors (primarily SMEs). The SPC raises equity funds from investors or through bank loans and buys aircraft, shipping vessels, and marine shipping containers, which it leases to lessees such as airlines and shipping companies. SPCs tend to have net losses in the first half of the lease period. Since they employ the declining balance depreciation method, depreciation expenses are greater than income early in the lease period. Later in the lease, depreciation declines, and the SPCs tend to move into net profits. Investors have a share in the profits and losses of the SPC. Through the earnings from the operating lease business, they can enjoy deferred tax benefits. The lessees conduct business using assets (aircraft, shipping vessels, and marine shipping containers) obtained under operating leases from the SPC. Tax Leasing Arrangement business flowchart Lessees, such as airlines Rentals Purchase leased asset Loan Manufacturers Resale market Sell leased asset (1) Service/management agreement (for structuring, sale, management) SPC fully owned by FPG FPG (1) Receipt of fees Repayment Silent partnership contribution Profits, losses, cash distribution (2) Finder agreement (2) Remuneration Financial institutions Investors (silent partners) Clients Intermediaries Accounting firms Regional banks Tax accountancies Securities firms The following discussion of the Tax Leasing Arrangement business is broken down into FPG s role and the SPC s role. FPG s role in Tax Leasing Arrangement In the Tax Leasing Arrangement business, FPG establishes an SPC, which manages an operating lease business, and places equity in the SPC s silent partnership with investors (primarily SMEs). 21/73

22 Tax Leasing Arrangement business flowchart Lessees, such as airlines Rentals Manufacturers Resale market Purchase leased asset Sell leased asset (1) Service/management agreement (for structuring, sale, management) SPC fully owned by FPG FPG (1) Receipt of fees Loan Repayment Silent partnership contribution Profits, losses, cash distribution (2) Finder agreement (2) Remuneration Financial institutions Investors (silent partners) Clients Intermediaries Accounting firms Regional banks Tax accountancies Securities firms FPG and SPCs FPG performs all the operations necessary to carry out the leasing business under contract from the SPC. It arranges operating lease deals, places partnership equity, and manages the business. For each business activity, classified as origination, placement, or management, FPG receives commissions from the SPC. It also receives arrangement fees for origination, placement commissions for placing equity stakes, and management fees, which it books as revenues. Arrangement fees and commissions are the main source of FPG s revenues, amounting to about 15% of the total amount of equity placement in operating leases. Management fees comprise only a small percentage of revenues. FPG and investors Accounting firms and financial institutions refer investors to FPG, which directly provides investors with product explanations. Before the leasing period under the SPC begins, the company markets equity in the SPC to investors. Once the lease begins, if all the equity in the SPC has not already been placed, the company places the portion it has purchased with investors and executes a transfer in the silent partnership contract. FPG and referring parties (accounting firms and financial institutions) FPG has customer referral agreements with accounting firms, tax accountancies, regional banks, and securities firms nationwide. FPG provides product explanations directly to investors. If a contract is signed, FPG pays commissions to the referring party. Referral fees are 1 2% of the total amount of equity placement in operating leases. As of FY09/17, the company had alliances with 3,466 accounting firms and tax accountancies (2,814 in FY09/16), 108 regional banks (91 in FY09/16), and 19 securities firms (unchanged from FY09/16). Business flows in Tax Leasing Arrangement business Business flows and revenue classification in the Tax Leasing Arrangement business, from receiving the mandate through the end of the lease, are as follows. 1. Order receipt (for origination) The company receives a leasing mandate from a lessee such as an airline, an aircraft leasing company, or a shipping company via a tender or individual negotiation. 22/73

23 The company uses a Japanese Operating Lease scheme. This takes advantage of investors expecting low rates of return from equity funds. Their fund contribution accounts for around 30% of a transaction under the scheme. Compared with operating leases from a conventional leasing company, this system allows the company to offer lower-priced leasing rates for the lessee. (See Other information for explanation of Japanese Operating Leases.) (Reference) Competitiveness versus other leasing companies, source of placement commissions Key assumptions Leasing company: cost of equity, 8% Interest rate on loans, 3% Effective tax rate, 40% Investors expected return under Japanese Operating Lease, 1%. If a conventional company uses its own balance sheet (shareholders equity, 30%; interest-bearing debt, 70%) to arrange an operating lease, the weighted average cost of capital (WACC) is 3.7% as shown below. WACC (%) = cost of equity x equity (equity + interest-bearing debt) + average borrowing interest rate x (1-effective tax rate) x interest-bearing debt (equity + interest-bearing debt) Compared with this, by arranging an SPC with 30% equity and 70% debt to finance an operating lease, the WACC comes out at 2.4% (under a Japanese Operating Lease, the tax savings from using debt are not considered because SPCs are not subject to taxes). This is a lower WACC than for a leasing company using its own balance sheet for an operating lease. Therefore it is possible to set leasing rates low using the low WACC available under a Japanese Operating Lease. 2. Deal origination An operating lease run by an SPC is arranged based on the type of lease required by the lessee, the financial institutions loan terms and conditions, and the projected amount of placement with investors. Decisions are made on the leasing period, residual value of the asset, lease rates, borrowing interest rates, followed by investors expected return, and arrangement fees and placement commission paid by the SPC to the company. Borrowing interest rates depend on the lessee s credit rating and market interest rates, and expected returns are set at a similar interest rate to that on ordinary bank deposits; these conditions vary little among different products. Yet commissions from equity placement that FPG receives move with lease rates. Lease rates vary by asset and product. If there are numerous competing companies trying to originate a certain leasing deal, rates tend to be lower, while if there are fewer competing companies, they tend to be higher. Aircraft leasing rates are low because there are many companies competing for individual assets. Rates for shipping vessels and marine shipping containers are higher due to fewer competitors (see Operating lease assets section for details). 3. Private offering (placement) Before the lease term begins, placements to potential investors of equity in the SPC s silent partnership occur. These are treated as private offerings of securities under the Financial Instruments and Exchange Act. When the leasing term begins, if some of the equity in the partnership has not yet been placed, FPG temporarily buys the stake on the assumption it will eventually place the stake with investors. The value of these temporary advances paid is booked on the balance sheet as equity underwritten or money held in trust (aircraft for arrangement). 4. Lease start (origination) Based on the lease contract, the SPC starts managing the operating lease business. 5. Transfer (placement) After the day that the lease term begins, if all of the equity in the SPC has not previously been placed with investors, the company places with investors the portion it has bought, and executes a transfer under the silent partnership contract. This transfer is treated as a securities transaction under the Financial Instruments and Exchange Act. 23/73

24 6. Business management Under the silent partnership contract, the company manages the operating lease business, including accounting and tax reporting. 7. Lease expiry (origination) Once the lease has expired, the leased asset is sold, borrowings are repaid and residual assets are distributed to investors. Role of SPCs in Tax Leasing Arrangement business SPCs raise funds by placing equity with investors and through bank loans, which they use to buy aircraft, shipping vessels, and marine shipping containers. The partnerships provide operating leases of the aircraft, shipping vessels, and marine shipping containers to lessees such as airlines and shipping companies. Tax Leasing Arrangement business flowchart Lessees, such as airlines Rentals Purchase leased asset Loan Manufacturers Resale market Sell leased asset (1) Service/management agreement (for structuring, sale, management) SPC fully owned by FPG FPG (1) Receipt of fees Repayment Silent partnership contribution Profits/losses/cash distribution (2) Finder agreement (2) Remuneration Financial institutions Investors (silent partners) Clients Intermediaries Accounting offices Regional banks Tax accountancies Securities firms SPCs and FPG FPG performs all operations necessary for a leasing business under a contract with the SPC. It arranges operating lease deals, places partnership equity, and manages the business. For each business activity, classified as origination, placement, or management, FPG receives commissions from the SPC. It also receives arrangement fees for origination, placement commissions for placing equity, and management fees, each of which it books under revenues. SPCs and lessees SPCs use funds raised by placing equity with investors and taking bank loans to buy aircraft, shipping vessels, and marine shipping containers from manufacturers and other companies. They lease these assets to lessees such as airlines and shipping companies under operating leases. Lessees use operating leases for a variety of reasons: to lower procurement costs, smooth out expenses, improve fundraising capacity, and for off-balance-sheet financing. For operating leases, around 30% of the price of the leased asset (funds raised by SPC) is equity from investors, and the funds do not incur heavy interest costs. Therefore, compared with purchasing the asset themselves, the lessees are able to reduce funds raised from financial institutions, and as such can further save on interest payments and reduce the use of credit lines with the financial institutions. 24/73

25 The lessees make regular payments to the SPC based on the leasing contract. If lease payments cease, (e.g., the lessee goes bankrupt), the revenues at the Operating Lease Business may worsen and investors may incur losses. As profits or losses in the Operating Lease Business belong to members of silent partnerships, they do not impact FPG s performance directly. Still, the lessees failure to pay leases could hurt FPG s reputation and is highly likely to affect FPG s business results. Therefore, FPG restricts operating lease activities to companies with a strong capacity to meet payments. The company prioritizes flag carriers, choosing airlines such as British Airways, Lufthansa and Air France, along with major aircraft leasing companies. According to the company, it generally does not deal with airlines that have a high risk of going bankrupt. FPG chooses marine shipping container lessees from among the top 20 container shipping companies globally. FPG also says its vessels are leased to the world s leading shipping companies. According to the company, since it launched its Tax Leasing Arrangement business, there have been no cases where lease payments stalled or a lessee went bankrupt. Following the leasing term, the SPC sells the leased asset and receives and distributes the sales proceeds. SPCs and investors, financial institutions The SPC executes a silent partnership agreement with investors. The partnership receives roughly 30% of the purchase price of lease assets (such as shipping vessels) and commissions by way of equity investments. It borrows roughly 70% of the lease asset cost from financial institutions under non-recourse loan contracts. Investors enter into a silent partnership agreement, and buy a stake in the SPC. These stakes (rights) are classified as securities under the Financial Instruments and Exchange Act. Non-recourse loan contract: payments are restricted to future cash flows (such as leasing income or asset sales) accruing to a specific asset owned by the borrower, without recourse to other assets of the borrower. The SPC settles its accounts each accounting period and distributes earnings to investors in accordance with their share of equity. SPC revenues consist of lease payments from the lessee and income from leased asset sales. Costs are depreciation on the leased assets, the book value of the asset when sold, interest payments on loans from financial institutions, and management fees paid to FPG (arrangement fees, placement commissions, and management fees). In the operating lease business, SPCs use the declining balance method to account for depreciation. This means that in the early part of the lease term depreciation and other expenses are higher than revenues, and the SPC tends to post a loss. In the latter part of the lease term, depreciation expenses decline, and the SPCs become profitable. Investors are allocated profits and losses in line with their share of equity, so they book losses to the extent of their investment. They can use these losses from their portion of SPC losses in the early part of the lease term to offset profits in their main businesses and thus defer taxes. Investors expected returns are set at a similar interest rate to that on ordinary bank deposits. Per the company, when investors provide equity, they tend to be more concerned about deferred tax effects than about direct yields. Further, investors bear forex risk, as at the end of the lease period they often receive returns in dollars. Investors can use the deferred taxes to smooth profits, make capital investment plans that coincide with the end of the lease term, plan for costs, and prepare for payments of retirement benefits for directors. They can also be used when an unlisted company transfers a business. They cut earnings per share, reducing the appraised value of shares. The company said that when shares are transferred to a business owner s heir, the inheritance tax burden may be reduced. Assume that the owner of an SME decides to retire in seven years, has decided to discontinue the business, and seeks to defer taxes by investing in an operating lease for seven years corresponding to the retirement payment (for simplification, assume losses incurred by the SPC during the fiscal period in which funds are invested can be used to dispose of the entire amount of losses equivalent to the invested funds). During the fiscal period in which the funds are invested, the SME can reduce profits by offsetting its main business profits with the portion of losses from the SPC and thereby defer taxes. After seven years, the SME can allocate the invested funds that are returned when the SPC s period expires to pay for expenses incurred for the owner s 25/73

26 retirement payment. As a result, the SME is not required to pay taxes on profits from its main business that it would otherwise have had to pay during the fiscal period when the funds were invested. Instead, since the payout for the retirement expenses are taxed, while the effective corporate tax rate is roughly 30%, retirement benefit payments are taxed at a maximum of 22.5% (1/2 of income after deductibles times the tax rate [maximum: 45%]). Investing in the operating lease business allows the retiring business owner to reduce the tax burden by the difference between the amount of taxes paid for the retirement payment and the amount that would be paid as a company. FPG s customers (investors) are highly profitable SMEs. Note: 60% are new customers and 40% repeat customers. They come from different industries without any concentration in specific sectors. The value of customer investments averages JPY50mn. Case study: profits in operating lease business For reference, profits for a SPC are shown below based on the following assumptions: investment, JPY10bn; non-recourse loan, JPY21.5bn; leasing term, eight years; lease fees, 9.0%; sale price as share of purchase price, 44.0%; interest rate on non-recourse loan, 2.5%; commissions (placement commissions and arrangement fees), 15.4% (versus equity investment amount). There is a limited impact from management fees, so they are not included in these calculations. Components of profit and loss in operating lease business 20,000 15,000 10,000 5, ,000-10,000-15,000 y+1 y+2 y+3 y+4 y+5 y+6 y+7 y+8 Source: Shared Research Under declining-balance method and useful life of eight years, depreciation rate is 25.0%, revised depreciation rate is 33.4%, and guarantee rate is From year six, when the unadjusted depreciation amount is lower than the guaranteed depreciation amount (purchase price times guarantee rate), the depreciation limit is calculated by multiplying the revised depreciation rate by the revised purchase price. Note: When transactions occur in foreign currencies, there may be an impact from currency fluctuations. During the lease term, the SPC receives lease payments from the lessee. Lease payments are determined based on lease term, non-recourse loan interest rates, and other factors. Loan repayments are via the principal and interest method, so early during the lease term there is a larger share of interest payments. As the loan matures the interest payment portion tapers off. The non-recourse loan interest rates reflect the credit rating of the lessee. The declining balance method is used for depreciating the lease assets, so depreciation expenses are large during the first half of the term of the lease, and decline during the second half of the term. The SPC incurs startup costs including arrangement fees and placement commissions in its first fiscal year. The sum of arrangement fees and placement commissions is around 15% of the total amount of equity placement in operating leases. Following lease expiry, the leased asset is sold and revenue received. The asset sales price is generally decided based on the book value after deducting expenses. y+1 y+2 y+3 y+4 y+5 y+6 y+7 y+8 Leasing expenses 2,704 2,704 2,704 2,704 2,704 2,704 2,704 2,704 Proceeds from sales ,182 Interest expenses Depreciation 7,490 5,618 4,213 3,160 2,370 2,375 2,375 2,359 Charges 1, Earnings -6,872-3,397-1, ,398 26/73

27 Profits from operating leases are distributed to investors after the various components are accounted for as shown below. Income = lease payments + asset sale receipts Expenses = depreciation (including asset book value upon sale) + interest paid + commissions, other Profit = income expenses As shown in the previous table, profits for the SPC are leasing fees plus asset sale receipts minus interest paid, depreciation, placement commissions, arrangement fees, etc. The SPC tends to generate losses in the first half of the lease term and profits in the second half. Investors can use deferred tax benefits as their share of losses given their share of equity. Investors earnings after adjustment for taxable income y+1 y+2 y+3 y+4 y+5 y+6 y+7 y+8 Earnings after adjustment for taxable income -6,872-3, ,600 Source: Shared Research Other businesses (10.0% of FY09/17 revenues) In addition to its Tax Leasing Arrangement business, the company is involved in real estate, insurance brokerage, M&A advisory, securities, trusts, and aircraft investment management services businesses. These accounted for 9.7% of consolidated revenues in FY09/16 and, although they had a relatively small impact on consolidated earnings, these businesses saw an increase in revenues from JPY137mn in FY09/12 to JPY2.1bn in FY09/17. Revenues in other businesses FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Act. Act. Act. Act. Act. Other businesses ,185 1,839 2,103 YoY 92.9% 206.1% 45.8% 55.2% 14.4% Real estate business YoY % 6.2% 64.1% 102.5% Insurance brokerage business YoY 62.4% 39.3% 15.7% 77.3% 37.8% M&A advisory business YoY % 133.5% -60.6% Securities business YoY % 23.6% -40.8% Aircraft investment management services YoY % -5.7% Real estate This business receives compensation for providing small-lot real estate products to investors (high net worth individuals and others). Prior to April 2016, FPG had been offering small-lot real estate products under the Real Estate Specified Joint Enterprise Act. Since April 2016 it has been offering small-lot real estate products leveraging trust beneficiary interests. These products are for buildings located in prime locations in central Tokyo, which are managed by subsidiary FPG Trust Co., Ltd. (FPG Trust), with trust beneficiary interests from the assets sold to investors. After units are sold, FPG Trust manages the properties as a single trust asset and distributes revenues generated from the buildings to investors. After a certain period, the property is sold, the payment distributed to investors, and the trust terminated. For tax purposes the trust beneficiary interests are valued as a real estate asset, so it is valued at 20 30% of the invested amount. As such, it offers investors greater inheritance or gift tax benefits compared to cash. The FPG Group receives 6 7% of the sales price in commissions. 27/73

28 Small-lot real estate products offer investors several benefits. They can invest in small lots of real estate located in prime locations in central Tokyo, are not responsible for time-consuming operations (property management and operation), and the asset can be used for asset management while also being used to transfer assets via inheritance or as a gift. These features are similar to features of products complying with the Real Estate Specified Joint Enterprise Act, but because costs for purchasing the trust beneficiary interests are handled differently from costs for products under the Act, investors are able to take advantage of new benefits, including various tax benefits and lower costs when acquiring the units. Furthermore, according to the company, since small-lot real estate products complying with the Real Estate Specified Joint Enterprise Act are treated as physical real estate, customer referrals from financial institutions was sluggish, as many financial institutions were concerned about regulations regarding dual businesses. In contrast, the new small-lot real estate product that sells trust beneficiary interests to investors is regarded as an investment security, and therefore should see increased referrals from financial institutions. Real estate product sales and real estate business revenue FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Act. Act. Act. Act. Act. Real estate product sales 780 1,972 2,028 3,258 5,805 YoY % 2.8% 60.6% 78.2% Real estate business revenue YoY % 6.1% 64.1% 102.5% Revenue / Product sales 7.6% 8.0% 8.2% 8.4% 9.6% Insurance brokerage This business primarily offers insurance products to SMEs. FPG is an intermediary between customers (insurance policyholders) and insurance companies. Independent from the insurers, FPG offers the most suitable insurance to the policyholders. When an insurance contract is signed, it receives a predetermined commission from the insurance company. M&A advisory This business is mainly concerned with selling customers businesses under advisory contracts. This generates commissions and predetermined success fees upon the successful sale of a business. Securities This business earns revenues by offering over-the-counter currency derivatives, such as foreign exchange contracts and currency options to its corporate customers to mitigate forex risk. The company s consolidated subsidiary FPG Securities Co., Ltd. runs this business. Trust This business earns revenues by operating and managing trust assets based on trust contracts between FPG and customers. Consolidated subsidiary FPG Trust Co., Ltd. runs this business. Aircraft investment management services This business receives compensation for arranging aircraft leases, lease management, remarketing, and financing arrangements. Consolidated subsidiary FPG Amentum Limited carries out this business. 28/73

29 Earnings structure Tax Leasing Arrangement business: more than 90% of revenues The Tax Leasing Arrangement business accounts for most of FPG s revenues, at 90.0% in FY09/17. The discussion below focuses on the earnings structure of the Tax Leasing Arrangement business. Revenues by business (service) (JPYmn) Note: YoY rises of over 1,000% are shown by - Key revenue source: placement commissions Main sources of revenues in the Tax Leasing Arrangement business: arrangement fees for arranging operating lease deals and placement commissions received from the SPC (for placing equity in the SPC s silent partnerships with investors). The company also receives arrangement fees for originating operating lease deals and management fees for operating the SPC, but this is a negligible share of revenues. Variables: equity placement, number of customer companies investing in products, average investment amount, commissions from equity placement, and number of partner accounting firms and financial institutions Revenues in the Tax Leasing Arrangement business are calculated by equity placement (value of equity in SPC placed with investors in FY09/17: JPY115.7bn) multiplied by commissions from equity placement (revenues divided by total amount of equity placement in operating leases amount in FY09/17: 17.1%. This is excluding full equity deals, whereby funds are exclusively raised from investor equity without any bank loans). FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Revenues 1,621 1,992 2,802 4,012 6,257 15,313 18,894 21,071 YoY 89.3% 22.9% 40.7% 43.2% 55.9% 144.7% 23.4% 11.5% Tax Leasing Arrangement business 1,616 1,926 2,665 3,747 5,444 14,127 17,055 18,968 YoY 88.8% 19.2% 38.4% 40.6% 45.3% 159.5% 20.7% 11.2% % of total revenues 99.7% 96.7% 95.1% 93.4% 87.0% 92.3% 90.3% 90.0% Other ,185 1,839 2,103 YoY % 92.9% 206.1% 45.8% 55.2% 14.4% Equity placement The total amount of equity placement in operating leases reflects the total amount (including value of beneficiary interests in aircraft leasing) of equity FPG sells to investors (equity placed in silent partnerships or in voluntary partnerships in the operating lease business). Per the company, economic fluctuations have a limited impact on the total amount of equity placement in operating leases. It cites that many SMEs are profitable even during economic slumps, and the leased asset market is large. In past downturns, such as in FY09/09, equity placement fell 5.1% YoY. But in FY09/10 equity placement grew 89.3% YoY. Number of partner accounting firms and business matching financial institutions As mentioned earlier, a major driver in revenue growth for the Tax Leasing Arrangement business has been an increase in the number of customer companies investing in products. FPG receives referrals to investors from accounting firms, and financial institutions such as regional banks and securities firms. Customer numbers have been increasing due to FPG expanding its distribution network of accounting firms and financial institutions. In FY09/17, the company had partnership agreements with 3,466 accounting firms and business matching agreements with 127 financial institutions. In FY09/17, referrals from accounting firms accounted for 42.0% of equity placement and those from financial institutions for 55.1%. 29/73

30 Number of partner accounting firms and business matching financial institutions Cumulative FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 No. of partnership agreements (accounting firms and offices) ,107 1,440 1,847 2,304 2,814 3,466 YoY 129.4% 557.3% 44.0% 30.1% 28.3% 24.7% 22.1% 23.2% Net increase No. of business matching agreements (financial institutions) YoY 200.0% 83.3% 63.6% 69.4% 37.7% 21.4% 7.8% 15.5% Net increase Equity placement by channel (JPYmn) FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 Total amount of equity placement in operating leases 25,617 37,899 84, , ,746 YoY 29.5% 47.9% 122.1% 30.0% 5.8% Accounting firms and offices 14,730 21,344 42,433 42,055 48,635 YoY 21.0% 44.9% 98.8% -0.9% 15.6% % of total 57.5% 56.3% 50.4% 38.4% 42.0% Financial institutions 9,045 14,456 38,233 63,931 63,834 YoY 55.7% 59.8% 164.5% 67.2% -0.2% % of total 35.3% 38.1% 45.4% 58.4% 55.2% Direct 1,842 2,098 3,511 3,430 3,275 YoY 2.6% 13.9% 67.3% -2.3% -4.5% % of total 7.2% 5.5% 4.2% 3.1% 2.8% Expanding fundraising capacity When the company arranges an operating lease in the Tax Leasing Arrangement business, it needs to raise funds via bank loans or investments from customers to buy assets until the lease begins. The company sometimes makes a temporary investment in the equity, assuming that it will eventually be transferred to investors. Funds for these temporary advances are covered either by the company s own funds or from financial institutions. If the company expands its fundraising capacity, it is easier to put together several deals at the same time and it also facilitates the arranging of larger deals and enables the company to conduct transactions with lessees based on favorable terms. The end result is that it should contribute to the company s profit growth. The aggregate value of committed credit line agreements and overdraft facilities was around JPY1.5bn before the company was listed. Following FPG s listing on the JASDAQ in 2010, TSE Second Section in 2011 and TSE First Section in 2012, its credit standing with financial institutions improved. The value of such agreements hit JPY106.2bn in FY09/17. FPG also increased the number of lender banks and the amount of funds raised through them via face-to-face negotiations. Fundraising capacity, equity underwritten, money held in trust (aircraft for arrangement), and equity placement (JPYmn) (JPYmn) FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 Total fundraising capacity 1,500 3,000 9,850 21,950 45,000 74,450 89, ,273 YoY % 228.3% 122.8% 105.0% 65.4% 20.1% 18.9% Total amount of assets arranged 1,405 3,749 3,152 13,436 28,542 46,522 57,121 50,380 YoY 199.6% 166.8% -15.9% 326.3% 112.4% 63.0% 22.8% -11.8% Equity underwritten 1,405 3,749 3,152 13,436 28,542 46,522 57,121 19,031 YoY 199.6% 166.8% -15.9% 326.3% 112.4% 63.0% 22.8% -66.7% Money held in trust (aircraft for arrangement) ,349 YoY Total amount of equity placement in operating leases 7,716 13,407 19,785 25,617 37,899 84, , ,746 YoY 53.7% 73.8% 47.6% 29.5% 47.9% 122.1% 30.0% 5.8% Note: Total amount of assets arranged reflects total for equity underwritten and money held in trust (aircraft for arrangement). Commission rate Commission rate varies depending on the lease asset. Due to competition among companies offering leases, leasing rates tend to be lowest for aircraft, followed by shipping vessels, and then marine shipping containers. 30/73

31 From FY09/11 through FY09/17, commission rate has been around 14 17%. Key variables in Tax Leasing Arrangement business (JPYmn) Note: Total amount of equity placement in operating leases in FY09/16 does not include full equity deals whereby funds are exclusively raised from investor equity without any bank loans. Note: Costs are mainly fixed costs. Cost of revenues Key components of cost of revenues are referral fees and deal arranging expenses. FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Total amount of assets arranged in operating leases 25,187 39,138 47,289 98, , , , ,168 YoY 88.7% 55.4% 20.8% 108.1% 71.4% 76.3% 27.4% -27.1% Total amount of equity placement in operating leases 7,716 13,407 19,785 25,617 37,899 84, , ,746 YoY 53.7% 73.8% 47.6% 29.5% 47.9% 122.1% 30.0% 5.8% Aircraft ,291 11,126 20,385 23,506 54,894 59,230 YoY % 52.6% 83.2% 15.3% 133.5% 7.9% % of total - 7.3% 36.9% 43.4% 53.8% 27.9% 50.2% 51.2% Shipping vessels 4,625 4,468 3, ,224 43,959 30,045 43,210 YoY 153.8% -3.4% -29.3% -73.3% 518.2% 741.5% -31.7% 43.8% % of total 59.9% 33.3% 16.0% 3.3% 13.8% 52.2% 27.5% 37.3% Marine shipping containers 3,091 7,956 9,334 13,645 12,289 16,713 24,477 13,290 YoY -3.3% 157.4% 17.3% 46.2% -9.9% 36.0% 46.5% -45.7% % of total 40.1% 59.3% 47.2% 53.3% 32.4% 19.9% 22.4% 11.5% Tax Leasing Arrangement business revenue 1,616 1,926 2,665 3,747 5,444 14,127 17,055 18,968 % of total 88.8% 19.2% 38.4% 40.6% 45.3% 159.5% 20.7% 11.2% Revenue / Equity placements 20.9% 14.4% 13.5% 14.6% 14.4% 16.8% 16.1% 17.1% Accounting firms and financial institutions refer the company to investors, and FPG pays referral commissions to the referring party when it signs a contract. Referral fees are about 1 2% of equity placement based on referrals. Arranging expenses include legal fees paid to lawyers who prepare legal agreements, tax advice fees, and costs relating to appraisal reports (calculating the lease cost upon the completion of the lease period). SG&A expenses SG&A expenses, such as personnel and rent, are mostly fixed. Personnel expenses are increasing, due to the expansion of operations and more consolidated subsidiaries. Earnings trends (JPYmn) FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Revenues 1,621 1,992 2,802 4,012 6,257 15,313 18,894 21,071 YoY 89.4% 22.9% 40.7% 43.2% 56.0% 144.7% 23.4% 11.5% Cost of revenues ,938 2,536 2,574 Cost ratio 13.7% 13.0% 14.5% 15.0% 14.0% 12.7% 13.4% 12.2% Gross profit 1,399 1,733 2,397 3,411 5,384 13,374 16,357 18,497 GPM 86.3% 87.0% 85.6% 85.0% 86.1% 87.3% 86.6% 87.8% SG&A expenses ,327 1,922 3,292 4,504 5,079 YoY 53.7% 20.7% 37.4% 38.4% 44.9% 71.2% 36.8% 12.8% SG&A ratio 35.7% 35.0% 34.2% 33.1% 30.7% 21.5% 23.8% 24.1% Personnel expenses ,569 2,390 2,673 Operating profit 821 1,035 1,438 2,084 3,461 10,081 11,853 12,944 YoY 166.8% 26.0% 38.9% 44.9% 66.1% 191.3% 17.6% 9.2% Recurring profit ,392 1,961 3,263 10,051 11,906 12,936 YoY 219.0% 25.1% 43.9% 40.8% 66.4% 208.0% 18.4% 8.7% Net income ,185 1,988 6,343 7,644 8,353 YoY 344.8% 25.4% 42.3% 49.5% 67.7% 219.0% 20.5% 9.3% Note: Personnel expenses include salaries and allowances, bonuses (including provision of allowances), legal and other welfare expenses, and recruitment costs. The figures have been disclosed since FY09/12. Amounts below JPY1mn were rounded. 31/73

32 Business segments FPG began reporting consolidated results in Q2 FY09/13, disclosing segment results for FPG, FPG Securities Co., Ltd. and other businesses (FPG Trust Co., Ltd., FPG Amentum Limited, and FPG Raffles Pte. Ltd.). Business segments, consolidated subsidiaries and main businesses Segment Company Main business FPG FPG Co., Ltd. Tax Leasing Arrangement Real estate Insurance brokerage M&A advisory FPG Real Estate Co., Ltd. Real estate FPG Securities FPG Securities Co., Ltd. Securities FPG Trust FPG Trust Co., Ltd. Trust FPG Amentum FPG Amentum Limited Tax Leasing Arrangement Aircraft investment management services FPG Raffles FPG Raffles Holdings Pte. Ltd. FPG Raffles Pte. Ltd. Three other companies Note: FPG includes FPG AIM Group, an equity method affiliate. Container investment management services In FY09/17, the FPG segment accounted for more than 90% of revenues and profits; FPG Securities Co., Ltd. and other segments are less significant influences on earnings. Segment results FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Act. Act. Act. Act. Act. Revenues 4,012 6,257 15,313 18,894 21,234 YoY 43.2% 55.9% 144.7% 23.4% 12.4% FPG 4,009 5,858 14,638 17,664 19,874 YoY % 149.8% 20.7% 12.5% FPG Securities YoY % 23.4% -40.6% Other YoY % 123.1% 11.9% Segment profit 1,961 3,263 10,051 11,906 13,711 YoY 40.8% 66.4% 208.0% 18.4% 15.2% FPG 2,024 3,115 10,287 12,137 13,866 YoY % 230.2% 18.0% 14.2% FPG Securities YoY % 348.3% - Other YoY Note: Segment profit figures are recurring profit Note: YoY rises of over 1,000% are shown by - 32/73

33 Strengths and weaknesses Strengths Leading market share and track record in Japanese Operating Leases: FPG has spearheaded growth in the Japanese Operating Lease transactions market, and leads the industry with a market share of about 30% (FY09/17, calculated by Shared Research based on various company data). Shared Research thinks that the company is more competitive than its industry peers because it was an early mover in building its business base, and as a result has competitive products, customer bases, and operating lease origination capabilities. Since FPG was established, there have been no instances of its lessees failing to make lease payments or going bankrupt. As of end-fy09/16, the company s customer base of investors was underpinned by a distribution network spanning 3,466 partner accounting firms (versus a total of 31,505 domestic CPA and tax accountancies) and business matching agreements with 127 financial institutions including 108 regional and other banks and 19 securities firms (versus 105 first- and second-tier regional banks as of September 2017 and 261 securities firms as of March 2017). In regard to origination capabilities, FPG maintains that by building a solid relationship with FPG AIM (deal origination support), it has exclusive referrals for operating leasing deals for shipping vessels and marine shipping containers from around the world with headquarters in the Netherlands and bases in Singapore and the United Arab Emirates and thus has a virtual monopoly on Japanese Operating Lease for shipping vessels and marine shipping containers. Few competitors in a promising market: According to Yano Research Institute (Japanese Operating Lease 2017 market survey), as of April 2017, only 10 of 170 leasing companies in Japan were involved in Japanese Operating Lease, and according to the company there were only three Japanese Operating Lease specialists including FPG. Japanese Operating Lease have been around for 30 years, but there have been almost no new entrants. Bank-affiliated leasing companies are not used to holding equity underwritten, so they are reluctant to expand in this area. Accordingly, industry peers only allocate a fixed equity placement amount to deals every fiscal year. As a result there is not excessive competition lowering leasing rates, and FPG is able to receive placement commissions that are high for a financial product. In fiscal 2016 there were 980,000 SMEs (potential customers) with aggregate recurring profit of JPY29.4tn (calculated by Shared Research from fiscal 2016 Financial Statement Statistics of Corporations). In FY09/17, the total amount of equity placement in operating leases at the company was JPY115.7bn, so Shared Research thinks that there is plenty of scope for market expansion. Efficient, high-margin earnings structure: According to Japan Exchange Group, Inc. s survey of business results of listed companies for fiscal 2016 (April 2016 to March 2017), companies listed on TSE First Section showed an ROE of 8.1% and an operating profit margin of 6.5% (the ROE is for all TSE First Section companies including financial firms and the OPM for all TSE First Section companies excluding financials). Meanwhile, in FY09/17, FPG had an ROE of 45.5% and OPM of 63.7%. The high ROE is due to financial leverage (equity ratio in FY09/17: 29.5%) and the high OPM. In Shared Research s view the high OPM stems from a business environment with few competitors, low costs and SG&A expenses that are primarily fixed. Shared Research thinks this is because margins are on an uptrend as revenues expand. Weaknesses Review of product structure may be needed depending on tax system reform: The scheme for Japanese Operating Leases, the core of the Tax Leasing Arrangement business, must conform to the Japanese tax system with regard to elements such as depreciation methods and the scope of investors tax deductions, which restricts freedom when structuring products. Furthermore, product structure needs to be altered with each tax reform. The predecessor to Japanese Operating Leases as the mainstream tax deferral product in the 1990s and early 2000s was Japanese Leveraged Leases (based on the finance lease formula). In the 1998 tax reform, the depreciation method of offshore lease assets was changed to the straight-line method, and in the 2005 reforms, the ceiling on investor deductions was changed to 100% of their investment. These Japanese Leveraged Leases became Japanese Operating Leases as we know today. Equity underwritten has to be placed within one year of origination: Since FY09/11, the company has had a strategy of holding equity underwritten as inventory, and then placing it in line with investor needs. Since it launched the Tax Leasing Arrangement business in 2004, FPG has not held unplaced equity underwritten for more than one year. If equity underwritten is held for more than one year, investors will not be able to have first year losses, which are the largest of the lease term, reflected in their settlements, so the quality of the product will worsen. 33/73

34 Yet to build a distribution network of city banks and shinkin banks, which are financial institutions other than regional banks and securities firms: In FY09/17, 55% of FPG s total amount of equity placement in operating leases came from referrals from financial institutions, a key customer distribution network for FPG. FPG has a distribution network encompassing 108 regional and other banks (versus the 105 first- and second-tier regional banks as of September 2017), but the company is yet to establish partnerships with city banks (Bank of Tokyo-Mitsubishi UFJ, Ltd.; Sumitomo Mitsui Banking Corporation; and Mizuho Bank, Ltd.) and shinkin banks (total of 265). According to the company, forming business ties with city banks is difficult as they already have lease companies in their groups, which provide the banks customers with tax deferral products. However, through referrals from partner accounting firms, FPG has built placement routes to certain companies whose main creditor banks are city banks. It has also gradually established relationships with shinkin banks. 34/73

35 Group companies The company has nine consolidated subsidiaries and three equity-method affiliates (FPG s stake in brackets). Key consolidated subsidiaries FPG Securities Co., Ltd. (100%) Established in June Became a consolidated subsidiary in March Earns revenues by offering over-the-counter currency derivatives such as foreign exchange contracts and currency options tailor-made to the needs of individual corporate customers. FPG Real Estate Co., Ltd. (100%) Established as a wholly owned subsidiary in April Operates a real estate leasing business under master leases. FPG Trust Co., Ltd. (100%) Established in March 2009 and made a subsidiary in October FPG Amentum Limited (75%) Based in Dublin, this business is involved in aircraft lease arrangement, lease management, remarketing, and arranging finance. FPG bought a 25% stake in Amentum in November 2013 and entered into a business alliance. The company bought further equity in May 2015 and made Amentum a consolidated subsidiary. FPG Raffles Holdings Pte. Ltd. (75.1%) Based in Singapore, the company engages in container investment management services, including container management, sales, and warehousing operations. In March 2017, the company became a joint venture of German container investment company Buss Global Holdings Pte. Ltd., FPG, and FPG affiliate FPG Asset & Investment Management B.V. Equity-method affiliates FPG AIM (FPG Asset & Investment Management B.V.) Headquartered in the Netherlands with offices in Singapore (FPG Asset & Investment Management Asia Pte. Limited) and the United Arab Emirates (FPG Asset & Investment Management Middle East FZ LLC). This company refers vessel and marine shipping container leasing deals from around the world exclusively to FPG, thus supporting FPG s origination business. It was established in February 2012 with a 75% investment by a non-japanese partner and 25% from FPG. The company aims to expand its presence in arranging overseas leases, cultivate new overseas lessees, and strengthen relationships with existing lessees. FPG pays FPG AIM commissions for arranging leasing deals. 35/73

36 Market and value chain Overview of Japan Operating Lease market Total amount of equity placement in operating leases and number of deals According to Yano Research Institute (Japanese Operating Lease market 2017 survey), the size of the Japanese Operating Lease market based on the value of investors equity investment is as follows. The impact of the 2008 global financial crisis caused declines on the supply side from aircraft and marine vessel manufacturers and reduced interest from the companies who would ordinarily have invested in operating leases, so the Japanese Operating Lease market continued to shrink through fiscal 2009 (April 2009 March 2010). In fiscal 2010 (April 2010 March 2011), the Japanese Operating Lease market started to grow again, with 121 deals worth JPY165.6bn. As the effects of the global financial crisis eased, investor demand remained firm in early 2011 and European airlines started to request leasing deals, giving the market a tailwind. By fiscal 2011 (April 2011 March 2012), the market was worth JPY166.5bn, with 129 deals, and in fiscal 2012 (April 2012 March 2013) the year FPG listed on the First Section of the Tokyo Stock Exchange it grew to JPY194.2bn and 128 deals, underpinned by robust investor demand. In fiscal 2013 (April 2013 March 2014), deal origination for airline companies proceeded not just in Europe, but in the Middle East and other areas. Marine shipping container deals also saw growth, but the shipping vessel deals were hurt by the impact of fewer orders for shipping vessels during the financial crisis, and the overall market was flat. In fiscal 2014 (April 2014 March 2015), aircraft, shipping vessels, and marine shipping containers all saw growth, and the market grew to as much as a little over JPY241.7bn. In addition to the acquisitions of overseas aircraft leasing companies by companies handling Japanese Operating Lease, there was a flurry of aircraft financing activity by Japanese banks. In fiscal 2015 (April 2015 March 2016), the market was worth JPY311.6bn, with 205 deals. The number of aircraft deals grew and some companies handled Japanese Operating Lease with larger amount of equity placement in the area of shipping vessels. In fiscal 2016 (April 2016 March 2017), the market was worth JPY371.0bn, with 232 deals. Shipping vessel and container deals recorded brisk growth and aircraft deals were underpinned by new investor needs (demand for an alternative to stocks and real estate investment and investment for business succession planning). The number of new lease arrangements increased amid the emergence of low-cost carriers (LCCs) and deals with Middle Eastern and African airlines. In its Japanese Operating Lease market 2017 survey, Yano Research Institute forecasts that the market in fiscal 2017 (April 2017 March 2018) will be worth JPY410.9bn, with 288 deals, and in fiscal 2018 (April 2018 March 2019), JPY460.5bn, with 345 deals. Yano also expects a slowdown of shipping vessel and container deals, but growth of aircraft deals in fiscal In fiscal 2018, leasing deals that originated during the fiscal 2008 global financial crisis (when the number of investors decreased) will begin expiring, and reinvestment demand may potentially fall, causing some temporary shrinkage of the market, but Yano expects an upturn in new investors in the aircraft market. 36/73

37 Total amount of equity placement in operating leases and number of deals in Japan Operating Lease market (JPYbn) Total amount of equity placement in operating leases Number of deals (right axis) FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY (JPYbn) FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Total amount of equity placement in operating leases Number of deals Source: Shared Research based on Yano Research Institute, Japanese Operating Lease market 2017 survey Note: 2017 figures are estimates, 2018 figures are forecasts Equity placement by type of lease asset Aircraft account for the largest share of equity placement in the Japanese Operating Lease market, and the share is on an uptrend. After aircraft, shipping vessels accounted for the second largest share in fiscal Vessel equity placement fell in fiscal 2013, but rose in fiscal 2014 and The value of marine shipping container equity placement shrank from fiscal 2007 through fiscal 2010, but resumed an uptrend from fiscal According to Yano Research Institute (Japanese Operating Lease 2017 market survey), from fiscal 2017 the share of aircraft equity placement is expected to grow, whereas the share of shipping vessel and container equity placement is expected to contract. Amount of Japanese Operating Lease equity placement in operating leases by asset Aircraft Shipping vessels Marine shipping containers (JPYbn) FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 (JPYbn) FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Marine shipping containers % of equity placement 5.8% 2.6% 1.8% 5.3% 5.3% 7.8% 8.3% 7.4% 8.8% 6.1% 6.1% Shipping vessels % of equity placement 26.3% 32.6% 30.5% 22.5% 16.3% 10.0% 9.6% 20.3% 13.9% 12.9% 11.8% Aircraft % of equity placement 67.9% 64.8% 67.6% 72.1% 78.4% 82.1% 82.1% 72.3% 77.3% 81.0% 82.1% Source: Shared Research based on Yano Research Institute, Japanese Operating Lease market 2017 survey Note: 2017 figures are estimates, 2018 figures are forecasts 37/73

38 SME market conditions The following discussion focuses on Statistics of Corporations published by the Ministry of Finance to examine the status of SMEs, who are the customers in FPG s Tax Leasing Arrangement business. Statistics of Corporations contains corporate financial data classed according to size of the companies capital: less than JPY10mn; JPY10mn 100mn; JPY100mn 1bn; and JPY1bn or more. Based on statistics for fiscal 2016, aggregate recurring profit for companies in the JPY10mn 1bn category was JPY29.4tn. In FY09/17, the total amount of equity placement in operating leases at the company was JPY115.7bn, so Shared Research thinks that there is plenty of scope for market expansion. This discussion classifies companies with capital of JPY10mn JPY1bn as SMEs, and those with more than JPY1bn as large corporations. These classifications differ from those of the Small and Medium Enterprise Agency. SME key features 980,000 companies have capital of JPY10mn 1bn; aggregate recurring profit is JPY29.4tn According to Statistics of Corporations for fiscal 2016 there were 980,000 SMEs with capital of JPY10mn 1bn in Japan; their aggregate recurring profit was JPY29.4tn. In FY09/17, the total amount of equity placement in operating leases at the company was JPY115.7bn. The number of SMEs (prospective customers) and their high profit levels highlight the magnitude of potential market for the Tax Leasing Arrangement business. Number of companies, revenues, and recurring profit by capital base (excludes finance and insurance businesses) Source: Shared Research based on Statistics of Corporations survey results (FY2016) Number of companies Sales Recurring profit ('000) % of total (JPYtn) % of total (JPYtn) % of total RPM Among SMEs, high proportion of non-manufacturing and domestic demand-based companies A comparison of SMEs and large corporations shows that in the SME sector, the share of non-manufacturing companies is greater than manufacturing by number of companies, revenues, and recurring profit. Per company (JPYmn) All corporations 2,776 1, % 27.0 Less than JPY10mn 1, % % 3 4.2% 2.6% 1.7 Over JPY10mn and less than JPY1bn % % % 3.7% 30.0 Over JPY1bn 5 0.2% % % 7.9% 8,323.4 Among the non-manufacturing companies, domestic industries such as construction, wholesale trade, retail trade, and services (accommodation, dining establishments, scientific research, and professional and technical services) make up a large share. Number of companies, revenues, and recurring profit classified by broad industry sector and capital base Capital No. of companies Source: Shared Research based on Statistics of Corporations survey results (FY2014) Limited profit fluctuations for SMEs Recurring profit trends since fiscal 2000 for SMEs correlated to recurring profit trends of all companies. Yet profit fluctuations for all domestic companies were higher than for SMEs. In fiscal and from fiscal 2010 onward, when recurring profit was recovering, SMEs showed a slower recovery. Over JPY10mn and less than JPY1bn % of total Sales (JPYtn) % of total RP (JPYtn) Over JPY1bn All industries 1,002, , Manufacturers 169, % % % 2, % % % Non-manufacturers 833, % % % 3, % % % Construction 160, % % % % % % Wholesale and retail 251, % % % % % % Services 209, % % % % % % Other non-manufacturers 212, % % % 1, % % % % of total No. of companies % of total Sales (JPYtn) % of total RP (JPYtn) % of total There is a low share of manufacturing companies and more non-manufacturing firms among SMEs, therefore Shared Research believes earnings at these companies are relatively immune to the impacts of forex fluctuations. Further, based on past earnings trends, earnings at large-scale companies among the manufacturing companies appear to be more volatile, while earnings at 38/73

39 SMEs show little volatility. Shared Research thinks this is because exported end products account for a high share of the product sales at large companies, leaving these companies vulnerable to the direct impacts of forex fluctuations. Recurring profit trends by size of capital base (indexed to 100 in fiscal 2000) All corporations SMEs Large enterprises FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 All corporations SMEs Large enterprises Source: Shared Research based on Statistics of Corporations Recurring profit trends by size of capital base and sector (JPYtn) 70.0 Non-manufacturers (large enterprises) Non-manufacturers (SMEs) Manufacturers (large enterprises) Manufacturers (SMEs) FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 (JPYt n) FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Manufacturers (SMEs) Manufacturers (large enterprises) Non-manufacturers (SMEs) Non-manufacturers (large enterprises) Source: Shared Research based on Statistics of Corporations SME profit trends Recurring profit for SMEs in recovery phase since fiscal 2010 SMEs recurring profits started to decline from fiscal They continued falling until fiscal 2009 after the global financial crisis, but have been on a recovery trend from fiscal 2010 in line with recovery in the global economy. 39/73

40 SME revenues and profits (JPYtn) 900 (JPYtn) Sales Recurring profit (right axis) FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY (JPYt n) FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 Sales Recurring profit RPM 2.0% 1.7% 1.8% 2.0% 2.3% 2.6% 2.5% 2.4% 1.9% 2.0% 2.4% 2.6% 2.8% 3.1% 3.2% 3.3% 3.7% Source: Shared Research based on Statistics of Corporations Ongoing polarization of SMEs: Numbers have decreased but recurring profit per company has increased The number of SMEs has been shrinking since fiscal 2002, but recurring profit per company has been on a long-term uptrend, accelerating since fiscal We think this is due to increasing polarization between highly profitable and unprofitable companies, with the latter being culled. According to the White Paper on Small and Medium Enterprises in Japan, among medium-sized enterprises (capital of JPY10mn JPY100mn) the gap in recurring profit margins between the top quarter of companies and the lowest quarter was 21.3pp in the 1990s, expanded to 25.7pp in the 2000s, and further to 29.2pp from 2010 on. Number of SMEs and recurring profit per company ('000) (JPYmn) 1, ,200 No. of companies Recurring profit per company (right axis) , ,100 1, , FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 No. of companies ('000) 1,183 1,202 1,201 1,170 1,177 1,172 1,165 1,154 1,140 1,120 1,098 1,076 1,053 1,034 1,018 1, Recurring profit per company (JPYmn) Source: Shared Research based on Statistics of Corporations Market for leasing assets The discussion below focuses on market conditions for the aircraft, shipping vessels, and containers that comprise assets in the Japanese Operating Lease industry. Aircraft market conditions Number of aircraft deliveries and market size According to the Japan Aircraft Development Corp, 1,617 aircraft were delivered in 2016 (1,563 in 2015). We estimate the annual market at roughly JPY26tn (assuming average aircraft price of USD150mn, and the 2016 average monthly forex rate of JPY108.8/USD). In FY09/17, the total amount of assets arranged in operating leases was JPY276.1bn (aggregate purchase price of 40/73

41 leased assets for aircraft, shipping vessels, and marine shipping containers), so the leasing market for aircraft alone has enormous potential. Number of aircraft deliveries 1,800 1,600 1,400 1,200 1, Source: Shared Research based on Japan Aircraft Development Corporation, Commercial Airplane Market Forecast: Aircraft market forecasts According to forecasts published by the Japan Aircraft Development Corp, Boeing and Airbus, for the 20 years starting in 2017, there will be demand for 34,000 41,000 new aircraft worth USD5.3tn USD6.0tn based on growing airline passenger and cargo demand. Aircraft market forecasts Source: Shared Research based on Japan Aircraft Development Corporation, Commercial Airplane Market Forecast: , Boeing, 2016 Current Market Outlook, and Airbus, Global Market Forecast Japan Aircraft Development Corp: world aircraft market forecasts Number of aircraft delivered 1,110 1,199 1, ,041 1,123 1,117 1,177 1,103 1,171 1,317 1,418 1,529 1,563 1,617 Market forecasts Japan Aircraft Development Corporation CAGR Sales (USDbn) CAGR Sales (USDbn) The Japan Aircraft Development Corp forecasts that from 2017 to 2036, there will be demand for 34,260 new aircraft (previous 2016 to 2035 forecast: 33,997 aircraft) worth USD5.3tn (previous 2016 to 2035 forecast: USD5.2tn), and the number of aircraft in operation will increase from 23,416 in 2016 to 41,448 in Over the forecast period, it expects average global GDP growth of 2.8% per year, 4.6% growth in passenger demand, and 4.1% for air cargo demand. (The previous forecast called for 2.9% GDP growth, 4.7% growth in passenger demand, and 4.1% growth in air cargo demand for 2016 to 2035.) CAGR Global GDP growth % % Passenger demand (passenger-km; bn) 7,119 17, % % % Sales (USDbn) No. of passenger aircraft in operation 21,597 38, % 5,008 23,480 46, % - 18,890 40, % - Cargo demand (ton-km; bn) % % % No. of cargo aircraft in operation 1,819 2, % 316 1,810 3, % - 1,610 2, % - Total aircraft in operation 23,416 41, % 25,290 49, % 20,500 42, % Total new aircraft delivered - 34,260-5,324-41,030-6,050-34,899-5,339 Boeing Airbus Boeing: world aircraft market forecasts According to Boeing s 2017 Current Market Outlook, over the next 20 years there will be demand for 41,030 aircraft (previous 2015 to 2035 forecast: 39,620 aircraft) worth USD6.0tn (previous 2015 to 2035 forecast: USD5.9tn), and the number of aircraft in operation will double from 25,290 in 2016 to 49,980 in Over the forecast period, Boeing expects average global GDP growth of 2.8% per year, 4.7% growth in passenger demand, and 4.2% growth in air cargo demand. (The previous forecast called for 2.9% GDP growth, 4.8% growth in passenger demand, and 4.2% growth in air cargo demand for 2015 to 2035.) Airbus: world aircraft market forecasts According to Airbus s Global Market Forecast , over the next 20 years there will be demand for 34,899 aircraft (previous 2016 to 2035 forecast: 33,074 aircraft) worth USD5.3tn (previous 2016 to 2035 forecast: USD5.2tn), and the number of aircraft in operation will increase from 20,500 in 2017 to 42,530 in Over the forecast period, Airbus expects growth in 41/73

42 passenger demand of an average of 4.4% per year and 4.0% for air cargo demand. (The previous forecast called for 4.5% growth in passenger demand and 4.0% growth in air cargo demand for 2016 to 2035.) Vessel demand The marine transport industry has continued to grow, amid global economic growth and globalization. Increased marine transport volume has boosted demand for shipping. Increased shipping tonnage (number of vessels multiplied by average capacity per ship) has fueled demand for new vessels. Demand for new vessels was particularly robust from 2003, in line with China s rapid economic growth, but orders fell sharply in , during the global financial crisis. In the shipbuilding industry after , when orders received in were completed, the number of orders for new vessels has been on a downtrend. This surplus shipping capacity led to falling prices, compressing margins in the marine transport industry, and leading to fewer new vessels being built. However, the volume of orders received and construction volume temporarily bottomed in 2012, and turned upward in Thereafter, the volume of orders received entered a decline from 2014, and construction volume turned down in Global marine transport volume (mn tons) and shipping volume (mn gross tons) (mn tons) 14,000 LPG, LNG, chemical products Oil Dry cargo Shipping tonnage (right axis) (mn gross tons) 1,400 12,000 1,200 10,000 1,000 8, , , , Source: Shared Research based on data from Shipbuilders Association of Japan 0 New shipbuilding order volume, completion volume, and backlog (mn gross tons) (mn tons) 400 Order backlog Orders Completion Completion / Order backlog (right axis) 80.0% % % % % % % % % Source: Shared Research based on data from Shipbuilders Association of Japan 42/73

43 Order volume, completion volume, and order backlog in main shipbuilding countries (mn gross tons) 70 Japan Order backlog (mn tons) 140 China Order backlog (mn tons) 160 South Korea Order backlog 60 Orders 120 Orders 140 Orders Completion Completion Completion Source: Shared Research based on data from Shipbuilders Association of Japan Demand in container market Container demand closely correlated to shipping volume The total number of marine shipping containers has continued to increase in proportion to shipping volume growth. The average lifespan of a container is years, with the price of a new container hovering at about USD1,500. Container transaction volume rises and falls in close relation to shipping volume shipping volume has a direct impact on container transaction volumes. Container ships on key shipping routes continue to get bigger, supporting container demand The construction of new container vessels was previously expected to drive 3x container demand, as it would require one container for the starting point, one for transport, and one for the destination. However, Shared Research understands that due to efficiency gains, construction to new container vessels has only sparked less than 2x container demand growth. Trends of building vessels with increased capacity have led to vessels carrying more than 10,000 TEUs, and vessels with 20,000-plus TEU capacity are slated for completion in TEU (twenty-foot equivalent units): TEUs are units used to express a container's carrying capacity, with 1 TEU corresponding to a single 20ft container. Containers are typically 20ft or 40ft; a 40ft container is classified as 2 TEU. Global container ships and composition by TEU capacity Ships 1000 TEU TEU nominal Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 4-year CAGR 18,000-21, ,395 1,936 2,026 2, % 13,300-17, ,830 2,164 2,375 2,501 2, % 10,000-13, ,512 3,001 3,296 3,320 3, % 7,500-9, ,176 4,241 4,241 4,241 4, % 5,100-7, ,911 2,940 2,940 2,940 2, % 4,000-5, ,077 3,023 3,023 3,023 3, % 3,000-3, % 2,000-2, ,572 1,675 1,755 1,760 1, % 1,500-1, ,008 1,071 1,101 1,110 1, % 1,000-1, % % % Total 5,112 5,325 5,475 5,501 5,502 20,271 21,886 23,114 23,376 23, % Total after Exp. Scrap/Slip 5,112 5,116 5,146 5,097 5,028 20,271 20,966 21,944 21,956 21, % YoY - 0.1% 0.6% -1.0% -1.4% 1.5% 3.4% 4.7% 0.1% -1.1% Source: Shared Research based on Alphaliner Fleet Forecast Competition According to Yano Research Institute (Japanese Operating Lease 2017 market survey), as of February 2017 about 10 of the 170 leasing companies in Japan were involved in the Japan Operating Lease market. Shared Research believes only three are Japanese Operating Lease specialists FPG, Japan Investment Adviser (TSE Mothers: 7172), and Nomura BABCOCK & BROWN CO., LTD. (subsidiary of Nomura Holdings [TSE1: 8604]). FPG likely had a roughly 30% market share of equity placement in FY09/17. (Shared Research estimates based on the market survey.) 43/73

44 According to FPG, its Tax Leasing Arrangement business began in 1985, and since then there have been almost no new entrants. The company notes that this is because Japanese Operating Lease is not an important business for the major leasing companies; most have just one team in this sector. Bank-affiliated leasing companies, meanwhile, are accustomed to bankruptcy risk, but as they are not skilled in the business of placing products they have underwritten they do not want to hold equity underwritten (inventory). As a result, FPG s industry peers only allocate a fixed amount to Tax Leasing Arrangement deals every fiscal year. In contrast to these companies, for FPG, Tax Leasing Arrangement is its core business. It can actively work to expand this business, given its experience related to arranging leases (including selecting lessees), and its distribution network of independent accounting firms and financial institutions that enable it to place equity underwritten in line with investor needs. Comparison: FPG and main competitor, Japan Investment Adviser Number of employees Source: Shared Research based on company and Japan Investment Adviser data FPG Japan Investment Advisor Earnings (JPYmn) FY09/17 FY12/16 Revenues 21,071 5,913 Operating profit 13,417 2,465 Recurring profit 13,711 2,241 Net income 9,580 1,390 Total assets 82,799 28,195 Net assets 25,624 6,757 Total amount of assets arranged and equity placement in operating leases Assets arranged (JPYmn) 276,168 78,373 Equity placement (JPYmn) 115,746 24,510 Aircraft 59,230 14,558 Shipping vessels 43,210 1,729 Marine shipping containers 13,290 4,208 Solar Power - 4,015 No. of partnership and business matching agreements Accounting firms and offices 3, Financial institutions Other Founded November 2001 September /73

45 Historical performance Full-year FY09/17 results In FY09/17, revenues were JPY21.0bn (+11.5% YoY), operating profit was JPY13.4bn (+13.2%), recurring profit was JPY13.7bn (+15.2%) and net income attributable to owners of parent was JPY9.5bn (+25.3%). Revenues Revenues were JPY21.0bn (+11.5% YoY). Revenues grew for the Tax Leasing Arrangement and other businesses. Tax Leasing Arrangement Tax Leasing Arrangement revenues were JPY18.9bn (+11.2% YoY). Revenues were up YoY on steady commissions from equity placement and an increase in the total amount of equity placement in operating leases. Total amount of assets arranged in operating leases was JPY276.1bn (-27.1% YoY). The amount of assets arranged in operating leases fluctuates widely on a quarterly basis, depending on the timing of lessees capital investment. The amount totaled JPY105.4bn in 1H (six months) FY09/17 and JPY170.7bn in 2H. The status by category was as follows. In the aircraft category, the total amount of assets arranged in operating leases was JPY181.8bn (-11.0% YoY). The YoY decline was mainly attributable to the fact that there were temporarily fewer deliveries of aircraft in 1H due to the timing of lessees capital investment. However, FPG secured new lessees in 1H by stepping up cooperation with overseas affiliates (FPG AIM Group and FPG Amentum Limited), which provide deal origination support for the company. In 2H, the amount exhibited a recovery that picked up pace as the company captured large series deals (multiple deals originating consecutively from the same existing lessee) and won repeated deals with new lessees contracted in 1H. In the shipping vessels category, the total amount of assets arranged in operating leases was JPY84.5bn (-15.1% YoY). The amount held firm against the backdrop of a decline in the number of deals driven by consolidation in the marine transport industry. The company managed to secure deals thanks to favorable relationships with existing lessees. In the marine shipping containers category, the total amount of assets arranged in operating leases was JPY9.7bn (-86.9% YoY). The YoY decline reflected the booking of a large deal in FY09/16. Total amount of equity placement in operating leases finished at JPY115.7bn (+5.8% YoY). Efforts to improve placement capability such as expanding distribution networks contributed to the increase amid continuing strong demand from investors. The company s distribution network expanded to 3,466 partner accounting firms (+652 from end-fy09/16) and 127 business matching financial institutions (+17). Commission fees from equity placement (revenues/total amount of equity placements in operating leases; this is excluding full equity deals, whereby funds are exclusively raised from investor equity without any bank loans) were +1.0pp YoY at 17.1%. Growth in the share of high-margin deals secured through private negotiations by overseas affiliates (FPG AIM Group and FPG Amentum Limited) led to an increase in the commission rate. According to the company, FPG captures origination deals for operating leases either by participating in competitive bidding through referrals from lessees and banks or by getting referrals from overseas affiliates. Since referrals from the latter result in privately negotiated transactions as opposed to a bid, there is less competition and the commission rate tends to be higher. Other businesses Revenues from businesses other than Tax Leasing Arrangement were JPY2.1bn (+14.4% YoY). Real estate revenues were JPY555mn (+102.5%), insurance brokerage revenues were JPY688mn (+37.8%), and securities revenues were JPY202mn (- 40.6%). Revenues in the aircraft investment management services business were JPY492mn (-5.8%). The business is operated by FPG Amentum Limited. 45/73

46 Turning to the real estate business, while it has been difficult thus far to acquire real estate for the purpose of originating small-lot real estate products, the company made progress in this area in FY09/17, and this led to favorable sales of trust beneficiary interests for real estate products. Specifically, the company acquired FPG Links Harajuku (a property near Harajuku Station), FPG Links Shinjuku (a commercial building near Isetan Shinjuku department store in Shinjuku-ku), and FPG Links Ebisu (a commercial building near Ebisu Station). It has started sales for FPG Links Harajuku and FPG Links Shinjuku. In the insurance brokerage business, the company deployed insurance specialists to key branches amid steady expansion in corporate demand for life insurance products, and revenues expanded as the company actively captured such demand. Cost of revenues and gross profit Cost of revenues was JPY2.5bn (+1.5% YoY). Fees incurred for customer referrals increased as revenues increased. Gross profit came to JPY18.4bn (+13.1% YoY), and GPM was 87.8% (+1.2pp). As noted earlier, the commission rate rose to 17.1% (+1.0pp YoY), and GPM also increased because referral fees to partner accounting firms and business matching financial institutions were set at a certain rate of the total amount of equity placement in operating leases. SG&A expenses SG&A expenses were JPY5.0bn (+12.8% YoY). Due to operational expansion, personnel expenses came to JPY2.6bn (+11.9%), and other expenses to JPY2.4bn (+13.8%). The headcount was 227 (+31 YoY). Operating profit Operating profit was JPY13.4bn (+13.2% YoY). Non-operating income and expenses Non-operating income was JPY1.2bn (+19.2% YoY). Interest income was JPY491mn (-29.2%) because interest income for the period of equity underwriting decreased. Share of profit of entities accounted for using equity method was JPY431mn (+97.5%). Rental income on real estate for arrangement was JPY137mn (+47.2%). Non-operating expenses were JPY924mn (-4.7% YoY). Interest expenses were up 0.7% at JPY320mn. Commission fee rose to JPY584mn (+18.2%). Recurring profit and net income Recurring profit was JPY13.7bn (+15.2% YoY) and net income attributable to owners of parent was JPY9.5bn (+25.3%). Balance sheet Equity underwritten and money held in trust Equity underwritten, which records unplaced equity in silent partnerships, totaled JPY19.0bn (-JPY38.0bn from end-fy09/16). This reflected a decrease at the Tax Leasing Arrangement business due to ongoing robust equity placement in operating leases. Money held in trust (aircraft for arrangement) that records unplaced beneficiary interests in aircraft leasing totaled JPY31.3bn. (Unplaced beneficiary interests in aircraft leasing are the unplaced portions of beneficiary interests that the company transfers to investors using the trust function of consolidated subsidiary FPG Trust.) Containers for arrangement (temporary stock of containers for arrangement) in the marine shipping container leasing business was JPY2.0bn (JPY0mn at end-fy09/16). The total amount of equity underwritten, money held in trust (aircraft for arrangement), and containers for arrangement was JPY52.3bn (-JPY4.7bn from end-fy09/16). 46/73

47 Real estate for arrangement Real estate for arrangement (real estate recorded for the sale of small-lot real estate products) totaled JPY9.7bn (+JPY7.2bn from end-fy09/16). The YoY increase reflected the acquisition of properties for new products. Q3 FY09/17 results For cumulative Q3 FY09/17, FPG posted JPY17.1bn (+16.7% YoY) in revenues, JPY11.3bn (+19.6%) in operating profit, JPY11.6bn (+21.7%) in recurring profit, and JPY8.0bn (+30.7%) in net income attributable to owners of parent. In the Tax Leasing Arrangement business, the total amount of equity placement in operating leases set a new record for the nine month period of cumulative Q3. Amid strong investor demand, an increase in investor referrals from FPG s nationwide distribution network of partner accounting firms and financial institutions has driven ongoing revenue growth. Revenues Revenues were JPY17.1bn (+16.7% YoY). Revenues grew for the Tax Leasing Arrangement and other businesses. Tax Leasing Arrangement Tax Leasing Arrangement revenues were JPY15.4bn (+16.7% YoY). Revenues were up YoY on steady commissions from equity placement and an increase in the total amount of equity placement in operating leases. Total amount of assets arranged in operating leases was JPY196.2bn (-38.5% YoY). This fluctuates widely on a quarterly basis, depending on the timing of the lessee s capital investment. While the total amount of assets arranged in operating leases was JPY105.4bn in 1H FY09/17 (six months), it marked JPY90.8bn in Q3 (three months). At the time the company released its Q3 results, it also revised the FY09/17 company forecasts, changing the target for total amount of assets arranged in operating leases from its previous forecast of JPY400bn to JPY300bn due to a delay in origination during 1H. However, from Q3 asset arrangements have been returning to their true potential, and the amount of assets arranged in operating leases is showing recovery. The status by category is as follows. In regard to aircraft, there were temporarily fewer deliveries of aircraft in 1H because of the timing of lessees capital investment. However, thanks to coordination with overseas affiliates (FPG AIM Group and FPG Amentum Limited) conducting deal origination support for FPG, during 1H the company was able to develop five new lessees. From Q3 onward, it has been strengthening recovery, mainly from capturing large series deals from existing lessees and winning additional deals with lessees newly contracted in 1H. In regard to shipping vessels, even as the number of deals is falling with the impact of consolidation in the marine transport industry, FPG s amount of assets arranged in operating leases increased YoY. The company was able to obtain deals thanks to ongoing relationships with existing lessees. It expects Q3 onward to maintain the same level of origination as FY09/16. In regard to marine shipping containers, origination was down YoY in 1H after a strong 1H in FY09/16 stemming from a large order during the period. With recovery in the levels of container prices and leasing rates from Q3 onward, the company expects the amount of assets arranged in operating leases to be level with FY09/16. Total amount of equity placement in operating leases was JPY95.9bn (+17.7% YoY), reaching record figures for the nine month period of cumulative Q3. Demand for equity from investors remained strong. The number of customer companies investing in products was 1,794 (+12.5%) and the average investment was JPY53mn (+4.6%). In terms of sales, cooperation with accounting firms and financial institutions continued to expand, and investor referrals by financial institutions that prioritize fee-based businesses were robust. The company s distribution network expanded to 3,260 partner accounting firms (+446 from end- FY09/16) and 121 partner financial institutions (+11). Thanks to referrals from accounting firms, the total amount of equity placement in operating leases increased YoY, setting a new record for cumulative Q3 (nine months). 47/73

48 Commission fees from equity placement (revenues/equity placements; this is excluding full equity deals, whereby funds are exclusively raised from investor equity without any bank loans) increased 0.7pp YoY to 17.0%. According to the company, the leasing business has been able to participate in competitive bidding thanks to referrals from lessees and banks and to capture deals thanks to referrals from overseas affiliates (FPG AIM Group and FPG Amentum Limited), but since the latter referrals result in privately negotiated transactions as opposed to a bid, there is less competition and commissions tend to be higher. Other businesses Revenues from businesses other than Tax Leasing Arrangement were JPY1.6bn (+16.7% YoY). Real estate revenues were JPY479mn (+214.9%), insurance brokerage revenues were JPY537mn (+40.4%), and securities revenues were JPY147mn (-52.3%). Revenues in the aircraft investment management services business were JPY386mn (-7.9%). The business is operated by FPG Amentum Limited. Revenue growth was particularly large in the real estate and insurance brokerage businesses. In the real estate business, sales of real estate beneficiary interests for the commercial building FPG Links Harajuku (a property near Harajuku Station that FPG acquired in Q2) have been favorable. According to the company, it is ordinarily difficult to acquire real estate for the purpose of originating small-lot real estate products, but in FY09/17 it acquired the property near Harajuku Station in Q2 and expects to acquire another commercial building near Isetan Shinjuku department store in Shinjuku 3-chome (Shinjuku-ku, Tokyo) in Q4. This indicates that acquisitions of real estate for arrangement have been proceeding well for the company. In the insurance brokerage business, having insurance specialists at each branch contributed to revenue expansion. Cost of revenues Cost of revenues was JPY2.1bn (+11.2% YoY). Commission fees for customer referrals increased as revenues increased. SG&A expenses SG&A expenses were JPY3.6bn (+11.6% YoY). Due to operational expansion, personnel expenses came to JPY1.9bn (+11.1%), and other expenses to JPY1.7bn (+12.2%). Operating profit Operating profit was JPY11.3bn (+19.6% YoY). Non-operating income and expenses Non-operating income was JPY943mn (+21.5% YoY). Interest income was JPY456mn (-10.4%) because interest income for the period of equity underwriting decreased. Share of profit of entities accounted for using equity method was JPY333mn (+75.6%). Non-operating expenses were JPY602mn (-8.6%). Interest expenses were down 9.6% at JPY217mn. Commission fee rose to JPY377mn (+42.6%). Recurring profit and net income Recurring profit was JPY11.6bn (+21.7% YoY) and net income after income tax attributable to owners of parent was JPY8.0bn (+30.7%). Balance sheet Equity underwritten (inventory) and money held in trust Equity underwritten, which records unplaced equity in silent partnerships, totaled JPY22.9bn (-JPY34.1bn from end-fy09/16), making a decline due to brisk equity placement trends in the Tax Leasing Arrangement business. Money held in trust (aircraft for arrangement) that record unplaced beneficiary interests in aircraft leasing totaled JPY5.1bn. (Unplaced beneficiary interests in aircraft leasing are the unplaced portions of beneficiary interests that the company transfers to investors using the trust function of consolidated subsidiary, FPG Trust.) 48/73

49 The value of the marine shipping containers for arrangement (inventory for arrangement) under the marine shipping container leasing business was JPY578mn. The total of equity underwritten, money held in trust (aircraft for arrangement), and marine shipping containers for arrangement was JPY28.6bn (-JPY28.4bn from end-fy09/16). Real estate for arrangement Real estate for arrangement (real estate for the sale of small-lot real estate products) totaled JPY5.9bn (+JPY3.4bn from end- FY09/16), increasing due to acquiring properties for new products. 1H FY09/17 results Revenues JPY12.1bn (+14.5% YoY) Operating profit JPY8.2bn (+16.3%) Recurring profit JPY8.4bn (+18.7%) Net income JPY5.8bn (+28.6%) (Net income is net income attributable to owners of parent.) At the Tax Leasing Arrangement business, the total amount of equity placement in operating leases marked a record high for the second consecutive quarter. Revenue growth continued as the number of customer companies, partner accounting firms, and business matching financial institutions increased and as the company solidly captured investor demand. Revenues Revenues were JPY12.1bn (+14.5% YoY). Revenues grew for the Tax Leasing Arrangement and other businesses. Tax Leasing Arrangement Tax Leasing Arrangement revenues were JPY11.0bn (+13.7% YoY). Revenues were up YoY on an increase in the total amount of equity placement in operating leases, despite a drop in commission rates due to a concentration of high margin deals in 1H FY09/16. Total amount of assets arranged in operating leases was JPY105.4bn (-42.1% YoY). This fluctuates widely on a quarterly basis, depending on the timing of the lessee s capital investment. In FY09/17, the company expects deals to be concentrated in Q3 and Q4. As a result, total amount of assets arranged in operating leases in 1H FY09/17 had a 26.4% progress rate relative to the fullyear company forecast of JPY400bn (+5.6% YoY). The company noted that there was no significant change in the origination environment for lease deals. In shipping vessels, FPG sees little risk of the recent slump in shipping market having an impact on the amount of assets arranged in operating leases for FY09/17. This is because the lead time from receiving an order to completing construction of a shipping vessel is two to three years. For aircraft, the demand has settled down since surging two to three years ago amid the oil price rise, but the company expects market expansion to continue, with the long-term outlook for volume growth remaining unchanged. Total amount of equity placement in operating leases was JPY71.5bn (+26.4% YoY). On a quarterly basis, the amount of equity placement in operating leases was JPY29.3bn (+6.0%) in Q1 and JPY42.1bn (+46.0%) in Q2, marking record highs two quarters in a row. Demand for equity from investors remained strong. The number of customer companies investing in products was 1,285 (+18.8% YoY) and the average investment was JPY55mn (+6.5% YoY). On the placement side, distribution network expanded with the number of partner accounting firms increasing by 281 from the end of FY09/16 to3,095, and that of business matching financial institutions growing by six to 116. The trend of financial institutions prioritizing fee-based businesses is continuing because of negative interest rates. In order to keep expanding its business over the medium term, FPG is pressing ahead with initiatives to create a new framework and foster human resources. One such initiative, a new personnel system with a framework for salaries and evaluations, has been 49/73

50 put in place in January Further, while the company previously prioritized cultivating new partner accounting firms, from FY09/17 onward, it also plans to increase the number of referrals by developing closer relationships with existing partner firms. Commission fees from equity placements (revenues/equity placements; this is excluding full equity deals, whereby funds are exclusively raised from investor equity without any bank loans) were -0.6pp YoY to 16.6%. Commission fees in 1H FY09/17 fell YoY due to a change in the lease asset mix of the total amount of equity placement in operating leases. That said, they exceeded the average commission fee rate over the five-year period of FY09/12 to FY09/16, which was 15.4%. A breakdown of the total amount of equity placement in operating leases shows that shipping vessels accounted for 35.9% (41.6% in 1H FY09/16), marine shipping containers 15.5% (22.1%), and aircraft 48.7% (36.2%), pointing to a decreased contribution from shipping vessels and marine shipping containers but an increased contribution for aircraft. Other businesses Revenues from businesses other than Tax Leasing Arrangement were JPY1.0bn (+24.1% YoY). Real estate revenues were JPY304mn (+113.8% YoY), insurance brokerage revenues were JPY303mn (+36.1% YoY), and securities revenues were JPY117mn (+13.2% YoY). Revenues in the aircraft investment management services business were JPY278mn (-11.7% YoY). The business is operated by FPG Amentum Limited. The sharp growth of real estate revenues stood out in Other businesses in 1H FY09/17. FPG began arrangement and sales of smalllot real estate products in FY09/13. These products offer investors the opportunity to invest in central Tokyo real estate for only JPY10mn per unit. Investors do not have to worry about property management or maintenance and can combine asset management with inheritance planning or asset gifting. From April 2016, FPG changed its product design from products based on the Real Estate Specified Joint Enterprise Act to smalllot real estate beneficiary interests utilizing the trust functions of a group company. Small-lot real estate beneficiary interests are treated as securities ( securities equivalents ) and can be marketed by financial institutions as financial products. The company therefore expects an increase in customer referrals from financial institutions. FPG commented that while demand for small-lot real estate products was brisk, acquiring properties that fulfill the conditions for real estate product arrangement had been a challenge in a robust real estate market. The company commented that since properties are becoming easier to acquire as of May 2017, it planned to acquire two or so properties per year going forward. Cost of revenues Cost of revenues was JPY1.4bn (+12.9% YoY). Commission fees for customer referrals increased as revenues increased. SG&A expenses SG&A expenses were JPY2.4bn (+9.6% YoY). Due to operational expansion, personnel expenses came to JPY1.2bn (+6.5% YoY), and other expenses to JPY1.1bn (+13.1%). Operating profit Operating profit was JPY8.2bn (+16.3% YoY). Non-operating income and expenses Non-operating income was JPY682mn (+31.3% YoY). Interest income was JPY392mn (+21.9% YoY) because interest income for the period of equity underwriting increased in line with the growth of total amount of equity placement in operating leases. Share of profit of entities accounted for using equity method was JPY211mn (+33.2% YoY). Non-operating expenses were JPY481mn (-2.8% YoY). Interest expenses were down 13.3% YoY at JPY137mn. Commission fee rose to JPY338mn (+45.9% YoY). 50/73

51 Recurring profit and net income Recurring profit was JPY8.4bn (+18.7% YoY) and net income after income tax attributable to owners of parent was JPY5.8bn (+28.6% YoY). Segment results FPG segment Revenues were JPY11.5bn (+14.7% YoY) and segment profit was JPY8.5bn (+16.3% YoY). FPG Securities segment Revenues were JPY117mn (+13.2% YoY) and segment loss was JPY24mn (vs JPY37mn segment loss in 1H FY09/16). Other segment Revenues were JPY493mn (+9.4% YoY) and segment profit was JPY106mn (vs JPY143mn segment loss in 1H FY09/16). Balance sheet Equity underwritten (inventory) and money held in trust Equity underwritten, which records unplaced equity in silent partnerships, totaled JPY21.3bn (-JPY35.7bn from end-fy09/16), marking a decline due to brisk equity placement trends in the Tax Lease Arrangement business. Money held in trust that records unplaced beneficiary interests in aircraft leasing totaled JPY5.2bn (in aircraft leasing projects, the company transfers beneficiary interests to investors using the trust function of consolidated subsidiary, FPG Trust). The total of equity underwritten and money held in trust was JPY26.5 billion (-JPY30.5bn from end-fy09/16). Real estate for arrangement Real estate for arrangement (real estate recorded for the sale of small-lot real estate products) totaled JPY7.9bn (+JPY5.4bn from end-fy09/16), increasing due to acquiring properties for new products. FY09/16 results Revenues JPY18.8bn (+23.4% YoY) Operating profit JPY11.8bn (+17.6%) Recurring profit JPY11.9bn (+18.4%) Net income JPY7.6bn (+20.5%) (Net income is net income attributable to owners of parent.) Revenues achieved 97.5% and operating profit, recurring profit, and net income achieved roughly 95% of FPG s FY09/16 full-year forecast, marking seven consecutive periods of double-digit revenue and profit growth. The slight shortfall was due to lowerthan-expected results at the Tax Leasing Arrangement business. The company stated that the sudden appreciation of the yen had made investors cautious, particularly in Q3, meaning the shortfall was not attributable to a fundamental decline in demand. A comparison of quarterly (three month) equity placement trends shows the company recorded a total amount of equity placement in operating leases of JPY27.6bn in Q1, JPY28.8bn in Q2, JPY24.9bn in Q3, and JPY27.8bn in Q4. While there was a temporary dip in Q3, the trend shows a return to growth in Q4. Note that at the operating lease business, equity returned to investors when a lease expires is often denominated in US dollars, and therefore investor equity becomes sensitive to forex rates at the time the lease expires. Revenues Revenues were JPY18.8bn (+23.4% YoY), driven by revenue growth in the mainstay Tax Leasing Arrangement business as well as in other businesses. 51/73

52 Tax Leasing Arrangement Tax Leasing Arrangement revenues were JPY17.0bn (+20.7% YoY). Increased equity placement in operating leases drove the increase in revenues. Leased assets were worth JPY378.8bn (+27.4% YoY). Key factors impacting growth were an increase in personnel for deal origination and the support of its associate companies FPG Asset & Investment Management B.V. and its subsidiaries (FPG AIM group) as well as FPG Amentum Limited amid a favorable equity placement environment and the company s improved fundraising capabilities. As a result of efforts to acquire new lessees to strengthen its origination capabilities, the company acquired as lessees four airlines, two aircraft leasing companies, and two shipping companies. FPG AIM Group has exclusively referred leasing projects for shipping vessels and marine shipping containers to FPG, but in the FY09/16 period, it also referred aircraft leasing projects to the company. FPG also took advantage of FPG Amentum Limited s aircraft investment management capabilities to arrange its first voluntary partnership-type lease. FPG stated that compared to conventional silent partnerships, partnership-type leases make it possible to arrange various products for investors with significant investment capital. In connection with efforts to improve its fundraising capabilities, the company now has committed credit line contracts and overdraft facilities with an aggregate value of JPY89.4bn (+ JPY14.9bn since end-fy09/15). The total amount of equity placement in operating leases was JPY109.4bn (+30.0% YoY). Demand for equity from investors with positive earnings remained strong. The number of customer companies investing in products was 2,089 (+26.4%) and the average investment was JPY52mn (+2.9%). Equity placement increased as the company s placing capabilities improved (including expansion of the placement network). The company improved its placing capabilities, with the distribution network expanding to 2,814 partnerships with accounting firms (+510 since end-fy09/15) and 110 financial institutions (+8 since end-fy09/15). There has been a noticeable focus by financial institutions on fee-based businesses due to the adoption of negative interest rates, and this has led to increased referrals from these institutions. FPG opened offices in Sapporo, Kanazawa, and Okayama as part of its network expansion efforts. Commissions from equity placement (revenues divided by total amount of equity placement in operating leases) were down 0.7pp YoY to 16.1% (this is excluding full equity deals, whereby funds are exclusively raised from investor equity without any bank loans). The company has stated that the commissions from equity placement vary depending on the leased asset, with leasing rates tending to be highest for shipping vessels, followed by marine shipping containers, and then aircraft. Commissions remained high despite a decline in the ratio of assets with high commissions and an increase in the ratio of assets with low commissions, with shipping vessels accounting for 27.5% (52.2% in FY09/15), marine shipping containers 22.4% (19.9% in FY09/15), and aircraft 50.2% (27.9% in FY09/15). This can be attributed to the implementation of measures to avoid competition, such as leasing deals that were acquired by FPG AIM Group via face-to-face negotiations. Other businesses Revenues from businesses other than Tax Leasing Arrangement were JPY1.8bn (+55.2% YoY). Real estate revenues were JPY274mn (+64.1%), insurance brokerage revenues were JPY499mn (+77.3%), and securities revenues were JPY341mn (+23.4%). Revenues in the aircraft investment management services business were JPY522mn (+112.5%). The business is operated by FPG Amentum Limited, which became a consolidated subsidiary in Q3 FY09/15. The M&A advisory business saw revenues of JPY121mn (+133.5%). In the real estate business, which FPG planned to develop into a second major source of revenues, the company has started offering small-lot real estate products with trust beneficiary interests and sales have been favorable. However, it may be difficult for FPG to expand this business because of the challenges it will face acquiring real estate that satisfies investment requirements because of soaring land prices in central Tokyo. 52/73

53 Cost of revenues Cost of revenues was JPY2.5bn (+30.8% YoY). In line with revenue growth, commissions for customer referrals also increased. SG&A expenses SG&A expenses were JPY4.5bn (+36.8% YoY). Factors leading to the increase were primarily initiatives undertaken to expand operations, such as strengthening the organizational and sales structures for operating lease projects in the Tax Leasing Arrangement business, increasing the number of sales personnel for small-lot real estate products, and consolidating FPG Amentum Limited. As a result, personnel expenses rose 52.2% YoY to JPY2.3bn, and other expenses rose 22.8% to JPY2.1bn. The consolidated headcount was 201 (vs. 157 at end-fy09/15). Operating profit Operating profit was JPY11.8bn (+17.6% YoY). Non-operating income and expenses Non-operating income was JPY1.0bn (+33.2% YoY). Interest income was JPY694mn (+87.9%) because interest income for the period of equity underwriting increased in line with equity placement growth. Equity in earnings of affiliates was JPY218mn (- 16.1%). Non-operating expenses were JPY969mn (+21.6% YoY). Interest payments were up 43.0% YoY at JPY318mn. Commission fee fell to JPY494mn (-7.4%) and losses on foreign exchange were JPY108mn (losses of JPY2mn in FY09/15). Recurring profit and net income Recurring profit was JPY11.9bn (+18.4% YoY) and net income attributable to owners of parent was JPY7.6bn (+20.5%). Segment results FPG segment Revenues were JPY17.6bn (+20.8% YoY) and segment profit was JPY12.1bn (+18.0%). The buoyant Tax Leasing Arrangement business drove the strong results. FPG Securities segment Revenues were JPY350mn (+24.8% YoY) and segment profit was JPY37mn (+348.3%). Other segment Revenues were JPY976mn (+145.0% YoY). FPG Amentum Limited was included in the segment from Q3 FY09/15. There was a segment loss of JPY214mn (-11.9% YoY). FPG Trust Co., Ltd incurred investment costs involved in preparing for revenue growth. Balance sheet Equity underwritten Equity underwritten, which comprises the main part of FPG s assets, came to JPY57.1bn (+JPY10.5bn since end-fy09/15). Equity underwritten has been increasing in line with the growth of the Tax Leasing Arrangement business. Projected commissions on inventory (excluding advances received for trust beneficiary interests for real estate products), calculated by dividing advances received by equity underwritten, was 16.2% at end-fy09/16. This surpasses the 15.3% commission rate required to achieve the company s FY09/17 forecast. Real estate for arrangement Real estate for arrangement came to JPY2.4bn (+JPY888mn since end-fy09/15). The increase was due to the acquisition of real estate for the purpose of originating small-lot real estate products with trust beneficiary interests. 53/73

54 FY09/15 results Revenues JPY15.3bn (+144.7% YoY) Operating profit JPY10.0bn (+191.3%) Recurring profit JPY10.0bn (+208.0%) Net income JPY6.3bn (+219.0%) (Net income is net income attributable to owners of parent.) Revenues Revenues were JPY15.3bn (+144.7% YoY), driven by growth in the mainstay Tax Leasing Arrangement business. Tax Leasing Arrangement business Tax Leasing Arrangement business revenues were JPY14.1bn (+159.5% YoY). In addition to increased equity placement, commissions from equity placement (revenues divided by total amount of equity placement in operating leases) rose, driving the large increase in revenues. Leased assets were worth JPY297.3bn (76.3% YoY). Key factors in the growth were the support of its associate company FPG Asset & Investment Management B.V. and its subsidiaries and FPG Amentum Limited amid a favorable equity placement environment and the company s improved capabilities to raise funds. The total amount of equity placement in operating leases was JPY84.1bn (+122.1% YoY). Improved corporate revenues and planned cuts to the corporate tax rate saw strong demand for equity from investors. The number of customer companies investing in products was 1,653 (+98.2%) and the average investment was JPY50mn (+11.1%). Equity placement increased as the company s capacity to originate deals in the leasing business rose and its placing capabilities improved. Commissions from equity placement (revenues divided by total amount of equity placement in operating leases) were +2.4pp YoY to 16.8%. Equity placement in operating leases of shipping vessels (with relatively high commissions) were JPY43.9bn (+741.4%) and grew to account for 52.2% of the total amount of equity placement in operating leases (13.8% in FY09/14). Other businesses Revenues from businesses other than the Tax Leasing Arrangement business were JPY1.1bn (+45.8% YoY). Real estate revenues were JPY167mn (+6.4%), insurance brokerage revenues were JPY281mn (+16.6%), and securities revenues were JPY276mn (- 12.7%). Revenues in the investment advisory business launched in Q3 FY09/14 were JPY110mn (+34.1%). The trust business, launched in Q1, posted revenues of JPY26mn and revenues in the aircraft investment management services business, which started in Q3 FY09/15, were JPY245mn. Cost of revenues Cost of revenues was JPY1.9bn (+122.1% YoY). In line with revenue growth, commissions for customer referrals also increased. However, the cost ratio fell 1.3pp YoY to 12.7%. SG&A expenses SG&A expenses were JPY3.2bn (+71.2% YoY). As operations expanded, personnel expenses rose 70.7% YoY (to JPY1.5bn), and other expenses rose 71.7% (to JPY1.7bn). The SG&A expense ratio fell 9.2pp YoY to 21.5% due to revenue growth. Operating profit Operating profit was JPY10.0bn (+191.3% YoY). 54/73

55 Non-operating income and expenses Non-operating income was JPY767mn (+124.3% YoY). Interest income was JPY370mn (+84.2%) because interest income for the period of equity underwriting increased in line with growth in total amount of equity placement in operating leases. Equity in earnings of affiliates was JPY260mn (+488.0%). Non-operating expenses were JPY797mn (+47.6% YoY). The amount of funds raised increased, but as the interest rate on these funds declined, interest payments were up only 0.9% YoY to JPY223mn. Commission fee touched JPY534mn (+100.7%). The company entered into committed credit line agreements to expand its credit lines, and the costs incurred at the time of signing the contracts increased. Recurring profit and net income Recurring profit was JPY10.0bn (+208.0% YoY) and net income JPY6.3bn (+219.0%). Segment results FPG segment Revenues were JPY14.6bn (+149.8% YoY) and recurring profit was JPY10.2bn (+230.2%). The buoyant Tax Leasing Arrangement business results drove results. FPG Securities segment Revenues were JPY277mn (-12.6% YoY) and recurring profit was JPY8mn (-94.2%). There were increased expenses as the company laid the groundwork for growth. Other segment Revenues were JPY399mn (+385.4% YoY). FPG Asset Management Co., Ltd. was launched in Q3 FY09/14, FPG Trust Co., Ltd was included in the segment from Q1 FY09/15 and FPG Amentum Limited included from Q3 FY09/15. There was a segment operating loss of JPY244mn (operating profit of JPY5mn in FY09/14). FPG Asset Management Co., Ltd and FPG Trust Co., Ltd. incurred upfront expenditures involved in preparing for revenue growth. Implementing strategies in medium-term plan The company worked to implement strategies in its medium-term plan as follows. In October 2014, the company entered the trust business by buying shares of FPG Trust Co., Ltd. (name changed from Bernina Trust in December 2014) and making it a consolidated subsidiary. It did so to expand its product lineup. FPG Trust Co., Ltd., has a license to operate as an investment-based trust company under the Trust Business Act. In May 2015, the company bought additional shares in equity-method affiliate FPG Amentum Limited (name changed from Amentum Capital Limited in August 2015) to bolster its Tax Leasing Arrangement business. It made FPG Amentum Limited a consolidated subsidiary and entered the aircraft investment management service business. The company increased its fundraising capacity to gain diverse and stable fundraising sources. It received credit ratings from Japan Credit Rating Agency, and started raising funds via a commercial paper program. In order to have flexible fundraising options, the company expanded its committed credit line contracts and overdraft facilities to a total of JPY74.4bn at end-fy09/15, from JPY45.0bn at end-fy09/14. 55/73

56 Income statement Income statement FY09/08 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Par. Par. Par. Par. Par. Cons. Cons. Cons. Cons. Cons. Revenues ,621 1,992 2,802 4,012 6,257 15,313 18,894 21,071 YoY 100.8% -5.1% 89.3% 22.8% 40.7% 43.2% 55.9% 144.7% 23.4% 11.5% Cost of revenue ,938 2,536 2,574 Gross profit ,399 1,733 2,397 3,411 5,384 13,374 16,357 18,497 GPM 79.1% 79.8% 86.3% 87.0% 85.5% 85.0% 86.0% 87.3% 86.6% 87.8% SG&A expenses ,327 1,922 3,292 4,504 5,079 SG&A ratio 25.1% 43.9% 35.6% 35.0% 34.2% 33.1% 30.7% 21.5% 23.8% 24.1% Operating profit ,035 1,438 2,084 3,461 10,081 11,853 13,417 YoY 95.3% -36.9% 166.8% 26.0% 38.9% 44.9% 66.1% 191.3% 17.6% 13.2% OPM 54.0% 35.9% 50.7% 52.0% 51.3% 52.0% 55.3% 65.8% 62.7% 63.7% Non-operating income ,021 1,217 Non-operating expenses Recurring profit ,392 1,961 3,263 10,051 11,906 13,711 YoY 89.7% -44.3% 219.0% 25.1% 43.9% 40.8% 66.4% 208.0% 18.4% 15.2% RPM 48.2% 28.3% 47.7% 48.6% 49.7% 48.9% 52.2% 65.6% 63.0% 65.1% Extraordinary gains Extraordinary losses Tax charges ,269 3,701 4,053 4,122 Implied tax rate 42.1% 43.9% 42.3% 41.9% 43.0% 39.5% 39.0% 36.8% 34.6% 30.1% Net income attributable to non-controlling shareholders Net income attributable to owners of parent ,185 1,988 6,343 7,644 9,580 YoY 84.7% -56.9% 344.8% 25.4% 42.3% 49.5% 67.7% 219.0% 20.5% 25.3% Net margin 25.7% 11.7% 27.4% 28.0% 28.3% 29.6% 31.8% 41.4% 40.5% 45.5% Note: Company adopted consolidated reporting from Q2 FY09/13; prior figures are for the parent For items from revenues through operating profit, see Earnings structure section. This section discusses non-operating income and expenses. Extraordinary items have only minor impact, and the tax rate has no noteworthy characteristics. Non-operating income FY09/08 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Par. Par. Par. Par. Par. Cons. Cons. Cons. Cons. Cons. Non-operating income ,021 1,217 Interest income Equity in earnings of affiliates Other Interest income: FPG collects interest as income from investors over the period from the beginning of a lease to when equity underwritten is placed (if the placement is after the start of the leasing period). The company books this as interest income. Interest income is increasing in line with equity placement growth. Equity in earnings of affiliates: It is the company s share of equity method affiliate FPG AIM s earnings. Non-operating expenses FY09/08 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Par. Par. Par. Par. Par. Cons. Cons. Cons. Cons. Cons. Non-operating expenses Interest expense Commission fee Other Commission fee: Mainly records commissions booked on entering committed credit line agreements with financial institutions. 56/73

57 Balance sheet Balance sheet FY09/08 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Par. Par. Par. Par. Par. Cons. Cons. Cons. Cons. Cons. Assets Cash and deposits ,226 1,987 3,840 4,092 7,384 8,671 12,602 Accounts receivable Supplies Equity underwritten 1, ,405 3,749 3,152 13,436 28,542 46,522 57,121 19,031 Money held in trust (aircraft for arrangement) ,349 Containers for arrangement ,006 Real estate for arrangement ,208 3,403 1,574 2,461 9,753 Deferred tax assets ,442 1, Guarantee deposits ,759 4,972 3,323 1,345 Other ,476 4,002 4,707 2,198 Total current assets 1,687 1,279 2,053 6,209 5,492 19,185 42,278 66,032 78,338 79,213 Facilities attached to building, net Vehicles, net Tools, furniture and fixtures, net Land Total tangible fixed assets Goodwill ,577 1,192 1,539 Other Total intangible assets ,627 1,259 1,640 Investment securities Shares of subsidiaries and associates ,009 Deferred tax assets Lease and guarantee deposits Other Investment and other assets ,170 1,023 1,160 1,584 Total fixed assets ,055 1,737 2,993 2,863 3,585 Total assets 1,881 1,539 2,366 6,589 5,919 20,240 44,016 69,087 81,222 82,799 Liabilities Accounts payable ,186 Short-term debt ,637 1,607 12,086 20,602 24,106 31,777 32,920 Commercial papers ,800 4,000 - Current portion of long-term loans payable ,208 2,014 4,047 Current portion of bonds Income taxes payable ,460 3,407 2,354 1,534 Advances received ,838 4,404 7,383 10,575 3,831 Guarantee deposits received ,930 5,453 3,666 2,063 Other ,451 4,214 4,363 2,460 Total current liabilities 1, ,539 3,096 15,355 31,968 50,030 59,242 48,344 Bonds payable , Long-term debt ,514 3,087 8,035 Asset retirement obligations Total long-term liabilities ,497 2,880 4,170 8,830 Total liabilities 1, ,630 3,368 15,751 33,466 52,910 63,412 57,174 Net assets Capital stock ,072 3,086 3,091 3,095 Capital surplus ,022 3,036 3,041 3,095 Retained earnings ,340 1,924 2,833 4,441 9,955 15,289 21,677 Treasury stock ,524-3,524 Total shareholders' equity ,553 1,958 2,551 4,487 10,535 16,077 17,897 24,344 Foreign currency translation adjustment Valuation differences on marketable securities Total accumulated other comprehensive income Non-controlling interests ,239 Total net assets ,553 1,958 2,551 4,489 10,549 16,176 17,809 25,624 Working capital 1, ,408 3,756 3,128 14,533 31,844 48,082 59,691 61,374 Total interest-bearing debt 1, ,738 1,998 12,636 22,882 32,089 42,029 45,853 Net debt (net cash) , ,796 18,789 24,705 33,357 33,250 Note: Company adopted consolidated reporting from Q2 FY09/13; prior figures are unconsolidated Net debt: Based on the total interest-bearing debt and cash and deposits FPG is a financial services company, so most of its assets are current: in FY09/17, current assets comprised 95.7% of total assets. Current assets Current assets are primarily cash and deposits, equity underwritten, money held in trust (aircraft for arrangement), and real estate for arrangement. Equity underwritten: In the Tax Leasing Arrangement business, on the day that the leasing term begins, if some of the equity in the partnership has not yet been placed, FPG temporarily buys the equity on the premise that it will transfer (place) the equity underwritten to investors later on. FPG has not held any equity underwritten for more than one year. If the equity 57/73

58 underwritten was to be held for more than a year, it would be booked under assets as other investments, or placed as a financial product with the yield equivalent to the placement commissions the company expected to receive. Money held in trust (aircraft for arrangement): Records unplaced beneficiary interests in aircraft leasing. Under such trust agreements, FPG entrusts the funds to FPG Trust Co., Ltd., and FPG Trust purchases aircraft using those funds, and leases those to airlines or sells them in the market, based on instructions from the company. By selling beneficiary interests to investors, the position of settlor is passed on, and the profits and losses generated from the trust assets thereafter are returned to investors. Real estate for arrangement: In the real estate business, investors buy real estate the company has bought for this purpose from the company. Until the company transfers the relevant real estate to investors, it is accounted for as real estate for arrangement on the company s books. Guarantee deposits: The company provides over-the-counter currency derivatives, such as foreign exchange contracts and currency options, in its securities business. As part of the service, the company holds an offsetting position to the forex position generated by transactions with its customers via a trade with a partner financial institution. This can mitigate market risk as necessary. In these instances, it accounts for the guarantee deposits placed with the financial institution that acts as the cover transaction counterparty as guarantee deposits. Tangible fixed assets The only tangible fixed assets are office and branch facilities. In FY09/17 tangible fixed assets comprised only 0.4% of total assets. Intangible fixed assets Goodwill: JPY1.5bn in FY09/17 (JPY1.1bn in FY09/16). The company booked goodwill for FPG Trust Co., Ltd. and for a subsidiary of FPG Amentum Limited. Liabilities The main liabilities are interest-bearing debt, advances received and security deposits received. Interest-bearing debt. The company mainly uses short-term loans to finance its holding of equity underwritten. In order to have flexible fundraising ability, the company has committed credit line contracts and overdraft facilities with multiple financial institutions. The aggregate value of committed credit line contracts and overdraft facilities (committed credit line financing facility) was JPY106.2bn as of end-fy09/17 (JPY89.4bn as of end-fy09/16). The company has diversified its fundraising sources, and started raising funds via a commercial paper program in FY09/15 after it received credit ratings from Japan Credit Rating Agency, Ltd. (JCR). In October 2014, JCR assigned the company a long-term issuer rating of BBB-, a shortterm issuer rating of J-2, and a domestic CP rating of J-2 (with a maximum issuance amount of JPY3b.0n). In August 2015, JCR left the ratings unchanged but raised the maximum amount for the domestic CP program to JPY5.0bn from JPY3.0bn. In FY09/17, the maximum amount was further increased from the previous JPY5.0bn to JPY10.0bn. Advances received. This is commissions on equity underwritten or beneficiary interests, recorded as FPG s revenues when payments for equity or beneficiary interests are received. Guarantee deposits received. The company provides over-the-counter currency derivatives, such as foreign exchange contracts and currency options, in its securities business. In this service, it receives deposits based on the customer s estimated transaction value. These are booked as guarantee deposits received. Net assets Net assets have been increasing due to retained net income, as well as funds raised through public offerings and third-party share allocations in September 2010, October and November 2012, and June The funds were used for the temporary advances paid for the silent partnership rights in the Tax Leasing Arrangement business, and the repayment of short-term loans obtained to purchase real estate for arrangement in the real estate business. 58/73

59 FPG: fundraising activity (JPYmn) Increase in Increase in Date Fundraising method capital stock legal capital surplus Total Sep Issuance of new shares (public offering) Sep Third-party allocation of shares Oct Issuance of new shares (public offering) Nov Third-party allocation of shares Jun Issuance of new shares (public offering) 1,835 1,835 3,669 Jun Third-party allocation of shares Total assets are inflated above their actual state by advances received and guarantee deposits received related to over-thecounter derivatives (foreign exchange contracts and currency options) in its securities business. This lowers the shareholder equity ratio. In FY09/17, the ratio was 29.5%. If shareholder equity is used as the numerator and the denominator is total assets minus guarantee deposit, the shareholder equity ratio is calculated to be 29.9%. Cash flow statement Cash flow statement FY09/08 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Par. Par. Par. Par. Par. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) ,679 1,842-8,952-13,024-3,250-1,692 3,030 Cash flows from investing activities (2) , Free cash flow (1+2) ,750 1,771-9,379-13,754-4,694-2,107 3,005 Cash flows from financing activities ,493-2,010 11,230 14,000 7,888 3, Depreciation and amortization of goodwill (A) Capital expenditures (B) Working capital changes (C) 1, , ,405 17,310 16,238 11,608 1,683 Simple FCF (NI + A + B - C) ,777 1,403-10,209-15,466-9,830-3,923 8,116 Note: Company adopted consolidated reporting from Q2 FY09/13; prior figures are unconsolidated Cash flows from operating activities In addition to net income, cash flow from operating activities fluctuates depending on changes in equity underwritten, money held in trust, real estate for arrangement, guarantee deposits, and guarantee deposits received. Since FY09/13, operating cash flows have been negative, primarily due to an increase in equity underwritten to facilitate revenue growth. Breakdown of cash flows from operating activities Cash flows from investing activities FY09/08 FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Par. Par. Par. Par. Par. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities ,679 1,842-8,952-13,024-3,250-1,692 3,030 Net income ,185 1,988 6,343 7,644 9,580 (A) + (B) + (C) + (D) + (E) -1, , ,492-18,130-14,841-11, Increase (decrease) in equity underwritten (A) -1, , ,283-15,106-17,980-10,598 38,090 Increase (decrease) in money held in trust (B) ,349 Increase (decrease) in real estate for arrangement (C) ,208-2,194 1, ,291 Increase (decrease) in guarantee deposits (D) ,759-2,212 1,648 1,978 Increase (decrease) in guarantee deposits received (E) ,930 3,523-1,786-1,602 FPG does not need to increase capex (buy tangible fixed assets) to accommodate revenue growth. As a result, changes in investing cash flows to support revenue growth have a minimal impact on its accounts. In FY09/15, while cash flow from investing activities was unusually negative, this was due to outflows of JPY1.2bn to buy shares in subsidiaries. Cash flows from financing activities Financing cash flows are impacted mainly by increases and decreases in interest-bearing debt. Since FY09/13, financing cash flows have tended to be positive due to increased interest-bearing debt accompanying higher equity underwritten in the Tax Leasing Arrangement business. 59/73

60 Other information News and topics October 2017 On October 31, 2017, the company made an announcement regarding dividend payment (increased dividend). The company had previously forecast a dividend of JPY37.15 per share, but decided to increase it to JPY45.80 per share to reflect brisk earnings performance. As a result, the dividend payout ratio will be 43.0%. The company also decided on the same day that it would raise its dividend payout ratio target to generally over 40% from FY09/18 onward. On the same day, the company also announced the cancellation of treasury shares. Type of shares to be cancelled: Total number of shares to be cancelled: FPG common stock 2,250,000 shares (2.37% of total number of issued shares before cancellation) Scheduled date of cancellation: November 10, 2017 Total number of issued shares after cancellation: 92,373,600 shares On the same day, the company announced a change in its dividend policy, raising its dividend payout ratio target from generally over 30% to over 40%. September 2017 On September 22, 2017, the company made an announcement regarding the conclusion of committed credit line agreements. FPG has decided to enter into committed credit line agreements with financial institutions for the purpose of flexibly procuring funds for deal origination in its Tax Leasing Arrangement business and funds for arranging small-lot real estate products in the real estate related business. The total amount of the company s funding facilities based on its committed credit line agreements, overdraft agreements, and other agreements, is scheduled to increase to JPY109.0bn as of October 2, 2017 (JPY84.9bn as of end- FY09/16). On September 7, 2017, the company made an announcement regarding an increase in the maximum amount of commercial paper (CP) issuance. The Japan Credit Rating Agency, Ltd. (JCR), from which FPG receives its credit ratings, has raised the maximum amount of the company s CP issuance from JPY5bn to JPY10bn. FPG s domestic CP rating of J-2 remains unchanged. On the same day, the company announced that it has acquired a property for the purpose of originating small-lot real estate products. FPG announced the acquisition of a property in Ebisu Nishi 1-chome (Shibuya-ku, Tokyo; use: stores) slated for use in the arrangement of the fourth offering of Premium Asset Series, the company s small-lot real estate products with trust beneficiary interests. The handover is scheduled for September 15, July 2017 On July 28, 2017, the company announced revisions to its full-year FY09/17 forecasts. 60/73

61 Revised FY09/17 forecasts Revenues Operating profit Recurring profit JPY21.2bn (previous forecast: JPY21.2bn) JPY13.3bn (JPY12.9bn) JPY13.2bn (JPY12.9bn) Net income JPY9.1bn (JPY8.3bn) (Net income is net income attributable to owners of parent.) Reasons for the revisions The company s revenues forecast is unchanged because total amount of equity placement in operating leases is on track, but the company revised up its forecasts for operating profit, recurring profit, and net income attributable to owners of parent, as it expects lower cost of revenues and expenses compared with initial plan. On July 18, 2017, the company announced that it has acquired a property for the purpose of originating small-lot real estate products. FPG announced the acquisition of a commercial building in Shinjuku 3-chome (Shinjuku-ku, Tokyo) slated for use in the arrangement of the third offering of Premium Asset Series, the company s small-lot real estate products with trust beneficiary interests. The handover is scheduled for August 21, Property overview Location: Use: Handover date: Shinjuku 3-chome, Shinjuku-ku, Tokyo (near Isetan Shinjuku department store) Stores August 21, 2017 (scheduled) April 2017 On April 14, 2017, the company announced a revision to its 1H FY09/17 earnings forecasts. Revisions to 1H FY09/17 earnings forecasts Revenues: JPY12.0bn (previous forecast: JPY10.4bn) Operating profit: JPY8.0bn (JPY6.3bn) Recurring profit: JPY8.2bn (JPY6.3bn) Net income*: JPY5.6bn (JPY4.1bn) * Net income attributable to owners of parent Reasons for the revision The Tax Leasing Arrangement business, which comprises most of the company s revenues, was steadily capturing demand from investors and was progressing more briskly than expected, leading the company to expect revenues and profits to outperform previous 1H forecasts. The company has kept its full-year forecasts unchanged due to uncertainties such as the political situation overseas and in Japan and the increase of geopolitical risks in the global economy. March 2017 On March 27, 2017, the company made an announcement concerning the signing of committed credit line contracts. To address the expanding asset value of small-lot real estate products FPG arranges in the Real Estate business, the company will enter into an agreement to amend the committed credit line contract it signed in September 2016, with Sumitomo Mitsui 61/73

62 Banking Corp. as arranger and Bank of Tokyo-Mitsubishi UFJ as co-arranger, effectively raising the credit facility amount from the previous JPY7.5bn to JPY15.0bn. Further, FPG will sign a new committed credit line contract with a JPY12.0bn credit facility arranged by Sumitomo Mitsui Banking Corp. as arranger and Sumitomo Mitsui Trust Bank, Limited as co-arranger, following the conclusion of a JPY11.0bn committed credit line contract the company signed with the banks in March FPG will enter into the agreement in light of the growing asset value of aircraft operating lease deals it arranges (using a new trust structure) in the company s Tax Leasing Arrangement business front. The aggregate value of the company s committed credit line contracts and overdraft facilities is expected to be JPY99.2bn effective April 1, 2017 (JPY89.4bn as of end-september 2016). On March 22, 2017, FPG announced that it has established a joint venture business in Singapore, with the intent to expand arrangement of operating leases for marine shipping containers. The company decided to establish an operating lease joint venture in Singapore under a partnership with Buss Global Holdings Pte. Ltd. (BUSS), a group company of BUSS GROUP (headquartered in Germany) that specializes in logistics and investments, and FPG Asset & Investment Management B.V. (FPG AIM), FPG s affiliate. Through this joint venture, the company aims to expand the total amount of assets arranged in operating leases for marine shipping containers. The joint venture company will be established utilizing a scheme where FPG, FPG AIM and BUSS subscribe to the shares offered by FPG Raffles Holdings PTE, Ltd. (FPG Raffles Holdings), a holding company incorporated in Singapore for this purpose. In this transaction, FPG and FPG AIM will make cash investments of USD19.9mn and USD4.9mn respectively, and BUSS will execute a contribution in kind of about USD4.5mn in shares of Raffles Lease Pte. Ltd. (Raffles Lease), BUSS s wholly-owned subsidiary in Singapore that provides container investment and management services. The establishment of this joint venture will allow FPG Group to utilize the container management system of Raffles Lease. After the transaction, both FPG Raffles Holdings and Raffles Lease will become FPG s consolidated subsidiaries (the name of Raffles Lease will be changed to FPG Raffles Pte. Ltd. upon execution of cash and stock investments). BUSS manages investment funds in which marine shipping containers are the underlying assets, and Raffles Lease, together with BUSS (its parent), has operated marine shipping container investment funds mainly in Singapore, leveraging on its proprietary container management system. The joint venture will allow FPG to draw on Raffles Lease s expertise in container management and sales and apply them to its own shipping container operating lease transactions, thereby achieving value-add for FPG products. The USD25mn cash investment (FPG and FPG AIM combined) to FPG Raffles Holdings will be used mainly to put in place a warehousing operation, which allows the company to hold the marine shipping containers acquired for the purpose of deal origination until the deals actually originate; the operation in turn contributes to FPG s goal of expanding opportunities to arrange operating lease deals. Outline of FPG RAFFLES HOLDINGS Before transaction After transaction Name FPG Raffles Holdings Pte. Ltd. FPG Raffles Holdings Pte. Ltd. Business None Container investment and management services Capital USD 2 USD29.5mn Shareholding ratio FPG 75.1% FPG 75.1% FPG AIM 24.9% FPG AIM 13.1% BUSS 11.8% *Investment entails class stocks; as such, economic rights attributable after capital increase will be 67.8% for FPG, 16.95% for FPG AIM and 15.25% for BUSS. 62/73

63 Outline of RAFFLES LEASE Before transaction After transaction Name Raffles Lease Pte. Ltd. FPG Raffles Lease Pte. Ltd. Business Container investment and management services Container investment and management services Capital USD4.6mn USD4.6mn Shareholding ratio BUSS 100.0% FPG RAFFLES HOLDINGS 100.0% RAFFLES LEASE Earnings results and financial standing (FY12/14 FY12/16) FY12/14 FY12/15 FY12/16 Net assets USD5.7mn USD6.1mn USD3.0mn Total assets USD10.0mn USD9.0mn USD4.1mn Revenues USD3.3mn USD2.5mn USD1.8mn Net income / loss USD- 0.9mn USD3.9mn USD-1.3mn *Earnings results and financial standing for FY12/16 are preliminary figures. On March 10, 2017, the company announced that it has acquired a commercial building located in front of Harajuku Station for the purpose of originating small-lot real estate products. FPG has completed acquisition of a commercial building located in front of Harajuku Station, a prime location in central Tokyo. The building is slated for the second offering of Premium Asset Series, the company s small-lot real estate products with trust beneficiary interests, through which investors are given an opportunity to invest in the subject property in small lots. The company will begin sales of unit trusts on March 21. Property overview Name: FPG Links Harajuku (formerly GreenOak Harajuku Bldg.) Land: sqm Total floor space: 1,482.99sqm Floors: 7 floors above ground, 1 floor below Use: Stores Completion: December 2015 December 2016 On December 22, 2016, the company announced that it had started arranging aircraft leases using a new trust structure. FPG s Tax Leasing Arrangement business presently arranges aircraft leases and places equity with investors. In offering this lease arrangement to investors, FPG takes advantage of consolidated subsidiary FPG Trust Co., Ltd. s ability to offer trust services, which is a new scheme. Based on this innovative structure, FPG as the initial settlor trusts money to FPG Trust, and as a trustee FPG Trust, in accordance with a trust agreement, purchases and manages the aircraft. Under the scheme, FPG then places the beneficiary interests with investors, and revenues from the management and sale of the aircraft are returned to investors (beneficiaries). Note that since aircraft investment management requires significant expertise, FPG utilizes consolidated subsidiary FPG Amentum Limited s aircraft investment management services function. This structure has allowed FPG to leverage its deal arranging capabilities and ability to attract investors, FPG Trust s ability to offer trust beneficiary interests, and FPG Amentum s aircraft investment 63/73

64 management services to create the first aircraft lease structured in a trust in Japan. It began offering such leases on December 22, Aircraft lease scheme using a new trust structure FPG Co., Ltd. (Settlor and initial beneficiary) (4) Transfer of beneficiary interests (1) Money held in trust (1) Trust beneficiary interests FPG Trust Co., Ltd. (Trustee) (2) Purchase of aircraft (2) Lease Seller Airlines, etc. Investors (New beneficiaries) (6) Dividends (5) Sale of aircraft Resale market (3) Contract management * Note that the diagram presents an overview of the aircraft lease structure, and the structure of actual deals may differ 1) As both the settlor and initial beneficiary, FPG trusts money to FPG Trust (trustee) for the purchase of the aircraft, and acquires the trust beneficiary interests FPG Amentum Limited 2) The trustee acquires the aircraft and leases it to an airline company based on a trust agreement 3) The trustee contracts FPG Amentum for management of the aircraft, including its purchase, lease, and sale 4) FPG transfers trust beneficiary interests to investors 5) When the lease expires, the trustee sells the aircraft to the resale market, with the aim of generating a capital gain on the sale 6) FPG Trust distributes rental income and sales revenues from the aircraft to beneficiaries October 2016 On October 31, 2016, the company made an announcement regarding a partial revision of its Articles of Incorporation. The company passed a resolution to include a partial revision of its Articles of Incorporation in the agenda for its 15th annual general shareholders meeting scheduled for December 21, In preparation for expanding into new areas of business and to clarify the company s operations, it will make additions and revisions to Article 2 (Purpose) of the Articles of Incorporation. Specifically, 11. Non-life insurance agency operations and operations related to life insurance solicitation and 12. Acquisition, holding, and transfer of securities will be added to Article 2, and the current 11. Management and administration of investment partnership properties will be revamped as 13. Arrangement of investment business and investment partnership, and management and administration of properties. August 2016 On August 12, 2016, the company announced the transfer (stock transfer) of consolidated subsidiary FPG Asset Management Co., Ltd. FPG had been involved in the investment advisory business through FPG Asset Management Co., Ltd. However, the company is expanding its asset management services by offering trust beneficiary interests, such as small-lot real estate products with trust beneficiary interests that FPG Trust Co., Ltd. began selling in April 2016 (FPG Trust has a license to operate as an investmentbased trust company). Since FPG plans to take further advantage of FPG Trust, it decided to transfer all of the shares of FPG Asset Management in order to avoid duplication and optimize allocation of management resources. Subsidiary FPG Asset Management will be removed from consolidation, effective September 30, 2016 (planned). The company does not expect this transaction to have a major impact on the company s FY09/16 earnings. 64/73

65 On August 5, 2016, the company announced it had been selected as one of the constituent issues of the JPX-Nikkei Index 400. The company announced it had been selected as one of the constituent issues of the JPX-Nikkei Index 400 for 2016 (August 31, 2016 to August 30, 2017). The JPX-Nikkei Index 400 is composed of companies that satisfy global investment standards, such as the efficient use of capital and investor-focused management. The replacement will be executed on August 31, June 2016 On June 21, 2016, the company announced the arrangement of a partnership-type lease business and its classification as a subsidiary. The FPG Group takes advantage of consolidated subsidiary FPG Amentum Limited s aircraft investment management capabilities to attract investors and arrange partnership-type aircraft leases (partnership agreements are defined in Article 667, paragraph 1 of the Civil Code). Partnerships enable investors to receive similar investment benefits as silent partnerships. Since the company will temporarily provide the partnership with a loan after it is arranged, the partnership will be equivalent to a subsidiary until the loan is repaid (planned for July 19, 2016). This is not expected to have a major impact on the company s FY09/16 earnings forecast. Overview of the partnership Corporate name: FPG Aircraft Partnership No. 1 Date of establishment: June 22, 2016 (planned) Purpose: Aircraft leasing business Total investment: USD45mn Investors (ownership ratio): general investors (99.996%) and FPG subsidiaries (total: 0.004%) History After holding positions at Sumisho Lease Co., Ltd. and ING Lease Japan N.V., founder, president and CEO Hisanaga Tanimura established Financial Products Group (FPG) in November The idea behind FPG was to create a business specializing in financial arrangement in Japan, similar to those in Europe and the US. The company initially offered products provided by the major leasing firms to customers and received agency commissions upon the closing of a contract. The turning point came from customer demand for products to defer taxes. FPG arranged an operating lease business based on marine shipping containers, and in August 2004 established its current core business, the Tax Leasing Arrangement business. Subsequently the Tax Leasing Arrangement business grew steadily by offering tax deferral products to SMEs. Business growth accelerated upon the company s stock exchange listing in FPG listed on the Osaka Stock Exchange JASDAQ market in September 2010, the Tokyo Stock Exchange Second Section in October 2011, and TSE First Section in October Per the company, investor trust improved following the listing. Customer referrals enabled partnerships with regional banks. This also facilitated dealings with major shipping companies and airlines. Fundraising capacity also improved. This enabled the company to borrow money from financial institutions to purchase equity in SPCs, with the aim of transferring (placing) it to investors. The strategy has been to build an expanded distribution network through accounting firms and financial institutions, and build up equity underwritten. This led to average annual growth rates from FY09/10 through FY09/16 of 55.6% for equity placement, 50.6% for revenues, and 56.0% for operating profit. 65/73

66 Starting in FY09/10, the company diversified into M&A advisory, real estate and other businesses. In addition to growth from its key Tax Leasing Arrangement business, the company plans to use the distribution network of accounting firms and financial institutions it has created to sell small-lot real estate products, currency derivatives, and insurance with company owners and high net worth individuals. FPG aims to be a one-stop financial services company offering various financial products and services, and is expanding and diversifying its revenues. Year November 2001 August 2004 May 2008 July 2009 September 2010 October 2010 November 2010 April 2011 October 2011 February 2012 October 2012 March 2013 August 2013 November 2013 October 2014 August 2015 March 2017 Overview Financial Products Group Limited established Transactions and private placements of leasing silent partnership rights begins Launches marine shipping container operating lease business Registers as Type II Financial Instruments Business Launches ship operating lease business Lists on Osaka Stock Exchange JASDAQ Launches M&A advisory business Launches insurance brokerage business Launches aircraft operating lease business Lists on Tokyo Stock Exchange Second Section Establishes lease arrangement joint venture in Europe (FPG Asset & Investment Management B.V.) Lists on Tokyo Stock Exchange First Section Acquires shares of Fintech Global Securities and makes it a subsidiary. Changes name to FPG Securities Co., Ltd. Launches real estate-related business Strategic alliance with Dublin (Ireland) based aircraft lease management specialist Amentum Capital Limited. Purchases all shares of The Bernina Trust Co., Ltd. (now FPG Trust Co., Ltd.), makes it a subsidiary and enters trust business Increases its shareholding in equity method affiliate Amentum Capital Limited (now FPG Amentum Limited) and makes it a consolidated subsidiary Established FPG Raffles Holdings Pte. Ltd., a Singapore-based joint venture that provides container investment management services Major shareholders Major shareholders (as of end-september 2017) Shareholding ratio HT Holdings Co., Ltd % The Master Trust Bank of Japan, Ltd. (Trust account) 6.99% Japan Trustee Services Bank, Ltd. (Trust account) 3.66% Hisanaga Tanimura 2.32% Trust & Custody Services Bank, Ltd. (Securities investment trust account) 2.02% BBH (Lux) for Fidelity Funds Pacific Fund 1.69% Goldman Sachs & Co. Reg 1.48% JPMC Goldman Sachs Trust JASDEC Lending Account 1.46% Japan Trustee Services Bank, Ltd. (Trust account 5) 1.41% Japan Trustee Services Bank, Ltd. (Trust account 1) 1.02% Shareholder returns policy The company s basic policy on distributing profits is to maintain internal reserves and stable dividends. It aims to maintain a consolidated dividend payout ratio of at least 30%. In FY09/17, the company plans on an annual dividend per share (DPS) of JPY45.8 (consolidated payout ratio: 43.0%). The company s dividend policy for FY09/18 and beyond calls for a consolidated payout ratio target of generally over 40%, and management targets an annual dividend per share of JPY49.25 in FY09/18 (consolidated payout ratio of 43.0%). 66/73

67 DPS and payout ratios (JPY) % % 35.1% 36.0% 36.3% 42.2% 43.0% % % 30.9% % DPS Dividend payout ratio (right axis) % FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/ % 0.0% DPS figures are adjusted for stock splits Corporate governance and top management Capital structure Controlling shareholder None Parent company code N/A Organization type/director relationships Organizational type Company with Audit & Supervisory Board Number of directors under Articles of Incorporation 10 Directors' terms under Articles of Incorporation 2 years Number of independent outside directors 3 Number of Audit & Supervisory Board members under Articles of Incorporation 5 Number of independent outside members of Audit & Supervisory Board 3 Number of independent outside officers (directors and Audit & Supervisory Board members) 6 Other Disclosure of directors' compensation Total amount disclosed Disclosure of executive officers' compensation None Policy on determining amount of compensation and calculation methodology In place Takeover defenses None The Board of Directors is comprised of four directors. Excluding the CEO, the three directors, Mr. Takeshi Kadota, Mr. Masashi Funayama, and Mr. Akihiko Matsunaga, are outside directors. The Tokyo Stock Exchange s Corporate Governance Code, which is an appendix to its listing criteria, provides that a listed company should select at least two outside directors. FPG has the three outside directors out of the four directors and all three auditors are outside members of Audit & Supervisory Board. Accordingly, Shared Research believes that the company has separated the functions of business execution and governance, and has in place a highly independent and transparent monitoring function. Hisanaga Tanimura: President and CEO Tanimura graduated with a Bachelor s Degree in Economics from Kwansei Gakuin University in He joined Sumisho Lease Co., Ltd. in April 1983 (now Sumitomo Mitsui Finance and Leasing Co., Ltd.). He was appointed Tokyo Branch representative, ING Lease Japan N.V. (100% subsidiary of ING Bank) in Then, in November 2001, he established Financial Products Group and was appointed to his current position president and CEO. 67/73

68 Operating leases Lease transactions In a lease transaction, the owner of a specific asset (the lessor), assigns rights to use that particular asset to a lessee over an agreed period. The lessee pays an agreed amount to the lessor. Leases are classified as either operating or finance leases (see following section for details). Operating lease transactions Sales contract Leasing contract Manufacturer Lessor (lease operator) Lessee (airline company, etc.) Payment for purchase Leasing fee pay ments Sale of lease assets P roceeds from sales Secondhand market Source: Shared Research Operating lease Under an operating lease, the leasing company estimates the resale price of the lease asset upon expiry of the leasing term. It calculates lease payments based on the difference between the initial value and this residual value. As a result, the total amount of lease payments is less than the asset value. Operating leases are used for assets that have a secondhand market where it is possible to forecast a future sales price. Examples: aircraft, vessels, containers, automobiles, and machine tools. Under an operating lease, the lessor records the lease asset on its balance sheet, while the lessee does not. Operating lease payments Aircrafts Shipping vessels Marine shipping containers Total amount of lease payments Value of secondhand assets (residual value) Residual value Interest and other expenses Source: Shared Research Finance lease In principle early termination of a finance lease is not possible. The lessee is responsible for lease payments that cover all items during the leasing term including asset purchase value, interest, taxes, and insurance. The total amount of lease payments is greater than the value of the asset. A finance lease is a sale and purchase transaction from an accounting perspective, so the lessee accounts for the lease asset on the company s balance sheet. In the March 2007 accounting standard reforms, the treatment of finance lease transactions from April 2008 onward was standardized. They could no longer be recognized as off-balance-sheet transactions and had to be recognized as sale and purchase (on-balance-sheet) transactions. 68/73

69 Finance lease payments Asset price Industrial equipment Medical equipment Communications equipment Total amount of lease payments (assets with high obsolescence risks) Interest and other expenses Source: Shared Research Benefits for lessee using operating lease 100% financing effect to be guaranteed and borrowing limit to remain intact: In order to purchase property, a lessee has to secure funds with its own money or borrowings from financial institutions. When a property is purchased under an operating lease, a lessee will enjoy a 100% financing effect and is able to use the property with the same conditions as when purchased by the lessee. The lessee s borrowing limit set by a financial institution will remain intact. Japanese Operating Lease scheme enables lessees to use property with lower lease fees: In a Japanese Operating Lease transaction, about 30% of funds to be raised to purchase a property comes from investors who require a low rate of return similar to an interest rate on ordinary bank deposits. Therefore, a lessee is able to use the property with a low lease fee based on the low cost of capital. Operating lease assets Aircraft Among aircraft, shipping vessels, and marine shipping containers, there are more companies in the aircraft operating lease industry, leasing periods are around 10 years, depending on the size of the fuselage, and the value of transactions is some JPY30bn for large aircraft and JPY5bn JPY6bn for small to medium-size planes. Lessees in the aircraft operating lease business are airlines. FPG primarily arranges operating leases with major overseas flag carrier airlines as the lessees. Aircraft become obsolete slowly and it is possible for the manufacturers to maintain market prices by adjusting production, so they tend to maintain their value. Aircraft become obsolete slowly To develop a new aircraft model requires a great deal of capital, time, and expertise. To get a return on invested capital it is necessary to manufacture the same model over a long period. As such, it generally takes a long time for aircraft to become obsolete. Easy to maintain market prices Market prices fluctuate as demand changes in step with the global economy. Yet, because the market is a duopoly of Boeing and Airbus, it is possible for the two companies to maintain market prices by adjusting production. Asset prices maintained The aviation authority requires the repair and maintenance of aircraft under law through a licensing regime. Residual value insurance is also available, so asset values are generally maintained. 69/73

70 Shipping vessels Among aircraft, shipping vessels, and marine shipping containers, the number of companies involved in the shipping vessel operating lease business is small. Lease periods are as long as those for aircraft. Transaction amounts are large at around JPY20bn for a large vessel. The average amount of transactions handled by FPG is around JPY10bn. Lessees in the shipping vessel operating lease business are shipping companies. FPG mainly deals with major overseas shipping companies as lessees for operating lease business in this sector. There are many types of vessels including cargo vessels, tankers, container ships, and car carriers. A variety of types are built to suit user needs in terms of size and purpose. Manufacturers differ from the aircraft market, in that there is a mixture of large and small companies. As a result, future prices will vary with ship type and size. The company does not handle oil tankers due to concern over oil pollution accidents. Marine shipping containers Compared with aircraft and shipping vessels, the operating lease business for marine shipping containers has few entrants, the leasing periods are short, and the deals are small in size. Lessees in the marine shipping containers operating lease business are shipping companies. FPG mainly deals with major overseas shipping companies as lessees for the operating lease business in this sector. Marine shipping containers are standardized products and have a low risk of technological obsolescence. Since few companies are involved in operating leases for marine shipping containers, margins tend to be high. Further, because the statutory useful life of marine shipping containers is a relatively short seven years, there is a short gap between the initial investment and fund redemption. Japanese Operating Lease transactions Under Japanese Operating Lease transactions, the lease operator (SPCs) raises equity from investors and borrows money from financial institutions to raise funds. The operator buys an asset (marine shipping container, shipping vessel, or aircraft) and enters into a lease transaction with a lessee (shipping company or airline). Investors receive a share of profits and losses from the sale of the leased assets, as well as dividends, and can carry forward business profits. In a Japanese Operating Lease transaction, about 30% of funds to be raised to purchase a property comes from investors who require a low rate of return similar to an interest rate on ordinary bank deposits. Accordingly, a lessee using a Japanese Operating Lease transaction does not need its own capital and is able to use the property with a low lease fee based on the low cost of capital. Japanese Operating Lease scheme Operating lease business Lessee Lease operators FPG subsidiaries (SPCs) *SPC (Special Purpose Company) = a company established specifically to raise funding for a lease company Shipping companies Airline companies Container lease companies Lease Leasing payments Lease assets Loans Funds Financing Financing through silent partnerships Financial institutions SME SME SME Source: Shared Research 70/73