date: 11/26/2017 seria (2782, jp)

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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Date:11/26/2017

Seria(2782,JP) Recommendation:OUTPERFORMExchange:JASDAQ SharePrice:JPY6,460(11/24/2017)Sector:Retail TargetPrice:JPY6,972MarketCap:JPY489.9billion P/E:41.9x(3/18CE)P/B:9.1x(3/17act) Div.Yield:0.4%(3/18CE)

Highlight–Strongcompetitivepositionacceleratesgrowthandprofitmargin-METRICALupgradedtoOUTPERFORMafterreviewingthe2Qfinancialreportandtheanalystmeeting.Thesharepriceisexpectedtomovehigherinfavorofitssolidcompetitivepositioningandgrowthprospect.TPhasbeenrevisedupwardtoJPY6,972fromJPY5,238ofthepreviousreportonMay20th2017.OPmarginroseto10.3%for2QFY3/2018,whichismuchhigherthanthatofpeersbutisexpectedtoriseto15%forthemid-term.ItsadvancedITbasedmanagementinstoreoperationandlogisticsleadsthecompany’sadvantagesinproductdevelopmentandcoststructure.Itshigherprofitmarginthancompetitorsshouldexpandthegapofstoreexpansiongoingforward.Thehigherthemarketsharerises,thehighertheOPmarginwouldincreasefurther.ThedivergenceoftheexpansionofearningsandsalebetweenSeriaandpeersisverylikelytoincreasethegapoftheshareprices.InvestmentrisksincludesthechangeincustomerbehaviorthatcustomersaremorelikelytobuyhigherpricedgoodsthanJPY100goods,buttheymaintainsupportingJPY100goodsonslowerconsumerexpendituresanditsexclusiveitemsdevelopedbyprofoundanalysisofcustomerneed.ItsrichfreecashflowandstrongbalancesheetwillpushcashdividendrisehigherthanitsprojectionofJPY25ashareforFY3/2018.BusinessDescriptionSeriawasfounded1987inOgaki,Gifuandhasgrowntothe2ndlargestJPY100shopinJapan.Itsnationwideoutletstotal1,417asofOctober2017andareprojectedtoadd150newstores(close60)forthisfiscalyear,strengtheningstoresinareasandrelocatingdirectrunstorestomorecompetitivelocationfortheyear.SeriafocusesononlyJPY100shopbusiness,expandingits‘Seria’brandshopsacrossthecountry.Thesalegrew+10%ayearfromJPY93,634millionforFY03/2012toJPY145,328millionforFY03/2017andisexpectedtokeepsolidgrowthbackedbymorethan100newstoreopeningayear.Operatingprofitalsoacceleratedyearly+19%fromJPY7,722milliontoJPY15,171millionforthesameperiod.Operatingprofitmarginimprovedfrom8.2%to10.4%duetoitsinnovativecostmanagement(seechart‘SalesandOPM’onleft).

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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IndustryOverviewandCompetitivePositioningIndustryOverviewSalesof4largestJPY100shopoperatorsrose26.4%(5%perannum)from5yearsfromJPY558billionforFY2011toJPY680billionforFY2016.Othercategory,DepartmentStoreandSuperMarketgrewmuchslower,asshownbarchart‘SalesGrowthbyCategory(allstore)’onleft.Meanwhile,ConvenienceStorehavegrownfavorablyincreasingitsfunctionstomeetvariousconsumersdemand,butJPY100shopgrewmorerapidpaceforthepreviousyear,amidincreasingbudgetmindofconsumersledbysoggyrealincomegrowth.Asaresult,JPY100shopshowedprettygoodsalesgrowthinYoYbasisforpast5yearsinlinewithanemicconsumerspendinginJapan.Examiningthiscategory,differentpictureisseen.AgiantDaiso(privateowned)accountsfor62%ofthesalesof4companiesforFY2016andtheother3companiessharetherestofmarket.Also,thechart‘SaleofJPY100Operators’showsthatthesalesgrowthofSeriaisoutstandinglyhighestof55%forthepast5years,whilethatofrivalsslowedtogrowat23%ofDaiso,8%ofCanDo(2698,JP)and17%ofWatts(2735,JP).Intermsofthenumberofstoresby4largestoperators,Daisocomesfirstand3companiesofSeria,WattsandCanDofollowthegiant.However,Daisodecelerateditsexpansionfrom3/2014andCanDoandWattsincreasedatmildpace,whereasSeriaaccelerateditsexpandingstore.TheJPY100shopmarketisdominatedbythe4largestoperatorssuchasDaiso(privateowned),Seria(2783,JP),CanDo(2698,JP)andWatts(2735,JP).AsofSeptember2017,thegiantDaisoruns3,049storesofthetotal6,580storesoperatedbythelargest4operators,andSeriaruns1,459,CanDoandWattsoperate966and1,006respectively.ThenumberofoutletsofDaisoisstillthelargestbuttherivalscatchesupDaisoyearbyyear.FortheperiodfromApriltoSeptember,Seria,WattsandCanDonet-increased35,45and19outlets,whileDaisodid35storesforthesameperiod.(seechart‘Numberof4Largeoperators’stores’onleft).CompetitivePositioning3keyfactorsofimprovingCOGSSeriabelievesthechangeinCOGSisexplainedby3factorsof(a)compositionratioofdirectrunstoresale/totalsale,(b)compositionratioofsundrytototalsaleand(c)changeineffectivecurrencyrate.Compositionratioofdirectrunsale/totalsaleAsshownchart‘Total#ofStores’and‘Open/CloseStores’onleft,Seriahasacceleratedopeningnewstoresfrom62forFY3/2012to124forFY03/2016and140forFY3/2017andprojecttoopen150forFY3/2018.Simultaneously,Seriahasreplacedtodirectrunstores

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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(DR)fromfranchisestores(FC),asthetotalnumberofFCstoresdecreasedfrom97forFY3/2012to53asofOctober2017andnewFCstoreshasnotopenedsinceAugust2014.Asaresult,thecompositionratioofdirectrunsaletototalsaleincreasedfrom96.9%for2QFY3/2016to97.1%forFY3/2016,97.3%for2QFY3/2017and2QFY3/2018.Seriaplanstoincrease90directrunstoresanddecrease5FCstoresonnetbasisforthefullyear.Thedirectrunsaletototalsalewillcontinuerisinggoingforward,too.CompositionratioofsundrytototalsaleThesundrysaletototalsalehasrisenfrom95.4%for2QFY3/2013to97.7%for2QFY3/2018,asshownchart‘SundriesSale/TotalSale’onleft.Thehigherthecompositionratioofsundrysaleis,thelowertheCOGSshouldbe,assundryishighergrossprofitmarginthansnacksandothergoods.Thecompanyaimsatincreasingthesaleofsundryledbyitsfollowingmeasuresbasedondeepanalysisofcustomerneed.Seriahasledthestoreinterior,makingdifferencefromtraditionalJPY100shopsanditsfancystoreinterior,‘Colorthedays’namedbySeria,whichhelpstogathermanyyoungteenagersanddelivermorevaluesthancommoditygoodsatlowerpricesoldbyotherretailers.Today,competitors’shopsfollowtoimitateitsstoredesign.Youngcustomersfavorsuchstoreinterior,butproductlineshouldbemoreimportant.Japan’sconsumerspendingischangingto‘Need’basedfrom‘What’based.ParticularlyyoungercustomersaremorelikelytobuyfancyitemsonspecialeventandSeriaexperiencesextremelyhighersaleineventmonthsofChristmas,HalloweenandSt.Valentine’sDay.Seriahasnotpredictedthechangeinconsumertrend,butpursuitsofferingwhatcustomersneedhelpedbyaccurateanalysis.Thisresultsinitsfancystoredesignanduniqueitemssupportedbyyoungcustomersinspecialmonths.Thecompany’sadvancedPOSanalysisreallyhelpstheproductdevelopmentandprovideshot-selleritemsinstores.Inadditiontothis,thefollowingstrategywouldstrengthenitsanalysismoreaccurately.Seriaisexpandingthesaleofexclusiveitemsinitsstoresandthiswouldreinforcesundrysaleandthecompetitivenessfurther.Asshownthechart‘ExclusiveProductsandPB’onleft,thenumberofexclusiveproductsandthesaleoftheproductstototalsaleisgrowing,whilethenumberofitemsexceeds20,000andtheprivatebrandsaleoftotalsaleisdecreasing.Theexclusiveproductsaredevelopedbyreal-timePOSanalysisofcustomerneedandthesaleoftheproductsstrengthensitscompetitivenessandmakestheanalysismoreaccuratethanotheritems,astheitemsthataresellingonlyatSeriashouldshowcustomerneedmoreclearly.AcustomerwhobuystheexclusiveitemswouldvisitSeriaforsuchtypeofitemsandmakea

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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customerSeriaorsuchitem’sfan.Conversely,competitorshavenodataofexclusiveitemsofSeriawhen,whattime,howmanyandwhobuyssuchitemsetc.Nowadays,itiscommonrivalJPY100storesoperatecloselyeachotherinthesameshoppingarea.Eachcompanymustdifferentiateanddeliveritsownvaluetocustomers.Therefore,exclusiveitemsarebecomingapowerfultoolofstrengtheningitscompetitiveness,astheyimproveaccuratedataofcustomerdemandanddifferentiationfromcompetitors.Exclusiveitemsenhanceitsproductdevelopmentbasedonmoreaccuratedatathancompetitors.ChangeineffectivecurrencyrateCurrencyhadaffectedCOGSofJPY100shopoperatorshistorically,buttheimpacthasbeendecreasing.SeriaestimatesthecurrencyratetoincreaseCOGS/Sale0.02ppt.astheeffectiveFXratedecreases1pt.andexpectsthechangeofcurrencytobecomelargestimpactontheCOGS18monthlater,whilethecompanyhastriedtominimizetheimpactbyJPYdominatedprocurementbuttheinventorywouldstillinfluencewhentheimpactcomesout.CurrencyrateswouldnolongerbeasignificantfactoronCOGSanditscoststructurehasbeenlessvulnerabletothechangeincurrencymarket.Thus,COGS/Salehasbeendecreasingyearbyyearanddeclinedto57.0%for2QFY3/2018(seechart‘COGS/Sale’onleft),andthecompanyexpectsCOGS/Saletomaintainatflatorslightlylowerfor2Hduetotheprojectionofthe3factors.2keydriversofreducingSGAexpensesSeriaalsomanagespersonnelcostanddistributioncostforreducingSGAexpenses.PersonnelcostmanagementThecompanycloselywatcheshowstaffisallocationinstoresefficiently.Oneofindicatorswhichthecompanyusesisthenumberofstoresinexcessorshortageofstaffingofthetotalnumberofstores.Morethan10%ofstoresheldexcessstaffbeforeMarch2014,whilemorethan10%ofstoressufferedshortageofstaff.Theratioimprovedgraduallyyearbyyear,asthe%ofbothinexcessandshortageofstoresdecreasedfrommorethan10%to5%inexcessand6%inshortageinSeptember2016duetoitsefficientstaffmanagement.Buttheratioslightlyroseto8%inexcessand7%inshortageinSeptember2017.Asthestaffshortagestoresincreasedfrom6%in7%duetotightlabormarket,thecompanygivesprioritytoitsstoreoperationatthismomentandthisresultsinariseofexcessofstaffingtemporarily.DistributioncostmanagementSeriahasfirstintroducedITbasedsystemsintheJPY100shopindustry,suchasreal-timePOSandautomatedorderingsystemetc.Thesein-storeoperationsystemhelpsstorestafftoreduceworkload

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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andcontributestostronganalysisofcustomerneedsthatleadstodevelopmentofhot-selleritems.Meanwhile,thecompanyhasalsodevelopeditsautomatedorderingsystemforlogistics.Logisticscostisoneofkeyissuesfortheretailer,asthecompanyprovidesmorethan20,000items.Logisticsshouldconnecttoinventorymanagement,asreal-timePOSandautomatedorderingsystemin-storeimproveinventoryturnover.Thisresultsinefficientuseofwarehouse,aimingatoptimalloadingperfleet,container.Efficientdistributionmanagementwouldreducewarehousecost(samevolumeofshippingitemsinsmallerwarehouse)andtransportationcost(well-loadingandwell-hiringfleet).TheinnovativeautomatedorderingsystemhasbeendevelopedbythecompanyanditsalgorithmhasbeentunedupinNovember.Theorderingsystemwaspreviouslyinputaveragenumbersasproxyforanewlyopenedstore,butcurrentlyisinputmoreaccuratenumbersbasedontheexperience.Thenewlytunedupsystemwillreduceitsdistributioncostfurtherduetoaccurateanalysis.Meantime,Serialooksbeyondthecomingcompetitionwithe-Commerceoperatorsandbelievesthatwell-productlineandwelldistributionmanagementwouldbekeyofwinningthecompetitionforareal-storeretailer.Therefore,thecompanystrengthensproduct-line-upandenhancesdistributionmanagementkeepingmorethan20,000itemsbasedoncustomerneed.Porter’s5ForcesBuyers(Lowrisk):ManyofSeriaishighlysupportedbycustomersparticularlyyoungladiesduetoitspleasantstoredesignanduniqueproductsbasedonstronganalysisoncustomerneed.Itshigher-than-industryaverageofstoresaleshowsitscompetitivepositionclearly.Therefore,riskofbuyersisminimalatthismoment.Suppliers(Lowrisk):20%ofthegoodsaresuppliedbyoverseassuchasChina.,whereas80%ofgoodsaresuppliedfromdomesticsuppliers.Duetoreductionofcurrencyrisk,Seriahasdiversifiedsuppliersindomesticandoverseas,anditsalgorithmbasedorderingsystemhelpslogisticstomanageinacontainerorafleetbasis.Also,SeriacollaborateswithmanufacturersinproductdevelopmentbasedonitsPOSthathelpstofindcustomerneed.Theriskwouldbemarginal.Competition(Middlerisk):DuetorelativelypositiveoutlookforJPY100shopsmarket,competitorsexpandedstoresaggressivelyfor1HFY3/2018.LandlordaremorelikelytowanttoleaseJPY100operatorsintheirsitethanotherretailers,andthecompetitorsoperateJPY100storesinthesameshoppingareacloselyinmanycases.Thecompetitionintheindustrywillcontinueshard.Butitsstrongerproductdevelopmentanddistributionmanagementhasleddivergenceinexistingstoresaleandprofitabilityagainsttherivals.Thisriskwouldbestayingatmiddle.

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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NewEntry(Low-Middlerisk):DuetosoggyconsumptionspendinginJapan,competitioninoverallretailsectorisintense.DeflationeconomyandslowerrecoveryofconsumerconfidencewouldbetailwindforJPY100shopoperators.Themarketlooksattractiveforanewentrant,butthemarketisalsodominatedby4largestoperatorsandtheuniquepricetagofJPY100anitemneedspecializedcostmanagement,too.Seria’stechnology-aidedadvancedsystemisfaraheadofcompetitorsandnewentrant.Consequently,theriskwouldbelow-middle.Substitution(Lowrisk):Manyretailersaresellinglow-pricegoodsatdiscountstore,DIYstore,drugstoreandsupermarket.However,JPY100isanultimatesalepriceofgoods,andcostmanagementissuewouldbeacrucialforthebusiness.Seriahasmuchadvantageincostmanagementandsellsuniqueitemsthataremorethancommoditygoods,asmentionedabove.AriskwouldbethecasethatcustomersarepreferabletoanitematmorethanJPY100.DaisothatisagiantofJPY100shopoperatorbutoffersJPY200orJPY300items,too.IfcustomersconsidersuchhigherpriceditemsashighervaluethanordinaryJPY100items,thiswouldbeariskforJPY100itemssellers.AsfarasDaisocontinuesellingsuchhigherpriceditems,thedifferentiationstrategymighthavesomepositiveeffectonthecompany,butConsideringthatthenumberofthehigherpriceditemsisnotexpandandthenumberofstoresofDaisoisnotincreasing,theriskseemstobelessimpactonothercompetitors.BusinessOutlookMonthlystoresaleThecompanyprojectsexistingstoresaletoinchup0.3%YoYfor2HFY3/2018,butactualsalegrew2.7%fromApriltoOctoberandislikelytomovehigherfor2HFY3/2018.METRICALexpectsexistingstoresaletomaintainsolidgrowth+3.0%YoYfromFY3/2018toFY3/2020(seeAppendix).StoredevelopmentDuetosolidgrowthofexistingstoresale,onlySeriakeepsacceleratingthenumberofstores.SupermarketoperatorshavesufferedsluggishsaleformanyyearsandanincreasingnumberofsupermarketsinviteJPY100shopstheirspaceforincreasingcustomersintothestores.SeriaplanstoincreaseitsstoresinweakerregionsuchasNorthKanto,collaboratinglocalsupermarketchains,andthisisalignedwithsupermarkets.METRICALexpectsdirectrunstorestoincreasefrom90forFY3/2018to110forFY3/2019,120forFY3/2020and130forFY3/2021onnetbasis.

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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OPmarginatstoresSeriaaimsatraisingtheoperatingprofitmarginto15%.ThemeanaverageofOPmarginatstoresacceleratedto10.3%for2QFT3/2018from7.5%for2QFY3/2011and8.5%for2QFY3/2014.ExaminingthedistributionofthestoreOPmargin,thehighestdistributionormedianincreasedfrom14%for2QFY3/2014and2QFY3/2014to16%for2QFY3/2018.Theapproximately10%storesearntheOPmarginatmedianineachperiodanddiversifyfromlowerandhighervalues.Asthemedianvalueshiftshigherto16%2QFY3/2018from14%for2QFY3/2014,lower-tailalsoshiftshigher.Thecompanyplanstoincrease15closingstoresto60from45ofitspreviousprojectionforFY3/2018.Thisshoulddecreaselower-tailandimprovemeanaverageofOPmarginfurther.Accordingtothecompany,thestoreprofitmargintendstoincreaseintheregainthatSeriahashighmarketsharesuchasTokairegionofSeria’shometown.Therefore,thecompanyprojectstoexpandstoresintheregionthatSeriaisbehindofrivalsinthenumberofstores.Assumingtheprofitmarginimprovesatthesamepace,itwouldtaketoreach15%for5-6years,butthetargetwouldbeachievedmuchearlierduetorelocationandexpansionofstores.CompanyOutlookforFullYearFY3/2018Thecompanyreviseditsfullyearprojection.Salewillbeup9.4%YoYtoJPY159,000millionandOP,RPandNPareexpectedtogain12.1%YoYtoJPY17,000million,11.7%YoYtoJPY17,000millionand11.1%YoYtoJPY11,700millionrespectively.METRICALforecastforFY3/2018Basedonpositiveoutlookofmonthlysale,earningsforthefullyearwillmovehigherthancompanyforecast.Salesareexpectedtorise10.5%YoYtoJPY160,594millionandOP,EBTandNPareexpectedtogain17.6%YoYtoJPY17,839million,15.1%YoYtoJPY17,744millionand16.6%YoYtoJPY12,122millionrespectively(seeAppendix).Mid-TermOutlookExistingstoresaleislikelytomaintainsolidgrowthinthemid-termat+3.0%YoYforFY3/2018(E),+2.9%YoYforFY3/2019(E),+3.0%YoYforFY3/2020(E)and+2.9%YoYforFY3/2021(E).Assumingdirectrunstoresincreasesto110forFY3/2019,120forFY3/2020and130forFY3/2021,thesaleisexpectedtogrow9.7%forFY3/2019,10.8%forFY3/2020and10.9%forFY3/2021.Meanwhile,thecompanyplanstodoubleitsmarketshare.CurrentlySeriaowns21.3%marketshareof4largestcompanies,whereasDaisoowns61.7%,CanDoandWattsowns10.0%and7.0%respectivelyasofFY2016.Simultaneously,SeriaprojectsitsOPmargintoraiseto15%,asthecompanyestimatesthemarginislikelytoriseasmuchas15%incaseall4competitorscontinuecompeting.IfoneofthemdroppedfromtheindustryandthemarketshareofSeriaincreasedlikeits

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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hometown,Tokairegion,themean-averageOPmarginwouldmovemuchhigher.Approximately10%ofstoresearnmorethan20%ofOPmarginfor2QFY3/2018andthesestoresseemtooperateinmonopolisticmarket.Thechart‘StoreIncreaseandOPmargin’showsthedivergenceofOPmarginbetweenSeriaandCanDoandWatts.Seriaincreasesitsoutlets,improvingtheprofitmargin,whileCanDoslowsstoreexpansionduetoslowerimprovementinprofitability.Wattsincreasesoutletsbutsufferinglowprofitabilityandwillsoftthestoreexpansionifthelowprofitabilitycontinues.METRICALdoesnotexpectanydropoutsoon,butthedivergenceofprofitabilityandcompetitivepositioningwillgrowforthemid-to-longterm.ExpectedfinancialstatementsofSeriaisshowninAppendix.ValuationTherewouldberoomofrisingsharepriceonthefollowingvaluations.DCFvalueisestimatedtobeJPY6,972ashare,usingpresentvalueofprojectedFCFfortheperiodFY3/2018(E)toFY3/2021(E)andterminalvaluebyWACCof4.1%.EV/EBITDAlooksexpensivecomparedwiththatofpeers,butthiswouldbeduetomuchhigherprofitabilityandrelativelysolidsalegrowth.ThefutureNAVinthegrowthforthenext3yearsasSOTPNAVforFY3/2021(E)supportstheupsidepotential,consideringitsbusinessvalue(16xofEBIT)plusnetcashandothernon-businessassets.DCFDCFvaluationusesexpectedfreecashflowsfromFY3/2018toFY3/2021(E).Thesalesisexpectedonthescenariothatexistingstoresalegrows+3%YoY,thenumberofstoresincreases+90forFY3/2018,+110forFY3/2019and+120forFY3/2020and+130forFY3/2021,andOPmarginrisesto11.1%forFY3/2018,11.9%forFY3/2019,12.7%forFY3/2020and13.4%forFY3/2021(seeAppendix).TheDCFvaluewasestimatedbasedonthePVofexpectedFCFsforthenext4yearsandtheterminalvaluedividedWACCof4.1%(seetablesonleft).InestimatingCostofEquity,4.1%(=1/24.5,P/EforFY3/2021(E))isusedasBetaofthesharepriceisnegative.Onthisassumption,thevaluationofDCFisestimatedtobeJPY6,972ashare.EV/EBITDAIntermsofEV/EBITDA,thesharepricedoesnotlookcheapatthismomentonclosingpriceonNovember24th2017.EV/EBITDAofSeriaismuchhigherthanthatofpeersonitshigherprofitmarginandsalesgrowth,asshowntablebelow.EV/EBITDAisexpectedtodeclinefrom20.0xforFY03/2018(E)to14.0xforFY03/2020(E)and11.6xforFY3/2021(E)(seeAppendix).

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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Sum-of-thePartsValueSum-of-the-Parts(SOTP)valueisbusinessvalueofeachbusinesssegmentthatusesEBIT,EBITDAandFCFaddedtonetcashandlong-terminvestmentsecuritiesandland.SOTPnetassetvalueforFY3/2018(E)isestimatedtobeJPY5,266ashareandSOTPvaluefromFY3/2018(E)toFY3/2021(E)isestimatedtobeJPY7,209ashare,asRetailbusinessvalueisapprisedby16xofEBIT(seetablebelow).CurrentlythesharepriceistradedbetweenthebothNAVsandislikelytomovehigheronthefutureearningsforthenext3years.

FinancialAnalysisAsshownthechart‘ROEBreakdown’onleft,ROEofSeriaisextremelyhigherthanthatof2competitorssuchasCanDoandWatts.Thisisduetomuchhigherprofitmarginofthecompanythanthatofpeers.AssetTurnoverandFinancialLeverageofSeriaarelowerthanthatoftheothers,asSeriastrengthensproductlinesatstores,increasinginventoryforsellingmoreitemsthanothers,andhasisnodebtcompanyinrealterm.HigherprofitmarginisduetotightcostmanagementthatisprovedbyhigherOPmarginandlowerSGA/Saleasalsoshownonthetable’ComparableAnalysis’inEV/EBITDAearlier.Additionally,3companieshaverelativelystrongbalancesheet,butSeriaissuperiorwithnobankborrowinginrealterm.Itsfree

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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cashflowisexpectedtoaccelerateinlinewiththeexpansionofprofmargin.ItstightcostmanagementwillmaintainhigherROEof20%levelgoingforward.Theincreaseofcashonhandwithoutbankborrowingonthebalancesheetshouldraisetheroomofcashdividend,asthecompanypreferdividendtosharebuyback.(seecashflowstatementandkeyfinancialratiosonAppendix).InvestmentRisksSharpinflationwouldbeariskasithardlytosellJPY100goodsattheshopsinrisingprices,buttheoperatorswouldtrytoreducetheimpact,astheyhavereducedtheimpactbythechangeincurrencyrates.JPY100shopsarehighlysupportedbycustomersinthedeflationandsluggishconsumerspending.Particularly,Seriahavedeliveredmorevaluetocustomersthanjustlow-pricedgoods.Seriaoffersenjoyableshoppingspacetocustomerswhowanttobuyanitemworthmuchmorethanitspricetagoncurrentcustomerneed.Customerneedbasedmanagementisthecenterofthebusinessofthecompanyandthiswouldreducerisks.Reversalofbudget-mindedconsumption(LessLikely,LowRisk)ThiswouldbeamajorriskforJPY100shopoperatorsifconsumersweremorelikelytobuyluxuryorhigh-pricedgoodsratherthanJPY100pricetaggoods.Theriskwouldbelesslikelyforthemid-term.Inmacroeconomicpointofview,disposableincomeofconsumersishardlyexpectedtogrow,associalsecurityexpenseisincreasingatsolidpaceduetodemographicstructureinJapan.Also,teenagerstudentswhodonothaveenoughmoneytobuyluxurygoodsfromtheirwalletwillcontinuesupportingSeria.Therefore,theriskthatconsumerswillnotgoshoppinghigh-pricedgoodsratherthanJPY100islesslikely.Inflation(Likely,Mid-HighRisk)InflationriskishardlyanticipatedinJapanwherehasbeensufferedfromdeflationeconomyformorethanadecade.Incaseofmildinflation,JPY100pricetaglooksmoreattractiveinvalueofmoney.Incaseofsharpinflation,pricetagwouldbenolongerputatJPY100agood,eventhoughSeriatriestoreducecostofpurchasedfrommanufacturerbyre-designingofitems.3-coinshops(JPY300shop)areoperatedinthiscountryandSeriaandrivalsmightchangepricetagstomorethanJPY100incase.Moreimportantlyforconsumersthanjustnumberonapricetag,howtheyfinditemsworthmorethanpricetag.Real-timedataofcustomerneedsbyadvancedITsystemwouldbemoreimportantinsuchsituation.WeakerJPYrates(likely,Low-MiddleRisk)TherewasnoclearcorrelationbetweencurrencyrateandgrossprofitofJPY100operators,astheyhavetriedtoreducetheimpactbythe

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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changeincurrencyrates.Ingeneral,howeverhighappreciationofJPYrateshurtgrossprofitmarginbuttheytrytomanagecostofgoodsbyredesigningofgoodsandincreasingprocurementofdomesticproducts.Moreover,Seriafocusesonshiftinguniquelyexclusivegoodsfromcommoditygoodsandthesensitivitybythecurrencyminimizesto0.02ppt.onCOGSastheeffectivecurrencyratedecreaseby1pt.Theriskwouldbelowerthanbefore.JPY200orJPY300items(likely,Low-MiddleRisk)3-coinshopsarealsodoingwell,butasfarasexaminingfavorablesaleofSeria,customersareunlikelytomoveto3-coinshopsorDaisothatoffersJPY200orJPY300itemsaswellasmanyofJPY100goods.Thekeywouldbeavaluehowitemsoffervaluebackedbycustomerneed.Seria’spositiveexistingstoresalegrowthshowsthatcustomersconsidertheitemsasvaluemorethanthepricetag.

AkiMatsumoto,CFAakimatsumoto@metrical.co.jp

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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Appendix

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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