Round One | 4680 |

Round One | 4680 |

R LAST UPDATE【2016/6/27】 Round One | 4680 | Research Report by Shared Research Inc. Shared Research Inc. has produced this report by request from the...

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R LAST UPDATE【2016/6/27】

Round One | 4680 | Research Report by Shared Research Inc. 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 [email protected] or find us on Bloomberg.

R

Round One | 4680 |

Shared Research Report

LAST UPDATE【2016/6/27】

INDEX Executive summary --------------------------------------------------------------------------------------------------- 3 Key financial data ----------------------------------------------------------------------------------------------------- 4 Recent updates --------------------------------------------------------------------------------------------------------- 5 Highlights ----------------------------------------------------------------------------------------------------------------------- 5 Trends and outlook --------------------------------------------------------------------------------------------------- 6 Monthly trends ---------------------------------------------------------------------------------------------------------------- 6 Quarterly trends and results----------------------------------------------------------------------------------------------- 7 FY03/17 company forecasts (announced May 9, 2016)-------------------------------------------------------- 10 Long-term strategy --------------------------------------------------------------------------------------------------------- 13 Business ----------------------------------------------------------------------------------------------------------------- 15 Summary ---------------------------------------------------------------------------------------------------------------------- 15 Business description ------------------------------------------------------------------------------------------------------- 16 Cost structure analysis ---------------------------------------------------------------------------------------------------- 20 Strengths and weaknesses ----------------------------------------------------------------------------------------------- 22 Market and value chain --------------------------------------------------------------------------------------------------- 23 Historical financial statements ----------------------------------------------------------------------------------- 26 Summary ---------------------------------------------------------------------------------------------------------------------- 26 Income statement ---------------------------------------------------------------------------------------------------------- 35 Balance sheet ---------------------------------------------------------------------------------------------------------------- 36 Cash flow statement ------------------------------------------------------------------------------------------------------- 38 Other information---------------------------------------------------------------------------------------------------- 39 History -------------------------------------------------------------------------------------------------------------------------- 39 News and topics ------------------------------------------------------------------------------------------------------------ 39 Top management----------------------------------------------------------------------------------------------------------- 40 Employees -------------------------------------------------------------------------------------------------------------------- 41 Major shareholders --------------------------------------------------------------------------------------------------------- 41 Investor relations ------------------------------------------------------------------------------------------------------------ 41 Company profile ------------------------------------------------------------------------------------------------------------ 42

www.sharedresearch.jp

02/43

R

Round One | 4680 |

Shared Research Report

Round One > Executive summary

LAST UPDATE【2016/6/27】

Executive summary Core business—operation of amusement complex centers Round One specializes in running amusement complex centers across Japan, with centers in Kansai (southern-central Japan including Osaka, Kobe, and Kyoto) and Kanto (eastern Japan including Tokyo) regions. In particular, it has a substantial presence in Hokusetsu, an area straddling parts of Osaka, Kyoto and Hyogo Prefectures, where it had 29 stores as of March 2014. The amusement services start with bowling as well as games, karaoke and SPO-CHA (abbreviation for “Sports Challenge”).

Trends and outlook Full-year FY03/16 sales were JPY83.5bn (-0.5% YoY), operating profit was JPY6.4bn (-4.1% YoY), recurring profit was JPY5.4bn (-12.2% YoY), and net income was JPY449mn (net loss of JPY4.6bn in FY03/16). In order to secure medium-to-long-term sources of revenue, the company focused on actively implementing policies to attract bowling customers, such as holding a variety of bowling tournaments and both opening and sponsoring a bowling class. It also bumped up prices to increase spend per customer, and worked to secure visitors by implementing a new project, Competitions for Everyone (Japanese: Minna no Konpe) that offered prizes from sponsors, and installing state-of-the-art karaoke machines. However, sales at existing domestic stores remained sluggish. In an effort to expand its operating base, the company also accelerated plans to start up operations in the US. It opened four branches in the US in 2015: one in the Santa Ana Main Place Mall (California) in May, one in Seattle Southcenter Mall (Washington) in July, one in San Jose Eastridge Shopping Center (California) in September, and one in Taunton Silver City (Massachusetts) in December. It also opened a domestic store in Sapporo Susukino (Chuo-ku, Sapporo) in December 2015.

Round One’s FY03/17 earnings forecast called for sales of JPY87.1bn (+4.3%), operating profit of JPY6.1bn (-4.8%), recurring profit of JPY5.5bn (+1.8%), and net profit of JPY1.5bn (+233.9%). The company expects personnel consumption trends to remain uncertain going forward, and finds it difficult to have a favorable view of the earnings environment. In light of this outlook, the company will work to attract customers though activities such as SNS and TV commercials. Further, it plans to accelerate the opening of new stores in North America through its US subsidiary and improve its profit structure.

Strengths and weakness Shared Research believes that the three main strengths of Round One are its unique business model, strong brand name, and cash-flow generating ability. Weaknesses include its higher risks on new store openings compared with retailers, shrinking market, and slower-than-expected industry shakeout (see Strengths and weaknesses).

www.sharedresearch.jp

03/43

R

Round One | 4680 |

Shared Research Report

Round One > Key financial data

LAST UPDATE【2016/6/27】

Key financial data FY03/07

FY03/08

FY03/09

FY03/10

FY03/11

FY03/12

FY03/13

FY03/14

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Est.

Bowling

23,877

28,188

28,334

30,787

31,000

32,400

29,700

27,200

24,520

23,030

23,240

Game

40,230

Income Statement (JPYmn)

FY03/15 FY03/16 FY03/17

29,106

33,205

32,218

33,405

35,224

36,400

34,500

34,900

36,520

36,580

Karaoke

4,505

5,447

5,686

6,037

6,715

8,200

8,300

8,400

8,640

8,660

8,660

SPO-CHA

6,967

9,199

9,278

8,963

8,748

9,400

10,300

10,900

11,500

12,190

11,850

Other Sales YoY Gross Profit

1,369

1,952

2,466

2,918

2,613

3,000

2,900

2,700

2,700

3,040

3,120

65,826

77,993

77,983

82,113

84,303

89,568

85,903

84,272

83,905

83,516

87,100 4.3%

30.9%

18.5%

0.0%

5.3%

2.7%

6.2%

-4.1%

-1.9%

-0.4%

-0.5%

19,325

19,890

15,361

13,810

13,273

17,789

13,328

11,723

8,395

8,426

YoY

37.7%

2.9%

-22.8%

-10.1%

-3.9%

34.0%

-25.1%

-12.0%

-28.4%

0.4%

GPM

29.4%

25.5%

19.7%

16.8%

15.7%

19.9%

15.5%

13.9%

10.0%

10.1%

17,913

18,287

13,611

12,031

11,416

16,036

11,565

10,088

6,641

6,367

6,060

YoY

40.7%

2.1%

-25.6%

-11.6%

-5.1%

40.5%

-27.9%

-12.8%

-34.2%

-4.1%

-4.8%

OPM

27.2%

23.4%

17.5%

14.7%

13.5%

17.9%

13.5%

12.0%

7.9%

7.6%

7.0%

16,385

15,986

9,798

7,848

6,929

11,481

8,217

7,818

6,150

5,402

5,500 1.8%

Operating Profit

Recurring Profit YoY

22.1%

RPM Net Income YoY

9,730 -18.7%

Net Margin

-2.4%

-38.7%

-19.9%

-11.7%

65.7%

-28.4%

-4.9%

-21.3%

-12.2%

20.5%

12.6%

9.6%

8.2%

12.8%

9.6%

9.3%

7.3%

6.5%

6.3%

9,152

3,977

3,396

-12,673

2,781

601

-19,681

-4,568

449

1,500

-5.9%

-56.5%

-14.6%

-

-

-

-

-

-

234.1%

11.7%

5.1%

4.1%

-

3.1%

0.7%

-23.4%

-5.4%

0.5%

1.7%

15.7

Per Share Data (JPY, After Stock Split Adjustments) Earnings Per Share

155.1

145.1

63.5

46.8

-136.8

29.2

6.3

-206.6

-48.0

4.7

Book Value Per Share

979.5

1,104.5

1,147.6

1,080.0

829.4

838.4

826.1

603.8

541.9

522.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

15,955

Dividend Per Share

20.0

Cash Flow Statement (JPYmn) Operating Cash Flow Investment Cash Flow Financing Cash Flow

9,766

17,285

13,978

22,175

22,418

32,852

26,418

20,456

22,576

-43,083

-23,632

-25,762

-35,616

-23,563

24,036

4,371

46,611

592

-5,082

22,147

3,256

10,625

24,881

-4,551

-45,981

-34,564

-66,200

-20,820

-15,309

Financial Ratios ROA (Net Profit/ Average Total Assets)

13.8%

9.3%

5.0%

3.4%

2.8%

4.8%

3.8%

4.7%

5.2%

5.0%

ROE (Net Profit/ Average S.E.)

17.2%

13.9%

5.6%

4.3%

-

3.5%

0.8%

-

-

0.9%

Equity Ratio Net Debt / Equity Ratio Total Asset Turnover

37.2%

39.5%

33.5%

34.1%

31.3%

35.0%

38.2%

45.3%

46.3%

47.6%

105.3%

108.5%

133.2%

126.2%

143.5%

101.9%

82.5%

20.2%

-1.3%

-0.8%

0.4

0.4

0.4

0.3

0.3

0.4

0.4

0.7

0.8

0.8

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

www.sharedresearch.jp

04/43

R

Round One | 4680 |

Shared Research Report

Round One > Recent updates

LAST UPDATE【2016/6/27】

Recent updates Highlights On June 9, 2016, Round One Corporation released monthly sales data for May 2016; see the monthly trend sections for details.

On June 8, 2016, Shared Research updated its report after interviews with the company.

On May 9, 2016, the company announced Full-Year FY03/16 earnings results; see the results section for details. On the same day, the company released monthly sales data for April 2016.

On April 7, 2016, the company released monthly sales data for March 2016.

For corporate releases and developments more than three months old, please refer to the News and topics section.

www.sharedresearch.jp

05/43

R

Round One | 4680 |

Shared Research Report

Round One > Trends and outlook

LAST UPDATE【2016/6/27】

Trends and outlook Monthly trends May 2016 sales were up 4.9% YoY with comparable store sales up 2.3% YoY. The total number of stores was 114 (compared to 114 the previous month), of which 112 (112 the previous month) were existing (comparable) stores. Monthly Sales Trends FY03/17 Total Sales (JPYmn)

Total Sales YoY

Bowling Game Karaoke SPO-CHA Other

Bowling Game Karaoke SPO-CHA Other Comparable Store Sales YoY Bowling Game Karaoke SPO-CHA Other Monthly Sales Trends FY03/16 Total Sales (JPYmn) Bowling Game Karaoke SPO-CHA Other Total Sales YoY Bowling Game Karaoke SPO-CHA Other Comparable Store Sales YoY Bowling Game Karaoke SPO-CHA Other

Apr 5,989 1,671 2,577 598 911 233 1.4% -1.2% 2.1% 1.3% 2.3% 10.4% 0.1% -1.9% 0.1% 0.3% 1.6% 9.3% Apr 5,908 1,692 2,522 591 890 211 -7.8% -15.4% -6.1% -7.8% 1.4% 5.8% -9.4% -16.6% -8.0% -9.4% -0.7% 5.3%

May 7,155 1,908 3,254 674 1,056 261 4.9% -0.3% 10.8% -3.4% 2.4% 8.8% 2.3% -1.5% 7.4% -5.0% -1.1% 7.7%

Jun

Jul

May Jun 6,820 5,279 1,913 1,441 2,936 2,363 698 569 1,032 693 240 211 -2.9% -10.7% -7.3% -14.7% -4.4% -10.9% -1.8% -8.8% 7.9% -7.0% 8.2% 5.1% -4.7% -12.3% -8.6% -15.8% -6.5% -12.7% -3.4% -10.4% 5.8% -8.9% 7.7% 4.7%

Jul 5,880 1,580 2,668 625 778 227 -4.2% -6.3% -7.9% -3.8% 11.2% 12.2% -5.9% -7.5% -9.8% -5.4% 8.8% 11.6%

Aug

Sep

Oct

Aug

Sep 6,399 1,761 2,746 608 1,035 248 1.2% 0.3% -5.3% -5.8% 28.6% 14.8% -0.6% -1.1% -7.3% -7.4% 25.9% 14.3%

Oct 5,536 1,511 2,493 536 764 231 -4.5% -7.0% -6.4% -5.8% 4.6% 11.6% -4.4% -7.0% -6.6% -6.3% 6.6% 11.5%

8,330

2,201 3,483 786 1,580 278

-10.6%

-16.9% -12.0% -15.2% 3.2% 9.4%

-12.3%

-18.2% -13.9% -16.7% 1.0% 8.8%

Nov

Nov

5,470

Dec

Jan

Feb

Mar

Dec

Jan 7,825 2,345 3,208 757 1,243 270 0.2% -3.5% -1.0% -2.6% 11.2% 11.8% -0.8% -4.5% -2.4% -3.8% 11.2% 10.2%

Feb 5,946 1,736 2,502 559 906 241 -2.6% -6.1% -1.1% -6.5% 0.2% 9.4% -3.5% -6.8% -2.5% -7.4% 0.2% 8.3%

Mar 7,983 2,527 2,970 712 1,505 266 -0.8% -4.7% 0.6% -4.5% 3.8% 7.4% -1.6% -5.3% -0.7% -5.3% 3.8% 6.3%

6,953

1,456

1,914

2,407

3,089

545

763

836

929

225

-9.9%

-12.3% -13.4% -8.5% 0.3% 10.9%

-9.9%

-12.3% -13.4% -8.5% 0.3% 10.9%

256

-0.2% -6.4% 0.6% -1.5% 9.5% 14.3% -1.6% -7.8% -1.1% -3.3% 9.5% 12.0%

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

www.sharedresearch.jp

06/43

R

Round One | 4680 |

Shared Research Report

Round One > Trends and outlook

LAST UPDATE【2016/6/27】

Quarterly trends and results Quarterly Performance (JPYmn) Sales YoY Gross profit YoY GPM SG&A expenses YoY SG&A / Sales Operating profit YoY OPM Recurring profit YoY RPM Net income YoY NPM (Cumulative) Sales YoY Gross profit YoY GPM SG&A expenses YoY SG&A / Sales Operating profit YoY OPM Recurring profit YoY RPM Net income YoY NPM

FY03/15 FY03/16 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 19,694 22,155 19,319 22,737 18,833 21,942 19,291 23,450 -2.3% 2.1% 3.2% -4.0% -4.4% -1.0% -0.1% 3.1% 1,559 2,995 210 3,631 419 2,783 817 4,407 -41.5% -1.8% -66.8% -32.4% -73.1% -7.1% 289.0% 21.4% 7.9% 13.5% 1.1% 16.0% 2.2% 12.7% 4.2% 18.8% 406 403 486 459 490 491 544 534 -0.7% 1.3% 4.5% 26.8% 20.7% 21.8% 11.9% 16.3% 2.1% 1.8% 2.5% 2.0% 2.6% 2.2% 2.8% 2.3% 1,152 2,593 -276 3,172 -71 2,292 272 3,874 -48.9% -2.2% - -36.7% - -11.6% - 22.1% 5.8% 11.7% - 14.0% - 10.4% 1.4% 16.5% 830 2,577 -222 2,965 -216 2,040 135 3,443 -49.5% 30.8% - -33.9% - -20.8% - 16.1% 4.2% 11.6% - 13.0% 9.3% 0.7% 14.7% 778 1,527 -479 -6,394 -585 1,179 44 -189 23.3% - -22.8% 4.0% 6.9% 5.4% 0.2% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 19,694 41,849 61,168 83,905 18,833 40,775 60,066 83,516 -2.3% -0.1% 1.0% -0.4% -4.4% -2.6% -1.8% -0.5% 1,559 4,554 4,764 8,395 419 3,202 4,019 8,426 -41.5% -20.3% -25.0% -28.4% -73.1% -29.7% -15.6% 0.4% 7.9% 10.9% 7.8% 10.0% 2.2% 7.9% 6.7% 10.1% 406 809 1,295 1,754 490 981 1,525 2,059 -0.7% 0.2% 1.8% 7.3% 20.7% 21.3% 17.8% 17.4% 2.1% 1.9% 2.1% 2.1% 2.6% 2.4% 2.5% 2.5% 1,152 3,745 3,469 6,641 -71 2,221 2,493 6,367 -48.9% -23.7% -31.7% -34.2% - -40.7% -28.1% -4.1% 5.8% 8.9% 5.7% 7.9% 5.4% 4.2% 7.6% 830 3,407 3,185 6,150 -216 1,824 1,959 5,402 -49.5% -5.7% -4.5% -21.3% - -46.5% -38.5% -12.2% 4.2% 8.1% 5.2% 7.3% 4.5% 3.3% 6.5% 778 2,305 1,826 -4,568 -585 594 638 449 23.3% - -74.2% -65.1% 4.0% 5.5% 3.0% 1.5% 1.1% 0.5%

FY03/16

% of FY 99.8%

FY Est. 83,700 39.3%

109.8%

105.9%

149.7%

5,800 132.7% 6.9% 5,100 160.3% 6.1% 300 0.4%

Source: Shared Research based on company data Company estimates are the most recent figures. Figures may differ from company materials due to differences in rounding methods. Seasonality: the company’s sales and profits are not spread evenly across quarters. Q1 (April-June) is busy due to many events held to coincide with the beginning of the business and school year, as well as the “Golden Week” holiday season in early May. Q2 (July-September) includes the busy summer vacation period. Q4 (January-March) includes New Year events and the spring vacation period in late March. In contrast, Q3 (October-December) has few holidays and is comparatively quiet.

FY03/16 full-year results ▶ ▶ ▶ ▶

Sales:

JPY83.5bn (-0.5% YoY)

Operating profit:

JPY6.4bn (-4.1% YoY)

Recurring profit:

JPY5.4bn (-12.2% YoY)

Net income:

JPY449mn (compared to net loss of JPY4.6bn this time last year)

*Net income is attributable to parent company shareholders.

www.sharedresearch.jp

07/43

R

Round One | 4680 |

Shared Research Report

Round One > Trends and outlook

LAST UPDATE【2016/6/27】

In order to secure medium-to-long-term sources of revenue, the company focused on actively implementing policies to attract bowling customers, such as holding a variety of bowling tournaments and both opening and sponsoring a bowling class. It also bumped up prices to increase spend per customer, and worked to secure visitors by implementing a new project, Competitions for Everyone (Japanese: Minna no Konpe) offered prizes from sponsors, and installing state-of-the-art karaoke machines. However, sales at existing domestic stores remained sluggish. In an effort to expand its operating base, the company also accelerated plans to start up operations in the US. It opened four branches in the US in 2015: one in the Santa Ana Main Place Mall (California) in May, one in Seattle Southcenter Mall (Washington) in July, one in San Jose Eastridge Shopping Center (California) in September, and one in Taunton Silver City (Massachusetts) in December. It also opened a domestic store in Sapporo Susukino (Chuo-ku, Sapporo) in December 2015. Looking at sales by service, while SPO-CHA saw revenue growth, bowling, amusement, and karaoke logged lower revenues. Although the company implemented cost reduction measures through rationalization, etc., lower revenues dragged profits down to negative territory.

Full-year FY03/16 results (year-on-year) (JPYbn) Domestic business

Plus

Minus

Decrease in lease expenses

1.88

Decrease in sales

Decrease in advertising expenses (cuts to TV commercials)

0.86

Increase in rental expenses

3.57 0.75

Decrease in sales promotion expenses

0.48

Foreign exchange loss

0.33

Decrease in D&A

0.47

Taxes (change in external tax rates)

0.15

Other

0.01

US business New stores, increase in sales, etc. Total

0.37 4.06

4.81

Source: Shared Research based on company data

Sales reached 99.8% of the company’s full-year forecast, operating profit 109.8%, recurring profit 105.9%, and net

income 149.7%. Profits overshot forecasts despite the domestic sales decline and a foreign exchange loss, thanks to

lower-than-expected leasing costs caused by the delay in installing new game machines. Operations in the US—a focus area—also surpassed expectations.

www.sharedresearch.jp

08/43

R

Round One | 4680 |

Shared Research Report

Round One > Trends and outlook

LAST UPDATE【2016/6/27】

Full-year FY03/16 results (vs. forecasts) (JPYbn)

Plus

Minus

Domestic business Decrease in lease expenses

0.65

Decrease in sales

0.35

Decrease in utility expenses

0.24

Foreign exchange loss

0.26

Increase in stocking of food, beverages, and proshops

0.16

Increase in amusement promotional costs (marketing giveaways)

0.09

Other

0.07

Decrease in communication (game machine communication) expenses

0.2

US business New stores, increase in sales, etc.

0.14

Total

1.23

0.93

Source: Shared Research based on company data

The breakdown of sales by service, excluding US subsidiaries, is as follows (figures in parentheses are based on sales by existing stores).

Bowling: -6.1% YoY (-9.4% YoY) In FY03/16, Round One worked to attract bowling customers by holding a variety of bowling tournaments, such as the Round One Cup and the Bowling World Open, and both opening and sponsoring ‘Teaching Bowling for Health’, a bowling class (offered by an industry organization). It also focused on securing core customers by offering special services for My Bowler members (members of the Round 1 Bowlers Club). Despite this, sales declined year-on-year.

Amusement: +0.2% YoY (-7.2% YoY) In FY03/16, the company held game tournaments at set periods throughout the year as a networking event for stores, aiming to attract gaming customers as well as to secure core customers. It also worked to attract customers by introducing new machines, such as large token-operated game machines, and updating popular games.

Karaoke: +0.2% YoY (-7.4% YoY) The company introduced its latest karaoke machines, LIVE DAM STADIUM and JOYSOUND MAX, at all its stores. In addition, it installed Dual Monitor Rooms at all its stores, which casts a large screen on the wall to provide customers with a sense of immersion. It also added “DVD and Blu-Ray viewing room”, which allows customers using the Dual Monitor Rooms to bring in and use media that they own.

SPO-CHA: +6.0% YoY (+5.0% YoY) The company reviewed and changed its pricing structure, and began to offer an early-morning weekday package to encourage use by students and families.

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

www.sharedresearch.jp

09/43

R

Round One | 4680 |

Shared Research Report

Round One > Trends and outlook

LAST UPDATE【2016/6/27】

FY03/17 company forecasts (announced May 9, 2016) Forecasts (JPYmn) Sales YoY CoGS Gross profit YoY GPM SG&A Expenses SG&A / Sales Operating profit YoY OPM Recurring profit YoY RPM Net income YoY Net margin

1H Act. 41,849 -0.1% 37,295 4,554 -20.3% 10.9% 809 1.9% 3,745 -23.7% 8.9% 3,407 -5.7% 8.1% 2,305 5.5%

FY03/15 2H Act. 42,056 -0.8% 38,215 3,841 -36.1% 9.1% 945 2.2% 2,896 -44.1% 6.9% 2,743 -34.8% 6.5% -6,873 -

FY Act. 83,905 -0.4% 75,510 8,395 -28.4% 10.0% 1,754 2.1% 6,641 -34.2% 7.9% 6,150 -21.3% 7.3% -4,568 0.0%

1H Act. 40,775 -2.6% 37,573 3,202 -29.7% 7.9% 981 2.4% 2,221 -40.7% 5.4% 1,824 -46.5% 4.5% 594 -74.2% 1.5%

FY03/16 2H Act. 42,741 1.6% 37,517 5,224 36.0% 12.2% 1,078 2.5% 4,146 43.2% 9.7% 3,578 30.4% 8.4% -145 -

FY Act. 83,516 -0.5% 75,090 8,426 0.4% 10.1% 2,059 2.5% 6,367 -4.1% 7.6% 5,402 -12.2% 6.5% 449 -

1H Est. 42,490 4.2%

FY03/17 2H Est. 44,610 4.4%

FY Est. 87,100 4.3%

2,140 -3.6% 5.0% 1,830 0.3% 4.3% 900 51.5% 2.1%

3,920 -5.5% 8.8% 3,670 2.6% 8.2% 600 -

6,060 -4.8% 7.0% 5,500 1.8% 6.3% 1,500 233.9% 1.7%

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

FY03/17 full-year earnings forecasts (previous results in parentheses) Sales:

JPY87.1bn (+4.3%)

Operating profit:

JPY6.1bn (-4.8%)

Recurring profit:

JPY5.5bn (+1.8%)

Net income:

JPY1.5bn (+233.9%)

The company expects personnel consumption trends to remain uncertain going forward, and finds it difficult to have a favorable view of the earnings environment. In light of this outlook, the company will work to attract customers though activities such as SNS and TV commercials. Further, it plans to accelerate the opening of new stores in North America through its US subsidiary and improve its profit structure. By segment, Amusement is projected to drive revenues both domestically and in the US. Although somewhat behind the initial timeline, the segment has been actively installing new game machines since February 2016. As these machines draw visitors, they are expected to contribute to sales growth. In particular, the popular model KanColle Arcade (SEGA) has would-be players waiting in line for two or three hours on the weekend. Round One is slated to release a proprietary large-size medal machine in June 2016. The company is counting on it to further attract visitors.

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Round One > Trends and outlook

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Segment forecasts

(JPYbn) Bowling Amusement Karaoke SPO-CHA Other Sales Operating profit Recurring profit RPM Net profit Store openings/closings

Cons 23.0 36.6 8.7 12.2 3.0 83.5 6.4 5.4 0.6% 0.4

FY03/16 Japan 22.1 33.4 7.8 12.2 2.9 78.3 6.1 5.2 0.7% 0.2

US 1.0 3.2 0.9 0.0 0.1 5.2 0.3 0.2 0.5% 0.2

Cons 23.2 40.2 8.7 11.9 3.1 87.1 6.1 5.5 0.6% 1.5

FY03/17 Japan 21.9 35.8 7.4 11.9 3.0 79.9 5.6 5.1 0.6% 1.1

US 1.3 4.4 1.3 0.0 0.2 7.2 0.5 0.4 0.6% 0.4

4

0

4

0

-5

5

-4

-5

1

Total No. of stores Operational months

122 1,443

113 1,356

9 87

122 1,484

108 1,349

14 135

0 41

-5 -7

5 48

YoY change Cons Japan 0.2 -0.2 3.6 2.4 -0.0 -0.4 -0.3 -0.3 0.1 0.0 3.6 1.6 -0.3 -0.5 0.1 -0.1 0.0% 0.0% 1.1 0.9

US 0.4 1.2 0.4 0.0 0.1 2.0 0.2 0.2 0.1% 0.1

Source: Shared Research based on company data

According to Round One, operating profit was forecast to decline in consideration of an increase of JPY2.0bn in expenses as the company incurs rents on new store spaces, leasing costs as it installs large-size game machines, and higher advertising costs for TVCM—which had been kept down in the previous year—despite the expected domestic sales increase of JPY1.6bn from new stores. Recurring profit is projected to edge up as the company snaps out of the currency loss from the previous fiscal year and on account of reduced interest payments. In the area of extraordinary loss, projected impairment charges for unprofitable stores will fall JPY3.1bn YoY to JPY2.1bn. This is the background behind the expected surge in net income.

Main factors behind the FY03/17 plan Domestic sales to increase by JPY1.6bn YoY ・Comparable store sales to bottom out (+0.3% YoY) by JPY230mn ・New stores (less than 12 months in operation) to increase sales by JPY2.2bn ・Store closures (decrease in 23 operational months) to decrease sales by JPY910mn Domestic expenses to increase JPY2.0bn YoY ・Advertising costs such as TVCM to increase by JPY200mn ・Bowling promotion costs etc. to increase by JPY210mn ・Amusement promotional costs (marketing giveaways) as a result of sales to increase by JPY270mn ・Spending on large AM machinery to increase lease expenses by JPY500mn ・Spending on communication AM machinery to increase communication costs by JPY250mn ・New store openings (large-scale shops such as Susukino and Ario Kashiwa) to increase rent by JPY420mn Increase in non-operating income by JPY420mn ・Foreign exchange loss and interest expenses to decrease by JPY 350mn Extraordinary income to increase by JPY1.0bn YoY Decrease in unprofitable and closing stores to decrease projected impairment charges by JPY950mn US profits to increase by JPY150mn YoY ・Sales of JPY7.2bn (assuming 0% increase of existing stores YoY) during 135 operational months ・Recurring profit in FY03/16 JPY240mn to be JPY400mn this fiscal year (including 5 store opening costs of JPY200mn) Source: Shared Research based on company data

Round One is planning to open seven new stores (5 in the US and 2 domestically) and to close seven (all domestic), thus making the total number at end FY03/17 unchanged year-on-year at 122. Round One’s US operations have been making steady expansion, overshooting forecasts in the previous fiscal year. The

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company is set to remain focused on further development of its US business as an important source of future growth. Learning a lesson from its second and fourth US stores, the company is carefully vetting options with an eye to higher profitability. As it decided to cancel some store opening plans, it now has five new opening plans in the pipeline for FY03/17. That said, the company is poised to open at least 10 new stores next year. On the domestic front, the company is planning to open two new stores and to close seven unprofitable ones. The objective underpinning the plan is to improve earnings by eliminating counterproductive competition among its stores.

Plans for store openings Date

Name/Location

Details

Floor Area in Tsubo

FY03/17 Store Openings Apr. 2016

Ario Kashiwa Store (Kashiwa-shi, Chiba)

Standard/Roadside (in a large shopping mall)

3,692 (12,205sqm)

Late May 2016

Grapevine Mills (Dallas, Texas)

Standard/Roadside (in a large shopping mall)

2,285 (7,554sqm)

Jul. 2016

Sun Valley (Concord, California)

Standard/Roadside (in a large shopping mall)

1,329 (4,393sqm)

Fall 2016

East Japan

Standard/Roadside (in a large shopping mall)

1,387 (4,585sqm)

Beginning of 2017

Southwest (Littleton, Colorado)

Standard/Roadside (in a large shopping mall)

1,857 (6139sqm)

Beginning of 2017

Stonecrest (Lithonia, Georgia)

Standard/Roadside (in a large shopping mall)

1,420 (4694sqm)

Beginning of 2017

Exton (Exton, Pennsylvania)

Standard/Roadside (in a large shopping mall)

1,673 (5531sqm) 1,422 (4701sqm)

FY03/18 Store Openings Spring 2017

Broadway (Hicksville, New York)

Standard/Roadside (in a large shopping mall)

Spring 2017

Fox Valley Mall (Aurora, Illinois)

Standard/Roadside (in a large shopping mall)

1,453 (4803sqm)

Fall 2017

East Japan

Standard/Roadside

1,878 (6,208sqm)

Source: Shared Research based on company data

Of the seven domestic stores slated to be closed, most are of the old type without SPO-CHA. In terms of extraordinary losses stemming from the closure, those for three stores were already booked in FY03/16, whereas those for the remainder will be booked this year. While the company has taken into account projected losses from closing the first three stores, it has not put into the equation the expected profit increase in the surviving stores from the elimination of unprofitable competition. With regard to the remaining four stores whose extraordinary losses are scheduled to be booked this year, the expected losses from their closing are not put into consideration since the timing of their closure is not determined yet. Going forward, Round One plans to close additional stores if it deems that eliminating counterproductive intra-company competition will likely result in higher profits.

Effects of closing stores in competition with other company stores

Source: Company data

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Results vs. historical company estimates FY03/06

FY03/07

FY03/08

FY03/09

FY03/10

FY03/11

FY03/12

FY03/13

FY03/14

FY03/15

Par.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales (Initial CE)

46,740

60,400

79,800

85,000

91,000

86,000

88,000

90,000

86,000

85,500

85,000

Sales (Results)

50,282

65,826

77,993

77,983

82,113

84,303

89,568

85,903

84,272

83,905

83,516

7.6%

9.0%

-2.3%

-8.3%

-9.8%

-2.0%

1.8%

-4.6%

-2.0%

-1.9%

-1.7% 6,890

Initial CE vs. Results (JPYmn)

Initial CE versus Results

FY03/16

-

-

20,300

19,000

16,500

14,000

12,500

14,100

11,600

10,000

12,735

17,913

18,287

13,611

12,031

11,416

16,036

11,565

10,088

6,641

6,367

-

-

-9.9%

-28.4%

-27.1%

-18.5%

28.3%

-18.0%

-13.0%

-33.6%

-7.6%

Recurring Profit (Initial CE)

12,100

18,700

18,100

16,700

13,000

9,000

80,000

10,000

8,400

9,000

6,150

Recurring Profit (Results)

13,418

16,385

15,986

9,798

7,848

6,929

11,481

8,217

7,818

6,150

5,402

10.9%

-12.4%

-11.7%

-41.3%

-39.6%

-23.0%

-85.6%

-17.8%

-6.9%

-31.7%

-12.2% 1,200

Operating Profit (Initial CE) Operating Profit (Results) Initial CE versus Results

Initial CE versus Results

7,080

10,980

10,500

9,600

6,300

2,500

3,300

1,000

-7,500

5,000

Net Income (Results)

11,967

9,730

9,152

3,977

3,396

-12,673

2,781

601

-19,681

-4,568

449

Initial CE versus Results

69.0%

-11.4%

-12.8%

-58.6%

-46.1%

-

-15.7%

-39.9%

-

-

-62.6%

Net Income (Initial CE)

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

Long-term strategy Round One has not released a medium-term management plan. However, in the medium to long term, the company aims for growth by focusing on the US market. With regard to the shrinking domestic market, it plans to press on with the closing of unprofitable stores and the opening of new ones. Through these measures, the company hopes to sustain its current profit level as the elimination of counterproductive intra-company competition leads to higher profitability. On the US side, the company is leveraging the lesson it learned from its second and fourth US stores and is carefully vetting options with an eye to higher profitability. It aims to attain the same level of recurring profit there as it does domestically, by opening 50-60 stores in the next three to five years. The target is to double the consolidated recurring profit through these measures. In the long term, Round One is striving for sustained growth by concentrating on the top 300 shopping malls (out of a total of about 900 in the US) in each strategic area for new store opening. In terms of investment, the company’s basic policy is to conduct business within the limit of its operational cash flow. Financially, it plans to maintain its current level.

US stores: the present and the future Stores currently in operation Date

Name/Location

Details

1

Aug. 2010

Puente Hills (Los Angeles, California)

Standard/Roadside (in a large shopping mall)

2

Sep. 2012

Moreno Valley (Riverside, California)

Standard/Roadside (in a large shopping mall)

1,249 (4,129sqm)

Weak

3

Lakewood (Lakewood, California) Stratford Square (Chicago, Illinois) Arlington Parks (Arlington, Texas)

Standard/Roadside (in a large shopping mall) Standard/Roadside (in a large shopping mall) Standard/Roadside (in a large shopping mall)

1,223 (4043sqm)

Average

5

Aug. 2013 Oct. 2014 Dec. 2014

1,121 (3,706sqm) 1,824 (6030sqm)

Weak Average

6

May. 2015

Main Place (Santa Ana, California)

Standard/Roadside (in a large shopping mall)

1,143 (3,779sqm)

Average

7

Jul. 2015

Southcenter (Seattle, Washington)

Standard/Roadside (in a large shopping mall)

1,171 (3871sqm)

Strong

8

Sep. 2015

Eastridge (San Jose, California)

Standard/Roadside (in a large shopping mall)

1,463 (4,836sqm)

Strong

9

Dec. 2015

Silver City (Taunton, Massachusetts)

Standard/Roadside (in a large shopping mall)

1,818 (6010sqm)

Average

4

Floor Area in Tsubo Earnings 1,686 (5,574sqm) Strong

Source: Shared Research based on company data

Capital investment and balance sheet

Category

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High-performing stores

Average stores

Low-performing stores

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Initial investment amount

Annual

USD6mn

USD5.5mn

(approx. JPY660mn)

(approx. JPY660mn)

(approx. JPY600mn)

USD7mn

USD5.5mn

USD3.3mn

(approx. JPY770mn)

(approx. JPY600mn)

(approx. JPY360mn)

Total sales

balance sheet

USD6mn

Operating profit

USD0.8mn

USD0.2mn

-USD0.7mn

(approx. JPY80mn)

(approx. JPY20mn)

(approx. –JPY80mn)

Operating profit

USD1.3mn

USD0.6mn

-USD0.4mn

(after 2-3 years)

(approx. JPY140mn)

(approx. JPY60mn)

(approx. –JPY40mn)

Operating profit

USD1.8mn

USD1mn

USD0.1mn

(4 year and onwards)

(approx. JPY190mn)

(approx. JPY110mn)

(approx. JPY10mn)

Operating profit margin

25.0%

18.2%

3.0%

(first year)

th

(4th year and onwards) Source: Shared Research based on company data Note 1: USD/JPY110

Note 2: First year operating profit includes store opening costs, with the exception of those of head office.

Summary of store opening policy:

Candidate

Directly managed store openings using existing facilities in large-scale shopping malls across the US

locations:

(approximately 900 shopping malls in the US are possible locations)

Floor area

42,000-64,000sqft

Population of

150,000 persons in a 5-mile radius, 400,000 persons in a 10-mile radius

surrounding area Target

Shopping mall visitors (At night, younger customers such as college students), assuming a 50/50 split

audience

between males and females

Average spend

USD14(JPY1,540)

per customer Sales

Amusement, 60%; Bowling, 18%; Food, 17%; karaoke (excluding food and drink) 2%, Other, 3%

composition Standard capex

USD6.0mn (approx. JPY660mn, composed of: interior remodeling, JPY260mn; amusement machinery, JPY250mn; other machinery (bowling, etc.), JPY110mn; other related expenses, JPY40mn)

Characteristics

Lease expenses for amusement machinery are depreciated over three years, and other machinery

of lease

(bowling, etc.) are depreciated over seven years. From the fourth year onward, lease fees decrease and

expenses

profit amounts (profit margins) increase.

Source: Shared Research based on company data Note : USD/JPY110

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Business Summary Core business—operation of amusement complex centers Round One specializes in running amusement complex centers across Japan, mainly in Kansai (Southern-Central Japan, including Osaka, Kobe, and Kyoto) and Kanto (Eastern Japan including Tokyo) regions. In particular, it has a substantial presence in Hokusetsu, an area straddling parts of Osaka, Kyoto and Hyogo Prefectures. As of March 2016, it had 30 stores in the Hokusetsu area. The amusement services start with bowling as well as game, karaoke and SPO-CHA (abbreviation for “Sports Challenge”). Capturing profitability metrics at each service level is difficult, as they are all provided in a same location and for the same customers, and it is therefore hard to appropriately allocate direct costs and overhead to each category. Another feature is that the company’s stores are amusement complexes. Under the company’s new pricing strategy launched in November 2013, the company is building a business model in which bowling draws in customers, which then drive growth in sales for other services thanks to synergies created.

Bowling has high marginal profitability Marginal profitability appears to be the highest in bowling, followed by SPO-CHA. For bowling, the marginal profitability is suggested to be over 90% while gaming is relatively lower due to variable costs associated with prizes in redemption type machines etc. Karaoke has a high exposure to variable costs; this service includes offerings of foods and drinks to customers. SPO-CHA has a marginal profitability structure similar to bowling. US Moreno Valley Mall Brench

Okinawa Ginowan Branch

Source: Company data

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Round One > Business

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Business description The company’s amusement centers are divided into “standard” and “stadium.” Bowling, game and karaoke are the three main revenue pillars at standard facilities, while SPO-CHA is the key feature for the stadium format.

Returning to the standard format from the stadium format Stadium added SPO-CHA to become the newer format. However, this format requires a large land area. Consequently, excluding certain stores (Sennichimae store), most of the stadium format stores are standalone. The company’s recent store opening strategy has been limited to tenancies within existing malls and commercial complexes. For this reason, when space sufficient for the stadium format cannot be leased, the company has opted for the standard format.

Bowling (27.6% of sales in FY03/16)

Revenues are mainly derived from fees for bowling rounds, bowling shoe rental, and sales from vending machines (such as drinks and snacks). Within the company’s overall sales mix, although bowling accounts for slightly less than amusement, bowling is the company’s core business and all stores include a bowling alley. Nearly all of Japan’s existing bowling alleys opened during Japan’s bowling boom from the mid-1960s to the mid-1970s, and have continued to operate in their original style. Round One’s facilities were newly opened long after the boom period and feature a range of innovations, such as moonlight strike games, which help boost bowling’s leisure appeal and differentiate the facilities from those of competitors. From FY03/09 onward, Round One has grown faster than the market, but it suffered in FY03/13 as competitors drove down prices. Growth was also sluggish in FY03/15, owing to the prolonged effect of the consumption tax hike in April 2014, and poor weather over the year-end holiday season—normally a time of peak demand. The adverse effect of the consumption tax hike lingered on. However, it seemed to be finally bottoming out in FY03/17.

Bowling business performance (JPYmn) Round One bowling sales Round One YoY Round One % of total Market YoY

FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 28,334 30,787 31,000 32,400 29,700 0.5% 8.7% 0.7% 4.5% -8.3% 36.3% 37.5% 36.8% 36.2% 34.6% -9.9% -8.8% -1.2% -7.3% -1.3%

FY03/14 27,200 -8.4% 32.3% -

FY03/15 24,520 -9.9% 29.2% -

FY03/16 23,030 -6.1% 27.6% -

Source: Shared Research based on company data, Japan Productivity Center (JPC) Figures may differ from company materials due to differences in rounding methods. *Market data on a calendar year basis.

Source: Company data

Amusement (43.8% of sales in FY03/16) This category mainly comprises revenue from medal games, prize games, virtual games, video games and purikura machines. Amusements accounts for the largest share of the company’s sales mix. While many of the major game arcade operators in Japan are affiliated with particular game manufacturers (Sega, Namco, Taito, etc.), the company is the largest independent game arcade operator in the country. That means the company is able to use its own judgment in choosing

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the best games for its arcades from a diverse range of machines. As the scale of the company’s operations has expanded, its purchasing power has increased, putting it in a strong bargaining position vis-à-vis arcade game vendors and giving it access to many of the latest game machines. Amusement business performance (JPYmn) Round One amusement sales Round One YoY Round One % of total Market YoY

FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 32,218 33,405 35,224 36,400 34,500 -3.0% 3.7% 5.4% 3.3% -5.2% 41.3% 40.7% 41.8% 40.6% 40.2% -12.2% -13.4% -7.6% -2.1% -1.3%

FY03/14 34,900 1.2% 41.4% -

FY03/15 36,520 4.6% 43.5% -

FY03/16 36,580 0.2% 43.8% -

Source: Shared Research based on company data, Japan Productivity Center (JPC) Figures may differ from company materials due to differences in rounding methods. *Market data on a calendar year basis.

Source: Company data

Karaoke (10.4% of sales in FY03/16) Sales are mainly derived from karaoke room rental fees, and food and beverage services for karaoke customers. In the Karaoke business it is difficult to achieve differentiation apart from store location. However, the company has attempted to differentiate itself from competitors via inter-store networks and ranking systems, karaoke rooms with mini-stages, and rooms equipped with massage chairs. Karaoke business performance (JPYmn) Round One karaoke sales Round One YoY Round One % of total Market YoY

FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 8,200 8,300 5,686 6,037 6,715 1.2% 4.4% 6.2% 11.2% 22.1% 7.3% 7.4% 8.0% 9.2% 9.7% 1.6% -1.4% -8.6% -1.6% 1.6%

FY03/14 8,400 1.2% 10.0% -

FY03/15 8,640 2.9% 10.3% -

FY03/16 8,660 0.2% 10.4% -

Source: Shared Research based on company data, Japan Productivity Center (JPC) data Figures may differ from company materials due to differences in rounding methods. *Market data on a calendar year basis.

Source: Company data

SPO-CHA (14.6% of sales in FY03/16) Sales mainly comprise of admission tickets for SPO-CHA (“Sports Challenge”) and food and beverages consumed by SPO-CHA customers. SPO-CHA is only available at the company’s stadium format stores, which are larger than its standard store format. Nearly all stadium stores are standalone. Usually, the roof area and floor directly below are dedicated to SPO-CHA, which includes spa relaxation facilities, three-on-three basketball, virtual games, video games, batting practice, roller skating and others. Once customers enter the area, all these services (with the exception of some food services) are

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available at no additional cost within the time period specified by the ticket, distinguishing it from its competitors. Furthermore, Kid’s SPO-CHA targets families with children and includes play items such as slides, ball pools, and a children's only karaoke area. SPO-CHA business performance (JPYmn) Round One SPO-CHA sales Round One YoY Round One % of total

FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 9,278 8,963 8,748 9,400 10,300 0.9% -3.4% -2.4% 7.5% 9.6% 11.9% 10.9% 10.4% 10.5% 12.0%

FY03/14 10,900 5.8% 12.9%

FY03/15 11,500 5.5% 13.7%

FY03/16 12,190 6.0% 14.6%

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

SPO-CHA facilities

Source: Company data

Other (3.6% of sales in FY03/16) Sales mainly comprise rental income from tenants (food service operators, etc.) as well as revenue from such services as pool tables, dart boards and table tennis at standard stores. Other business performance (JPYmn) Round One other sales Round One YoY Round One % of total

FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 2,900 2,918 2,613 3,000 2,466 14.8% -3.3% 18.3% -10.5% 26.3% 3.3% 3.4% 3.6% 3.1% 3.2%

FY03/14 2,700 -6.9% 3.2%

FY03/15 2,700 0.0% 3.2%

FY03/16 3,040 12.6% 3.6%

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

Development of new centers As of end March 2016, the company had 122 amusement complex centers (standard stores: 67; stadiums: 46; US: 9), the oldest created in FY03/95. Through FY03/05 to FY03/08 Round One was focusing on stadium centers that include SPO-CHA. However, in FY03/09 the pace of stadium center openings slowed to an average of one per fiscal year. Implementing a decision to open a new center requires between six months and two years. Over the past few years, the company has maintained a policy of only opening new stores as a tenant. From FY03/06 to FY03/10, the company opened around 10 new stores annually, but since FY03/11, store openings have been limited to 1–5 per year.

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Store count Openings Closures Year-end store count Owned Rented Japan Standard (Road-side) (City Center) Stadium (Road-side) (City Center) US

FY03/09 13 2 94 61 33 94 52 45 7 42 42 -

FY03/10 11 0 105 69 36 105 62 55 7 43 43 -

FY03/11 4 0 109 69 40 108 65 57 8 43 43 1

FY03/12 1 0 110 63 47 109 66 58 8 43 43 1

FY03/13 4 1 113 58 55 111 66 57 9 45 44 1 2

FY03/14 1 0 114 21 93 111 66 57 9 45 44 1 3

FY03/15 4 0 118 29 84 113 67 58 9 46 45 1 5

FY03/16 5 1 122 28 94 113 67 57 10 46 45 1 9

Source: Shared Research based on company data

New store openings

Source: Shared Research based on company data

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Round One | 4680 |

Shared Research Report

Round One > Business

LAST UPDATE【2016/6/27】

Cost structure analysis According to the company, its marginal profit ratio is approximately 70% to 80%. Round One’s business model is such that fixed costs per center have a tendency to decline in the medium or long term. The company’s typical model shows that the annual leasing expense through the first year to the third year is JPY203mn versus JPY123mn in the fourth year to the sixth year and JPY94mn in the seventh year and onward (see table below). When assuming constant sales levels, the leasing expenses equate to 16.9%, 10.3%, and 7.8% of sales, respectively, throughout the three periods. When other conditions remain unchanged, operating profit margins are expected to improve as leasing expenses decline. Leasing costs by length of operation (JPYmn)

First 3 Years

4th to 6th

7th and Later

Bowling

360

360

360

Game

340

340

340

Karaoke

60

60

60

SPO-CHA

440

440

440

1,200

1,200

1,200

36

36

4

150

77

79

Karaoke

17

10

11

SPO-CHA

77

18

19

Sales Bowling Game

Leasing Costs Bowling

203

123

94

10.0%

10.0%

1.1%

Game

44.1%

22.6%

23.2%

Karaoke

28.3%

16.7%

18.3%

SPO-CHA Leasing Costs / Sales

17.5%

4.1%

4.3%

16.9%

10.3%

7.8%

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

Leasing costs are declining because of the gradual effects from initial investments. Leasing contract renewals, except for bowling, are signed every three years, and the costs of the fourth year decrease as initial investments aren’t required to renew a lease. For bowling, leasing costs remain stable for the first six to seven years, after which costs will decrease. Bowling has the lowest leasing costs compared with other facilities, and it has the lowest variable costs (meaning high marginal profit rates), making it a key earnings pillar for the company. After the seventh year bowling leasing costs come down to 1.1%, with higher profit margins expected. Bowling requires almost no additional investments when renewing leasing contracts, unlike other categories, and therefore the rate of declines in leasing costs are large. This analysis assumes constant sales; in reality comparable store sales significantly affect margins. Fluctuations in SPO-CHA sales mean leasing costs may account for a larger share of sales. But these numbers serve as a reference when analyzing Round One’s other services.

Ages of centers The number of centers in their first to third year continued increasing through FY03/09, but since the substantial slowdown of new store openings from FY03/11, centers four years or older are becoming more numerous, lowering overall costs.

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Shared Research Report

Round One | 4680 |

Round One > Business

LAST UPDATE【2016/6/27】

Store breakdown by age

Source: Shared Research based on company data

Group companies The group is comprised of the parent and its 17 consolidated subsidiaries. With the exception of Round One Entertainment Inc., the remaining 16 subsidiaries are silent partnerships (Tokumei Kumiai) under the special-purpose company scheme, established with the sole purpose of developing and renting stores for the parent. In the past, the company had a consolidated subsidiary that issued point cards, but as it did not meet expectations, the business was liquidated in FY03/02 and from the following year the company excluded this subsidiary from its scope of consolidation. Meanwhile, in 2002 the company followed the suggestion of a leasing company and started to use SPCs. Under the prevailing accounting rules, development-type SPCs were off balance sheets and therefore did not require consolidated reporting. From FY03/07 the company began including all its SPC-related assets and liabilities in the scope of consolidation. As a result, consolidated subsidiaries include silent partnerships (Tokumei Kumiai). In addition, from FY03/11, US subsidiary Round One Entertainment Inc. has become included in the consolidated companies.

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Shared Research Report

Round One > Business

Round One | 4680 | LAST UPDATE【2016/6/27】

Strengths and weaknesses Strengths: ◤

Unique business model: Combining bowling, amusement (game arcades), karaoke and SPO-CHA (not in all centers) into one large amusement center proves to be a unique business model. When these are further combined with such offerings as pool tables and dart boards, synergies increase to attract customers. Synergies also smooth out revenues as fluctuations in individual services have less effect on the overall business. While core markets gradually shrink and competitors withdraw, Round One reaps benefits of being the country’s sole nationwide operator of amusement complexes. In the past, large game machine manufacturers and developers have attempted similar operations, but these generally ended in failure due to lack of operational expertise and the need for a large level of capex.



Strong brand name: “Round One” is well recognized by consumers nationwide due to advertising on the major TV networks.



Strong cash-flow generating ability: Although the high earnings growth seen in the past has steadied to less-spectacular rates, it will be important for the company to maintain comparable store sales since the company’s ability to generate free cash flow will weaken if comparable store earnings stagnate.

Weaknesses: ◤

Compared with retailers, new store openings carry high risks: While many retailers can close their stores relatively easily, the company’s large-scale centers are unique and closures carry the risk of incurring major asset write-offs. However, from FY03/11, the company prioritized the leasing of vacant space in existing buildings. For example, the Fuchu Hommachi-ekimae store opened in FY03/11 in a building formerly occupied by a large supermarket operator. The company proved it was possible to hold down capex while sustaining growth. This also suggests that there may be room to reduce store-opening-related risks by using existing buildings.



Shrinking market: Having a high presence in its market, it is harder for the company to find new venues of profitable growth, especially when only looking at its domestic operations. The company entered the North American market in 2010 as it looked to develop new markets that could sustain long term growth. Although overseas store openings carry country risk and face regulatory hurdles (e.g. medal games), the stores operating demonstrate a certain level of success.



Slower-than-expected industry shakeout: As Japan continues to see bowling and amusement markets shrink, the number of industry players is on a downward trend. Because of these players generating steady operating cash flows, the pace of market shrinkage is slow. If industry shakeout accelerates, the company can benefit from being a survivor.

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Round One | 4680 |

Shared Research Report

Round One > Business

LAST UPDATE【2016/6/27】

Market and value chain Market overview Bowling gained wide popularity in Japan in the 1960s when it was first imported. In those days, many companies with suitable idle land aggressively built bowling alleys for customers who often lined up for hours to bowl. After peaking at around 4,000, the number of centers declined to about 900 as of June 2011. Japanese people now have access to a wide variety of entertainment options, leading to a smaller portion of disposable income for bowling. The market for Round One’s services is no longer in a secular growth stage. It goes through other cycles more related to product innovation and emergence of competing entertainment options rather than responding to normal economic cycles. For instance, when automatic scoring was introduced in bowling alleys in Japan, it fueled a temporary boom. On the other hand, when mobile phone content started rapidly gaining acceptance among young people, handsets took away a portion of their disposable incomes and negatively impacted other amusement alternatives, including bowling. The impact tends to wear off after an initial surge, creating a “hindsight cycle”. Generally speaking, such cycles are short-lived, so Round One’s markets (bowling, games) seem to have a slow contraction trend arguably driven by changing demographics. Market Trends (JPYbn) Bowling Market size YoY Participating population (mn) YoY Karaoke Market size YoY Participating population (mn) YoY Arcade Games Market size YoY Participating population (mn) YoY

2001

2007

2008

2009

2010

2011

2012

115.0

101.0 -1.0% 25.1 0.0%

91.0 -9.9% 23.5 -6.4%

83.0 82.0 -8.8% -1.2% 22.1 17.8 -6.0% -19.5%

76.0 -7.3% 16.9 -5.1%

75.0 -1.3% 14.5 -14.2%

427.0 -2.1% 43.1 0.5%

421.0 -1.4% 44.3 2.8%

385.0 -8.6% 50.0 12.9%

379.0 385.2 -1.6% 1.6% 39.1 46.8 -6.4% -16.5%

391.2 1.6% 36.5 -6.6%

595.0 515.0 678.0 3.0% -12.2% -13.4% 22.7 29.0 22.0 -2.7% 3.2% 27.8%

476.0 466.0 -7.6% -2.1% 30.0 19.1 3.4% -36.3%

460.0 -1.3%

34.4 451.0 51.5 546.0 21.6

Source: Shared Research based on Japan Productivity Center (JPC) data

With 113 centers nationwide (FY03/16 end), Round One has approximately 30% of the market (company estimate). While its market share based on the number of bowling centers is only about 10%, it has a very high lane utilization rate compared with its peers. The company entered the market late, in the early 1980s, at the end of an era of such commercially successful entries. The company not only opened bowling alleys but also introduced a completely new model (under the Round One brand), combining bowling with games, karaoke, and other amusement options. This model came to dominate the market. The market size is currently about JPY70-80bn with approximately 10 centers closing each year, and expectations for continued contraction of the market. However, Round One has the potential to improve sales by increasing its share as smaller competitors exit the market. The market for arcade games is saturated, due to relatively low entry barriers and over-expansion of market supply in the past. The total market size is just under JPY500bn, down from a peak of over JPY700bn. The contraction of the market has motivated some incumbents to reconsider participation, and some larger national operators are selling assets to smaller regional firms. The overcapacity has caused ripple effects through the value chain as game manufacturers reacted by limiting game title production. Smaller arcade operators are slow to replace machines due to financing challenges, and manufacturers respond by making fewer games, which in turn limits choices for larger arcade operators.

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Shared Research Report

Round One | 4680 |

Round One > Business

LAST UPDATE【2016/6/27】

US market The company plans to open more US stores. According to FY03/14 company materials, the US bowling market had the following characteristics (market size and other data were company estimates based on the Japan Productivity Center’s White Paper of Leisure 2013):

Overview ◤

Market size: USD7.0bn (approximately 9.2 times the size of the Japanese market based on a JPY100 to the dollar exchange rate)



Number of centers: 5,350 centers (Private sector: about 4,800 centers; Others (such as Military/Association operated): about 550 centers)



Bowling population: about 71 million people (people bowling at least once a year; 14.5 million people for Japan)

Other market features ◤

The two largest operators (Brunswick Corp. and AMF Bowling, Inc.) have approximately 400 stores with second-tier players having around 50 stores. Most of the other operators are family-owned businesses.

◤ ◤

Recession-resistant: the market has displayed continued stable growth over the past few years. Older bowling alleys have been closed down over the years and about 20-50 of these stores per year are then renovated into other facilities (such as go-kart tracks, video game arcades, and mini golf courses).



Participation rates for bowling are very high compared to other leisure activities (such as golf, fishing, tennis, billiards, cycling, roller skating, ice skating and marathon running).



Bowling alleys are viewed as social venues with increasing users with above average incomes.

Customers Customer breakdown by generations with the company is as follows: people in their teens and twenties collectively account for 50% of the total. The family segment with adults in their 40s accounts for about 30%. Other generations account for the remaining 20%. The population in Japan is unlikely to grow in the future, and the proportion of young people to the total population is likely to decline. Given this trend, the key customer base (younger people) should suffer proportionally larger declines than the overall Japanese population, and this could lead to future decreases in customers. However, current young customers (if they habitually come to amusement centers) could potentially become repeat customers even in their thirties and forties.

Suppliers Round One sources equipment for its facilities, otherwise there are no major items to procure. All equipment is leased, not purchased. Suppliers of game machines include Sega Sammy Holdings Inc. (TSE 1st Section 6460), Namco Bandai Holdings Inc. (TSE 1st Section 7832), Taito Corporation, a subsidiary of Square Enix Holdings Co., Ltd. (TSE 1st Section 9684), and Konami Corp. (TSE1: 9766). Excluding Konami, most game suppliers also operate their own arcade game chains, also making them competitors of the company. For these manufacturers, Round One is a major customer.

Barriers to entry A mature market with limited growth potential makes a profitable entry less possible and therefore less attractive. Both

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Round One > Business

Round One | 4680 | LAST UPDATE【2016/6/27】

the existence of a national Round One franchise and its expertise in managing this franchise create high barriers to entry for mid- and small-sized competitors. Additionally, several billion yen is required to invest in facilities, which is a significant barrier to entry. Some game manufacturers abandoned their attempts to enter the bowling market after they found that their expertise (arcade games) was not transferable to bowling.

Competitors There are no direct competitors that run national chains. Neighborhood operators of bowling centers, game arcades, and karaoke centers are all competitors to varying degrees. Sport Co., Ltd. (previously a subsidiary of Koshidaka Holdings Co., Ltd. (JASDAQ: 2157), sold in 2012 to Venus Fund Co., Ltd.) is considered a distant second runner in the industry, operating 16 plain-vanilla bowling centers. The second-largest operator in terms of store numbers is Next Co., Ltd. (formerly Tokori Global Co., Ltd.), which had around 40 centers under the T.T BOWL brand (as of March 2014). However, this operator filed for bankruptcy protection in March 2014 due to excessive price cutting and overextending itself in store openings. No company has succeeded in replicating the national scale and highly standardized model that Round One has accomplished. In the words of management, “there is no Round 2” in the market using the same business model. Arcade game operators such as Sega Sammy Holdings, Namco Bandai Holdings and Taito, are competitors, but none of them operate amusement complexes on a nationwide basis. Smaller players like Adores Inc. (Jasdaq 4712) and GEO Holdings Corp (TSE1:2681) an subsidiary Warehouse Co., Ltd. can also be cited as competitors, but they are not deeply involved in bowling operations and have a much smaller scale, so direct comparisons are not useful.

Substitutes Essentially, Round One’s services provide customers with amusement and/or entertainment, and thus any other equivalents could be substitutes. However, the mainstay bowling has distinguished characteristics that make it popular—the rules are simple, skill is not required for enjoyment, and it is relatively inexpensive. Given these factors, it is unlikely that the market for bowling will quickly decline. The diversification of amusement and/or entertainment will most likely continue to progress, but bowling should survive as one of the key categories even in the long term.

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Round One | 4680 |

Shared Research Report

Round One > Historical financial statements

LAST UPDATE【2016/6/27】

Historical financial statements Summary Q3 FY03/16 results ▶ ▶ ▶ ▶

Sales:

JPY60.1bn (-1.8% YoY)

Operating profit:

JPY2.5bn (-28.1% YoY)

Recurring profit:

JPY2.0bn (-38.5% YoY)

Net income*:

JPY638mn (-65.1% YoY)

*Net income is attributable to parent company shareholders.

The company bumped up prices to increase spend per customer, and worked to secure visitors by implementing a new project, Competitions for Everyone, offering prizes from sponsors and installing state-of-the-art karaoke machines. However, sales at existing domestic stores remained sluggish. By service, SPO-CHA saw increased sales while bowling, amusement, and karaoke all suffered decreased sales. Efforts were made to restrain expenses through rationalization initiatives, but these were unable to offset the effects of lower sales, causing a significant fall in profits.

Cumulative Q3 FY03/16 earnings results (year-on-year) (JPYbn) Domestic business Decrease in lease expenses Decrease in advertising expenses (reduce TV commercials) Decrease in sales promotion expenses Decrease in D&A Other US business

Plus 1.33 0.71 0.38 0.36 0.02

Decrease in sales Increase in rental expenses Increase in commission fees (shuttle bus operation increase)

3.35 0.43 0.37

Increase in sales attributable to increase in stores, etc.

2.25

Increase in expenses attributable to increase in stores, etc.

2.13

Total

Minus

5.05

6.28

Source: Shared Research based on company data

As a result, versus full-year targets, the company achieved 71.8% of its sales (compared to 72.9% the previous year), 43.0% of its operating profit (52.2% the previous year), 38.4% of its recurring profit (51.8% the previous year), and 212.7% of its net income (net loss the previous year) forecasts. Domestic sales on a quarterly basis were down 8.5% year-on-year in Q1, down 7.0% year-on-year in Q2, and down 5.0% year-on-year in Q3, signaling a narrowing in declines. As a result, sales during cumulative Q3 were able to maintain levels in line with the company’s previous plans. Expenses were lower than company forecasts due to progress in rationalization measures, in addition to a delay in the introduction of new large-scale amusement machinery. Operations in the US continue to exceed expectations. As a result, recurring profit was JPY670mn higher than the company’s most recent plans.

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Round One | 4680 |

Shared Research Report

Round One > Historical financial statements

LAST UPDATE【2016/6/27】

1H FY03/16 earnings results (versus company plans) Factors affecting recurring profit (JPYbn) Domestic business Decrease in lease expenses Decrease in amusement promotional costs (marketing giveaways) Decrease in utility expenses Decrease in other expenses US business

Minus

Plus 0.26

Decrease in sales

0.05

Increase in expenses

0.06

0.14 0.14 0.09 0.05

Increase in sales 0.11 Total

0.79

0.11

Source: Shared Research based on company data

According to the company, the delayed introduction of new large-scale amusement machinery is planned to occur during the period between the end of February and April 2016. Although dependent on results in March, a month historically associated with high sales, profits may exceed company forecasts, owing to results that were better than expected as of end cumulative Q3. From FY03/17 onward, Round One expects sales from the introduction of new large-scale amusement machinery in Q4 FY03/16 to be a contributor to overall results. To secure profits in FY03/16, the company was restrained in the airing of television commercials. However, the decline in sales appears to have bottomed out, and plans call for television commercials to resume from April 2016. This has the additional aim of increasing overall demand for bowling. The company’s plans for FY03/16 call for JPY3.1bn (JPY4.4bn in FY03/15) in impairment losses associated with unprofitable stores. However, as year-on-year sales declines have narrowed, Round One projects that impairment losses during FY03/17 will be significantly lower. Before the end of FY03/17, the company also appears to be considering the closing of six to eight additional unprofitable stores. Based on company estimates, the benefit to its bottom line is about JPY100mn to JPY150mn per store, yielding a profit improvement of between JPY800mn and JPY1.0bn if eight unprofitable stores are closed. As stated above, operations in the US continue to exceed forecasts. As a result, the company plans to take an aggressive stance with regard to expansion. However, learning from its experiences in opening its second and fourth stores in the US, Round One will move forward only with projects that can generate greater profits. This has caused the opening of one store to be reconsidered. Due to this reconsideration, new store openings during FY03/16 and FY03/17 will likely be about four stores per year. The breakdown of sales by service, excluding US subsidiaries, is as follows (figures in parentheses are based on sales by existing stores).

Bowling: -7.6% YoY (-8.9% YoY) Round One focused on securing core customers by collecting fees from the Round 1 Bowlers Club league, and offering free practices for professionals. Still, sales were down despite efforts to increase customers, such newly implemented Competition for Everyone.

Amusement: -1.8% YoY (-6.8% YoY) The company installed state-of-the-art game machines and updated popular games to draw visitors. Nevertheless, sales

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Round One | 4680 |

Shared Research Report

Round One > Historical financial statements

LAST UPDATE【2016/6/27】

declined. The delayed introduction of new large-scale amusement machinery is planned to begin in February 2016. Round One plans for these new machines to contribute to higher sales from FY03/17 onward.

Karaoke: -0.7% YoY (-5.6% YoY) The company introduced the latest karaoke machines, LIVE DAM STADIUM and JOYSOUND MAX. In addition, it installed the Duel Monitor Room in all the stores, which casts a large screen on the wall providing the customers a real sense of being part of the scene. However, sales were down year-on-year.

SPO-CHA: +6.3% YoY (+5.4% YoY) Sales were up, as the company reviewed and changed its pricing structure. Although a price hike was implemented in the first half of 2015, it has not significantly impacted customer count, and has been a factor in higher sales.

1H FY03/16 results On November 9, 2015, Round One announced its 1H FY03/16 earnings results. ▶ ▶ ▶ ▶

Sales:

JPY40.8bn (-2.6% YoY)

Operating profit:

JPY2.2bn (-40.7% YoY)

Recurring profit:

JPY1.8bn (-46.5% YoY)

Net profit:

JPY594mn (-74.2% YoY)

The company bumped up prices to increase spend per customer, and worked to secure visitors by implementing a new project, Competitions for Everyone, offering prizes from sponsors and installing state-of-the-art karaoke machines. However, sales at existing domestic stores remained sluggish. As of the end of 1H FY03/16, the total domestic store count was 121 (+7 stores YoY), with 714 outlet operational months (+30 months YoY). By service, SPO-CHA saw increased sales while bowling, amusement, and karaoke all suffered decreased sales.

FY03/16 Results (YoY) (JPYbn) Domestic business Decrease in lease expenses Decrease in advertising expenses (cuts to TV commercials) Decrease in D&A

Plus

Minus

0.78 0.43 0.24

Decrease in sales Increase in rental expenses Increase in commission fees (increase in number of shuttle buses) Other

2.48 0.38 0.13 0.09

1.41

Increase in expenses attributable to increase in stores, etc.

1.36

US business Increase in sales attributable to increase in stores, etc. Total

2.86

4.44

Source: Shared Research based on company data

As a result, versus 1H targets, the company achieved 97.9% of its sales, 70.3% of its operating profit, 66.3% of its recurring profit, and 35.6% of its net income forecasts. See the recent updates section for details. Sales for 1H were JPY855mn below the level targeted at the beginning of the year. By service, Amusement was about JPY400mn short of initial company target, while Bowling and Karaoke each fell about JPY200mn short. The main reason for the low growth in Amusement was the lack of anticipated new game machines from major manufacturers which meant that demand

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Round One | 4680 |

Shared Research Report

Round One > Historical financial statements

LAST UPDATE【2016/6/27】

remained subdued. From April, 2015, the company also made all of its centers smoke-free. As such, Bowling and Amusement were affected by a fall in demand of 6% and 4% respectively, according to the company. For Karaoke, prices were raised an average of 3%, which the company says led to a fall in demand of around 7%, mostly among students and other price sensitive customers. Recurring profit was down JPY926mn, compared to initial company target. On the expenses side, a lack of new products in Amusement meant that lease fees were lower than expected. The US business was stronger than expected, but not enough to offset the fall in domestic sales, and so profit still came in below forecast.

1H FY03/16 Earnings vs Plan (JPYbn) Domestic business Decrease in lease expenses Decrease in communication expenses (usage fee for amusement machines) Decrease in other expenses US business Increase in sales

Plus

Total

0.96

Minus

0.25 0.19 0.06

Decrease in sales Increase in supplies expenses

1.33 0.24

0.46

Increase in expenses attributable to increase in sales, etc.

0.32 1.89

Source: Shared Research based on company data

Revised FY03/16 full-year earnings forecasts Sales:

JPY83.7bn (-0.2% YoY)

Operating profit:

JPY5.8bn (-12.7% YoY)

Recurring profit:

JPY5.1bn (-17.1% YoY)

Net income:

JPY300mn (net loss of JPY4.6bn in FY03/15)

For post-earnings company forecasts, see the company plan for FY03/16. The breakdown of sales by service, excluding US subsidiaries, is as follows (figures in parentheses are based on sales by existing stores).

Bowling: -10.6% YoY (-11.8% YoY) Round One focused on securing core customers by collecting fees from the Round 1 Bowlers Club league, and offering free practices for professionals. Still, sales were down despite efforts to increase customers, such as the newly-implemented Competition for Everyone.

Amusement: -7.9% YoY (-9.9% YoY) The company installed state-of-the-art game machines and updated popular games to draw visitors. Nevertheless, sales declined.

Karaoke: -7.7% YoY (-9.2% YoY) The company introduced the latest karaoke machines, LIVE DAM STADIUM and JOYSOUND MAX. In addition, it installed the Dual Monitor Room in all stores, which casts large images on the wall to provide a more immersive experience for customers. However, sales were down year-on-year.

SPO-CHA: +7.0% YoY (+4.8% YoY) Sales were up, as the company reviewed and changed its pricing structure.

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Shared Research Report

Round One | 4680 |

Round One > Historical financial statements

LAST UPDATE【2016/6/27】

Q1 FY03/16 results On August 5, 2015, Round One announced its Q1 FY03/16 earnings results. ▶ ▶ ▶ ▶

Sales:

JPY18.8bn (-4.4% YoY)

Operating loss:

JPY71mn (from a profit of JPY1.2bn in FY03/15)

Recurring loss:

JPY216mn (from a profit of JPY830mn in FY03/15)

Net loss:

JPY585mn (from a profit of JPY778mn in FY03/15)

The company worked on securing visitors by designating lanes for My Bowler members, setting up Round 1 Bowlers Club which offers discounts according to the number of games played, renewing group reservation plans, and installing state-of-the-art karaoke machines. However, sales at existing domestic stores remained sluggish. Taking services separately, SPO-CHA saw increased sales while bowling, amusement, and karaoke all suffered decreased sales. As a result, recurring profit was short of company forecasts by JPY900mn in Q1. This was attributed mainly to a JPY850mn drop in domestic sales and JPY200mn higher supply costs. But profit was boosted by lower Amusement promotional costs (marketing giveaways) (+JPY300mn), higher US revenue (+JPY300mn), and lower other costs (+JPY100mn). The biggest factor hurting profits was lower domestic sales. Although demand had been projected to bottom, the downward trend continued. Supply costs rose because of purchases of energy-saving LED lights ahead of projected higher electricity costs. As a result, the company achieved 45.2% of its 1H forecast (versus 47.1% the same period a year earlier), falling short of the year-earlier rate. The company has not revised its 1H and full-year earnings forecasts. Round One raised prices on July 17, 2015 to counter its slow start in Q1. These price hikes were not included in its initial forecast, but will be factored in from 2H. The company reports the price hikes are already boosting sales. Bowling, Karaoke, and SPO-CHA sales (which comprise approximately 60% of the company’s sales) were up approximately 7% after the price hike compared to the last week of June 2015, before prices were raised. Overall nationwide net sales rose approximately 4%. Further, despite being impacted by the extreme heat in August, sales appear to have recovered overall. The company reports it raised Bowling segment prices by approximately 20% and by an average of 9% overall. But discount coupons (expired at end August) were distributed to regular customers to alleviate the impact of the sudden price hike. The company was also promoting registration in ‘My Bowler’ (which began in Q2) by offering one free game to users downloading the app. Such efforts have kept the company from enjoying the full benefit of the prices hikes, and the company has not yet been able to offset the decline in customers through the higher prices. Still, Round One expects the effects of the discount tickets to end from mid-September. The company expects that even if some customers are driven away by the higher prices, revenue will be boosted and overall sales will recover to year-earlier levels. Further, 400,000 people are participating in ‘My Bowler,’ launched from July 2015 and extended through August. The company expects the game to strengthen future customer retention.

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Round One > Historical financial statements

Round One | 4680 | LAST UPDATE【2016/6/27】

Round One’s US operations are growing faster than projected. The three US shops operating for a year or more have reported revenue growth of 20% or more. As a result, 1Q US profit was JPY300mn higher than the company forecast, as reported above. The company reports that the launch of the US business has been smooth overall, and plans to expand operations earlier than initially planned (from FY03/16) because of the strong US economy. The company plans to open more outlets from next year, primarily in North America. Twelve US outlets are expected by end FY3/16, but the company is considering opening 12 more stores next year, doubling the number of outlets. The company had 119 outlets (+5 YoY) with 355 outlet operational months (+13 months YoY) as of end Q1 FY3/16. As a result, sales attained 45.2% (down from 47.1% in FY03/15) of the company’s 1H plan. There is no change to the company’s 1H or full-year forecasts. The breakdown of sales by service, excluding US subsidiaries, is as follows (figures in parentheses are based on sales by existing stores).

Bowling: -10.7% YoY (-13.5% YoY) Round One focused on securing core customers by setting up Round 1 Bowlers Club and offering an assortment of services, such as designating lanes for My Bowler members, changing the oil pattern between the first and second halves of the month, and offering discounts according to the number of games played. It also renewed group reservation plans. However, the company posted a loss in sales.

Amusement: -3.3% YoY (-8.9% YoY) The company installed state-of-the-art game machines and updated popular games so as to draw visitors. Nevertheless, sales declined.

Karaoke: -2.1% YoY (-7.6% YoY) The company introduced an advanced sound system and the latest karaoke machine, LIVE DAM STADIUM, which has a marking function close to human auditory sensibility. In addition, it installed the Duel Monitor Room in all the stores, which casts a large screen on the wall providing the customers a real sense of being part of the scene. However, sales were down year-on-year.

SPO-CHA: +1.4% YoY (+0.7% YoY) Round One aimed to drive up visitors by distributing flyers and coupons via the SNS LINE, which resulted in increased sales.

FY03/15 results ▶ ▶ ▶ ▶

Sales:

JPY83.9bn (-0.4% YoY)

Operating profit:

JPY6.6bn (-34.2% YoY)

Recurring profit:

JPY6.2bn (-21.3% YoY)

Net loss:

JPY4.6bn (net loss of JPY19.7bn in FY03/14).

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Round One > Historical financial statements

LAST UPDATE【2016/6/27】

The company targeted occasional users such as families with Disney characters in promotional campaigns and planning. It also expanded its free shuttlebus service from 33 to 88 stores, in a bid to make it more convenient for visitors. The company was aiming to increase sales, but in the end sales fell year-on-year. According to the company, this was partly because sluggish demand persisted following the consumption tax hike in April 2014, and sales growth stalled owing to poor weather during the holiday season, usually a time of peak demand. Rising personnel and utilities expenses led to higher overheads, resulting in double-digit declines in operating and recurring profit. Factors affecting recurring profit (JPYbn) Lower Lower Lower Lower Other Total

D&A* lease expenses* interest expenses* taxes*

Plus 1.94 1.35 1.25 0.74 0.31 5.59

Higher rental expenses* Higher amusement prize expenses Higher personnel expenses Higher utilities expenses Lower sales

Minus 4.85 0.91 0.71 0.42 0.36 7.25

Source: Shared Research based on company data *Mostly due to sale and leaseback agreements

Extraordinary losses totaled JPY31.5bn in FY03/14 as the company continued making sale-and-leaseback agreements. In FY03/15, extraordinary losses came to just JPY5.0bn, despite some impairment losses. As a result, the net loss narrowed significantly year-on-year. As of the end of April 2015, total domestic store count was 113, of which 111 stores were existing (comparable) stores. The breakdown of sales by service is as follows (figures in parentheses exclude US sales).

Bowling: -9.9% YoY (-10.5% YoY) Round One focused on attracting more customers. It attracted bowling customers by continuing to offer bowling classes (offered by an industry organization from midway through the year), following their launch in FY03/14. It also offered group customers seat reservations on free buses, along with a variety of special offers.

Amusement: +4.4% YoY (+3.3% YoY) Besides updating popular games and changing the mix of games with prizes, the company also expanded the range of machines available for the all-you-can-play plan to suit a wide range of customer tastes.

Karaoke: +2.8% YoY (+1.2% YoY) The company introduced Disney character-themed karaoke rooms and deals for customers arriving before nine in the morning on weekends and holidays, offering a flat fee for unlimited singing and drinks.

SPO-CHA: +2.8% YoY (+5.1% YoY) Round One focused on offering new services. For example, it rolled out Bubble Soccer, a fun sport from Norway, across all stores. The company also introduced a new type of attraction—e-Sports Ground—in some stores. The company distributed flyers and promotional materials with Disney characters to draw customers, particularly families. Amid difficult domestic conditions, Round One aims to grow sales by opening new stores in areas in Japan and the US where there is a promising outlook for demand. It opened stores in Hamaotsu A-QUS (Otsu, Shiga Prefecture), LaLaport Izumi (Izumi, Osaka Prefecture), and Stratford (Illinois) in October 2014, in addition to a store in Arlington (Texas) in December 2014. As a result of the above, sales declined only moderately, but profits fell significantly. Still, the net loss narrowed

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Round One > Historical financial statements

LAST UPDATE【2016/6/27】

year-on-year because impairment losses fell with the company’s decision to sell fixed assets as part of a sale-and-leaseback policy. Sales stood at 98.1% of the full-year target. Operating profit significantly underperformed the target, at 66.4%. On a monthly basis, sales increased in October and November 2014 after the company increased prices, but were down year-on-year for five straight months from December onward. The breakdown of domestic comparable store sales by service is as follows (figures in parentheses are on an all-store basis). ▶ ▶ ▶ ▶

Bowling:

-16.6% YoY (-15.4% YoY)

Amusement:

-8.0% YoY (-6.1% YoY)

Karaoke:

-9.4% YoY (-7.8% YoY)

SPO-CHA:

-0.7% YoY (+1.4% YoY).

FY03/14 results In November 2013, Round One implemented a new pricing structure to improve customer appeal and increase earnings with promotional activities such as the “Round 1 X Evangelion” campaign. The company has also been strengthening its financial health to facilitate the opening of new stores in the US. The company achieved progress via sales and simultaneous rental of store assets (sale-and-leaseback arrangements) to continue operations at 37 of its domestic stores, and significantly reduced its interest-bearing liabilities. By segment, sales performance was as follows. Figures in parentheses indicate comparable store sales changes: ▶ ▶ ▶ ▶

Bowling: -8.6% YoY (-10.5%) Amusement: +1.3% YoY (-1.7%) Karaoke: +1.3% YoY (-1.8%) SPO-CHA: +5.7% YoY (+5.1%)

Sales, operating profit, and recurring profit all came in below earnings forecasts. The company cited heavy snowfall in February as a primary factor. In addition, Round One raised its prices by approximately 7% beginning on April 1, 2014. The company said that concentrated spending prior to the consumption tax hike increased financial pressure imposed on households, limiting income for leisure activities such as bowling. The company is planning to make a final assessment of conditions during the July-September quarter before moving forward with any countermeasures.

Extraordinary profit, extraordinary loss, and reversal of deferred tax assets As a result of aggressive implementation of sale-and-leaseback arrangements, the company recorded an extraordinary profit of JPY490mn in cumulative Q3 FY03/14, owing to sale of fixed assets. Round One also booked a JPY2.2bn loss on sale of fixed assets, and an impairment loss of JPY24.6bn as extraordinary losses. Additionally, an extraordinary profit of JPY2.0bn was recorded during the January-March quarter of FY03/14, arising from a gain on sale of fixed assets when some store locations were sold. Reassessment of all stores, including those which are planned to be sold, was conducted according to standards set forth in the Japanese “Accounting Standards for Impairment of Fixed Assets,” and this resulted in the booking of an additional extraordinary loss of JPY7.1bn in the form of an impairment loss. The effects of the above extraordinary profits and losses are included in the earnings forecasts revisions announced on February 10, 2014.

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Round One | 4680 | LAST UPDATE【2016/6/27】

In light of current earnings forecasts, the company also reassessed the collectability of its deferred tax assets. Upon completion of the assessment, Round One conducted a reversal of deferred tax assets in the amount of JPY3.6bn, and recorded these as deferred income taxes. The effects of the reversal of deferred tax assets are not included in the earnings forecasts revisions announced on February 10, 2014.

FY03/13 results Sales were 85.9 billion yen (-4.1% YoY), operating profit was 11.6 billion yen (-27.9%), recurring profit was 8.2 billion yen (-28.4% YoY), and net income was 601 million yen (-78.4%). In April 2012, the company opened two new shops, one at the Divercity Tokyo Plaza multipurpose commercial complex in Tokyo and the other in Sennichimae, Osaka. In December 2012, the company opened a new shop in Ikebukuro, Tokyo, and it operated these facilities as flagship shops in eastern and western Japan. Outside Japan, the company opened a shop in Moreno Valley, California in September 2012, its second overseas outlet. The number of stores multiplied by the number of months during which those stores operated came out to be 1,344 in FY03/12, compared with 1,314 in FY03/12. However, comparable store sales in Japan fell 9.0% YoY, resulting in lower sales YoY. Shared Research believes that the company faced tough business environment compared with a year earlier, when Round One benefitted from consumer preference for the type of entertainment provided by the company. During the latest fiscal year, the company faced shrinking consumer spending and other unfavorable conditions. By segment, sales performance was as follows. Sales of the bowling and amusement operations sharply declined. Figures in parentheses indicate comparable store sales changes: ▶ ▶ ▶ ▶

Bowling: -8.2% YoY (-11.3%) Amusement: -5.3% YoY (-10.7%) Karaoke: +0.9% YoY (-3.7%) SPO-CHA: +10.2% YoY (+0.2%)

Bowling sales fell because of increased price competition at a time when the market is shrinking. The amusement operations were affected by a decline in the amount of money customers spent on medal games, which comprised 40% of the segment sales. UFO Catchers, which generated 30% of the segment sales, were also sluggish. The company’s high marginal profit ratio (SR Inc. estimated this at around 80%), coupled with lower sales, resulted in decreases in operating and other profits. The company sought to reduce interest-bearing debt by selling shops and leasing them back. The company took a 7.4 billion yen charge, including 4.6 billion yen linked with its real estate sales. As a result, the company’s net income fell. The company’s interest-bearing liabilities totaled 90.2 billion yen at the end of March 2013, down from 110.9 billion yen a year earlier. Net interest-bearing debt was 64.9 billion yen, down from 81.4 billion yen. According to the company, liabilities declined more than expected in part because some property leaseback transactions were postponed until FY03/14.

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Round One | 4680 |

Shared Research Report

Round One > Historical financial statements

LAST UPDATE【2016/6/27】

Income statement Income Statement (JPYmn) Sales CoGS Gross Profit SG&A Expenses Operating Profit

FY03/06

FY03/07

FY03/08

FY03/09

FY03/10

FY03/11

FY03/12

FY03/13

FY03/14

FY03/15

Par.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

FY03/16 Cons.

50,282

65,826

77,993

77,983

82,113

84,303

89,568

85,903

84,272

83,905

83,516

36,248

46,501

58,103

62,622

68,302

71,030

71,779

72,575

72,549

75,509

75,090

14,034

19,325

19,890

15,361

13,810

13,273

17,789

13,328

11,723

8,395

8,426

1,299

1,412

1,603

1,750

1,779

1,856

1,753

1,762

1,634

1,754

2,058

12,735

17,913

18,287

13,611

12,031

11,416

16,036

11,565

10,088

6,641

6,367

Non Operating Income

980

303

354

222

357

511

296

388

315

745

281

Non Operating Expenses

297

1,831

2,656

4,036

4,540

4,999

4,850

3,736

2,585

1,236

1,246

13,418

16,385

15,986

9,798

7,848

6,929

11,481

8,217

7,818

6,150

5,402

6,985

479

0

5

40

0

373

434

2,515

204

-

68

278

302

2,758

1,822

27,280

5,710

7,387

34,059

5,230

3,508

20,335

16,586

15,684

7,045

6,065

-20,351

6,144

1,264

-23,725

1,125

1,894

8,367

6,856

6,531

3,068

2,668

-7,677

3,362

663

-4,044

5,693

1,444

11,967

9,730

9,152

3,977

3,396

-12,673

2,781

601

-19,681

-4,568

449

27.9%

29.4%

25.5%

19.7%

16.8%

15.7%

19.9%

15.5%

13.9%

10.0%

10.1%

Recurring Profit Extraordinary Gains Extraordinary Losses Pretax Profit Tax Charges Net Profit GPM OPM

25.3%

27.2%

23.4%

17.5%

14.7%

13.5%

17.9%

13.5%

12.0%

7.9%

7.6%

RPM

26.7%

24.9%

20.5%

12.6%

9.6%

8.2%

12.8%

9.6%

9.3%

7.3%

6.5%

Net Margin

23.8%

14.8%

11.7%

5.1%

4.1%

-15.0%

3.1%

0.7%

-23.4%

-5.4%

0.5%

2.6%

2.1%

2.1%

2.2%

2.2%

2.2%

2.0%

2.1%

1.9%

2.1%

2.5% -0.5%

SG&A /Sales Sales YoY

45.8%

30.9%

18.5%

0.0%

5.3%

2.7%

6.2%

-4.1%

-1.9%

-0.4%

Operating Profit YoY

67.3%

40.7%

2.1%

-25.6%

-11.6%

-5.1%

40.5%

-27.9%

-12.8%

-34.2%

-4.1%

Recurring Profit YoY

65.8%

22.1%

-2.4%

-38.7%

-19.9%

-11.7%

65.7%

-28.4%

-4.9%

-21.3%

-12.2%

154.3%

-18.7%

-5.9%

-56.5%

-14.6%

-

-

-78.4%

-

-

-

Net Profit YoY

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

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Round One > Historical financial statements

LAST UPDATE【2016/6/27】

Balance sheet Balance Sheet

FY03/06

FY03/07

FY03/08

FY03/09

FY03/10

FY03/11

FY03/12

FY03/13

FY03/14

FY03/15

Par.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cash and Equivalent

25,067

28,864

22,924

21,525

30,815

22,773

29,487

25,324

25,172

27,777

23,199

Accounts Receivable

182

284

330

292

361

414

557

605

648

671

647

Inventories

685

737

857

1,058

1,141

1,347

1,422

1,185

1,121

1,228

1,576

(JPYmn)

Other Current Assets Tangible Assets

4,295

5,597

5,384

6,166

6,846

12,637

3,764

4,143

4,099

2,416

2,295

30,229

35,482

29,495

29,043

39,163

37,171

35,230

31,257

31,040

32,092

27,717

18,252

119,978

135,548

178,133

202,298

202,599

179,317

160,065

72,919

61,773

60,417

53

109

219

133

169

231

209

177

143

101

167

22,989

10,788

11,122

8,749

9,609

12,104

13,479

14,717

23,033

17,621

16,232

Intangible Assets LT Investment Securities etc.

FY03/16

Fixed Assets

41,294

130,875

146,889

187,015

212,076

214,934

193,005

174,960

96,097

79,496

76,817

Total Assets

71,523

166,357

176,384

216,059

251,240

252,106

228,236

206,217

127,138

111,588

104,535

Accounts Payable

82

141

111

137

156

189

211

196

257

337

477

Short-Term Debt

2,107

21,381

12,864

21,799

25,569

36,289

19,621

31,147

8,789

8,440

7,212

10,481

9,844

7,444

17,548

13,516

15,007

15,857

16,003

15,460

15,409

13,401

Current Liabilities

Other

12,670

31,366

20,419

39,484

39,241

51,485

35,689

47,346

24,506

24,186

21,090

Long-Term Debt

7,184

72,610

85,654

96,121

113,318

99,870

91,293

59,077

28,025

18,652

15,614

437

558

617

8,060

13,051

21,722

21,370

21,080

17,074

17,123

18,100

Other Fixed Liabilities

7,621

73,168

86,271

104,181

126,369

121,592

112,663

80,157

45,099

35,775

33,714

Total Liabilities

20,291

104,534

106,690

143,665

165,611

173,078

148,353

127,503

69,606

59,961

54,805

Shareholders' Equity

51,232

62,350

70,232

72,941

86,177

79,950

80,825

79,519

57,443

50,967

49,508

0

-528

-538

-548

-548

-922

-943

-805

88

659

221

Adjusted Shareholders' Equity

51,232

61,822

69,694

72,393

85,629

79,028

79,882

78,714

57,531

51,626

49,730

Net Assets

51,232

61,822

69,694

72,393

85,629

79,028

79,882

78,714

57,531

51,626

49,730

Total Liabilities & Net Assets

71,523

166,357

176,384

216,059

251,240

252,106

228,236

206,217

127,138

111,588

104,535

Appraisal Gains / Losses etc.

Working Capital Interest-Bearing Debt

785

880

1,076

1,213

1,346

1,572

1,768

1,594

1,512

1,562

1,746

9,291

93,991

98,518

117,920

138,887

136,159

110,914

90,224

36,814

27,092

22,826

-15,776

65,127

75,594

96,395

108,072

113,386

81,427

64,900

11,642

-685

-373

ROA (Net Profit/ Average Total Assets)

23.3%

13.8%

9.3%

5.0%

3.4%

2.8%

4.8%

3.8%

4.7%

5.2%

5.0%

ROE (Net Profit/ Average S.E.)

29.5%

17.2%

13.9%

5.6%

4.3%

-

3.5%

0.8%

-

-

0.9%

0.7

0.4

0.4

0.4

0.3

0.3

0.4

0.4

0.7

0.8

0.8

52.9

63.1

67.8

59.2

59.9

52.7

50.5

61.2

64.7

61.5

47.6

Net Debt

Total Asset Turnover Inventory Turnover Days of Inventory

6.9

5.8

5.4

6.2

6.1

6.9

7.2

6.0

5.6

5.9

7.7

Quick Ratio

199.3%

92.9%

113.9%

55.3%

79.4%

45.0%

84.2%

54.8%

105.4%

117.6%

113.1%

Current Ratio

238.6%

113.1%

144.4%

73.6%

99.8%

72.2%

98.7%

66.0%

126.7%

132.7%

131.4%

71.6%

37.2%

39.5%

33.5%

34.1%

31.3%

35.0%

38.2%

45.3%

46.3%

47.6%

-30.8%

105.3%

108.5%

133.2%

126.2%

143.5%

101.9%

82.5%

20.2%

-1.3%

-0.8%

Equity ratio Net Debt / Equity

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

Assets The bulk of fixed assets at the end of FY03/15 were tangible fixed assets associated with the company's operations of amusement complex centers. Tangible fixed assets are trending downward owing to depreciation and sale-and-leaseback agreements.

Liabilities Interest-bearing debt as of the end-FY03/14 stood at JPY36.8bn, significantly down from the FY03/10 figure of JPY138.9bn. Net interest-bearing debt was JPY108.1bn (JPY139.0bn including guarantee liability) at end-FY03/10 and declined to JPY11.6bn as of end-FY03/14. The company reported a net cash position at the end of FY03/15, with cash and deposits at JPY27.8bn, against interest-bearing debt of JPY27.1bn. This meant the company achieved its goal of effectively becoming debt-free one year early.

Shareholders’ equity Shareholders’ equity as of end FY03/16 declined JPY1.9bn YoY to JPY49.7bn. Shareholders’ equity included capital of JPY25.0bn and capital surplus of JPY25.5bn. The company also transferred funds, in the amount of JPY19.2bn, from the capital reserves account to the capital surplus account on May 8, 2015, in order to ensure financial flexibility and stable

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Round One | 4680 |

Shared Research Report

Round One > Historical financial statements

LAST UPDATE【2016/6/27】

dividend payments. Per Share Data (JPY)

FY03/06

FY03/07

FY03/08

FY03/09

FY03/10

FY03/11

FY03/12

FY03/13

FY03/14

FY03/15

Par.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

623 20,125.6 82,243.8 2,000.0

632 1 15,510.0 97,954.5 2,000.0

632 2 14,507.1 110,452.6 2,000.0

63,241 159 63.5 1,147.6 20.0

79,453 163 46.8 1,080.0 20.0

95,453 166 -136.8 829.4 20.0

95,453 168 29.2 838.4 20.0

95,453 170 6.3 826.1 20.0

95,453 175 -206.6 603.8 20.0

95,453 180 -48.0 541.9 20.0

95,453 184 4.7 522.0 20.0

Stock Split Factor

100

100

100

1

1

1

1

1

1

1

1

Earnings Per Share

201

155

145.1

63.5

46.8

-136.8

29.2

6.3

-206.6

-48.0

4.7

Book Value Per Share

822

980

1,104.5

1,147.6

1,080.0

829.4

838.4

826.1

603.8

541.9

522.0

20

20

20.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

(As Reported) No. of Shares ('000) FY End Treasury Stock ('000) FY End Earnings Per Share Book Value Per Share Dividend Per Share

FY03/16

(After Stock Split Adjustments)

Dividend Per Share

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

Shareholder returns Round One generally pays a dividend per share of JPY20, and it plans to do the same in FY03/17. It has not disclosed any official target dividend payout ratio, but it plans to continue paying a dividend per share of JPY20 for the time being.

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Round One > Historical financial statements

LAST UPDATE【2016/6/27】

Cash flow statement Cash Flow Statement

FY03/06

FY03/07

FY03/08

FY03/09

FY03/10

FY03/14

FY03/15

Par.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Operating Cash Flow

12,019

9,766

17,285

13,978

22,175

22,418

32,852

26,418

20,456

22,576

15,955

Investment Cash Flow

-3,763

-43,083

-23,632

-25,762

-35,616

-23,563

24,036

4,371

46,611

592

-5,082

8,256

-33,317

-6,347

-11,784

-13,441

-1,145

56,888

30,789

67,067

23,168

10,873 -15,309

(JPYmn)

FCF Financing Cash Flow

FY03/11 FY03/12 FY03/13

FY03/16

8,710

22,147

3,256

10,625

24,881

-4,551

-45,981

-34,564

-66,200

-20,820

Pretax Profit (A)

20,335

16,586

15,684

7,045

6,065

-20,351

6,144

1,264

-23,725

1,125

1,894

Depreciation (B)

1,937

4,549

7,754

10,243

14,358

18,824

19,702

18,960

15,928

12,956

11,444 -184

-182

-96

-193

-137

-134

-226

-196

174

82

-50

Tax Charges (E)

Working Capital Changes (D)

-3,411

-11,526

-5,792

-6,740

-2,603

-2,488

780

-361

-2,361

1,528

-97

Capital Expenditure (F)

-4,518

-37,818

-27,104

-26,955

-33,787

-6,259

-2,587

-5,241

-3,752

-4,818

-5,636

Simple FCF (A+B+C+D+E)

14,161

-28,305

-9,651

-16,544

-16,101

-10,500

23,843

14,796

-13,828

10,741

7,421

Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

Operating cash flow The company’s operating cash flow is mostly influenced by pretax profit and depreciation. In other words, changes in working capital have a limited impact. This is because 1) customers pay in cash 2) there are no major procurement items, and 3) the level of inventory is very low.

Investment cash flow Round One has exhibited meaningful outflows in free cash flows from FY03/07 to FY03/10. However, since FY03/12 the company has generated a positive free cash flow thanks to performance improvements, slower store openings, and sale-and-leaseback of existing stores.

Financing cash flow From FY03/11, when it started improving its financial standing through its strategy of store sale-and-leaseback, the company has actively reduced interest-bearing debt, and consequently has a negative cash flow.

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Round One | 4680 |

Shared Research Report

Round One > Other information

LAST UPDATE【2016/6/27】

Other information History Sugino Kosan (the predecessor to Round One) was founded in 1980. It was running a roller skating business but the company soon realized that sales were too concentrated on weekends, making the business unattractive. The company was going to close the rink and transform it into a warehouse until current CEO Sugino (at that time still a university student) suggested opening a bowling alley instead. Sugino set out to construct a bowling alley that he, the same age as his target consumer group, would enjoy. His bowling alley proved to be very successful and he proceeded to open similar centers across Japan. He formed Round One (the former one) in March 1993. Later he added other amusement services such as arcade games and karaoke, making Round One stand out from other game centers even today. Dec. 1980

Sugino Kosan, the precursor of Round One, founded to manage a roller skating court in Izumi-Ohtsu city, Osaka.

Mar. 1993

Round One established by the current President & CEO, Masahiko Sugino.

Aug. 1997

Listed on the Second Section of the Osaka Stock Exchange, ticker 4680.

Dec. 1998

Listed on the Second Section of the Tokyo Stock Exchange.

Sep. 1999

Moved to the First Section of the Tokyo Stock Exchange and Osaka Stock Exchange.

Mar. 2001

Acquired top shareholder (at the time), Wiz Co., Ltd. in absorption-type merger.

Jul. 2004

Opened first combined indoor leisure and SPO-CHA facility in Fushimi, Kyoto.

Sep. 2009

Established Round One Entertainment, Inc. (now a consolidated subsidiary).

Aug. 2010

Opened first overseas store in Los Angeles.

News and topics November 2015 On November 9, 2015, the company announced revisions to its full-year earnings forecasts.

FY03/16 full-year earnings forecasts (previous forecasts in parentheses) Sales:

JPY83.7bn (JPY85.0bn)

Operating profit:

JPY5.8bn (JPY6.9bn)

Recurring profit:

JPY5.1bn (JPY6.2bn)

Net income:

JPY300mn (JPY1.2bn)

EPS:

JPY3.15 (JPY12.60)

The company revised down its sales and profit forecasts given sluggish comparable store sales and the booking of an extraordinary loss in 1H FY03/16. Although it expects changes in its fee structure and reduced miscellaneous store operation fees from Q3, it revised down its sales and profit estimates for the full-year due to sluggish sales in 1H.

May 2015 On May 8, 2015, the company announced that the board of directors had resolved to put forth a proposal for a reduction in capital reserves, in order to ensure financial flexibility and a stable dividend.

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Round One | 4680 |

Round One > Other information

LAST UPDATE【2016/6/27】

The company plans to reduce capital reserves from JPY25.5bn to JPY6.3bn, and allocate the JPY19.2bn to the other capital surplus account, effective June 27, 2015.

April 2015 On April 9, 2015, the company announced revisions to full-year earnings forecasts for FY03/15.

Full-year earnings forecasts for FY03/15 (previous forecast in parentheses) ▶ ▶ ▶ ▶ ▶

Sales:

JPY83.3bn (JPY85.5bn)

Operating profit:

JPY6.1bn (JPY8.8bn)

Recurring profit:

JPY5.7bn (JPY8.0bn)

Net loss:

JPY5.3bn (net income of JPY4.5bn)

EPS:

minus JPY55.63 (JPY47.23).

Reasons for the revisions Sales have declined since the positive impact of price changes began to wear off in December 2014. Costs have also risen as the company has stocked up on amusement prizes and spent on energy-saving supplies. The company thus expects recurring profit to underperform the previous target by JPY2.3bn. The company also projects that extraordinary losses will overshoot the previous forecast by JPY4.1bn, partly owing to impairment losses. As a result of the above, Round One now expects pretax net income of JPY400mn. But corporation tax has increased with changes to tax regulations, so the company projects a net loss of JPY5.3bn. According to the company, impairment losses and the reversal of deferred tax assets will affect profit and loss, but there will be no actual cash flows associated with these accounting changes.

August 2014 On August 25, 2014, the company announced that it would sell real estate assets related to its Round One Stadium Mie Kawagoe IC Store and simultaneously lease back the property. The company opened this store in December 2007. The sale of the property will not materially affect the operation of the store. The company accounted for this transaction during FY03/14, and it will not have any significant effects on earnings results for FY03/15.

Top management President Masahiko Sugino (born 1961) is also the founder of the company. He is the key driving force for the massive growth of Round One. He has been and is likely to remain a key player in all important decision making. According to the company, he has made it absolutely clear that he is prepared to take full responsibility for his decisions. Managing director Shiniji Sasae (born in 1956) joined Sumitomo Bank (now part of SMBC) in 1975, and joined the company in 2009. After serving as executive officer responsible for the corporate management division, he was appointed director and general manager of corporate affairs in 2012, and moved to the position of managing director in 2014. Managing director Naoto Nishimura (born in 1963) joined Takii Kogyo Co., Ltd. in 1987, and joined the company in 1994. After serving as executive officer responsible for the comprehensive operations division, he was appointed director

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Round One | 4680 |

Shared Research Report

Round One > Other information

LAST UPDATE【2016/6/27】

and general manager of operations, and moved to the position of managing director and vice general manager of comprehensive operations in 2014. Managing director Tamiya Sakamoto (born in 1971) joined the company in 1996. After serving as vice general manager of comprehensive operations responsible for AM planning, he was appointed director and general manager of operational planning, and moved to the position of managing director and general manager of operational planning in 2014.

Employees At the end of FY03/16, the company reported a total of 6,634 employees on a consolidated basis (1,838 full time employees and the equivalent of 4,796 part-time workers). At the parent level the company employed 6,073 employees with 1,277 full-time and 4,796 part-time workers. At the parent level, on average, employees were about 33.14years old, earning an average salary of JPY5.5mn. It requires about 10 to 15 full-time employees and 100 to 250 registered part-time employees on a registration basis to open a new center.

Major shareholders As of the end of FY03/16, the ten largest shareholders collectively accounted for 51.21% of shares outstanding, according to the annual report. The top shareholder is Masahiko Sugino, the current CEO, President and founder, holding 20.84% of the company and 33.08% when the holdings by his eldest son Kosuke Sugino (12.24%) are added. Top Shareholders

Amount Held

Masahiko Sugino

20.84%

Kosuke Sugino

12.24%

The Master Trust Bank of Japan., Ltd. (Trust account9)

3.25%

Goldman Sachs International

3.07%

Japan Trustee Services Bank, Ltd. (Trust account 9)

2.77%

Chase Manhattan Bank GTS Clients Account Escrow

2.63%

Trust & Custody Services Bank, Ltd. (Pension trust account)

1.90%

Japan Trustee Services Bank, Ltd. (Trust account ) BNP Paribas Securities Services Luxembourg/Jasdec/Henderson HHF SICAV CBNY-Government of Norway

1.60%

Total

1.50% 1.41% 51.21%

Source: Shared Research based on company data As of March 31, 2016

Investor relations Results meetings for analysts and institutional investors are currently held on a quarterly basis in Tokyo and on a half-year basis in Osaka. IR contact is Eishin Ikeda, General Manager of Financial Division (Phone: +81-72-224-5115). “Quiet Period.” The company’s quiet period begins approximately two weeks before earnings announcements, during which the company’s IR will not be available for investor interviews.

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Round One | 4680 |

Round One > Other information

LAST UPDATE【2016/6/27】

Company profile Company Name

Head Office

ROUND ONE Corporation

4-45-1 Ebisujima-Cho Sakai-Shi Sakai-ku

Portus Center Building Osaka, Japan 590-0985 Phone

Listed On

+81-72-224-5115

Tokyo Stock Exchange 1st Section

Established

Exchange Listing

December 25, 1980

August 28, 1997

Website

Fiscal Year-End

http://www.round1.co.jp/

March

IR Contact

IR Web

Eishin Ikeda, General Manager

http://www.round1.co.jp/company/ir/english.html

IR Mail

IR Phone +81-72-224-5115

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