Japan Tech – Internet

GMO Internet
INITIATION 21 November 2013

T ic k e r 9 4 4 9 JP
The Essence of Japans’ Internet Industry with
Reco m m e nd . H O LD potentials and concerns at the same time
( P r io r ) (B U Y )

T a r g e t P r ic e 1 ,2 0 0 Initiating with a HOLD and TP of JPY 1,200 (0% Upside): We initiate coverage of GMO Internet
U p s id e +0% (“GMO”) with a HOLD recommendation and TP 1,200 JPY. Our forecast numbers are close to
C u rre n t P rice 1 ,2 0 0
consensus and the valuation looks fair.

Introducing new domains and entered on a new index are short term catalysts: GMO has
more than 90% market share in the Japan domain registration. It is due to introduce some new
domains such as “.tokyo” and “.shop” in Q1 – Q2 next year. Also, the company will be entered
on a new index of JPX Nikkei 400 from the next January. These could be short term catalysts
for the share price.

Our forecast numbers are slightly lower for Q4 but slightly higher for 2014 than consensus:
Although our forecast of operating profit is slightly weaker for F2013 (11,652 million JPY vs.
consensus 12,043 million JPY) and slightly stronger for F2014 (14,706 million JPY vs. consensus
14,333 million JPY) than consensus numbers, the difference is not material. However, we
highlight the potential near-term weakness in the stock price given our dimmer outlook for the
4Q vs. consensus expectations (our operating profit forecast is 3,038 million JPY vs. consensus
3,352 million JPY).

Complicated business mix and organisation: One of the characteristics of GMO is its
complexity within its business mix and organisation. Many businesses are operated under the
main brands and many subsidiaries including five listed companies. It took us a lot longer to
understand them than other companies we look at. We think it would be better to consolidate
and simplify the organisation structure, but the company currently seems to be focusing more
on the motivation of subsidiaries’ management and employees at this moment.

Essence of Japan internet industry with much potential and but also concerns: GMO runs
various key businesses of Japan’s internet industry, such as web hosting (server), domain
registration, internet security and payment processing service. The company keeps the largest
ANALYST positions in most of the key businesses. We believe that these businesses will expand as the
internet develops in Japan. However, at the same time, these businesses are difficult to
Naoshi Nema differentiate from others. We see signs of strong competition unveiling in some of the
+ 852 3558 5546 businesses.
nnema@cantor.com
High volatility of FX trading and smartphone game: GMO has the largest worldwide market
share in retail FX trading brokerage. However, its sales are subject to the FX market conditions
and their profit depends on its USD/JPY among all FX currencies owing to the lowest
commission rate in all FX currencies and the interbank transaction. Additionally, GMO keeps
making losses in their smartphone business in order to develop new games. Although it may
Market data priced at close generate huge profit once they have a big hit title, it is difficult to predict such likelihood, in our
th
of business (Tokyo) 20
view. These two businesses need frequent monitoring.
November 2013
P/E 20x to 2014 EPS is fair to the company: Our forecast numbers are almost in-line with
PLEASE SEE ANALYST consensus. GMO is quite an average internet company from the view point of valuation. Their
CERTIFICATION AND
ROE is 25% vs. 23% for global peer’s average and 3 years profit CAGR is 22% vs. 21% for global
IMPORTANT REGULATORY
DISCLOSURES BEGINNING average. Therefore, we believe we can adopt GMO with a global peer median P/E of 20x to our
ON PAGE 22 2014 forecast numbers.

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Please see analyst certification and important regulatory disclosures at the end of this note
Summary of GMO Numbers
( ¥ M i ll io n s ) F20 10 F2 01 1 F20 1 2 F20 1 3 Co. F2 0 13 C o s F20 1 3e F2 0 14 C o s F20 1 4e F2 0 15 e
S a le s 4 4 ,4 8 4 6 1 ,6 9 1 7 4 ,3 7 6 9 2 ,0 0 0 9 0 ,9 4 4 9 3 ,3 6 0 9 8 ,9 6 7 1 0 0 ,8 7 2 1 0 7 ,5 2 8
G r o s s P r o fi t 2 4 ,7 1 0 3 7 ,4 0 6 4 3 ,4 6 0 - 5 2 ,7 4 8 5 3 ,3 7 5 5 7 ,5 9 9 5 8 ,5 0 6 6 2 ,3 6 6
O p e r a t i n g P r o f it 5 ,7 2 9 7 ,5 2 5 9 ,1 4 9 1 1 ,0 0 0 1 2 ,0 4 3 1 1 ,6 5 2 1 4 ,3 3 3 1 4 ,7 0 6 1 7 ,4 2 8
R e c u r r in g P r o f it 5 ,7 3 8 7 ,0 1 6 9 ,1 7 5 1 1 ,0 0 0 1 1 ,9 9 1 1 1 ,6 3 7 1 4 ,2 4 9 1 4 ,9 0 6 1 7 ,6 2 8
P r o f it b e f o r e T a x 5 ,4 9 6 6 ,0 1 9 9 ,4 4 4 - 1 2 ,7 0 0 1 0 ,6 1 7 1 5 ,5 0 0 1 4 ,1 0 6 1 6 ,8 2 8
N e t P r o f it 2 ,2 0 9 4 ,2 8 6 4 ,5 1 8 5 ,0 0 0 5 ,6 2 4 5 ,1 2 7 6 ,9 1 3 7 ,0 8 7 8 ,8 0 2
(T a x r a te) (3 5 .7 % ) ( 1 3 .7 % ) ( 3 6 .7 % ) - - ( 3 6 .2 % ) - (3 7 .0 % ) ( 3 7 .0 % )
% Y o Y G ro w t h
S a le s 1 6% 39 % 2 1% 24 % 22% 26 % 9% 8% 7%
G r o s s P r o fi t 1 8% 51 % 1 6% - 21% 23 % 9% 1 0% 7%
O p e r a t i n g P r o f it 2 3% 31 % 2 2% 20 % 32% 27 % 19% 2 6% 19 %
R e c u r r in g P r o f it 2 0% 22 % 3 1% 20 % 31% 27 % 19% 2 8% 18 %
P r o f it b e f o r e T a x 5 2% 10 % 5 7% - 34% 12 % 22% 3 3% 19 %
N e t P r o f it 6 3% 94 % 5% 11 % 24% 13 % 23% 3 8% 24 %
% P ro fit M a rg in
G r o s s P r o fi t 5 5 .5 % 6 0 .6 % 5 8 .4 % - 5 8 .0 % 5 7 .2 % 5 8 .2 % 5 8 .0 % 5 8 .0 %
O p e r a t i n g P r o f it 1 2 .9 % 1 2 .2 % 1 2 .3 % 1 2 .0 % 1 3 .2 % 1 2 .5 % 1 4 .5 % 1 4 .6 % 1 6 .2 %
R e c u r r in g P r o f it 1 2 .9 % 1 1 .4 % 1 2 .3 % 1 2 .0 % 1 3 .2 % 1 2 .5 % 1 4 .4 % 1 4 .8 % 1 6 .4 %
P r o f it b e f o r e T a x 1 2 .4 % 9 .8 % 1 2 .7 % - 1 4 .0 % 1 1 .4 % 1 5 .7 % 1 4 .0 % 1 5 .6 %
N e t P r o f it 5 .0 % 6 .9 % 6 .1 % 5 .4 % 6 .2 % 5 .5 % 7 .0 % 7 .0 % 8 .2 %
E P S (¥ ) 2 2 .1 3 6 .4 3 8 .4 4 2 .4 4 8 .2 4 3 .5 5 9 .1 6 0 .2 7 4 .7
C FP S (¥) 4 1 .4 6 5 .5 7 5 .3 - - 8 1 .7 - 9 8 .4 1 1 2 .9
B P S (¥ ) 2 1 4 .0 2 2 1 .8 2 5 8 .2 - - 2 8 8 .7 - 3 3 0 .9 3 8 3 .6
D P S (¥ ) 7 .0 1 2 .0 1 3 .0 - - 1 3 .0 - 1 8 .0 2 2 .0
P / E (x ) 1 8 .5 8 .1 1 4 .5 2 8 .3 2 4 .9 2 7 .6 2 0 .3 1 9 .9 1 6 .1
P /S (x) 0 .9 0 .6 0 .9 1 .5 1 .6 1 .5 0 .7 1 .4 1 .3
P / B (x ) 1 .9 1 .3 2 .2 - - 4 .2 - 3 .6 3 .1
P /C F (x) 9 .8 4 .5 7 .4 - - 1 4 .7 - 1 2 .2 1 0 .6
E V / E B IT D A ( x ) 6 .0 3 .0 4 .3 - - 7 .5 - 5 .7 4 .3
D / E R a t io ( x ) - 0 .5 -0 .6 -0 . 7 - - -1 .0 - -1 .2 -1 . 3
R OE 1 2 .4 % 1 8 .0 % 1 6 .0 % - - 1 5 .9 % - 1 9 .4 % 2 0 .9 %
R OA 2 .1 % 2 .3 % 1 .9 % - - 1 .7 % - 2 .1 % 2 .5 %
C a p it a l R a t io 1 2 .9 % 1 2 .7 % 1 1 .0 % - - 9 .9 % - 1 1 .4 % 1 2 .8 %
P a y o u t R a tio 3 1 .7 % 3 3 .0 % 3 3 .9 % - - 3 0 .0 % - 3 0 .0 % 3 0 .0 %
D iv id e n d Y i e ld 1 .7 % 4 .1 % 2 .3 % - - 1 .1 % - 1 .5 % 1 .8 %
F r e e C F In te re s t 3 3 .0 % 1 9 .6 % 1 8 .5 % - - 1 1 .6 % - 1 3 .1 % 1 5 .9 %
C F f r o m O p e r a t io n 6 ,3 6 3 1 2 ,3 7 9 1 3 ,7 2 2 - - 1 4 ,2 6 3 - 1 4 ,7 9 2 1 5 ,8 0 4
C F fr o m In v e st m e n t 8 ,7 7 3 -6 , 0 1 2 - 3 ,0 5 7 - - -1 73 - -5 1 8 -64 0
C F f r o m F in a n c e -8 ,0 5 0 -1 , 4 3 4 - 1 ,5 0 9 - - -1 ,6 4 9 - -1 ,6 4 9 -1 , 6 4 9
Free CF 1 5 , 1 3 5 .9 6 ,3 6 7 . 0 1 0 ,6 6 5 .0 - - 1 4 ,0 8 9 .2 - 1 4 ,2 7 3 .5 1 5 ,1 6 3 .5
CA PEX -7 7 3 -29 9 -1 3 4 - - -2 00 - -3 0 0 -40 0
N o n -C a sh C o sts 1 ,9 3 4 3 ,4 2 8 4 ,3 4 8 - - 4 ,5 0 0 - 4 ,5 0 0 4 ,5 0 0
EV 4 5 ,8 1 8 3 2 ,4 0 4 5 7 ,6 1 3 - - 1 2 1 ,0 0 5 - 1 0 8 ,5 8 1 9 5 ,2 6 6
M arket Ca p. 4 0 ,8 0 1 3 4 ,6 3 5 6 5 ,7 3 6 1 4 1 ,3 6 8 1 4 1 ,3 6 8 1 4 1 ,3 6 8 6 5 ,7 3 6 1 4 1 ,3 6 8 1 4 1 ,3 6 8
( N e t In t e r e s t B e a r in g D e b t ) -1 0 , 9 7 2 -1 5 ,0 1 2 - 2 2 ,4 2 5 - - -3 4 ,8 6 5 - -4 7 , 4 9 0 -6 1 ,0 0 4
I n t e r e s t B e a r in g D e b t 1 8 ,2 1 5 1 9 ,3 9 5 2 1 ,1 9 3 - - 2 1 ,1 9 3 - 2 1 ,1 9 3 2 1 ,1 9 3
C a s h & D e p o s it 2 7 ,8 6 9 3 2 ,9 2 8 4 2 ,0 8 5 - - 5 4 ,5 2 5 - 6 7 ,1 5 0 8 0 ,6 6 4
I n v e s t m e n t S e c u r it i e s 1 ,3 1 7 1 ,4 7 9 1 ,5 3 3 - - 1 ,5 3 3 - 1 ,5 3 3 1 ,5 3 3
D e f e rre d A s se ts 3 ,1 4 6 5 ,1 6 3 4 ,9 7 9 - - 5 ,1 7 9 - 5 ,3 7 9 5 ,5 7 9
M i n o r it y In t e r e s t s 1 2 ,8 4 3 7 ,6 1 8 9 ,3 2 3 - - 9 ,3 2 3 - 9 ,3 2 3 9 ,3 2 3
S h a r e h o ld e r s ' E q u it y 2 1 ,3 9 6 2 6 ,1 2 5 3 0 ,4 1 8 - - 3 4 ,0 1 3 - 3 8 ,9 7 9 4 5 ,1 8 9
T o ta l A sse ts 1 6 5 ,4 6 0 2 0 5 ,0 5 5 2 7 5 ,9 6 0 - - 3 4 4 ,3 3 2 - 3 4 2 ,9 5 1 3 5 2 ,7 7 2
E B IT D A 7 ,6 6 2 1 0 ,9 5 3 1 3 ,4 9 7 - 1 5 ,2 4 9 1 6 ,1 5 2 1 7 ,6 5 3 1 9 ,2 0 6 2 1 ,9 2 8
CF 4 ,1 4 3 7 ,7 1 4 8 ,8 6 6 - - 9 ,6 2 7 - 1 1 ,5 8 7 1 3 ,3 0 2
FCF 4 ,9 1 6 8 ,0 1 3 9 ,0 0 0 - - 9 ,8 2 7 - 1 1 ,8 8 7 1 3 ,7 0 2
S h a r e s # ( '0 0 0 ) 1 0 0 ,0 0 3 1 1 7 ,8 0 7 1 1 7 ,8 0 7 1 1 7 ,8 1 3 1 1 7 ,8 0 7 1 1 7 ,8 0 7 1 1 7 ,8 1 3 1 1 7 ,8 0 7 1 1 7 ,8 0 7
S t o c k P r ic e ( ¥ ) 4 08 29 4 558 1 ,2 0 0 1 ,2 0 0 1 ,2 0 0 1 ,2 0 0 1 ,2 0 0 1 ,2 0 0
Source: Bloomberg, Company data, CFHK Research estimates

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Company profile – Complicated Subsidiary/Brand Structure
GMO runs many businesses under many brands and subsidiaries. Its business mix and corporate structure are
complicated and tough to understand. However, understanding these points is an important first step to
evaluate the company.

Complicated structure to motivate subsidiaries – After the numerous acquisitions of other internet companies,
GMO Internet has six listed subsidiaries, their business areas are varied and widespread, and some of their
businesses are operated by multiple subsidiaries. This situation makes it tough to get an overview of the
company’s business performance. For example, the domain business is done by the parent company under the
brand of Onamae.com, paper&co’s Muu Muu Domain and GMO Digirock’s Value Domain. Their server (web
hosting) business is more complicated with more subsidiaries under various brands. We believe that this
complicated structure is coming from CEO Kumagai’s way to motivate the management and employees of the
subsidiaries. Although we think the company is better off simplifying its structure in the future, even though
the current structure seems to work well at this moment.

GMO Segment and Product Brands

Source: Company presentation material

Each Sub-Segment has a strong positioning – In the server business, the roles are divided by customer type.
The parent company services mainly corporations in the gaming industry, GMO Cloud services other
corporations, and paperboy & co services mainly individuals. Thus, in the case of the server business, the roles
within the group are relatively clear. However, in the case of the domain business, the roles are not clear. In
this case, it is more efficient to analyse each sub-segment in whole (i.e. the domain registration business in the
infrastructure segment) rather than to analyse each brand or subsidiary. As shown in the figure below, the
company has built a strong position in each sub-segment.

GMO Sub-Segment and Positioning

Source: Company presentation material

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Business Model – Basically Backbone of Japan Internet
Although the business mix of GMO Internet is complex, their business model is composed mainly of three
businesses.

(1) Corporate businesses: Mainly server-related. It supports the backbone of Japanese internet environment.
The Infrastructure segment is the one including servers, payment processing, domains, e-commerce support,
access and security.

(2) Consumer businesses: Applying their accumulated experience of server technology and operation, the
company provides online brokerage services for securities (mainly FX) transactions in the Internet Security
segment, and runs an online gaming platform business in the Social Smartphone segment.

(3) B2B2C businesses: Standing between corporates and consumers and applying their accumulated experience
of server technology and operation, the company runs an advertisement agency business too.

The most important factors for analysing GMO are Infrastructure, Internet Securities and the cost control of
the Social Smartphone business: The 2012 sales breakdown was 41% infrastructure, 35% media, 23% internet
securities, 4% social smartphones and -2% others. However, the operating profit breakdown of the same year
was 46% infrastructure, 22% Media, 49% internet securities, -23% social smartphones and 6% others. Against
the consolidated operating profit margin (12%), infrastructure has 14%, media has 8%, internet securities has
27% and social smartphone has -74%. The reason why the media profit margin is lower than the others is
because it is an agent business and it is hard to have more than a 10% margin. The internet securities business
can have economies of scale due to the nature of the business. One of the problems is the losses in the social
smartphone segment. The company is now trying to expand its social game business and the business is still in
the investing phase. How the company controls this loss and how fast the business makes its break through are
key.

A c t u a l S a le s b y S e g m e n t O p e ra t in g P ro fit b y S e g m e n t
( b n JP Y )
( b n JP Y )
80
15
70
60 10
50 5
40
30 0

20 -5
10
-1 0
0
-1 0 -1 5

FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

In f r a s tr u c tu r e M e d ia F in a n c ia l S o c ia l S m a r tp h o n e O th e r s In f r a s tr u c tu r e M e d ia F in a n c ia l S o c o ia l S m a r tp h o n e O th e r s

Source: CFHK Research based on company data Source: CFHK Research based on company data

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Infrastructure Segment
Infrastructure segment is composed of 7 businesses: (1) Server, (2) Payment Processing, (3) Access, (4) Domain,
(5) EC Support, (6) Security and (7) Others. The company does not disclose the exact profit margin of each
business but says that Payment Processing and Server segment have higher margins than the segment average;
EC Support and Security have almost average margins, and Domain and Access have lower margins than the
average.

2 0 1 2 In fr u s t r u c t u r e S e g m e n t S a le s

S e cu r it y
6%
O the rs
6%

A cce s s
7%
Se rve r
EC Su p p o rt
42%
9%

D o m a in
14%
S e t t le m e n t
16%

Source: CFHK Research based on the company data

Server Business: Their server business is their original and major business. It mainly deals with rental servers or
hosting services. This business has 42% in the sales of the infrastructure segment. We estimate that the main
companies that run the server business are (1) GMO cloud, (2) GMO (the parent company) and (3) paperboy (in
sales size order). The division of roles depends on their customer target. GMO Cloud’s main customers are
corporates, GMO’s main targets are on-line game companies and sometimes individuals related to its domain
business, and paperboy’s targets are individuals. The total market share is circa 56%.

Payment Processing Business: GMO runs a payment processing business mainly through GMO Payment. This
business has 16% in the sales of infrastructure segment. GMO Payment Gateway has 44,328 customers as of
the end of September 2013, and 509 million transactions with 1,211 billion JPY transaction value annually. The
market share should be the largest in Japan. The revenue sources of the business are:

1. Initial charge is a charge revenue when a new customer joins. We estimate the average initial charge was
88,429 JPY in Jul-Sep 2013 quarter.
2. Fixed type of revenue charging monthly fees to a customer. We estimate the average monthly fee in the Jul-
Sep 2013 quarter was 3,256 JPY.
3. Transaction Charge per Transaction Number: Charging against its transaction number. We estimate the
average charge per transaction was 3.2 JPY in Jul-Sep 2013.
4. Transaction Charge per Transaction Amount: Charging against its transaction amount. We estimate the
average charge rate per transaction amount was 0.18% in Jul-Sep 2013 quarter.
Domain Business: GMO runs a domain registrar business under the brand of Onamae.com, paperboy under
the brand of Muu Muu Domain and GMO DigiRock under the brand of DigiRock. The market share in gTLD
(Generic Top Level Domain such as.com and .net etc.) is circa 91%.

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EC Support Business: GMO runs EC (e-Commerce) support business, which is an automatic webpage service
with an on-line shopping cart function. This business is mainly run by GMO parent company under the brand of
MakeShop and paperboy under the brand of Color Me Shop. The total participant shops are 83,000 and it is
more than the largest on-line shopping mall of Raktuen (4755 JP – HOLD – TP 1,300JPY) and should be the
largest market share in terms of shop number.

Access Business: GMO runs an internet provider business mainly under the band of Toku Toku BB. However,
only monthly charges and other stable revenue is included in the Access business, and other temporary
revenue, such as device sales, are accounted in another segment.

Security Business: GMO acquired Cyber Trust producing SSL (Security Socket Layer) under the brand of Global
Sign in 2006 and started selling Global Sign from 2007. The issued number of SSL is 42 thousands in Japan and
GMO has the largest market share in Japan. We estimate the average price per SSL was 5,532 JPY in Jul-Sep
2013 quarter.

Internet Securities Segment

GMO runs an online securities business under the brand of GMO Click and FX Prime but more than 80% of the
segment sales are from FX transactions rather than stocks or bonds. The segment is only 22% in the GMO
consolidated sales but bears as much as 49% of the consolidated operating profit in 2012.

Scale of economies sometimes does not work: Although a usual on-line securities business can enjoy
economies of scale, GMO sometimes does not see this happening when the transaction sales are expanding. It
is because of (1) the mix between USD/JPY transaction and others and (2) the mix between outside transaction
and inside transaction.

S a l e s a n d O P o f In t e r n e t S e c u r i t i e s S e g m e n t
( b n JP Y )
6

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

F1 1 F1 2 F1 3

S a le s O p e r a tin g P r o f it

Source: CFHK Research based on company data

Mix between USD/JP transaction and other: USD/JPY transaction is the most popular and the most fierce price
competition among FX brokers in Japan. GMO Click offers 0.004 JPY for 1USD/JPY transaction and this is the
lowest commission rate among the FX currencies. Therefore, the profit margin tends to be lowered when the
portion of USD/JPY transaction is increasing.

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Source: Company Presentation on October 30th. The source of left graph in the exhibit is Financial Futures Association of Japan (2013 August).

Mix between Outside Transaction and Inside Transaction: GMO has to use an outside bank to cover trades,
and the cover rate is always higher than the rate GMO offers to their customer for USD/JPY. Thus GMO tries to
increase the amount of their internal matching. Although they do not disclose the amount, we estimate the
portion of internal matching could potentially be more than 50% in total USD/JPY transaction. This portion
tends to be lowered/worse when the market moves to one direction since the chance of matching decreases in
such situations.

Source: Company Presentation on October 30th.

Other Businesses
GMO also has an internet media, social smartphone and incubation segments. The internet media and social
smartphone segments were 35% and 1% in the consolidated sales respectively but the operating profits were 22%
and 4% in the consolidated operating profit respectively in 2012. Thus we may be able to say they are not as
important as the infrastructure and internet securities businesses. In terms of the social smartphone segment, it is
only 4% in the consolidated sales but operating losses are as much as 23% of the consolidated profit. Although the
social game business included in the social smartphone segment can become a very profitable business once it has
a big hit title, chances of success are low as we’ve seen with DeNA (2432 JP – SELL – TP 1,400 JPY) and
Gree (3632 JP – SELL – TP 800 JPY). We will have to watch the cost control of the business very carefully.

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Our View on Each Business
The following are our views on each business within GMO. The business mix is complicated. Please refer to the
company profile and business model section in this research note.

Web Infrastructure& Ecommerce

Access (Internet Provider) Business (7% in the 2012 segment sales)
Our forecast: In Q1-Q3/13 Access business grew +134% YoY due to strong momentum of WiMax mobile
devices. We forecast that the business will grow +123% YoY this year and +27% YoY next year. It will grow
robustly although there will be some slow down as the YoY comparison gets tougher.
Opportunities: GMO accounts for only monthly charge in the Access business sub-segment and puts the
sales of devices into “others” of the Web Infrastructure segment. Thus, the number in Access business
sub-segment is relatively stable. Although we expect the growth rate to calm down as the YoY
comparison gets tougher, this business will grow robustly.
Concerns: We see the risk of this business to be more penetration of smartphone tethering.

Domain Business (14% in the 2012 segment sales)

Our forecast: In Q1-Q3/13 domain business slowed down to +8% YoY from +28% YoY in 2012. We forecast
that the business will grow +11% YoY this year (Q4/12 was unusually weak) and +18% YoY next year thanks
to the introduction of new domains.
Opportunities: It is expected that some new domains such as “.tokyo”, “.osaka”, “.shop” and “.inc” will be
introduced around Q1 (Jan-Mar) 2014. We foresee that this will reaccelerate the domain business.
Concerns: Google (GOOG US – BUY – TP USD$ 1,175) search algorithms have recently started to evaluate
meaningless external links lower than before. Thus, SEO (Search Engine Optimisation) companies and self
SEO persons/companies no longer need a bunch of websites for SEO. Also, less people are inputting URL
directly into the browser URL bar owing to the penetration of search engine and smartphone apps. These
trends may give some negative impacts to the business. The company already has more than 90% market
share and there is limited room to have more market share for sales expansion.

Web Hosting (42% in the 2012 segment sales)

Overview: In Q1-Q3/13 Web Hosting business grew +11% YoY but slowed down to +8% YoY in Q3 owing
mainly to strong competition with a competitor, Sakura Internet (3778 JP – N/C). We forecast the business
will slow down to +10% YoY this year and +7% YoY next year owing to the competition.
Opportunities: There is no doubt that Japan’s internet market will continue to grow in the future and also
that internet needs servers. GMO is the largest web hosting company in Japan. We believe this business
will come back to the growth stage again in the future. However, there may be some slowdown in one year
or so.
Concerns: The competitive landscape is particularly bad in the high spec servers for corporate use, despite
that the servers for game companies run by the parent company are doing well. In addition, the lower spec
servers for individuals have recently also started to slow down. We think that this may be attributed to the
change in Google’s search algorithm. The value of keeping hundreds or thousands of websites for external
link is now becoming more meaningless for SEO companies and self SEO persons/companies.

Ecommerce Solutions (9% in the 2012 segment sales)

Overview: In Q1-Q3/13 Ecommerce Solution business grew +32% YoY and the growth rate accelerated to
+43% in Q3. There is no sign of slow down but we have to be careful about the negative impact from Yahoo
Japan’s (4689 JP – HOLD – TP 470 JPY) strategy change to cut its charge to its customers who want to open
an on-line shop on its platform. We are cautious about this risk and forecast the business will have +31%
YoY this year but may significantly slow down to +10% YoY next year owing to the impact from Yahoo
Japan’s strategy.

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 Opportunities: The business has been growing strongly. Japan’s e-commerce market has been expanding
thanks to the expansion of e-commerce penetration, which is a result of people shifting to e-commerce
from actual shops. It could be a strong support for this business.
Concerns: Yahoo Japan announced in October that they will cut its charge to customers that want to open up
an on-line shop on its platform. Thus any individuals or companies will be able to have an on-line shop on
Yahoo Japan without any charge. It could be negative to GMO’s e-commerce solution in the near-term
which charges monthly fees to its customers. However, Yahoo Japan also says that external links are
allowed. Thus a customer can put a link to their other on-line shop outside of Yahoo Japan. Therefore we
think customers will have multiple stores across different online hosts in the future to expand their sales as
much as they can. It may be positive to GMO in middle/long term.

Security (7% in the 2012 segment sales)

Overview: In Q1-Q3/2013 Security business grew +33% YoY and we forecast the business will grow +34% YoY
this year due to overseas expansion.
Opportunities: We estimate overseas security sales were 30% more than Japan domestic sales in Q1-Q3/13
and it grew faster (+50% YoY) than Japan domestic sales (+16% YoY). We foresee that the business will
continue to grow driven by the overseas segment.
Concerns: We estimate the average unit price of Japan is 9,000 JPY – 10,000 JPY. On the other hand, we
estimate overseas’ average price is around 3,500 JPY – 4,000 JPY owing to the more competitive situation
and agency system. The falling price in Japan is a risk but we don’t see any significant signs of that
happening any time soon.

Payment Processing (16% in the 2012 segment sales)

Overview: In Q1-Q3/13 Payment Processing business grew +22% YoY and we forecast the business will grow
+22% YoY this year thanks to the expansion of the e-commerce market.
Opportunities: An ecommerce shop needs a payment processing system since a shop and customer are not
able to exchange the product and cash like an actual shop. Therefore the e-commerce market expansion
directly expands the payment processing market as well. The company keeps a strong position in this area
and we believe that this business will grow robustly in the future too.
Concerns: People may think that Yahoo Japan’s strategy change in cutting its charge to its customers could
have a negative impact to this business since Yahoo Japan also provides payment processing service.
However, the customers opening shops on Yahoo Japan tend to have trivial sales, and we do not think it
will be negative to GMO’s payment processing business.

Internet Media – Will enjoy macro economic recovery but not share expansion
Overview: In Q1-Q3/13 Internet media business grew +15% YoY and we forecast the business will grow +13%
YoY this year thanks to macro economic recovery.
Opportunities: The macro economic recovery is favorable to internet advertisement businesses. Also, social
advertisement using Twitter (TWTR US – HOLD – TP USD$ 32) and Facebook (FB US - BUY – TP USD$ 63) is
growing rapidly (+6.5 fold from Q4/12). In addition to these trends, the company is now developing more
advanced ad technology. It could have some positive impacts next year.
Concerns: Internet advertisement is moving more to CPC (Cost Per Click) type ad from impressive type ad,
and to smartphones from PC. These trends may make it more difficult for small/middle sized ad agencies
such as GMO Ad Partners.

Internet Securities – Strong Position. Profit improvement is key.

Overview: In Q1-Q3/13 Internet Security business grew +40% YoY and we forecast the business will grow
+30% YoY this year but significantly slow down to -4% YoY next year with a conservative stance.
Opportunities: Their FX trading volume is the largest in the world. Our forecast of this business sales next
year is -4% YoY next year but this number simply assumes the same amount of Q3 sales will continue from
here, a conservative stance. There is enough room to expand the business once the market re-accelerates.

9|P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Concerns: The Securities business, which is mainly FX trading, is volatile and their profit margin deteriorates
when the portion of USD/JPY among all currency transactions increase. Thus we think that we should not
expect too much from this business.

Social & Smartphone – Cost control is the key we believe

Overview: The most important point for social & game business is not sales expansion but reduction of
operating profit. It had 873 million JPY operating loss in Q1 –Q3/13, although it had improved from 1,534
million JPY loss in Q1-Q3/12. We assume the same amount of loss as Q3 will continue in the future since
the situation of the game titles and cost control have not changed drastically in Q4. Social game
development has a huge potential once they have a big hit title. However, it is very hard and rare to have
such a hit title. The company is aiming to have more sales rather than controlling its cost at this moment.
Thus, we take an assumption that the same sales and cost amount would occur in the future as well. In the
future, the cost control will be key for the business in our view.

10 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
 Valuation
Initiate with HOLD and TP 1,200 JPY (0% upside)
Although our forecast of operating profit is slightly lower for F2013 (11,652 million JPY vs. consensus 12,043
million JPY) and slightly higher for F2014 (14,706 million JPY vs. consensus 14,333 million JPY) than consensus
numbers, the difference is not material. GMO is quite an average internet company from the view point of
valuation. Their ROE is 25% vs. 23% for global peer’s average and 3 years profit CAGR is 22% vs. 21% for global
average. Therefore we believe we can put GMO on a global peer median P/E of 20x to our 2014 forecast
numbers. We set our TP at 1,200 JPY (P/E20x to our F2014 forecast EPS of 60.2JPY), which gives only x% upside.
We initiate the company with a HOLD recommendation. We have a DCF reference sheet near the end of this
research note. It shows our TP of 1,200 JPY is justified when we assume 0.8% risk free rate, 10% market
premium and 0.9 Beta for the company.

Global Peers Valuation Comparison

CAP P/E E V / E B IT D A P /B ROE
(m n U S D ) F1 3 F1 4 F1 3 F1 4 F1 2 F1 2
GO O G US G o o gle 3 4 ,6 9 3 2 3 .5 1 9 .8 1 3 .6 1 1 .3 4 .2 1 6. 5
A M ZN US Am az o n 1 6 ,8 6 9 1 4 9 .2 7 8 .8 3 3 .6 2 3 .7 1 8 .5 1. 6
FB US F ac eb o o k 1 1 ,9 6 8 5 9 .2 4 3 .9 2 5 .1 1 8 .8 9 .2 7. 6
7 00 HK T e n ce n t H D 1 0 ,0 9 4 3 6 .5 2 8 .7 2 7 .2 2 1 .7 1 1 .6 3 3. 3
EB AY US EB A Y 6 ,8 6 7 1 9 .6 1 6 .9 1 1 .6 1 0 .2 3 .0 1 2. 9
YH OO US Y a h o o In c . 3 ,6 3 2 2 4 .5 2 1 .7 2 1 .9 2 1 .0 2 .9 9. 2
4 68 9 JP Y a h o o Ja p a n 2 ,6 9 8 2 1 .2 1 9 .6 1 0 .4 9 .5 4 .5 2 3. 2
0 35 4 2 0 K S NHN 1 ,9 5 0 4 8 .0 3 2 .2 3 0 .4 2 1 .4 9 .4 2 9. 9
4 75 5 JP R ak u t en 1 ,8 1 9 3 0 .4 2 5 .2 4 .5 3 .8 6 .4 1 0. 0
3 76 5 JP G u n gH o 721 1 1 .8 1 1 .4 6 .9 7 .4 1 2 .1 1 3 7. 1
2 37 1 JP K akak u 415 4 4 .6 3 4 .4 2 5 .3 1 9 .7 1 9 .5 4 2. 0
3 65 9 JP Nexon 398 9 .4 8 .8 4 .8 4 .5 1 .9 1 3. 2
3 09 2 JP s ta rt T o d a y 323 4 1 .8 3 5 .6 2 3 .8 1 9 .4 2 0 .3 5 5. 8
ZN GA US Zyn ga 320 N.A. N .A . 5 5 .4 4 6 .1 1 .7 - 3. 2
2 43 2 JP DeNA 278 6 .7 6 .6 3 .4 3 .6 1 .9 3 9. 8
4 75 1 JP C y b er ag en t 211 1 9 .3 1 5 .6 7 .2 5 .9 4 .6 2 4. 0
3 63 2 JP G r ee 204 1 0 .8 9 .1 4 .8 4 .2 2 .1 1 7. 5
9 44 9 JP G M O I n te rn e t 136 2 4 .0 1 9 .6 8 .2 7 .1 5 .6 2 5. 3
A v er age 3 4 .1 2 5 .2 1 7 .7 1 4 .4 7 .7 2 7. 5
M e d ia n 2 4 .0 1 9 .8 1 2 .6 1 0 .8 5 .1 2 0. 3
Source: Bloomberg
Notes: Share prices based on November 20th, 2013 Tokyo close.

Investment Risks
In our view, the following points are the main current investment risks. We describe them in more detail in
each of the business overviews in this research note.

Stronger competition in Web Hosting, Security businesses: GMO is the largest provider of web hosting and SSL
(“Secure Sockets Layer”) accounted in the internet security business in Japan. However, these services are
difficult to differentiate from other competitors and we see some signs of stronger competition here. We have
already factored in for some degrees of stronger competition in our forecast numbers, but there is the risk that
it becomes much stronger than we anticipated.

11 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
High Volatility of Internet Security and Social & Smartphone businesses: GMO is the largest internet retail
broker for FX trading in the world. This business is subject to the FX market conditions and the portion of
USD/JPY trading among all currencies as we have explained in the business model section of this research note
(see page 4). This business inherently carries a large volatility risk. Also, the social & smartphone segment has a
volatility risk owing to its smartphone game apps. Focusing on developing smartphone game apps, GMO has
already been booking operating losses for three years in this segment. It is hard to predict how much revenue
they can generate from the smartphone game apps in the future. While the potential upside is huge, the
downside from carrying such losses for too long is also a concerning risk, in our view.

Impact from Yahoo Japan’s strategy change: Yahoo Japan changed their strategy to focus more on the
advertisement business model and cut their shop charge in their e-commerce business. Although it is too early
to tell the magnitude of this, it may affect GMO’s ecommerce business solution segment in the future.

12 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Company History - Many Acquisitions and Subsidiaries listings
In May of 1991, CEO Kumagai established Voice Media as a multi-media company. In July of 1995, the company
changed their company name to InterQ and started the access business in September of the same year, and
started the server business in November 1996.

The company became a public company listed on JASDAQ in August 1999, they were the first public company
within the independent internet service provider space. In September 1999, the company started the domain
business and established Magclick, current GMO Ad Partners (4784 JP – N/C), for an e-mail-magazine distribution
business. Magclick went public on NADAQ Japan in September of 2000.

The company changed their name to Global Media Online in April of 2001. “GMO” from the current name GMO
Internet is an abbreviation of this old company name. In May of 2001, the company bought iSLE, current GMO
Cloud (3788 JP – N/C), to enhance their server business.

The company changed the listing exchange to TSE 2nd in February 2004 and put capital into “paperboy &co”
(3633 JP – N/C) to bolster their server business in March 2004. In September 2004, the company acquired “Card
Commerce Service”, current GMO Payment Gateway (3769 JP – N/C). GMO Payment Gateway went public on TSE
Mothers in April 2005.

In June 2005, the company was promoted to list on TSE 1st and changed the company name to GMO Internet. In
October 2005, the company established GMO Internet Securities, current GMO Click Securities to enter into the
securities business. In March 2006, GMO Hosting & Security, current GMO Cloud went public in TSE Mothers. In
August 2007, the company withdrew from all credit loan businesses.

In 2008, GMO payment moved to TSE 1st in August and paperboy& co. went public on JASDAQ in December. In
September 2010, the company acquired Click Securities (ex. GMO Internet Securities) to re-enter into securities
business. In 2011, the company established GMO Game Center with Acrodia (3823 JP – N/C) in June to enhance
their smartphone game platform, and bought FX Prime (8711 JP – N/C) to enhance their securities business in
September 2011.

13 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Income Statement
( ¥ M illio n s ) F2 0 1 0 F2 0 1 1 F 2012 F 2013 Co . F2 0 1 3 C o s F 2013e F 2014 Cos F 2014e F2 0 1 5 e
Sa l e s 4 4 ,4 8 4 61,691 7 4 ,3 7 6 9 2 ,0 0 0 9 0 ,9 4 4 9 3 ,3 6 0 9 8 ,9 6 7 1 0 0 ,8 7 2 1 0 7 ,5 2 8
G ro ss P ro fi t 2 4 ,7 1 0 37,406 4 3 ,4 6 0 - 5 2 ,7 4 8 5 3 ,3 7 5 5 7 ,5 9 9 5 8 ,5 0 6 6 2 ,3 6 6
O p e ra t i n g P ro f i t 5 ,7 2 9 7,525 9 ,1 4 9 1 1 ,0 0 0 1 2 ,0 4 3 1 1 ,6 5 2 1 4 ,3 3 3 1 4 ,7 0 6 1 7 ,4 2 8
R e c u rri n g P ro f i t 5 ,7 3 8 7,016 9 ,1 7 5 1 1 ,0 0 0 1 1 ,9 9 1 1 1 ,6 3 7 1 4 ,2 4 9 1 4 ,9 0 6 1 7 ,6 2 8
P ro fi t b e f o re T ax 5 ,4 9 6 6,019 9 ,4 4 4 - 1 2 ,7 0 0 1 0 ,6 1 7 1 5 ,5 0 0 1 4 ,1 0 6 1 6 ,8 2 8
N et P ro f it 2 ,2 0 9 4,286 4 ,5 1 8 5 ,0 0 0 5 ,6 2 4 5 ,1 2 7 6 ,9 1 3 7 ,0 8 7 8 ,8 0 2
(T a x ra t e ) (3 5 .7 % ) (1 3 . 7 % ) (3 6 .7 % ) - - ( 3 6 .2 % ) - ( 3 7 .0 % ) ( 3 7 .0 % )
% Y o Y G ro w t h
Sa l e s 16% 39% 21% 24% 22% 2 6% 9% 8% 7%
G ro ss P ro fi t 18% 51% 16% - 21% 2 3% 9% 10% 7%
O p e ra t i n g P ro f i t 23% 31% 22% 20% 32% 2 7% 19% 26% 19%
R e c u rri n g P ro f i t 20% 22% 31% 20% 31% 2 7% 19% 28% 18%
P ro fi t b e f o re T ax 52% 10% 57% - 34% 1 2% 22% 33% 19%
N et P ro f it 63% 94% 5% 11% 24% 1 3% 23% 38% 24%
% P ro fit M a rg in
G ro ss P ro fi t 5 5 .5 % 6 0 .6 % 5 8 .4 % - 5 8 .0 % 57.2% 5 8 .2 % 5 8 .0 % 5 8 .0 %
O p e ra t i n g P ro f i t 1 2 .9 % 1 2 .2 % 1 2 .3 % 1 2 .0 % 1 3 .2 % 12.5% 1 4 .5 % 1 4 .6 % 1 6 .2 %
R e c u rri n g P ro f i t 1 2 .9 % 1 1 .4 % 1 2 .3 % 1 2 .0 % 1 3 .2 % 12.5% 1 4 .4 % 1 4 .8 % 1 6 .4 %
P ro fi t b e f o re T ax 1 2 .4 % 9 .8 % 1 2 .7 % - 1 4 .0 % 11.4% 1 5 .7 % 1 4 .0 % 1 5 .6 %
N et P ro f it 5 .0 % 6 .9 % 6 .1 % 5 .4 % 6 .2 % 5.5% 7 .0 % 7 .0 % 8 .2 %
EPS (¥) 2 2 .1 3 6 .4 3 8 .4 4 2 .4 4 8 .2 4 3 .5 5 9 .1 6 0 .2 7 4 .7
CF PS (¥) 4 1 .4 6 5 .5 7 5 .3 - - 8 4 .7 - 1 0 5 .6 1 2 4 .4
B P S (¥ ) 2 1 4 .0 2 2 1 .8 2 5 8 .2 - - 2 8 8 .7 - 3 3 0 .9 3 8 3 .6
D P S (¥ ) 7 .0 1 2 .0 1 3 .0 - - 1 3 .0 - 1 8 .0 2 2 .0
P/ E (x) 1 8 .5 8 .1 1 4 .5 2 6 .4 2 3 .3 2 5 .7 1 9 .0 1 8 .6 1 5 .0
P / S (x ) 0 .9 0 .6 0 .9 1 .4 1 .5 1 .4 0 .7 1 .3 1 .2
P / B (x ) 1 .9 1 .3 2 .2 - - 3 .9 - 3 .4 2 .9
P/ CF (x) 9 .8 4 .5 7 .4 - - 1 3 .2 - 1 0 .6 9 .0
E V/ E B ITD A ( x ) 6 .0 3 .0 4 .3 - - 6 .7 - 4 .9 3 .6
D / E R a t i o (x ) -0 .5 - 0 .6 - 0 .7 - - - 1 .0 - -1 .2 -1 .4
RO E 1 2 .4 % 1 8 .0 % 1 6 .0 % - - 15.9% - 1 9 .4 % 2 0 .9 %
RO A 2 .1 % 2 .3 % 1 .9 % - - 1.7% - 2 .1 % 2 .5 %
C a p i t a l R a t io 1 2 .9 % 1 2 .7 % 1 1 .0 % - - 9.9% - 1 1 .4 % 1 2 .8 %
P a yo u t Ra tio 3 1 .7 % 3 3 .0 % 3 3 .9 % - - 30.0% - 3 0 .0 % 3 0 .0 %
D i v i d e n d Y ie l d 1 .7 % 4 .1 % 2 .3 % - - 1.2% - 1 .6 % 2 .0 %
Fre e C F In t e re s t 3 3 .0 % 1 9 .6 % 1 8 .5 % - - 13.0% - 1 5 .4 % 1 9 .8 %
C F f ro m O p e ra t i o n 6 ,3 6 3 12,379 1 3 ,7 2 2 - - 1 4 ,6 1 1 - 1 5 ,6 4 0 1 7 ,1 5 2
C F f ro m In v e st m e n t 8 ,7 7 3 -6 , 0 1 2 -3 ,0 5 7 - - -173 - -518 -6 4 0
C F f ro m Fi n a n c e -8 ,0 5 0 -1 , 4 3 4 -1 ,5 0 9 - - - 1 ,6 4 9 - - 1 ,6 4 9 - 1 ,6 4 9
Fre e C F 1 5 ,1 3 5 .9 6 ,3 6 7 .0 1 0 ,6 6 5 .0 - - 1 4 ,4 3 7 .2 - 1 5 ,1 2 1 .5 1 6 ,5 1 1 .5
CA PE X -7 7 3 -299 -134 - - -200 - -300 -4 0 0
N o n - C a s h C o st s 1 ,9 3 4 3,428 4 ,3 4 8 - - 4 ,8 4 8 - 5 ,3 4 8 5 ,8 4 8
EV 4 5 ,8 1 8 32,404 5 7 ,6 1 3 - - 1 1 1 ,2 3 3 - 9 7 ,9 6 0 8 3 ,2 9 8
M ar k e t C a p . 4 0 ,8 0 1 34,635 6 5 ,7 3 6 1 3 1 ,9 4 4 1 3 1 ,9 4 4 1 3 1 ,9 4 4 6 5 ,7 3 6 1 3 1 ,9 4 4 1 3 1 ,9 4 4
( N e t I n t e re s t B e a ri n g D e b t ) -1 0 ,9 7 2 -1 5 , 0 1 2 -2 2 ,4 2 5 - - - 3 5 ,2 1 3 - - 4 8 ,6 8 6 - 6 3 ,5 4 8
In t e re st B e ar in g D eb t 1 8 ,2 1 5 19,395 2 1 ,1 9 3 - - 2 1 ,1 9 3 - 2 1 ,1 9 3 2 1 ,1 9 3
C as h & D e p o s i t 2 7 ,8 6 9 32,928 4 2 ,0 8 5 - - 5 4 ,8 7 3 - 6 8 ,3 4 6 8 3 ,2 0 8
In v e s t m e n t S e c u ri t i e s 1 ,3 1 7 1,479 1 ,5 3 3 - - 1 ,5 3 3 - 1 ,5 3 3 1 ,5 3 3
D e fe rr e d A ss e t s 3 ,1 4 6 5,163 4 ,9 7 9 - - 5 ,1 7 9 - 5 ,3 7 9 5 ,5 7 9
M in o ri t y In t e re st s 1 2 ,8 4 3 7,618 9 ,3 2 3 - - 9 ,3 2 3 - 9 ,3 2 3 9 ,3 2 3
Sh ar e h o l d e rs ' E q u i t y 2 1 ,3 9 6 26,125 3 0 ,4 1 8 - - 3 4 ,0 1 3 - 3 8 ,9 7 9 4 5 ,1 8 9
T o t a l A s se t s 1 6 5 ,4 6 0 205,055 2 7 5 ,9 6 0 - - 3 4 4 ,3 3 2 - 3 4 2 ,9 5 1 3 5 2 ,7 7 2
E B IT D A 7 ,6 6 2 10,953 1 3 ,4 9 7 - 1 5 ,2 4 9 1 6 ,5 0 0 1 7 ,6 5 3 2 0 ,0 5 4 2 3 ,2 7 6
CF 4 ,1 4 3 7,714 8 ,8 6 6 - - 9 ,9 7 5 - 1 2 ,4 3 5 1 4 ,6 5 0
FC F 4 ,9 1 6 8,013 9 ,0 0 0 - - 1 0 ,1 7 5 - 1 2 ,7 3 5 1 5 ,0 5 0
Sh ar e s # (' 0 0 0 ) 1 0 0 ,0 0 3 117,807 1 1 7 ,8 0 7 1 1 7 ,8 1 3 1 1 7 ,8 0 7 1 1 7 ,8 0 7 1 1 7 ,8 1 3 1 1 7 ,8 0 7 1 1 7 ,8 0 7
St o c k P ri c e (¥ ) 40 8 294 558 1 ,1 2 0 1 ,1 2 0 1 ,1 2 0 1 ,1 2 0 1 ,1 2 0 1 ,1 2 0
Source: Company data, Bloomberg, CFHK Research estimates

14 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Segment Sales
F Y 2009 F Y 2010 F Y 2011 F Y 2012 F Y 2013 F Y 2014 F Y 2015
Sa le s 3 8 ,1 9 5 4 4 ,4 8 4 6 1 ,6 9 1 7 4 ,3 7 6 9 3 ,3 6 0 1 0 0 ,8 7 2 1 0 7 ,5 2 8
W e b In f ra s t ru c t u re & E c o m m e rc e 1 8 ,5 1 3 2 0 ,3 7 1 2 4 ,3 6 1 3 0 ,2 1 3 3 8 ,3 7 1 4 3 ,8 2 1 4 7 ,0 0 6
In t e rn e t A c c e ss P ro v id e r 1 ,2 0 7 1 ,0 9 8 1 ,2 0 3 2 ,0 2 0 4 ,5 0 1 5 ,7 2 4 6 ,5 2 4
D o m a in 2 ,2 4 2 2 ,2 7 4 3 ,2 1 5 4 ,1 2 3 4 ,5 6 8 5 ,4 0 0 4 ,8 0 0
W e b H o st in g 9 ,0 1 0 9 ,4 3 8 1 0 ,9 2 9 1 2 ,5 8 6 1 3 ,7 9 4 1 4 ,7 8 3 1 5 ,7 9 6
E c o m m e rc e S u p p o rt 1 ,8 4 3 1 ,9 0 9 2 ,2 2 4 2 ,6 9 9 3 ,5 2 8 3 ,8 6 8 3 ,8 6 8
Se r u c it y 1 ,2 9 2 1 ,5 8 2 1 ,7 0 4 1 ,9 7 6 2 ,6 5 2 3 ,2 8 0 3 ,6 9 8
P a ym e n t P ro c e e d in g 2 ,6 0 7 3 ,2 2 7 3 ,9 2 6 4 ,8 2 4 5 ,9 0 1 7 ,0 7 0 8 ,3 7 0
O t h e rs 312 843 1 ,1 6 0 1 ,9 8 5 3 ,4 1 8 3 ,6 9 6 3 ,9 5 2
M e d ia 2 0 ,3 1 5 2 1 ,3 3 5 2 2 ,0 3 9 2 6 ,0 7 8 2 9 ,5 0 5 3 2 ,4 6 3 3 5 ,9 3 3
In t e rn e t Se c u rit ie s 21 2 ,9 1 8 1 4 ,7 5 7 1 6 ,5 2 5 2 1 ,5 3 8 2 0 ,6 4 8 2 0 ,6 4 8
S o c ia l & S m a rt p h o n e 0 0 1 ,9 3 2 2 ,8 6 0 5 ,8 5 4 5 ,9 4 0 5 ,9 4 0
O t h e rs -654 -140 - 1 ,3 9 8 - 1 ,3 0 0 - 1 ,9 0 8 - 2 ,0 0 0 - 2 ,0 0 0
% Y o Y G ro w t h R a te
Sa le s 3% 16 % 39 % 21 % 26 % 8% 7%
W e b In f ra s t ru c t u re & E c o m m e rc e -3 % 10 % 20 % 24 % 27 % 14% 7%
In t e rn e t A c c e ss P ro v id e r -1 8 % -9 % 10 % 68 % 123 % 27% 14%
D o m a in -6 % 1% 41 % 28 % 11 % 18% -1 1 %
W e b H o st in g 4% 5% 16 % 15 % 10 % 7% 7%
E c o m m e rc e S u p p o rt -3 9 % 4% 17 % 21 % 31 % 10% 0%
Se r u c it y 20 % 22 % 8% 16 % 34 % 24% 13%
P a ym e n t P ro c e e d in g 18 % 24 % 22 % 23 % 22 % 20% 18%
O t h e rs 86 % 170 % 38 % 71 % 72 % 8% 7%
M e d ia 8% 5% 3% 18 % 13 % 10% 11%
In t e rn e t Se c u rit ie s -7 2 % 13795 % 406 % 12 % 30 % -4 % 0%
S o c ia l & S m a rt p h o n e - - - 48 % 105 % 1% 0%
O t h e rs - - - - - - -
% t o Sa le s
Sa le s 100 % 100 % 100 % 100 % 100 % 100% 100%
W e b In f ra s t ru c t u re & E c o m m e rc e 48 % 46 % 39 % 41 % 41 % 43% 44%
In t e rn e t A c c e ss P ro v id e r 3% 2% 2% 3% 5% 6% 6%
D o m a in 6% 5% 5% 6% 5% 5% 4%
W e b H o st in g 24 % 21 % 18 % 17 % 15 % 15% 15%
E c o m m e rc e S u p p o rt 5% 4% 4% 4% 4% 4% 4%
Se r u c it y 3% 4% 3% 3% 3% 3% 3%
P a ym e n t P ro c e e d in g 7% 7% 6% 6% 6% 7% 8%
O t h e rs 1% 2% 2% 3% 4% 4% 4%
M e d ia 53 % 48 % 36 % 35 % 32 % 32% 33%
In t e rn e t Se c u rit ie s 0% 7% 24 % 22 % 23 % 20% 19%
S o c ia l & S m a rt p h o n e 0% 0% 3% 4% 6% 6% 6%
O t h e rs -2 % 0% -2 % -2 % -2 % -2 % -2 %
Source: Company data, Bloomberg, CFHK Research estimates

15 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Segment Operating Profit
F Y 2009 F Y 2010 F Y 2011 F Y 2012 F Y 2013 F Y 2014 F Y 2015
O p e r a tin g P ro f it 4 ,6 5 0 5 ,7 2 9 7 ,5 2 5 9 ,1 4 9 1 1 ,6 5 2 1 4 ,7 0 6 1 7 ,4 2 8
W e b In f ra s t ru c t u re & E c o m m e rc e 2 ,6 4 9 3 ,0 1 4 3 ,0 7 6 4 ,2 5 4 5 ,5 2 0 8 ,4 8 4 1 0 ,8 5 9
In t e rn e t M e d ia 2 ,0 6 7 1 ,9 0 1 1 ,5 9 8 2 ,0 2 6 2 ,2 3 0 2 ,5 2 6 2 ,8 7 3
In t e rn e t Se c u rit ie s 0 740 4 ,3 8 6 4 ,4 4 0 4 ,7 6 1 4 ,6 7 6 4 ,6 7 6
S o c ia l & S m a rt p h o n e 0 0 - 1 ,5 4 3 - 2 ,1 2 9 - 1 ,1 7 3 - 1 ,2 0 0 - 1 ,2 0 0
O t h e rs -6 6 73 8 558 314 220 220
% Y o Y G ro w t h R a te
O p e ra t in g P ro f it 12 % 23 % 31 % 22 % 27 % 26% 19%
W e b In f ra s t ru c t u re & E c o m m e rc e 8% 14 % 2% 38 % 30 % 54% 28%
In t e rn e t M e d ia 25 % -8 % -1 6 % 27 % 10 % 13% 14%
In t e rn e t Se c u rit ie s - - 492 % 1% 7% -2 % 0%
S o c ia l & S m a rt p h o n e - - - - - - -
O t h e rs - - -8 9 % 6875 % -4 4 % -3 0 % 0%
% P ro fit M a rg in
O p e ra t in g P ro f it 12 % 13 % 12 % 12 % 12 % 15% 16%
W e b In f ra s t ru c t u re & E c o m m e rc e 14 % 15 % 13 % 14 % 14 % 19% 23%
In t e rn e t M e d ia 10 % 9% 7% 8% 8% 8% 8%
In t e rn e t Se c u rit ie s - 25 % 30 % 27 % 22 % 23% 23%
S o c ia l & S m a rt p h o n e - - -8 0 % -7 4 % -2 0 % -2 0 % -2 0 %
O t h e rs 10 % -5 2 % -1 % -4 3 % -1 6 % -1 1 % -1 1 %
% t o T o ta l P r o f it
O p e ra t in g P ro f it 100 % 100 % 100 % 100 % 100 % 100% 100%
W e b In f ra s t ru c t u re & E c o m m e rc e 57 % 53 % 41 % 46 % 47 % 58% 62%
In t e rn e t M e d ia 44 % 33 % 21 % 22 % 19 % 17% 16%
In t e rn e t Se c u rit ie s - 13 % 58 % 49 % 41 % 32% 27%
S o c ia l & S m a rt p h o n e - - -2 1 % -2 3 % -1 0 % -8 % -7 %
O t h e rs -1 % 1% 0% 6% 3% 1% 1%
Source: Company data, Bloomberg, CFHK Research estimates

16 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Quarter Income Statement
F 12 F 13 F 14 F 15
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q 4e Q 1e Q 2e Q 3e Q 4e Q 1e Q 2e Q 3e Q 4e
0 3 / '1 2 0 6 /' 1 2 0 9 / '1 2 1 2 / '1 2 0 3 /' 1 3 0 6 /' 1 3 0 9 / '1 3 1 2 / '1 3 0 3 /' 1 4 0 6 /' 1 4 0 9 / '1 4 1 2 / '1 4 0 3 /' 1 5 0 6 / '1 5 0 9 / '1 5 1 2 / '1 5
Sa l e s 1 7 ,9 6 0 1 8 ,0 0 5 1 8 ,0 9 2 2 0 ,3 1 9 2 2 ,8 1 0 2 3 ,8 7 3 2 3 ,3 1 0 2 3 ,3 6 7 2 4 ,8 0 9 2 5 ,4 9 7 2 5 ,3 2 2 2 5 ,2 4 4 2 6 ,6 3 3 2 7 ,1 3 2 2 6 ,8 6 7 26,895
C o s t o f S a le s 7 ,4 6 0 7 ,2 6 2 7 ,9 5 6 8 ,2 3 8 9 ,5 4 0 1 0 ,3 7 9 1 0 ,2 5 2 9 ,8 1 4 1 0 ,4 2 0 1 0 ,7 0 9 1 0 ,6 3 5 1 0 ,6 0 2 1 1 ,1 8 6 1 1 ,3 9 6 1 1 ,2 8 4 11,296
G ro ss P ro fi t 1 0 ,5 0 0 1 0 ,7 4 3 1 0 ,1 3 6 1 2 ,0 8 1 1 3 ,2 7 0 1 3 ,4 9 4 1 3 ,0 5 8 1 3 ,5 5 3 1 4 ,3 8 9 1 4 ,7 8 8 1 4 ,6 8 7 1 4 ,6 4 1 1 5 ,4 4 7 1 5 ,7 3 7 1 5 ,5 8 3 15,599
S G& A 7 ,9 7 5 8 ,2 5 7 8 ,5 6 3 9 ,5 1 6 1 0 ,3 7 6 1 0 ,5 2 3 1 0 ,3 0 9 1 0 ,5 1 5 1 0 ,9 3 3 1 1 ,1 6 0 1 0 ,9 9 5 1 0 ,7 1 2 1 1 ,1 5 6 1 1 ,3 9 4 1 1 ,2 7 9 11,109
O p e ra t i n g P ro f i t 2 ,5 2 5 2 ,4 8 6 1 ,5 7 3 2 ,5 6 5 2 ,8 9 4 2 ,9 7 1 2 ,7 4 9 3 ,0 3 8 3 ,4 5 7 3 ,6 2 9 3 ,6 9 2 3 ,9 2 9 4 ,2 9 1 4 ,3 4 3 4 ,3 0 4 4,490
N o n - O p e ra t i n g P ro f i t -25 -5 10 46 -35 51 -8 1 50 50 50 50 50 50 50 50 50
R e c u rri n g P ro f i t 2 ,5 0 0 2 ,4 8 1 1 ,5 8 3 2 ,6 1 1 2 ,8 5 9 3 ,0 2 2 2 ,6 6 8 3 ,0 8 8 3 ,5 0 7 3 ,6 7 9 3 ,7 4 2 3 ,9 7 9 4 ,3 4 1 4 ,3 9 3 4 ,3 5 4 4,540
E x t ra o rd in ar y P ro fi t -31 -138 579 -1 4 1 -215 -450 -1 5 5 -2 0 0 -200 -200 -2 0 0 -2 0 0 -200 -200 -2 0 0 -200
P ro fi t b e f o re T ax 2 ,4 6 9 2 ,3 4 3 2 ,1 6 2 2 ,4 7 0 2 ,6 4 4 2 ,5 7 2 2 ,5 1 3 2 ,8 8 8 3 ,3 0 7 3 ,4 7 9 3 ,5 4 2 3 ,7 7 9 4 ,1 4 1 4 ,1 9 3 4 ,1 5 4 4,340
C o rp o ra t e T ax 1 ,1 3 5 1 ,0 3 0 1 ,0 0 3 29 7 1 ,1 4 6 833 796 1 ,0 6 9 1 ,2 2 4 1 ,2 8 7 1 ,3 1 0 1 ,3 9 8 1 ,5 3 2 1 ,5 5 1 1 ,5 3 7 1,606
M in o ri t y In t e re s t 438 317 341 36 5 396 445 355 45 0 450 450 450 4 50 450 450 450 450
N et P ro f it 896 996 818 1 ,8 0 8 1 ,1 0 2 1 ,2 9 4 1 ,3 6 2 1 ,3 6 9 1 ,6 3 3 1 ,7 4 2 1 ,7 8 1 1 ,9 3 1 2 ,1 5 9 2 ,1 9 1 2 ,1 6 7 2,284
Y o Y G ro w th R a te
Sa l e s 24% 20% 16 % 23% 27% 33% 2 9% 15% 9% 7% 9% 8% 7% 6% 6% 7%
C o s t o f S a le s 35% 27% 29 % 20% 28% 43% 2 9% 19% 9% 3% 4% 8% 7% 6% 6% 7%
G ro ss P ro fi t 17% 15% 7% 25% 26% 26% 2 9% 12% 8% 10% 1 2% 8% 7% 6% 6% 7%
S G& A 16% 12% 9% 23% 30% 27% 2 0% 10% 5% 6% 7% 2% 2% 2% 3% 4%
O p e ra t i n g P ro f i t 23% 28% -3 % 35% 15% 20% 7 5% 18% 19% 22% 3 4% 29% 24% 20% 17% 14%
N o n - O p e ra t i n g P ro f i t - - - - - - - 9% - -2 % - 0% 0% 0% 0% 0%
R e c u rri n g P ro f i t 30% 35% 6% 47% 14% 22% 6 9% 18% 23% 22% 4 0% 29% 24% 19% 16% 14%
E x t ra o rd in ar y P ro fi t - - - - - - - - - - - - - - - -
P ro fi t b e f o re T ax 62% 29% 74 % 73% 7% 10% 1 6% 17% 25% 35% 4 1% 31% 25% 21% 17% 15%
C o rp o ra t e T ax - 24% 85 % - 1% -1 9 % -2 1 % 260% 7% 55% 6 5% 31% 25% 21% 17% 15%
M in o ri t y In t e re s t -25% 70% 712 % 276% -10% 40% 4% 23% 14% 1% 2 7% 0% 0% 0% 0% 0%
N et P ro f it -25% 26% 24 % 10% 23% 30% 6 7% -24% 48% 35% 3 1% 41% 32% 26% 22% 18%
% t o Sa le s
Sa l e s 100% 100% 100 % 100% 100% 100% 10 0% 100% 100% 100% 10 0% 100% 100% 100% 1 00% 100%
C o s t o f S a le s 42% 40% 44 % 41% 42% 43% 4 4% 42% 42% 42% 4 2% 42% 42% 42% 42% 42%
G ro ss P ro fi t 58% 60% 56 % 59% 58% 57% 5 6% 58% 58% 58% 5 8% 58% 58% 58% 58% 58%
S G& A 44% 46% 47 % 47% 45% 44% 4 4% 45% 44% 44% 4 3% 42% 42% 42% 42% 41%
O p e ra t i n g P ro f i t 14% 14% 9% 13% 13% 12% 1 2% 13% 14% 14% 1 5% 16% 16% 16% 16% 17%
N o n - O p e ra t i n g P ro f i t 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
R e c u rri n g P ro f i t 14% 14% 9% 13% 13% 13% 1 1% 13% 14% 14% 1 5% 16% 16% 16% 16% 17%
E x t ra o rd in ar y P ro fi t 0% -1 % 3% -1% -1% -2 % -1% -1% -1% -1 % -1% -1% -1% -1 % -1% -1%
P ro fi t b e f o re T ax 14% 13% 12 % 12% 12% 11% 1 1% 12% 13% 14% 1 4% 15% 16% 15% 15% 16%
C o rp o ra t e T ax 6% 6% 6% 1% 5% 3% 3% 5% 5% 5% 5% 6% 6% 6% 6% 6%
M in o ri t y In t e re s t 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
N et P ro f it 5% 6% 5% 9% 5% 5% 6% 6% 7% 7% 7% 8% 8% 8% 8% 8%
C o r p o r at e T a x R a t e 46% 44% 46 % 12% 43% 32% 3 2% 37% 37% 37% 3 7% 37% 37% 37% 37% 37%

Source: Company data, Bloomberg, CFHK Research estimates

17 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Quarter Segment Sales
F 12 F 13 F 14 F 15
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q 4e Q 1e Q 2e Q 3e Q 4e Q 1e Q 2e Q 3e Q 4e
0 3 / '1 2 0 6 /' 1 2 0 9 / '1 2 1 2 /' 1 2 0 3 /' 1 3 0 6 /' 1 3 0 9 / '1 3 1 2 / '1 3 0 3 /' 1 4 0 6 / '1 4 0 9 / '1 4 1 2 / '1 4 0 3 /' 1 5 0 6 / '1 5 0 9 / '1 5 1 2 / '1 5
Sa le s 1 7 ,9 6 0 1 8 ,0 0 5 1 8 ,0 9 1 2 0 ,3 1 9 2 2 ,8 1 0 2 3 ,8 7 3 2 3 ,3 1 0 2 3 ,3 6 7 2 4 ,8 0 9 2 5 ,4 9 7 2 5 ,3 2 2 25,244 2 6 ,6 3 3 2 7 ,1 3 2 2 6 ,8 6 7 2 6 ,8 9 5
W e b In fra s t ru c t u re & E c o m m e rc e 7 ,0 1 5 7 ,3 1 1 7 ,7 8 3 8 ,1 0 2 9 ,0 5 1 9 ,4 3 6 9 ,7 3 8 1 0 ,1 4 6 1 0 ,4 6 7 1 0 ,9 8 9 1 1 ,0 7 6 11,289 1 1 ,4 1 2 1 1 ,7 2 4 1 1 ,7 6 0 1 2 ,1 1 0
I n t e rn e t M e d ia 6 ,5 2 9 6 ,3 9 6 6 ,6 6 2 6 ,4 9 0 7 ,4 8 8 7 ,6 0 4 7 ,3 3 9 7 ,0 7 4 8 ,1 9 6 8 ,3 6 1 8 ,0 9 9 7,807 9 ,0 7 5 9 ,2 6 1 8 ,9 6 0 8 ,6 3 8
I n t e rn e t S e c u ri t i e s 4 ,1 2 6 4 ,1 2 5 3 ,4 3 6 4 ,8 3 7 5 ,5 2 8 5 ,6 8 6 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2 5,162 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2
S o c i a l & S m a rt p h o n e 676 675 689 81 8 1 ,2 6 1 1 ,6 2 2 1 ,4 8 6 1 ,4 8 5 1 ,4 8 5 1 ,4 8 5 1 ,4 8 5 1,485 1 ,4 8 5 1 ,4 8 5 1 ,4 8 5 1 ,4 8 5
I n c u b at i o n 39 1 36 52 5 41 42 61 50 50 50 50 50 50 50 50 50
A d ju s t m e n t f o r In t e rn a l T ra n sa c t i o n -425 -503 -515 -4 5 3 -559 -517 -4 7 9 -5 5 0 -550 -550 -5 5 0 -550 -550 -550 -5 5 0 -550
Y o Y G ro w th R a te
Sa le s 2 4 .2 % 1 9 .6 % 1 5 .5 % 2 3 .0 % 2 7 .0 % 3 2 .6 % 2 8 .8 % 1 5 .0 % 8 .8 % 6 .8 % 8 .6 % 8 .0 % 7 .4 % 6 .4 % 6 .1 % 6 .5 %
W e b In fra s t ru c t u re & E c o m m e rc e 2 2 .1 % 2 5 .6 % 2 4 .8 % 2 3 .5 % 2 9 .0 % 2 9 .1 % 2 5 .1 % 2 5 .2 % 1 5 .6 % 1 6 .5 % 1 3 .7 % 1 1 .3 % 9 .0 % 6 .7 % 6 .2 % 7 .3 %
I n t e rn e t M e d ia - - 2 3 .1 % 7 .3 % 1 4 .7 % 1 8 .9 % 1 0 .2 % 9 .0 % 9 .4 % 1 0 .0 % 1 0 .4 % 1 0 .4 % 1 0 .7 % 1 0 .8 % 1 0 .6 % 1 0 .6 %
I n t e rn e t S e c u ri t i e s - - -7 .6 % 3 2 .7 % 3 4 .0 % 3 7 .8 % 5 0 .2 % 6 .7 % - 6 .6 % -9 .2 % 0 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 %
S o c i a l & S m a rt p h o n e - - 1 9 .6 % 2 3 .6 % 8 6 .5 % 1 4 0 .3 % 1 1 5 .7 % 8 1 .5 % 1 7 .8 % -8 .4 % -0 .1 % 0 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 %
I n c u b at i o n - - 3 5 0 0 .0 % 2 6150% 5 .1 % 4 1 0 0 .0 % 6 9 .4 % - 9 0 .5 % 2 2 .0 % 1 9 .0 % -1 8 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 %
A d ju s t m e n t f o r In t e rn a l T ra n sa c t i o n 2 2 .5 % 2 2 .0 % - - - - - - - - - - - - - -
% t o T o ta l S a le s
Sa le s 100% 100% 100 % 100% 100% 100% 10 0% 100% 100% 100% 1 00% 100% 100% 100% 100% 100%
W e b In fra s t ru c t u re & E c o m m e rc e 39% 41% 43 % 40% 40% 40% 4 2% 43% 42% 43% 44% 45% 43% 43% 44% 45%
I n t e rn e t M e d ia 36% 36% 37 % 32% 33% 32% 3 1% 30% 33% 33% 32% 31% 34% 34% 33% 32%
I n t e rn e t S e c u ri t i e s 23% 23% 19 % 24% 24% 24% 2 2% 22% 21% 20% 20% 20% 19% 19% 19% 19%
S o c i a l & S m a rt p h o n e 4% 4% 4% 4% 6% 7% 6% 6% 6% 6% 6% 6% 6% 5% 6% 6%
I n c u b at i o n 0% 0% 0% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
A d ju s t m e n t f o r In t e rn a l T ra n sa c t i o n -2% -3 % -3 % -2% -2% -2 % -2% -2% -2% -2 % -2% -2% -2 % -2 % -2% -2%
Source: Company data, Bloomberg, CFHK Research estimates

18 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Quarter Segment Operating Profit
F 12 F 13 F 14 F 15
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q 4e Q 1e Q 2e Q 3e Q 4e Q 1e Q 2e Q 3e Q 4e
0 3 / '1 2 0 6 /' 1 2 0 9 / '1 2 1 2 /' 1 2 0 3 /' 1 3 0 6 /' 1 3 0 9 / '1 3 1 2 / '1 3 0 3 /' 1 4 0 6 / '1 4 0 9 / '1 4 1 2 / '1 4 0 3 /' 1 5 0 6 / '1 5 0 9 / '1 5 1 2 / '1 5
O p e r a tin g P ro f it 2 ,5 2 5 2 ,4 8 6 1 ,5 7 2 2 ,5 6 4 2 ,8 9 4 2 ,9 7 1 2 ,7 4 8 3 ,0 3 8 3 ,4 5 7 3 ,6 2 9 3 ,6 9 2 3,929 4 ,2 9 1 4 ,3 4 3 4 ,3 0 4 4 ,4 9 0
W e b In fra s t ru c t u re & E c o m m e rc e 981 1 ,1 4 3 1 ,1 0 3 1 ,0 2 6 1 ,3 1 8 1 ,3 2 7 1 ,2 8 4 1 ,5 9 1 1 ,8 0 3 2 ,0 3 6 2 ,2 3 7 2,408 2 ,5 5 0 2 ,6 6 0 2 ,7 6 3 2 ,8 8 6
I n t e rn e t M e d ia 633 473 455 46 5 659 593 455 5 23 730 669 531 597 818 759 617 680
I n t e rn e t S e c u ri t i e s 1 ,3 0 9 1 ,3 7 2 584 1 ,1 7 4 1 ,2 5 3 1 ,1 7 0 1 ,1 6 9 1 ,1 6 9 1 ,1 6 9 1 ,1 6 9 1 ,1 6 9 1,169 1 ,1 6 9 1 ,1 6 9 1 ,1 6 9 1 ,1 6 9
S o c i a l S m a rt p h o n e -427 -529 -578 -5 9 5 -402 -171 -3 0 0 -3 0 0 -300 -300 -3 0 0 -300 -300 -300 -3 0 0 -300
I n c u b at i o n -26 -27 -2 7 44 8 6 3 11 5 5 5 5 5 5 5 5 5
A d ju s t m e n t 55 54 35 46 60 49 128 50 50 50 50 50 50 50 50 50
% G ro w th R a te
O p e ra t i n g P ro f i t 23% 28% -3 % 35% 15% 20% 7 5% 18% 19% 22% 34% 29% 24% 20% 17% 14%
W e b In fra s t ru c t u re & E c o m m e rc e 2% 63% 76 % 32% 34% 16% 1 6% 55% 37% 53% 74% 51% 41% 31% 24% 20%
I n t e rn e t M e d ia 39% 31% 21 % 14% 4% 25% 0% 13% 11% 13% 17% 14% 12% 13% 16% 14%
I n t e rn e t S e c u ri t i e s 63% -4 % -4 2 % 2% -4% -1 5 % 10 0% 0% -7% 0% 0% 0% 0% 0% 0% 0%
S o c i a l S m a rt p h o n e - - - - - - - - - - - - - - - -
I n c u b at i o n - - - - - - - -99% -17% 67% -55% 0% 0% 0% 0% 0%
A d ju s t m e n t 206% -4 % 150 % -31% 9% -9 % 26 6% 9% -17% 2% -61% 0% 0% 0% 0% 0%
% P ro fit M a rg in
O p e ra t i n g P ro f i t 14% 14% 9% 13% 13% 12% 1 2% 13% 14% 14% 15% 16% 16% 16% 16% 17%
W e b In fra s t ru c t u re & E c o m m e rc e 14% 16% 14 % 13% 15% 14% 1 3% 16% 17% 19% 20% 21% 22% 23% 23% 24%
I n t e rn e t M e d ia 10% 7% 7% 7% 9% 8% 6% 7% 9% 8% 7% 8% 9% 8% 7% 8%
I n t e rn e t S e c u ri t i e s 32% 33% 17 % 24% 23% 21% 2 3% 23% 23% 23% 23% 23% 23% 23% 23% 23%
S o c i a l S m a rt p h o n e -63% -7 8 % -8 4 % -73% -32% -1 1 % -2 0 % -20% -20% -2 0 % -20% -20% -20% -2 0 % -20% -20%
I n c u b at i o n -67% -2700% -7 5 % 85% 15% 7% 1 8% 10% 10% 10% 10% 10% 10% 10% 10% 10%
A d ju s t m e n t -13% -1 1 % -7 % -10% -11% -9 % -2 7 % -9% -9% -9 % -9% -9% -9 % -9 % -9% -9%
Source: Company data, Bloomberg, CFHK Research estimates

19 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
Quarter Segment Sales - Detail
F 12 F 13 F 14 F 15
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q 4e Q 1e Q 2e Q 3e Q 4e Q 1e Q 2e Q 3e Q 4e
0 3 / '1 2 0 6 /' 1 2 0 9 / '1 2 1 2 /' 1 2 0 3 /' 1 3 0 6 /' 1 3 0 9 / '1 3 1 2 / '1 3 0 3 /' 1 4 0 6 / '1 4 0 9 / '1 4 1 2 / '1 4 0 3 /' 1 5 0 6 / '1 5 0 9 / '1 5 1 2 / '1 5
Sa le s 1 7 ,9 6 0 1 8 ,0 0 5 1 8 ,0 9 1 2 0 ,3 1 9 2 2 ,8 1 0 2 3 ,8 7 3 2 3 ,3 1 0 2 3 ,3 6 7 2 4 ,8 0 9 2 5 ,4 9 7 2 5 ,3 2 2 25,244 2 6 ,6 3 3 2 7 ,1 3 2 2 6 ,8 6 7 2 6 ,8 9 5
W e b In fra s t ru c t u re & E c o m m e rc e 7 ,0 1 5 7 ,3 1 1 7 ,7 8 3 8 ,1 0 2 9 ,0 5 1 9 ,4 3 6 9 ,7 3 8 1 0 ,1 4 6 1 0 ,4 6 7 1 0 ,9 8 9 1 1 ,0 7 6 11,289 1 1 ,4 1 2 1 1 ,7 2 4 1 1 ,7 6 0 1 2 ,1 1 0
A ccess 423 439 502 65 6 827 1 ,1 1 2 1 ,2 5 6 1 ,3 0 6 1 ,3 5 6 1 ,4 0 6 1 ,4 5 6 1,506 1 ,5 5 6 1 ,6 0 6 1 ,6 5 6 1 ,7 0 6
D o m a in 1 ,0 5 6 1 ,0 8 1 1 ,0 4 3 94 2 1 ,1 3 8 1 ,1 8 4 1 ,1 0 6 1 ,1 4 0 1 ,2 0 0 1 ,4 4 0 1 ,4 4 0 1,320 1 ,2 0 0 1 ,2 0 0 1 ,2 0 0 1 ,2 0 0
W e b H o st i n g 2 ,9 4 8 3 ,1 2 3 3 ,1 8 6 3 ,3 2 7 3 ,3 4 2 3 ,4 6 5 3 ,4 2 7 3 ,5 6 0 3 ,6 1 1 3 ,6 8 4 3 ,6 7 5 3,813 3 ,8 6 4 3 ,9 3 8 3 ,9 2 7 4 ,0 6 7
G M O C lo u d 1 ,6 3 3 1 ,6 4 7 1 ,6 4 1 1 ,6 3 0 1 ,6 2 6 1 ,6 4 4 1 ,5 8 0 1 ,6 6 2 1 ,6 5 8 1 ,6 7 7 1 ,6 1 2 1,695 1 ,6 9 1 1 ,7 1 0 1 ,6 4 4 1 ,7 2 9
pa per boy 648 671 655 66 8 709 733 714 7 15 720 725 730 735 740 745 750 755
O t h e rs 667 805 890 1 ,0 2 9 1 ,0 0 7 1 ,0 8 8 1 ,1 3 3 1 ,1 8 3 1 ,2 3 3 1 ,2 8 3 1 ,3 3 3 1,383 1 ,4 3 3 1 ,4 8 3 1 ,5 3 3 1 ,5 8 3
E c o m m e rc e S o l u t io n s 653 607 676 76 1 845 749 967 9 67 967 967 967 967 967 967 967 967
pa per boy 206 219 220 24 0 236 236 241 2 41 241 241 241 241 241 241 241 241
O t h e rs (M ak e Sh o p e t c .) 447 388 456 52 1 609 513 726 7 26 726 726 726 726 726 726 726 726
S e c u ri t y 472 487 511 50 4 616 658 674 7 04 779 841 812 848 898 970 895 935
G M O C lo u d 501 507 532 53 4 637 686 691 7 21 796 858 829 865 915 986 912 951
O t h e rs -29 -20 -2 1 -3 0 -21 -28 -1 7 -17 -17 -17 -1 7 -17 -17 -17 -1 7 -17
P a y m e n t P ro c e s si n g 1 ,1 3 2 1 ,1 3 9 1 ,2 7 1 1 ,2 8 1 1 ,3 8 2 1 ,4 2 6 1 ,5 1 9 1 ,5 7 4 1 ,6 6 3 1 ,7 3 6 1 ,7 9 5 1,876 1 ,9 7 3 2 ,0 6 5 2 ,1 2 1 2 ,2 1 1
G M O P ay m e n t G a t e w a y 1 ,1 6 2 1 ,1 7 7 1 ,3 0 8 1 ,3 1 1 1 ,4 2 0 1 ,4 7 0 1 ,5 6 3 1 ,6 1 3 1 ,7 0 4 1 ,7 7 8 1 ,8 3 7 1,917 2 ,0 1 4 2 ,1 0 7 2 ,1 6 2 2 ,2 5 2
O t h e rs -30 -38 -3 7 -3 0 -38 -44 -4 4 -39 -41 -42 -4 2 -41 -41 -42 -4 1 -41
O t h er s 328 432 590 62 9 898 838 787 8 95 892 915 930 959 954 979 995 1 ,0 2 5
G M O C lo u d 214 186 170 21 4 201 214 219 2 35 222 235 240 259 244 259 265 285
O t h e rs 114 246 420 41 5 697 624 650 6 60 670 680 690 700 710 720 730 740
I n t e rn e t M e d ia 6 ,5 2 9 6 ,3 9 6 6 ,6 6 2 6 ,4 9 0 7 ,4 8 8 7 ,6 0 4 7 ,3 3 9 7 ,0 7 4 8 ,1 9 6 8 ,3 6 1 8 ,0 9 9 7,807 9 ,0 7 5 9 ,2 6 1 8 ,9 6 0 8 ,6 3 8
In t e rn e t M e d i a & Se a rc h M ar k e t i n g 2 ,4 2 6 2 ,4 6 4 2 ,4 5 9 2 ,3 4 7 2 ,5 1 4 2 ,5 3 2 2 ,5 2 3 2 ,4 0 6 2 ,5 7 7 2 ,5 9 5 2 ,5 8 6 2,466 2 ,6 4 1 2 ,6 6 0 2 ,6 5 1 2 ,5 2 7
In t e rn e t A d v er t is i n g Ag e n c y 3 ,7 4 3 3 ,5 8 1 3 ,8 5 4 3 ,6 7 3 4 ,4 9 1 4 ,6 1 0 4 ,3 8 2 4 ,2 2 4 5 ,1 6 5 5 ,3 0 2 5 ,0 3 9 4,858 5 ,9 3 9 6 ,0 9 7 5 ,7 9 5 5 ,5 8 6
O t h er s 358 349 347 46 9 482 462 434 4 44 454 464 474 484 494 504 514 524
I n t e rn e t S e c u ri t i e s 4 ,1 2 6 4 ,1 2 5 3 ,4 3 6 4 ,8 3 7 5 ,5 2 8 5 ,6 8 6 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2 5,162 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2 5 ,1 6 2
S o c i a l & S m a rt p h o n e 676 675 689 81 8 1 ,2 6 1 1 ,6 2 2 1 ,4 8 6 1 ,4 8 5 1 ,4 8 5 1 ,4 8 5 1 ,4 8 5 1,485 1 ,4 8 5 1 ,4 8 5 1 ,4 8 5 1 ,4 8 5
S m a rt p h o n e G a m e 289 246 267 43 5 863 1 ,2 3 1 1 ,1 4 7 1 ,1 4 7 1 ,1 4 7 1 ,1 4 7 1 ,1 4 7 1,147 1 ,1 4 7 1 ,1 4 7 1 ,1 4 7 1 ,1 4 7
D ai l y D e a l s 386 428 421 38 3 397 392 338 3 38 338 338 338 338 338 338 338 338
I n c u b at i o n 39 1 36 52 5 41 42 61 50 50 50 50 50 50 50 50 50
A d ju s t m e n t f o r In t e rn a l T ra n sa c t i o n -425 -503 -515 -4 5 3 -559 -517 -4 7 9 -5 5 0 -550 -550 -5 5 0 -550 -550 -550 -5 5 0 -550
Source: Company data, Bloomberg, CFHK Research estimates

20 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
DCF Sheet
-1 . 5 + 0 .5 + 1 .5 +2 . 5 + 3 .5 +4.5 + 5 .5 + 6 .5 +7 . 5 + 8 .5 +9.5

(m il lio n JP Y ) F 2012 F 20 1 3 e F 2014e F2 0 1 5 e F 2 0 16 e F2 0 1 7 e F2 0 1 8 e F 2019e F2 0 1 0 e F 2 01 1 e F 2012e

N et O p e ra tin g P r o fit 9,149 1 1 ,6 5 2 1 4 , 7 06 1 7 ,4 2 8 1 9 ,1 7 1 21,088 2 2 ,7 7 5 2 4 , 14 1 2 5, 3 4 8 2 6 ,1 0 9 26,631

(Y o Y ) 21.6% 2 7 .4 % 2 6 . 2% 1 8. 5 % 1 0 .0 % 10.0% 8 .0 % 6 .0 % 5.0% 3 .0 % 2 . 0%

T ax -3 , 4 6 5 -3 ,8 4 4 -5 , 2 19 -6 ,2 2 6 -6 ,9 0 1 -7 , 5 9 2 -8 ,1 9 9 -8 , 69 1 - 9, 1 2 5 -9 ,3 9 9 -9 , 5 8 7

(T ax R at e) -3 8 % -3 3 % -3 5% -3 6 % -3 6 % -3 6 % -3 6 % - 36 % -3 6 % -3 6 % -3 6%

N et O p e ra tin g P r o fit a fte r T ax 5,684 7 ,8 0 8 9 , 4 87 1 1 ,2 0 2 1 2 ,2 6 9 13,496 1 4 ,5 7 6 1 5 , 45 0 1 6, 2 2 3 1 6 ,7 1 0 17,044

D e p r ec i ati o n /A m o rti za tio n 4,348 4 ,5 0 0 4 , 2 50 4 ,0 0 0 3 ,7 5 0 3,500 3 ,2 5 0 3 , 00 0 2, 7 5 0 2 ,5 0 0

C AP E X -1 3 4 -2 0 0 -3 00 -4 0 0 -5 0 0 -5 0 0 -5 0 0 - 50 0 -5 0 0 -5 0 0

W o r kin g C a p ita l 2,900 -2 ,5 9 7 -1 47 -3 7 2 -3 9 0 -4 1 0 -4 3 0 - 45 2 -4 7 4 -4 9 8

A /C an d N o te R e c e iva b le -7 7 1 -1 ,6 4 3 -6 50 -5 7 6 -6 0 5 -6 3 5 -6 6 7 - 70 0 -7 3 5 -7 7 2

Fi n an c i al B u s in e ss A s se ts 3,227 -1 ,5 3 7 2 73 0 0 0 0 0 0 0

A /C an d N o te P a ya b le 444 583 2 31 204 215 225 236 24 8 261 274

F CF - 9 ,5 1 2 1 3 , 2 90 1 4 ,4 3 0 1 5 ,1 2 9 16,086 1 6 ,8 9 6 1 7 , 49 9 1 7, 9 9 9 1 8 ,2 1 2 17,044

DC F - 9 ,1 0 0 1 1 , 7 00 1 1 ,7 0 0 1 1 ,3 0 0 11,000 1 0 ,7 0 0 1 0 , 20 0 9, 6 0 0 9 ,0 0 0 88,500

N PV 1 8 2 ,8 0 0

N o n -O p e ra tin g A s se ts 1 ,5 3 3

N et In t er es t B ea ri n g D e b t -3 4 ,8 6 5 W A C C C a lc u la tio n

M in o rit y I n te re s t -9 ,3 2 3 (m n JP Y ) Sh a re R at e T a x E ffec t A c tu a l R a te W ei gh t

S h a re h o ld e rs ' V al u e 1 4 0 ,1 4 5 M a rk et C a p 14 1 , 3 6 8 8 7 .0 % 9 .8 % 9 .8 % 8 . 5%

S h a re # 118 S h o rt-te r m De b ts 8,792 5 .4 % 2 .3 % 0.9% 1 .4 % 0 . 1%

T h e o re ti c al Sh a re P ri c e 1 ,2 0 0 L o n g -te rm D e b ts 12,401 7 .6 % 2 .5 % 1.0% 1 .5 % 0 . 1%

T o ta l 16 2 , 5 6 1 W A CC 8 . 7%

C a p ita l C o st 9 .8 %

Rf 0 .8 %

Rm 1 0 .0 % T e rm in a l G r o w th

β 0 .9 0%

Source: Company data, Bloomberg, CFHK Research estimates

21 | P a g e
Please see analyst certification and important regulatory disclosures at the end of this note
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Table of Disclosures on Interests

1 The analyst(s) named on the front page of this research note is / are a holder(s) of the following company (ies)
mentioned / referenced in this research note.
2 Cantor Fitzgerald (Hong Kong) Capital Markets Limited or an affiliated company has a shareholding exceeding 1% of the
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Company Name Disclosures

GMO Internet – 9449 JP N/A
Raktuen – 4755 JP N/A
DeNa – 2432 JP N/A
Gree – 3632 JP N/A
Google Inc N/A
Twitter N/A
Facebook N/A
Yahoo Japan N/A
GMO Ad Partners – 4784 JP N/A
GMO Cloud – 3788 JP N/A
Paperboy & co – 3633 JP N/A
GMO Payment Gateway – 3769 JP N/A
FX Prime – 8711 JP N/A
Sakura Internet – 3778 JP N/A
Acrodia Inc – 3823 JP N/A

Cantor Fitzgerald (Hong Kong) Capital Markets Limited - Japan Technology – Internet Research

Naoshi Nema
+ 852 3558 5546
nnema@cantor.com

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