japan value report

Value-oriented Equity Investment Ideas for Sophisticated Investors

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Investing In The Tradition of Graham, Buffett, Klarman

Year IV, Volume IV May 2, 2011

When asked how he became so successful, Buffett answered: “We read hundreds and hundreds of annual reports every year.”

Top Ideas In This Report

Konami (Tokyo: 9766, NYSE: KNM) ……. 50

Ricoh (Tokyo: 7752, OTC: RICOY) …… 90

Toyota Motor (Tokyo: 7203, NYSE: TM) …….. 106

Also Inside

Editorial Commentary ………………. 4

Superinvestor Update ………………. 7

Interview with Scott Callon ………… 8

Interview with Mark O’Friel ………. 12

Japan, the Country and Economy … 17

Screening for Japanese Ideas …….. 24

Profiles of 20 Japanese Companies 30

Selected Statistics on Japan ………110

Screens for Value Investors ……… 115

This Month’s Top Web Links …….. 124

About The Manual of Ideas

Our goal is to bring you investment ideas that are compelling on the basis of value versus price. In our quest for value, we analyze the top holdings of top fund managers. We also use a proprietary methodology to identify stocks that are not widely followed by institutional investors.

Our research team has extensive experience in industry and security analysis, equity valuation, and investment management. We bring a “buy side” mindset to the idea generation process, cutting across industries and market capitalization ranges in our search for compelling equity investment opportunities.

THE JAPAN ISSUE

► Context: Japan, the country and the economy

► 20 Japanese companies profiled and analyzed

► Proprietary selection of top investment candidates

► Plus: Exclusive interview with Scott Callon

► Plus: Exclusive interview with Mark O’Friel

► Plus: Superinvestor holdings update

► Plus: Favorite screens for value investors

Companies mentioned in this issue include Advantest, Aeon, Aisin Seiki, Asahi Breweries, Asahi Glass, Asahi Kasei,

Astellas Pharma, Bridgestone, Canon, Central Jap. Railway, Chubu Electric, Chugai Pharma, Chuo Mitsui, Dai Nippon Printing, Dai-ichi Life,

Daiichi Sankyo, Daikin Industries, Daiwa Securities, Denso, East Japan Railway, Eisai, Fanuc, Fast Retailing, FUJIFILM, Fujitsu,

Hitachi, Honda Motor, Hoya, ITOCHU, Japan Tobacco, JFE Holdings, JS Group, JX Holdings, Kansai Electric, Kao, KDDI, Keyence, Kirin, Kobe Steel, Komatsu, Konami, Kubota, Kyocera, Kyushu Electric,

Marubeni, Mitsubishi, Mitsubishi Chemical, Mitsubishi Electric, Mitsubishi Estate, Mitsubishi Heavy, Mitsubishi UFJ Financial,

Mitsui + Co., Mitsui Fudosan, Mizuho Financial, MS + AD Insurance, Nikon, Nippon Steel, Nissan Motor, Nitto Denko, NKSJ, Nomura, NTT,

NTT Data, NTT DoCoMo, ORIX, Osaka Gas, Otsuka, Panasonic, Resona, Ricoh, SANYO Electric, Secom, Seven + i Holdings, Sharp,

Shin-Etsu Chemical, SMC, Softbank, Sony, Sony Financial, Sumitomo, Sumitomo Chemical, Sumitomo Electric, Sumitomo Metal,

Sumitomo Mining, Sumitomo Mitsui, Sumitomo Realty, Suzuki Motor, T+D Holdings, Takeda Pharma, TDK, Terumo, Tohoku Electric,

Tokio Marine, Tokyo Electric, Tokyo Electron, Tokyo Gas, Toray Industries, Toshiba, Toyota Industries, Toyota Motor,

West Japan Railway, Yahoo Japan, and more.

(analyzed companies are underlined)


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Table of Contents

EDITORIAL COMMENTARY ......................................................................... 4

SUPERINVESTOR HOLDINGS UPDATE ..................................................... 7

EXCLUSIVE INTERVIEW WITH SCOTT CALLON ....................................... 8

EXCLUSIVE INTERVIEW WITH MARK O’FRIEL ....................................... 12

SOME CONTEXT: JAPAN, THE COUNTRY AND THE ECONOMY .......... 17

SCREENING FOR JAPANESE INVESTMENT OPPORTUNITIES ............. 24

TOP 100 TOKYO STOCK EXCHANGE COMPANIES, BY MARKET VALUE ......................................... 24 PROFITABLE COMPANIES WITH 5-YEAR ROE > 5%, TRADING AT < 1X BOOK ............................... 26 PROFITABLE COMPANIES WITH 5-YEAR ROA > 5% .................................................................... 28 CHEAPEST BASED ON TANGIBLE BOOK TO MARKET VALUE ......................................................... 29

PROFILES OF 20 JAPANESE INVESTMENT CANDIDATES ................... 30

ADVANTEST (TOKYO: 6857, NYSE: ATE) .................................................................................. 30 CANON (TOKYO: 7751, NYSE: CAJ) ......................................................................................... 34 FUJIFILM (TOKYO: 4901, OTC: FUJIY) ...................................................................................... 38 FUJITSU (TOKYO: 6702, OTC: FJTSY) ...................................................................................... 42 HITACHI (TOKYO: 6501, NYSE: HIT) ......................................................................................... 46 KONAMI (TOKYO: 9766, NYSE: KNM) ....................................................................................... 50 KUBOTA (TOKYO: 6326, NYSE: KUB) ....................................................................................... 54 KYOCERA (TOKYO: 6971, NYSE: KYO) ..................................................................................... 58 MITSUBISHI UFJ FINANCIAL (TOKYO: 8306, NYSE: MTU) .......................................................... 62 MITSUI (TOKYO: 8031, OTC: MITSY) ........................................................................................ 66 NOMURA HOLDINGS (TOKYO: 8604, NYSE: NMR) ..................................................................... 70 NIPPON TELEPHONE AND TELEGRAPH (TOKYO: 9432, NYSE: NTT)............................................ 74 NTT DOCOMO (TOKYO: 9437, NYSE: DCM) ............................................................................ 78 ORIX (TOKYO: 8591, NYSE: IX) ............................................................................................... 82 PANASONIC (TOKYO: 6752, NYSE: PC) .................................................................................... 86 RICOH (TOKYO: 7752, OTC: RICOY) ........................................................................................ 90 SHARP (TOKYO: 6753, OTC: SHCAY) ...................................................................................... 94 SONY (TOKYO: 6758, NYSE: SNE) ........................................................................................... 98 TDK (TOKYO: 6762, OTC: TTDKY) ........................................................................................ 102 TOYOTA MOTOR (TOKYO: 7203, NYSE: TM) ........................................................................... 106

APPENDIX: SELECTED STATISTICS ON JAPAN .................................. 110

FAVORITE STOCK SCREENS FOR VALUE INVESTORS ...................... 115

“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME ................................................... 115 “MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ................................................... 116 “MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES .................................................. 117 CONTRARIAN: BIGGEST YTD LOSERS (DELEVERAGED & PROFITABLE) ....................................... 118 VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK ..................................................... 119 PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS ............................................. 120 DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE ..................................................... 121 DEEP VALUE: NEGLECTED GROSS PROFITEERS ....................................................................... 122 ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ........................................... 123

THIS MONTH’S TOP 10 WEB LINKS ....................................................... 124



Editorial Commentary Japan has been on our radar screen for quite some time. The aftermath of this

year’s Great East Japan Earthquake has given us the impetus to look at this market in more detail — and to try to identify some bargains among Japanese mid- and large-cap stocks. These companies are quite accessible to non Japan-based investors, as they trade on one or more stock exchanges in addition to the Tokyo Stock Exchange.

When an already cheap market becomes even cheaper due to an exogenous shock, value investors are bound to take notice. While the human toll of the Great East Japan Earthquake has been devastating, we have confidence in the ability of the Japanese people to rebound from disaster. Japan has gone through many trying periods in history, repeatedly emerging with a newfound zeal to grow and prosper.

Most of the issues that have kept investors away from Japan over the years remain today. Japanese companies still have not embraced a goal of achieving strong returns on equity. Corporate boards remain entrenched, and value-unlocking strategic actions remain an exception. On the positive side, many Japanese companies are highly competitive on a global scale and have built truly global brands — Canon (CAJ), Sony (SNE) and Toyota Motor (TM) are just a few. Executive compensation at Japanese companies remains reasonable, contrasting sharply with the experience of major U.S. corporations. Finally, Japanese companies’ balance sheets tend to be among the strongest in the world, with many large companies owning substantial excess assets. The latter can be seen as a positive or a negative, but the fact is that much improvement is possible at Japan Inc. Excess assets could be rationalized over time, while returns on equity have ample room for improvement. Contrast this with Corporate America, where profit margins have almost nowhere to go but down.

Here are a few lessons from our research into Japanese companies:

Lesson #1: There is not a “Japanese” company. However, there is Canon that derives ~80% of revenue from outside Japan; there is Advantest that is set to become the largest global producer of semiconductor test equipment pending the acquisition of Verigy; and there is Toyota that created the world’s first mass-produced hybrid car. These firms are leaders in their industries and defy being labeled “Japanese.”

Lesson #2: Company-specific factors remain paramount for valuation. Companies like Kubota and Mitsui are benefiting from the same trends that Caterpillar and Glencore are taking advantage of. They also face similar risks, which likely outweigh the risk associated with a Japan-based headquarters.

Lesson #3: Governance is not all bad. In our research, we’ve mostly come across committed and experienced managers who are not overpaid or incentivized to bet the house every day they walk through the doors. Another often overlooked fact about Japan’s corporate governance is that it is a shareholder-meeting system, not a board-level governance regime. Shareholders have strong legal rights and can call a shareholder meeting at will. If shareholders want to dismiss the board or double the dividend, with enough votes it can be done, even against the board’s wishes.

Lesson #4: The “Mitsubishi UFJ” factor. The Japanese mega bank, with customer deposits representing two thirds of total assets, has avoided the fate of some of its Western peers during the 2008/09 financial crisis. Indeed, it has taken



advantage of weaker rivals to buy up assets, including community banks in the U.S. as well as a stake in Morgan Stanley. Supported by strong balance sheets, many Japan-based companies are similarly expanding their business. On the other hand, quite a few Western firms have taken on debt to buy back shares at the top of the market, ruining investors in the process. So much for “efficient” capital structures.

Lesson #5: Key issue is long-term competitiveness, not how “Western” the management culture is. It is underappreciated how well-invested Japan-based companies are and how much they spend on R&D to advance their competitive moat. This, however, is one of the key determinants of long-term shareholder value. On this account, it is interesting to observe how former household consumer electronics companies such as Fujifilm and TDK have stumbled and are attempting to reinvent themselves. Similarly, Sony investors would probably prefer if Howard Stringer could win some product battles against the likes of Apple than if he were to split the role of CEO and chairman or sell the financial services business.

We are pleased to bring you two exclusive interviews this month, each of which sheds light on the peculiarities of the Japanese equity market as well as the way to identifying compelling investments in Japan. Scott Callon and Mark O’Friel have decades-long experience and impressive track records in Japan. We think you’ll enjoy the conversations a great deal.

We highlight three intriguing Japanese investment opportunities:

Konami (Tokyo: 9766, NYSE: KNM, $19.50 per share; MV $2.6 billion)

Under the direction of CEO and founder Kagemasa Kozuki, Konami has expanded from an arcade games producer in the 1970s to one of the world’s major gaming companies, with a strong franchise in video game software publishing. Despite conglomerate tendencies, including a loss-making foray into fitness clubs, Kozuki remains incentivized to create long-term value as the largest shareholder with 28%. Recent valuation is attractive relative to the earning power inherent in Konami’s businesses.

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Ricoh (Tokyo: 7752, OTC: RICOY, $58 per share; MV $8.4 billion)

Office printer and copier manufacturer Ricoh derives high-margin, annuity-like income from equipment maintenance, rentals and consumables, which represent nearly half of revenue. This offsets the more volatile product sales and leads to relatively stable free cash flow generation. Ricoh’s modest valuation fails to reflect this, as shares trade at 1.1x tangible book and a 10+% FCF yield based on average free cash flow during FY06-10. The balance sheet is stronger than it may appear as cash and finance receivables offset the gross debt balance. Despite product commoditization risks, the risk-reward is attractive.

Toyota Motor (Tokyo: 7203, NYSE: TM, $80 per share; MV $125 billion)

Car industry pioneer Toyota is struggling following multiple “shocks” including the financial crisis of 2008/09, the massive U.S. vehicle recall in 2010, and most recently, due to production issues related to the Japanese earthquake. While it may take time, an eventual reversion to average profitability should reward long-term shareholders. Trading at tangible book, the shares offer an attractive risk-reward as Toyota is likely to deliver normalized ROEs of 10+%, in-line with historical experience.

Sincerely,

John Mihaljevic, CFA

and The Manual of Ideas research team

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Superinvestor Holdings Update We recently profiled the holdings of 50+ top investment managers, based on their Schedule 13F-HR filings with the Securities and Exchange Commission. On this page, we provide an update on the latest disclosed purchase and sale activity by the same group of investors. This information is based primarily on Schedule 13G or 13D filings and Form 3 or 4 filings.

Increases in Superinvestor Holdings

Latest Market Stock Price ($) Shares Owned Holdings Trade/ Filing Value Latest Filing ∆ since Latest ∆ since as % of Filing Type Investor Company / Ticker ($mn) Date Date Filing (mn) 12/31/10 Company

4/8/11 4 Second Curve Primus Guaranty / PRS 186 4.89 5.01 -2% 6.5 0% 17%

3/21/11 13D Pershing Sq. Alexander & Baldwin / ALEX 2,190 52.65 41.57 27% 3.6 new 9%

3/18/11 13G Glenview Meritor / MTOR 1,600 17.00 17.85 -5% 5.4 33% 6%

3/15/11 4 Icahn Hain Celestial / HAIN 1,310 30.43 28.67 6% 7.1 n/a 17%

2/23/11 13G Scout Domino’s Pizza / DPZ 1,080 17.97 16.49 9% 3.0 21% 5%

2/16/11 4 Ancient Art ZipRealty / ZIPR 56 2.75 2.71 1% 2.2 0% 11%

2/14/11 13G Lone Pine Ctrip.com / CTRP 5,290 36.86 40.65 -9% 7.9 83% 5%

Source: SEC filings, The Manual of Ideas compilation and analysis.

Decreases in Superinvestor Holdings

Latest Market Stock Price ($) Shares Owned Holdings Trade/ Filing Value Latest Filing ∆ since Latest ∆ since as % of Filing Type Investor Company / Ticker ($mn) Date Date Filing (mn) 12/31/10 Company

4/19/11 4 Second Curve Mercantile Bank / MBWM 78 9.06 9.50 -5% 0.9 n/a 10%

4/8/11 4 Breeden Zale / ZLC 116 3.61 3.99 -10% 7.5 -17% 23%

4/5/11 4 Second Curve CompuCredit / CCRT 151 4.22 6.83 -38% 3.5 -19% 10%

4/4/11 13D Third Point Nabi Pharma / NABI 242 5.76 5.78 0% 3.5 -8% 8%

4/1/11 13D Southeastern Pioneer Natural / PXD 11,660 100.10 103.81 -4% 5.0 -61% 4%

3/29/11 13D Southeastern Telephone & Data / TDS 3,510 33.72 32.81 3% 9.6 -17% 9%

3/28/11 13G Bares Hallmark Financial / HALL 170 8.46 8.08 5% 1.9 -20% 10%

3/1/11 13D Breeden Hillenbrand / HI 1,330 21.50 21.47 0% 3.1 -25% 5%

Source: SEC filings, The Manual of Ideas compilation and analysis. The Manual of Ideas follows portfolio moves by Bill Ackman, Pershing Square; Lee Ainsle, Maverick; Chuck Akre, Akre Capital; Zeke Ashton, Centaur Capital; Brian Bares, Bares Capital; Bruce Berkowitz, Fairholme; Richard Breeden, Breeden Capital; Tom Brown, Second Curve; Warren Buffett, Berkshire Hathaway; Francis Chou, Chou Associates; Chase Coleman, Tiger Global; James Crichton, Scout; Ian Cumming and Joe Steinberg, Leucadia; Boykin Curry, Eagle; David Einhorn, Greenlight; Phil Falcone, Harbinger; Alan Fournier, Pennant; Glenn Fuhrman and John Phelan, MSD Capital; Jeffrey Gates, Gates Capital; Tom Gayner, Markel Gayner; Kian Ghazi, Hawkshaw; Ed Gilhuly and Scott Stuart, Sageview; Glenn Greenberg, Brave Warrior; John Griffin, Blue Ridge; Howard Guberman, Gruss; Andreas Halvorsen, Viking Global; Mason Hawkins, Southeastern; Lance Helfert and Paul Orfalea, West Coast; Chris Hohn, Children’s Investment Fund; Carl Icahn, Icahn; Rehan Jaffer, H Partners; Seth Klarman, Baupost; John Kleinheinz, Kleinheinz Capital; Eddie Lampert, ESL Investments; Quincy Lee, Teton; Dan Loeb, Third Point; Steve Mandel, Lone Pine; Sandy Nairn, Edinburgh Partners; Mohnish Pabrai, Pabrai Funds; John Paulson, Paulson & Co.; Boone Pickens, BP Capital; Mark Rachesky, MHR; Lisa Rapuano, Lane Five; Larry Robbins, Glenview; Bob Rodriguez and Steven Romick, First Pacific; Wilbur Ross, WL Ross; Ken Shubin Stein, Spencer; Chris Shumway, Shumway Capital; David Tepper, Appaloosa; Peter Thiel, Clarium; Prem Watsa, Fairfax; Wally Weitz, Weitz Funds; and David Winters, Wintergreen.



Exclusive Interview with Scott Callon We are pleased to bring you the following interview with Scott Callon, Partner and CEO of Ichigo Asset Management, Ltd. A brief biography follows:

On behalf of Ichigo, currently serving as Chairman and Representative Statutory Executive Officer of Ichigo Group Holdings Co., Ltd. (2337), a Japanese real estate asset manager listed on JASDAQ (ichigo-holdings.co.jp).

Previously, Managing Director, Head of Equities, and member of the Executive Committee of Morgan Stanley Japan; Chairman of the Foreign Securities Council of the Japan Securities Dealers Association (JSDA); and Chief Executive Officer of PCA Asset Management of the UK Prudential Group. A.B., Woodrow Wilson School, Princeton University, 1986 (Phi Beta Kappa and summa cum laude (highest honors)), and Ph.D. in Political Science from Stanford University.

Author of Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Policy, 1975-1993, winner of the Arisawa Prize. (“Callon’s findings are extraordinary... It is essential for anyone trying to get a little closer to the core of what makes Japan tick.” Japan Times).

Has lived in Japan for twenty-two years; fluent in spoken and written Japanese. Chartered Financial Analyst (CFA).

The Manual of Ideas: Tell us about the genesis of your firm. What goals did you have at the outset, and what operating principles have guided you since then?

Scott Callon: We started the firm in early 2006, so it has been five years now. Our goal was and continues to be to serve our investors by investing wisely and judiciously on behalf of their enduring missions (we invest primarily for endowments and foundations), to partner with great companies and management teams, and to support positive change in Japan. We are high-commitment value investors. We believe that valuation ultimately is the single most important determinant of investment merit and ultimately returns. We seek to be shareholders of outstanding companies that have demonstrated their excellence over many years and yet trade at substantial discounts to their fundamental value.

We are Japan specialists and invest only in Japan. Japanese valuations are truly unique: it is the only market in the world where you can buy consistently profitable companies at a discount to their tangible asset value. We strive to invest with respect and humility – it is an enormous challenge to run a public company and the management teams of our portfolio companies have our deepest respect. We seek to focus our portfolio on the best return opportunities available and have only about ten major positions. We are not in the diversification business – we expect to be only a small part of our clients’ highly diversified portfolios and thus we concentrate only on what [we] consider to be our very best investment ideas.

“Japanese valuations are truly unique: it is the only market in the world where you can buy consistently profitable companies at a discount to their tangible

asset value.”



MOI: You have received much publicity for successfully standing up for shareholder democracy in Japan in the case of Osaka Steel’s proposed merger with Tokyo Kohtetsu in 2006. How has this event shaped your investment approach since then? What lessons have you learned?

Callon: We think Tokyo Kohtetsu is Japan’s best small steel company. We thought that back in 2006 and still think that today. We have never sold a share. With all due respect to the proposed buyer, which was a larger, also extraordinarily successful steel maker, we and a large number of other shareholders had a strong desire to remain as shareholders of Tokyo Kohtetsu. Unfortunately, we could not reach agreement on what the Tokyo Kohtetsu shareholders hoped for as an acquisition price, so we and nearly three-quarters of the individual shareholders chose not to vote for the acquisition, which proved to be the first successful shareholder-led proxy in Japanese history.

For us, the first key lesson was that Japanese shareholders are willing to stand up for their rights. The second was that we as a firm needed to work harder at building deeper relationships with our portfolio company management teams to reach agreement on the way forward. In 2006, we had just started out as a firm, had not yet built the depth of relationship with Tokyo Kohtetsu that we typically aim to achieve, and quite frankly were taken by surprise at the merger announcement. The outcome may have been in its own way history-making, but it also strengthened Ichigo’s commitment to building and maintaining close relationships and alignment with our portfolio companies.

MOI: Help us understand your investment approach more broadly. What are the key criteria you employ when making an investment decision?

Callon: Again, we’re value guys. We do not try to guess what the market is thinking or will be thinking, we do not track flows of funds, etc. That is not to say that we think those particular approaches to investment are wrong – it is just not what we do. There is lots of room in the capital markets for a variety of approaches and the markets are stronger for having diversification in investment approaches. However, in our case, we are valuation fundamentalists. We seek to buy companies that are trading around or below tangible book value, who typically have dominant market positions in specialized markets (smaller market size and specialization invites less new entry), conservative balance sheets, and high returns on net operating assets – in short, companies with great operating and financial performance over time and through multiple economic cycles. Our basic framework is to think of corporate value as made up of two fundamental components: asset value and operating value. Asset value tends to be simpler to understand (although usually requires a translation from book value to market value), and we generate a view on operating value using conservative views of the future and relatively high assumptions about cost of capital.

MOI: What role, if any, do macroeconomic factors play in your investment strategy? Are you worried about how Japan’s high debt, aging population or other macro variables may affect real equity returns in the long-run?

Callon: We are entirely company-focused. Operating cashflows, assets required to generate those cashflows, etc. are what is fundamental to us. Having said that, macro factors clearly feed into company operating performance. If the population is shrinking, then retail sales are also likely to shrink. We own a couple of great retailers, and we have forecast very little in the way of future

“We think Tokyo Kohtetsu is Japan’s best small steel

company. We thought that back in 2006 and still think that today. We have never

sold a share.”



growth from them. However, if you have a market cap that is 60-70% made up of cash holdings, a dominant market position which translates into significant positive cash flow, and a price-to-book ratio well below one, you can build in a large amount of macro deterioration and still be confident of generating a reasonable return. In fact, what we tend to find is that the negative demographic headwinds have been overly-priced in, that the negative scenarios baked into certain companies’ stock prices are wildly more extreme than what is actually happening.

MOI: For investors that may be new to Japanese equities, are there any Japan-specific “checklists” that you would recommend going through before investing?

Callon: Not really. We think the fundamental principles of sound investing apply the same in Japan as they do anywhere else in the world.

MOI: Many investors, most notably Warren Buffett and Jim Rogers, have expressed a view that the Japanese stock market may present buying opportunities following the sell-off related to the March earthquake? Do you share this view, and, if so, do you think the opportunity may extend beyond retracing recent share price declines? In other words, could this catastrophe accelerate changes at the corporate or government level that could lead to more sustained value creation for shareholders of Japanese companies?

Callon: We do share the view that there have been some significant buying opportunities post-quake. Alongside the deeply saddening human loss, the disaster has impacted Japanese companies on three levels: 1) Direct physical damage (destruction of corporate assets such as factories, loss of employees, etc.); 2) Secondary sectoral spillover effects, either negative or positive (supply chain disruptions, electricity shortages, substitution effects as production shifts away from suppliers in Tohoku to other regions, heightened demand for goods such as construction materials, alternative fuels, bottled drinks, etc.); and 3) Macro effects, again both negative and positive, including a dampening in discretionary consumption as the Japanese people mourn, loosened monetary policy to lessen the initial supply and demand shocks to the economy, massive infrastructure spending to rebuild Tohoku, etc. What is striking is that for a number companies the sum of these three impacts has been quite moderate relative to how much their shares have been sold off.

Although this is not something that we have attempted to price into our company-level valuations, we do think it possible that the aftermath could prove to be a catalyst for positive and accelerated change.

MOI: While Warren Buffett has recently sounded optimistic on Japan, it remains telling that he has not made any significant investments in Japan. As far back as in 1998, Buffett commented in a speech to University of Florida students that one reason for his lack of interest in Japanese companies are their low returns on equity. Despite low ROEs remaining a characteristic of the Japanese equity market in general, can you point to any exceptions to this “rule”? Are there any developments that may lead to improving ROEs in the future?

Callon: Japan’s ROE challenge is really about the E, not the R. Japanese companies’ returns are very similar to those of peers in the US and Europe, so the R part of the equation is fine. The driver of low ROEs is thus the

“Japan’s ROE challenge is really about the E, not the R. Japanese companies’ returns are very similar to those of

peers in the US and Europe, so the R part of the equation

is fine. The driver of low ROEs is thus the

denominator, E: Japanese firms frequently have very large amounts of retained

earnings, often in the form of cash, so the returns are diluted across a massive

equity base.”



denominator, E: Japanese firms frequently have very large amounts of retained earnings, often in the form of cash, so the returns are diluted across a massive equity base. On the one hand, this is enormously comforting: Japanese balance sheets are about as bullet-proof as they come and cash has real value. However, the large equity bases do dramatically reduce ROEs, so from a shareholder’s perspective, this is a negative.

The good news is that more Japanese companies are working towards higher capital efficiency and increasing shareholder distributions via both higher dividends and share repurchase, but this is clearly going to happen over time. We actually prefer to discuss this issue with management teams in terms of EPS, rather than ROE. Growing EPS is clearly in everybody’s interest, and EPS can be grown both via increasing total earnings and reducing share count, so we think a balanced approach of both managing for earnings growth and buying back shares when they are inexpensive is appropriate.

MOI: How do you generate investment ideas?

Callon: We invest only in Japanese small caps, so we need to build our understanding of our portfolio companies directly. The sell-side is a business, and Japanese equities have underperformed for so long that the sell-side has retreated (along with a good chunk of the buy-side), so our investment universe has no research coverage to speak of. If one is investing in Toyota, there are plenty of folks out there expressing a view, but our universe is under-researched, under-known, and under-owned.

MOI: What is the single biggest mistake that keeps investors from reaching their goals?

Callon: Hmm. Not sure. I do think it is important to be extraordinarily prudent about downside risk, to test worst-case scenarios and make sure one is protected under those scenarios. In our case, we don’t use leverage and prefer to have cash on hand. Both of these decisions potentially constitute a drag on returns, but they also radically diminish risk during extreme negative market environments.

MOI: Are there any books you would recommend to non-Japanese investors looking to learn about Japan?

Callon: Gillian Tett, Saving the Sun: How Wall Street Mavericks Shook Up Japan’s Financial World and Made Billions. John Dower, Embracing Defeat: Japan in the Wake of World War II. Junichiro Tanizaki, The Makioka Sisters.

“The sell-side is a business, and Japanese equities have underperformed for so long

that the sell-side has retreated (along with a good chunk of the buy-side), so our

investment universe has no research coverage to speak

of. If one is investing in Toyota, there are plenty of folks out there expressing a

view, but our universe is under-researched, under-

known, and under-owned.”



Exclusive Interview with Mark O’Friel We are pleased to share with you our recent conversation with Mark O’Friel, the managing partner of MOF Capital, an alternative investment fund focused on investments in Japan and China. Prior to starting MOF Capital, Mark was with Steel Partners Japan as managing director and head of the Tokyo office in 2008 and 2009. Previously, he jointly led Morgan Stanley’s U.S. proprietary trading business in North America from 2002-05. Mark formerly directed Morgan Stanley’s Equity Division in Japan, acting as senior equity risk manager and a member of the firm’s Global Equity Operating Committee from 1996-2002. Under his leadership, Morgan Stanley achieved leading market share in the Japanese equity market and received Institutional Investor’s top ranking for equity research in Japan. Mark served on the committees of the Tokyo Stock Exchange that wrote the regulations and guidelines for program trading, options trading and new technologies. He also represented Morgan Stanley on the board of the Osaka Stock Exchange. He began his Morgan Stanley career as an equity derivatives and program trader, introducing some of the first quantitative trading strategies in the Japanese market. Mark began his career in Japan as a market strategist for Sanyo Securities. He serves on the board of the Kennedy Child Study Center in New York City. He is a member of the Leadership Council of the Harvard School of Public Health. He is active with the Harvard School of Public Health China Initiative, which partners with the Chinese Ministry of Health to advance health and social development in China, Room to Read, Math for America and Harvard College. He is a graduate of Harvard College.

The Manual of Ideas: Mark, thank you for taking the time to discuss Japan at this pivotal moment in the country’s recent history.

Mark O’Friel: Thank you for the opportunity to speak with you about Japan. The country has just experienced a tragedy that goes beyond words, with 25,000 people dead or missing. The pictures of the earthquake and ensuing tsunami damage are heart rendering. The resilience that the Japanese of Tohoku have shown in the face of this event is a profound statement to the strength of the national character. The best of Japan is on display throughout the country.

What is overlooked in the reports and pictures of the disaster is in fact how well prepared Japan was and how the damage was minimized. The earthquake itself, despite its unprecedented size, caused relatively little damage. Even near the epicenter, collapsed buildings and deaths were few. This is after the main earthquake of 9.0 and over 800 aftershocks greater than 4.5.

The before and after satellite pictures now available on the web are testimony to the power of nature. The pictures now and the pictures one, five and ten years from now will be testimony to the speed and efficiency of how Japan can rebuild physical infrastructure. Japan has a long history of rebuilding, from the aftermath of World War II to the Kobe earthquake. Despite high levels of government debt, the government actually has quite a bit of leeway. Ten-year JGBs have remained quite strong.

“Despite high levels of government debt, the

government actually has quite a bit of leeway. Ten-year JGBs have remained

quite strong.”



The earthquake and its aftermath will not be a catalyst for change in Japan. The government, corporate Japan and its population will seek to draw on the traditional strengths of discipline, perseverance, hard work and self sacrifice.

MOI: You have spent the major part of your career in Japan. Tell us a little about your background and what motivated you to work in Japan.

O’Friel: Japan had already become an economic power when I began my career, but it was just beginning on the path of deregulation of its financial service sector. The early eighties was also the first phase of the globalization of U.S. financial firms. Investment banks were just opening or expanding what had been small outposts overseas. Given my interest in Japan, it seemed interesting for me to take the opportunity to spend one or two years just out of college overseas and then come back to the U.S. Two years ended up being twenty.

I first worked at a Japanese investment bank. At that time I lived in a company dorm and experienced firsthand the Japanese style of management. This was at the beginning of the equity and real estate stock bubble.

I moved to Morgan Stanley where I was “present at the creation” of international derivatives markets. We were among the first traders of the Hang Seng, the SIMEX and the Osaka 50 futures contracts. Morgan Stanley facilitated the first program trades and the first electronic trades on the Tokyo stock exchange. As markets grew and became more sophisticated we helped introduce options, over the counter options and algorithmic trading to Japan.

Morgan Stanley also had one of the leading prime brokerage businesses in Asia. We were able to deal with many of the leading hedge funds as they increased their exposure to Japanese shares.

After running the Morgan Stanley Equity department in Tokyo, I moved to the buy side. First running an internal hedge fund for Morgan, then with Steel Partners Japan and now on my own.

MOI: How has your view of corporate Japan evolved over the years?

O’Friel: As I mentioned above, my first exposure to corporate Japan was working at a Japanese company. Those were the heady years just after the publishing of Japan as Number One, a book by Ezra Vogel, my mentor at Harvard. At that company, I learned the difference between management theory and execution. They were an affiliate of Nomura Securities and tried to use the same business plan. However they did not have the human resources, capital or scale to execute the plan.

It was obvious to me, a naïve observer fresh out of school, that there really was no “corporate Japan,” just as there is no “corporate America.” There are good companies and there are bad companies. That being said, there are some management philosophies that are more prominent in Japanese companies. In general the Japanese have a broader view of who the stakeholders are in corporations. There is a sense of responsibility to workers, vendors, clients and regions that is stronger than at most U.S. firms. Japanese managers are also less likely to own a large amount of shares in their companies. Thus, the interests of managers are less likely to be directly aligned with shareholders, especially short-term shareholders. This was true when I first came to Japan and is true now. The result is, although management is much more focused on the interests

“Japanese managers are less likely to own a large amount of shares in their companies.

Thus, the interests of managers are less likely to be

directly aligned with shareholders, especially

short-term shareholders.”



of shareholders, there is still little interest in financial engineering for the short term benefit of stock prices.

MOI: Given the mixed track record of activist funds in Japan, is it justified investing in Japan using an activist approach?

O’Friel: I would highlight the distinction that you made in your question. There is a difference between the success of activism used as part of the investment process and the success of particular activist funds, especially given the small sample size of such funds.

Activist funds can act as a bridge between what the majority of shareholders want. Often large shareholders remain silent and prefer to “vote with their feet” by selling shares. However, there are fund managers who have complemented their success in Japan by behaving in an activist fashion, that is, working with management to implement change. These shareholders might not be noisy, but they have frequent and meaningful meetings with managers and directors of corporates. Japanese companies have always been innovative and willing to learn from the outside. Corporate finance departments and CEOs are willing to listen to shareholders. Gaiastu is a well recognized term in Japanese vocabulary that describes using the threat of foreign pressure to implement change. The improvements in balance sheets of corporate Japan over the last decade can be attributed to some degree to shareholder pressure.

MOI: How would you assess the state of corporate governance in Japan? For investors looking to invest in Japanese equities, are there any governance related checklists that you would recommend?

O’Friel: Corporate governance can be defined as monitoring the behavior of corporations so that efficient operations can be maintained, and assuring that the benefits accrue fairly among shareholders, management and other stakeholders. Legal shareholder rights in Japan are comparatively strong. Majority votes of shareholders can enforce change. The issue is that there are often more than a majority of shareholders that have no interest in the level of corporate governance and little interest in monitoring management.

The first checklist point is the makeup of shareholders. Some items to check are the level of the institutional ownership, the number and relationship of cross shareholdings and the amount of insider or management ownership.

The second item to check is the board membership. There has been some movement to improve the governance of corporate boards. The TSE has introduced some guidelines. Corporate boards in Japan are often large and have few independent directors. An analysis of the number and relationship of board members will give you an idea of the level of independence.

A third item is executive compensation. In this area, Japanese corporations are far superior to companies in the West. There are few cases of management enriching themselves to the disadvantage of shareholders or employees.

MOI: Many investors, most notably Warren Buffett and Jim Rogers, have expressed the view that the Japanese stock market may present buying opportunities following the selloff related to the March earthquake. Do you share this view?

“In [terms of executive compensation], Japanese

corporations are far superior to companies in the West.”



O’Friel: One of the reasons that the stock market rebounded so sharply after the immediate selloff was the vote of confidence by Buffett and other foreign investors. They realized that the damage of the earthquake and tsunami, while devastating in its human toll, was not huge in its infrastructure and economic ramifications. The three prefectures most directly affected by the quake (Miyagi, Iwate and Fukushima) account for only 4% of the population and GDP of Japan. However, damage to facilities did effect national supply chains and distribution.

Then came the news of the damage and leaks at the Fukushima nuclear facilities. This has created more uncertainty in the medium term. 3% of the electrical capacity of Japan is now offline. This has begun to affect production outside of the areas directly impacted by the quake. In addition, both private consumption and consumer confidence in Japan will be eroded as the impact of blackouts continues.

The loss of consumption on the private side will have to be measured against the rise in reconstruction demand. There will be gains in government consumption and public investment.

While it is undeniable that the rebuilding process in Japan will be fast and efficient, it is vital that the repairs to the nuclear facility proceed without interruption and that the government is transparent about the damage and the impact of any dispersion of radiation.

MOI: Will the recent catastrophe accelerate changes at the corporate or government level that could lead to more sustained value creation for shareholders in Japan?

O’Friel: The general public has increased its demand for transparency from the government and from TEPCO. This might inspire the creation of an independent nuclear regulatory agency. The crisis has also highlighted the cozy relationship between regulators and the regulated in the power industry.

We must keep in mind that tragedy often inspires countries to search for their core strengths. I think the Japanese nation, its people and its corporations will look to their core to help the rebuilding. They will look to the values of solidarity, patience and discipline. There is no indication that these noble traits, however useful they are to surviving and overcoming this disaster, will lead to fewer or better regulations or different views of corporate governance.

MOI: While Buffett has recently sounded optimistic about Japan, he has not made any significant investments there. Are there any developments that may lead to improving returns on equity in the future?

O’Friel: The particular way of valuing Japanese companies has been the subject of debate throughout the course of my career. Many of the valuation metrics have come into line with global norms. Once, brokers and companies struggled to justify P/E ratios of 60x to 100x as something that was unique to Japan. P/E ratios are now at levels in the low teens, which compare favorably to other international markets. Price to book, especially for mid-cap and small-cap stocks, is low. There are many with price-to-book ratios below one.

MOI: What are some of your key investment criteria?

O’Friel: I have three simple criteria. First, the investment business is all about trust and values. If the management of an investment target is trustworthy and

“The three prefectures most directly affected by the quake

(Miyagi, Iwate and Fukushima) account for only

4% of the population and GDP of Japan. However,

damage to facilities did effect national supply chains and

distribution.”



shares common values with the investor, then the opportunity is worth closer inspection. Otherwise, it is best to stay away, short or, if given the capacity, replace management. Second, valuation is the primary determinant of long-term returns. Being right on the concept and right on the price are two very different things. Finally, patience is important. If one is patient, it is easier to be a contrarian and to wait for the fat pitch.

MOI: What is the single biggest mistake that keeps investors from reaching their goals?

O’Friel: Research has shown that the single biggest error is overconfidence. Investing is hard, with elements of skill, hard work and luck. An investor who attributes every success to skill is susceptible to overreaching. Despite the outward veneer of successful managers, most are rather modest in reference to their own skills. They know what they do not know. They respect the market.

MOI: What books would you recommend to non-Japanese investors looking to learn about Japan?

O’Friel: Any of the John Dower books, from War Without Mercy to Embracing Defeat, tell the story of how Japan rebuilds from disaster and will give readers a clue as to how Japan will respond to the recent earthquake. Ronald Dore’s Stock Market Capitalism: Welfare Capitalism challenges the preconception that there is one way of global capitalism. It highlights similarities between traits seen in Germany and Japan. It is especially relevant given the 2008 shocks to the “Anglo-American” system.

“…valuation is the primary determinant of long-term

returns. Being right on the concept and right on the

price are two very different things.”



Some Context: Japan, The Country and The Economy POPULATION SIZE – JAPAN IS DWARFED BY THE U.S. AND SEVERAL EMERGING COUNTRIES

Source: Japan Statistical Yearbook 2011, The Manual of Ideas. POPULATION GROWTH HAS TURNED NEGATIVE

Source: Japan Statistical Yearbook 2011, Chapter 2: Population and Households, The Manual of Ideas.

Japan is ranked 9th in terms of population size, but its rank may slip in the coming decades.

The decline in youth is worrisome for Japan’s long-term economic and social outlook.



JAPAN’S POPULATION PYRAMID HAS BECOME TOP-HEAVY…

Source: “Statistical Handbook of Japan 2010” by Statistics Bureau, Japan; The Manual of Ideas. …AND WILL LIKELY BECOME EVEN MORE TOP-HEAVY OVER TIME

Source: Japan Statistical Yearbook 2011, Chapter 2: Population and Households, The Manual of Ideas.

Increased immigration or a higher birth rate are likely necessary for Japan’s long-term viability as an economic power.



DISTRIBUTION OF ESTABLISHMENTS AND EMPLOYEES IN JAPAN

Source: Japan Statistical Yearbook 2011, The Manual of Ideas.

GDP BY COUNTRY – JAPAN REMAINS AN ECONOMIC POWERHOUSE *

* Based on 2008 data. Source: Japan Statistical Yearbook 2011, The Manual of Ideas.

JAPANESE GDP HAS STAGNATED FOR MORE THAN A DECADE


Corporations, both large and small, dominate the employment picture.

Japan’s economic significance dwarfs what might be expected when considering the country’s population size ranking.

That said, China recently surpassed Japan in terms of GDP.

The Japanese economy has made little progress against a backdrop of multi-year deflationary pressures.



NOT SURPRISINGLY, SALES AND PROFITS HAVE ALSO STAGNATED

Source: Japan Statistical Yearbook 2011, The Manual of Ideas. TRADE INCREASED THROUGH 2008, BUT EXPERIENCED A SHARP SETBACK AS A RESULT OF THE FINANCIAL CRISIS


The financial crisis has affected the profits of “Japan Inc.” in an unprecedented way.

Japan has consistently maintained its status as a leading exporter and generator of trade surpluses. The latter have shrunk in recent years, as imports have become more important to the country.



NEARLY ONE-HALF OF REVENUE FROM BOND ISSUANCE, WHILE NEARLY A QUARTER OF BUDGET GOES TO DEBT SERVICE

Source: Japan Statistical Yearbook 2011, The Manual of Ideas. “NON-PRODUCTIVE” SPENDING (RETIREES AND DEBT SERVICE) HAS BEEN INCREASING OVER TIME


Japan relies heavily on debt issuance to fund the annual budget.

Social security and debt service represent large burdens on Japan’s budget. Offsetting these needs is a relatively low allocation to defense.

Japan’s has radically reduced land preservation and development expenditures in order to fund other priorities.



JAPAN’S GOVERNMENT DEBT-TO-GDP RATIO STANDS OUT AMONG DEVELOPED COUNTRIES


UNEMPLOYMENT HAS INCREASED BUT REMAINS QUITE LOW


Japan’s debt-to-GDP ratio may have passed the “point of no return”.

Japan’s unemployment rate fell to remarkable lows prior to the crisis.



RETAIL SALES HAVE BEEN ON THE DECLINE FOR NEARLY TWO DECADES

Source: Japan Statistical Yearbook 2011, The Manual of Ideas. NUCLEAR PLAYS A SMALL BUT NON-NEGLIGIBLE ROLE IN JAPAN’S OVERALL ENERGY MIX

Source: Japan Statistical Yearbook 2011, The Manual of Ideas. JAPANESE STOCK MARKET VALUES REMAIN SIGNIFICANTLY BELOW THE 1989 HIGH


The fate of Japan’s retail industry was sealed with the bursting of the late-80s bubble.

Natural gas may gain share in the wake of the recent Fukushima nuclear plant disaster.

Two “lost decades”:

The aftermath of the 1980s bubble has been exacerbated by persistent deflationary pressures.



Screening for Japanese Investment Opportunities

Top 100 Tokyo Stock Exchange Companies, by Market Value Market Enter. Trailing EBIT LTM Earnings Yield Net Debt/ Tang.

Value Value Revenue Margin FCF Last This Tangible Book Tokyo

Company Industry ($bn) ($bn) to EV (5-Yr) Yield Year Year Book to MV Symbol

Toyota Motor Auto & Truck Manufacturers 140 242 94% 5% 1% 2% 5% 83% 88% 7203

NTT DoCoMo Communications Services 77 75 69% 17% 7% 8% 8% -3% 62% 9437

Honda Motor Auto & Truck Manufacturers 67 102 102% 6% -1% 5% 10% 66% 79% 7267

Mitsubishi UFJ Regional Banks 67 550 n/m 22% n/m 8% 10% n/m 145% 8306

NTT Communications Services 65 108 114% 11% 17% 10% 10% 61% 106% 9432

Canon Computer Peripherals 59 48 94% 13% 8% 5% 7% -37% 51% 7751

Mitsubishi Iron & Steel 48 89 62% 7% 2% 7% 11% 108% 80% 8058

Sumitomo Mitsui Regional Banks 44 261 n/m 21% n/m 10% 15% n/m 123% 8316

Softbank Communications Services 43 63 53% 10% 15% 5% 6% -307% -15% 9984

Nissan Motor Auto & Truck Manufacturers 40 77 118% 5% -5% 3% 10% 112% 83% 7201

Takeda Pharma Major Drugs 37 28 64% 29% 1% 10% 8% -50% 50% 4502

Mizuho Financial Regional Banks 36 623 n/m 18% n/m 9% 17% n/m 134% 8411

Fanuc Misc. Capital Goods 36 29 10% 35% 2% 2% 5% -64% 28% 6954

Japan Tobacco Tobacco 36 43 174% 5% 6% 8% 5% 1846% 1% 2914

Komatsu Constr. & Agric. Machinery 34 39 44% 10% 3% 1% 5% 59% 27% 6301

Mitsui + Co. Misc. Capital Goods 33 58 86% 4% 7% 7% 14% 92% 80% 8031

Sony Audio & Video Equipment 32 26 336% 1% 18% 1% 3% -25% 81% 6758

Panasonic Audio & Video Equipment 31 39 230% 4% 8% n/m 4% 55% 44% 6752

Denso Auto & Truck Parts 28 25 146% 6% 12% 4% 7% -16% 81% 6902

KDDI Communications Services 28 38 109% 9% 10% 12% 11% 49% 77% 9433

Mitsubishi Electric Electronic Instr. & Controls 25 26 155% 5% 13% 2% 7% 11% 50% 6503

Mitsubishi Estate Real Estate Operations 24 39 31% 12% 10% 4% 3% 117% 55% 8802

Hitachi Electronic Instr. & Controls 23 45 241% 2% 12% n/m 12% 191% 49% 6501

Seven + i Holdings Retail (Grocery) 22 23 267% n/a -1% 7% 6% 4% 73% 3382

East Japan Railway Misc. Transportation 22 63 49% 15% 1% 7% 8% 191% 97% 9020

Nippon Steel Iron & Steel 22 37 112% 9% 3% 0% 6% 73% 100% 5401

Tokio Marine Insurance (Prop. & Casualty) 21 19 n/m 4% n/m 8% 7% n/m 96% 8766

Shin-Etsu Chemical Chemical Manufacturing 21 18 63% 18% 3% 5% 6% -22% 80% 4063

Toshiba Computer Hardware 21 32 240% 2% 4% n/m 6% 421% 13% 6502

Yahoo Japan Computer Services 21 19 18% 48% 2% 5% 5% -43% 20% 4689

Kansai Electric Electric Utilities 20 61 52% 8% 4% 8% 7% 187% 107% 9503

Kyocera Electronic Instr. & Controls 19 14 93% 8% 3% 3% 7% -35% 79% 6971

Nomura Investment Services 19 111 15% 0% n/m 12% 2% n/m 130% 8604

Sumitomo Oil & Gas Operations 18 59 59% 6% 0% 11% 14% 282% 80% 8053

JFE Holdings Iron & Steel 18 35 97% 7% 11% 5% 6% 108% 94% 5411

Astellas Pharma Biotechnology & Drugs 18 16 76% 21% 1% 9% 6% -25% 44% 4503

JX Holdings Oil & Gas - Integrated 17 41 0% n/a n/a n/m 25% 136% 104% 5020

Bridgestone Tires 17 21 162% 5% 4% 8% 7% 33% 79% 5108

Central Jap. Railway Railroads 17 53 34% 25% 16% 7% 10% 254% 85% 9022

ITOCHU Misc. Fabricated Products 17 42 97% 8% 14% 10% 13% 237% 64% 8001

Chubu Electric Electric Utilities 16 45 60% 8% 13% 8% 5% 141% 124% 9502

FUJIFILM Office Equipment 16 14 182% 3% 9% 4% 5% -9% 102% 4901

Mitsubishi Heavy Misc. Capital Goods 15 30 117% 2% 8% 1% 2% 100% 96% 7011

Mitsui Fudosan Real Estate Operations 15 35 47% 10% -2% 6% 4% 170% 80% 8801

Asahi Glass Constr. - Supplies & Fixtures 15 19 81% 6% 12% 11% 11% 45% 62% 5201

Chuo Mitsui Regional Banks 15 32 n/m 24% n/m 11% 12% n/m 50% 8309

Dai-ichi Life Insurance (Life) 15 12 n/m n/a n/m 12% 4% n/m 59% 8750

MS + AD Insurance Insurance (Prop. & Casualty) 14 9 n/m 3% n/m 8% 4% n/m 135% 8725

Keyence Electronic Instr. & Controls 14 11 16% 47% 4% 3% 5% -51% 49% 6861

Otsuka Biotechnology & Drugs 14 9 142% n/a n/m 7% 8% -35% 93% 4578



Market Enter. Trailing EBIT LTM Earnings Yield Net Debt/ Tang.

Value Value Revenue Margin FCF Last This Tangible Book Tokyo

Company Industry ($bn) ($bn) to EV (5-Yr) Yield Year Year Book to MV Symbol

Fast Retailing Apparel/Accessories 14 11 87% 15% 2% 7% 5% -76% 22% 9983

Daiichi Sankyo Biotechnology & Drugs 14 13 91% n/a 6% 4% 6% -12% 61% 4568

Kao Personal & Household Prods. 13 14 104% 9% 8% 4% 5% 12% 25% 4452

Marubeni Oil & Gas Operations 13 38 105% 4% 12% 10% 13% 345% 56% 8002

Kirin Beverages (Alcoholic) 13 21 122% 5% 8% 9% 7% 239% 29% 2503

Suzuki Motor Auto & Truck Manufacturers 12 10 305% 3% 9% 3% 5% -22% 93% 7269

Tokyo Gas Natural Gas Utilities 12 18 94% 7% -1% 5% 7% 65% 76% 9531

Kubota Constr. & Agric. Machinery 12 15 73% 10% 7% 4% 6% 43% 64% 6326

Resona Regional Banks 12 26 n/m 31% n/m 12% 14% n/m 178% 8308

Toray Industries Textiles - Non Apparel 12 17 96% 4% 12% n/m 6% 77% 59% 3402

Fujitsu Computer Services 12 15 371% 2% 2% 15% 7% 55% 56% 6702

SMC Scientific & Technical Instr. 12 9 29% 21% 6% 2% 6% -35% 54% 6273

Sharp Audio & Video Equipment 11 19 177% 2% -7% 3% 3% 69% 102% 6753

Terumo Medical Equipment & Supplies 11 10 37% 20% 2% 5% 4% -20% 33% 4543

Sumitomo Electric Auto & Truck Parts 11 13 168% 4% 5% 5% 8% 20% 102% 5802

NKSJ Insurance (Prop. & Casualty) 11 10 n/m n/a n/m n/m 3% n/m 124% 8630

Secom Security Systems & Services 11 9 89% 13% 3% 6% 7% -28% 63% 9735

Sumitomo Metal Constr. - Supplies & Fixtures 11 23 67% 13% 12% n/m 3% 128% 91% 5405

Eisai Biotechnology & Drugs 11 13 74% 10% 10% 6% 8% 162% 15% 4523

ORIX Consumer Financial Services 10 64 18% 15% -39% 5% 8% 344% 153% 8591

Sumitomo Mining Metal Mining 10 11 79% 10% 8% 7% 10% 13% 71% 5713

Tokyo Electron Semiconductors 10 7 68% 11% -1% n/m 8% -41% 66% 8035

Hoya Electronic Instr. & Controls 10 9 57% 18% 3% 5% 7% -26% 40% 7741

Chugai Pharma Major Drugs 10 8 56% 18% -2% 5% 6% -30% 55% 4519

Aisin Seiki Auto & Truck Parts 10 10 248% 4% 24% 6% 9% 3% 83% 7259

Sumitomo Realty Real Estate Operations 10 31 28% 15% -5% 6% 7% 382% 58% 8830

Toyota Industries Auto & Truck Parts 10 14 123% 2% 12% 0% 6% 35% 115% 6201

Mitsubishi Chemical Chemicals - Plastics & Rubber 10 22 137% 3% 18% 4% 10% 195% 67% 4188

Asahi Kasei Chemical Manufacturing 10 11 152% 5% 10% 4% 8% 24% 79% 3407

Nitto Denko Semiconductors 9 8 93% 9% 8% 5% 8% -31% 52% 6988

Daikin Industries Misc. Capital Goods 9 12 104% 7% 6% 5% 3% 78% 38% 6367

Mitsubishi Tanabe Biotechnology & Drugs 9 8 61% 13% 4% 6% 5% -17% 75% 4508

Aeon Retail (Grocery) 9 21 267% 2% 29% 5% 8% 125% 100% 8267

Kyushu Electric Electric Utilities 9 33 53% 8% 2% 6% 4% 183% 143% 9508

Tokyo Electric Electric Utilities 9 91 67% 5% 38% 20% 12% 231% 407% 9501

NTT Data Computer Networks 9 12 117% 6% 10% 5% 5% 208% 17% 9613

Ricoh Office Equipment 9 15 166% 6% 9% 4% 5% 88% 79% 7752

SANYO Electric Electronic Instr. & Controls 9 12 168% 0% 1% n/m -3% 332% 12% 6764

Sony Financial Insurance (Life) 8 7 n/m 6% n/m 7% 127% n/m 40% 8729

Sumitomo Chemical Chemical Manufacturing 8 19 103% 4% 7% 2% 3% 272% 47% 4005

Dai Nippon Printing Printing & Publishing 8 9 222% 4% 6% 7% 6% 3% 127% 7912

Kobe Steel Iron & Steel 8 16 122% 8% 28% 0% 7% 131% 76% 5406

Nikon Photography 8 7 127% 7% 12% n/m 4% -19% 50% 7731

T+D Holdings Insurance (Life) 8 6 n/m 1% n/m 21% 5% n/m 91% 8795

Tohoku Electric Electric Utilities 8 31 65% 5% 13% 3% 4% 207% 134% 9506

Osaka Gas Natural Gas Utilities 8 13 98% 7% 3% 7% 7% 73% 91% 9532

JS Group Constr. - Supplies & Fixtures 8 10 123% 2% 2% 2% 4% 26% 76% 5938

Asahi Breweries Beverages (Alcoholic) 8 12 152% 5% 13% 10% 9% 64% 74% 2502

Daiwa Securities Investment Services 8 87 7% 12% n/m 8% 0% n/m 108% 8601

West Japan Railway Misc. Transportation 8 20 71% 8% -13% 4% 6% 151% 105% 9021

Note: The above table includes companies incorporated in Japan only.

Favorable data points, i.e., those that exceed certain thresholds set by The Manual of Ideas, are highlighted.



Profitable Companies with 5-Year ROE > 5%, Trading at < 1x Book Company Industry Tokyo 52-Wk Market Enter. Sales 5-Yr Average Sales/ Price to Trailing ROE

Ticker Price Value Value ($mn) Profit Margins Empl. EPS Cash Book (5-Yr

($mn) ($mn) Gross Net ($’000) Flow Avg)

Toyota Motor Auto & Truck 7203 -12% 136,960 249,340 242,550 16% 4% 763 20x 7x 1.0x 8%

NTT Communications 9432 -2% 65,770 134,840 126,000 57% 7% 545 9x 2x .6x 7%

Sumitomo Oil & Gas 8053 12% 18,320 61,640 37,850 27% 6% 584 7x 4x .9x 14%

Orix Consumer Financial 8591 6% 11,200 n/m 11,770 42% 10% 673 19x 4x .7x 9%

Ricoh Office Equipment 7752 -34% 8,560 15,340 24,470 41% 3% 226 21x 5x .7x 7%

Japan Retail Fund Real Estate 8953 22% 2,730 6,400 536 41% 35% n/m 12x 8x .8x 5%

Nomura RE Office Real Estate 8959 12% 2,160 4,350 334 49% 37% n/m 18x 13x .9x 5%

Japan Prime Realty Real Estate 8955 9% 1,930 3,790 299 51% 36% n/m 17x 12x .9x 5%

Kewpie Food Processing 2809 -3% 1,860 2,010 5,820 24% 2% 496 14x 6x .9x 6%

Tokyo Tatemono Construction 8804 -3% 1,680 7,020 2,450 25% 5% 1,133 21x 9x .5x 5%

Sapporo Beverages 2501 -35% 1,530 3,620 4,810 31% 1% 1,235 12x 4x 1.0x 5%

Orix Jreit Real Estate 8954 12% 1,400 3,020 266 50% 39% n/m 15x 10x .8x 6%

Toagosei Chemical Manuf. 4045 11% 1,330 1,400 1,900 28% 5% 739 8x 5x .9x 6%

Tokyu Reit Real Estate 8957 14% 1,110 2,120 162 50% 42% n/m 22x 12x .9x 8%

Tokai Carbon Chemical Manuf. 5301 -24% 1,110 1,220 1,330 28% 7% 741 15x 6x .8x 8%

Shimachu Retail (Specialty) 8184 -10% 1,080 777 1,800 32% 6% 1,405 12x 8x .5x 5%

China Boqi Waste Mgmt 1412 -6% 1,000 249 2,350 14% 3% 4,786 8x 6x .5x 5%

Gurobaru Wan Real Estate 8958 3% 837 1,450 112 55% 45% n/m 20x 14x .9x 7%

His Personal Services 9603 -7% 718 (44) 4,470 15% 1% 719 8x 7x 1.0x 8%

Bic Camera Retail (Tech) 3048 5% 695 1,240 7,670 24% 1% 1,285 7x 5x .9x 10%

Alpen Retail (Specialty) 3028 -5% 691 432 2,350 44% 3% 793 16x 7x .6x 6%

Premier Investment Real Estate 8956 30% 652 1,530 128 54% 41% n/m 14x 10x .7x 7%

PGM Holdings Recreational 2466 -28% 646 1,930 982 54% 14% 209 4x 3x .7x 19%

Thasegawa Chemical Manuf. 4958 -12% 644 510 563 33% 6% 447 15x 8x .9x 5%

Kato Sangyo Food Processing 9869 -10% 621 167 8,340 7% 1% 4,183 10x 6x .7x 6%

Nippon Denko Metal Mining 5563 -32% 619 602 889 21% 7% 1,370 8x 6x 1.0x 13%

SAN-A Retail (Grocery) 2659 -8% 597 447 1,670 30% 4% 1,492 8x 5x .8x 10%

Tkc Business Services 9746 -3% 534 367 671 60% 7% 276 14x 8x .9x 7%

Mitsubishi Pencil Office Supplies 7976 -6% 496 298 644 44% 6% 232 10x 7x .8x 7%

Shizuokagas Nat. Gas Utilities 9543 1% 458 1,010 1,460 -- 4% 1,313 9x 2x .8x 7%

Heiwa Real Estate Real Estate 8966 59% 431 1,240 77 49% 68% n/m 3x 3x .5x 8%

Mitsubishi Research Computer Services 3636 -13% 333 260 903 22% 4% 285 12x 6x 1.0x 10%

Pack Containers & Pack. 3950 -7% 317 212 1,020 23% 4% 911 8x 6x .8x 12%

Nihon Nohyaku Chemical Manuf. 4997 -31% 311 245 490 40% 4% 686 13x 8x .8x 5%

Sri Sports Recreational 7825 -2% 308 322 786 50% 4% 488 9x 4x .7x 8%

Nippon Carbon Electronic Instr. 5302 -29% 298 445 433 31% 10% 738 14x 4x .8x 12%

Ohara Personal Products 5218 -38% 294 275 341 36% 10% 116 15x 6x .6x 7%

Daiwa Industries Capital Goods 6459 -9% 256 (123) 348 57% 16% 189 6x 5x .5x 17%

Keiyo Gas Nat. Gas Utilities 9539 -5% 254 421 982 -- 4% 881 9x 2x .4x 6%

Torigoe Food Processing 2009 -4% 219 109 262 25% 6% 761 16x 11x .8x 6%

Chiyoda Integre Electronic Instr. 6915 -2% 196 141 476 23% 4% 93 36x 9x .7x 7%

Tomoe Engineering Plastics & Rubber 6309 22% 194 138 517 19% 3% 703 9x 8x .8x 8%

Hosokawa Micron Capital Goods 6277 2% 187 183 399 35% 4% 285 14x 7x .8x 8%

CAC Computer Services 4725 -1% 177 90 452 18% 3% 217 13x 8x .7x 7%

Teikoku Sen Textiles 3302 18% 171 75 323 24% 6% 1,299 6x 5x .9x 12%

Tosei Real Estate 8923 15% 165 501 327 23% 6% 1,586 27x 17x .6x 12%

Space Co Business Services 9622 -8% 163 63 361 12% 4% 533 14x 12x .6x 7%



Company Industry Tokyo 52-Wk Market Enter. Sales 5-Yr Average Sales/ Price to Trailing ROE

Ticker Price Value Value ($mn) Profit Margins Empl. EPS Cash Book (5-Yr

($mn) ($mn) Gross Net ($’000) Flow Avg)

Shinwa Co Machinery 7607 -14% 156 96 282 16% 4% 609 23x 15x .9x 11%

Sanyo Housing Real Estate 8904 -1% 124 116 418 18% 4% 919 7x 6x .6x 12%

Toukei Computer Computer Services 4746 -7% 121 104 140 31% 9% 182 11x 7x .8x 9%

Nitto Seiko Fabric. Products 5957 -12% 117 85 312 24% 6% 221 11x 5x .5x 11%

Satori Electric Semiconductors 7420 -13% 113 247 2,190 7% 1% 2,561 7x 6x .3x 5%

Takara Printing Printing Services 7921 -16% 99 36 143 44% 6% 206 16x 8x .6x 7%

Otaki Gas Nat. Gas Utilities 9541 6% 99 31 589 -- 2% 2,082 7x 3x .4x 5%

Kanro Food Processing 2216 -1% 96 103 246 49% 3% 526 12x 5x .7x 7%

Create Medic Medical Equipment 5187 -7% 95 59 112 52% 8% 167 11x 9x .7x 7%

Maeda Kosen Construction 7821 105% 88 52 157 38% 4% 415 9x 6x .7x 6%

Altech Business Services 4641 -3% 87 47 202 24% 3% 72 12x 9x .9x 8%

Invincible Invest. Real Estate 8963 -21% 84 571 66 9% 48% n/m 2x 1x .2x 9%

Gameon Computer Services 3812 -22% 81 17 75 73% 12% 311 157x 16x .8x 12%

Himaraya Retail (Specialty) 7514 54% 81 122 579 36% 1% 821 12x 6x .7x 6%

Hagihara Industries Plastics & Rubber 7856 11% 80 94 238 25% 4% 219 5x 3x .6x 10%

Nippon Seiro Oil & Gas 5010 50% 75 204 403 12% 2% 1,709 4x 3x .6x 7%

Kyowa Electronic Electronic Instr. 6853 -10% 73 70 163 35% 3% 212 23x 8x .7x 6%

Maruka Machinery Capital Goods 7594 3% 69 2 303 14% 2% 798 28x 11x .5x 8%

Niitaka Personal Products 4465 -3% 65 81 145 38% 3% 634 27x 6x .9x 7%

Kuraudia Personal Services 3607 -13% 64 107 169 66% 6% 179 5x 4x .7x 14%

Densan Software 3640 -- 61 47 166 26% 4% 232 6x 4x .7x 11%

Toa Valve Fabricated Prod. 6466 -26% 58 16 138 29% 5% 361 5x 4x .5x 9%

Genky Stores Retail (Drugs) 2772 -- 58 110 571 21% 2% 1,459 7x 3x .7x 14%

Top Culture Retail (Specialty) 7640 -2% 53 154 415 31% 2% 1,112 9x 3x .6x 7%

Gakujo Business Services 2301 -13% 52 30 32 55% 9% 220 22x 17x .7x 6%

Land Business Real Estate 8944 -11% 51 296 119 32% 10% 7,428 29x 6x .3x 9%

Intellex Real Estate 8940 -39% 47 223 336 12% 1% 1,740 3x 3x .6x 7%

Medical System Retail (Drugs) 4350 -19% 46 137 521 34% 1% 459 7x 2x .9x 12%

Densan System Computer Services 3630 1% 38 (120) 237 15% 2% 342 7x 4x .6x 9%

Mitachi Semiconductors 3321 -17% 38 42 427 9% 1% 730 7x 5x .6x 9%

Paraca Business Services 4809 -12% 38 153 85 30% 7% 1,538 5x 4x .5x 9%

Trust Co Retail (Specialty) 3347 -3% 32 111 90 29% 5% 787 9x 2x .7x 6%

Golf Digest Online Recreational 3319 -35% 30 44 163 39% 2% 623 14x 5x .9x 9%

Higashinihon Gas Nat. Gas Utilities 9544 -5% 28 69 80 -- 4% 765 15x 1x .4x 6%

Information Planning Computer Services 3712 -20% 26 5 23 54% 14% 210 21x 18x .9x 14%

Chip One Stop Electronic Instr. 3343 1% 25 4 45 37% 5% 635 7x 6x .7x 7%

Japan Corp. Housing Real Estate 8945 -4% 23 13 74 20% 4% 151 4x 4x .9x 17%

Riken Corundum Supplies & Fixtures 5395 -2% 19 24 75 23% 4% 490 7x 4x .4x 6%

Ifis Japan Computer Services 7833 -11% 17 3 33 35% 4% 383 17x 6x .9x 9%

Early Age Real Estate 3248 -17% 16 41 47 27% 6% 1,813 6x 5x .8x 21%

Mandarake Retail (Specialty) 2652 13% 15 72 101 49% 2% 295 4x 3x .4x 6%

Kojima Iron Works Capital Goods 6112 -20% 14 11 28 18% 6% 291 62x 10x 1.0x 19%

Dear Life Real Estate 3245 56% 13 13 16 26% 5% 850 12x 10x .8x 10%



Profitable Companies with 5-Year ROA > 5% Market Enter. EV/ MV/ LTM P/E EBIT

Tokyo Value Value LTM Tang. FCF LTM For- Margin Symbol Company Sector ($mn) ($mn) Sales Book Yield Adj. ward (5-Yr)

1819 Taihei Kogyo Capital Goods 384 484 .2x .7x 10% 4x 5x 7%

7599 Gulliver International Services 413 547 .3x 1.4x 28% 13x 6x 4%

7294 Yorozu Consumer Cyclical 427 265 .3x 1.0x 32% 14x 6x 4%

8876 Relo Holdings Services 258 299 .3x 1.5x 7% 7x 7x 4%

9729 Tokai Healthcare 326 289 .3x .9x 22% 6x 7x 6%

9430 NEC Mobiling Technology 441 302 .2x 1.1x 9% 8x 7x 4%

9831 Yamada Denki Services 6,472 7,310 .3x 1.3x 11% 9x 7x 4%

1722 Misawa Homes Capital Goods 238 393 .1x 1.5x 110% 17x 8x 8%

5214 Nippon Electric Glass Technology 6,989 6,729 1.7x 1.3x 7% 10x 8x 20%

7313 TS Tech Consumer Cyclical 1,153 817 .2x 1.0x 20% 15x 8x 4%

7251 Keihin Consumer Cyclical 1,360 874 .3x .9x 14% 13x 8x 6%

4283 Panasonic Works Technology 268 265 .6x 1.1x 2% 9x 9x 12%

4617 Chugoku Marine Basic Materials 573 700 .7x 1.1x 6% 9x 9x 8%

5541 Pacific Metals Basic Materials 1,429 981 1.4x 1.1x 12% 14x 9x 33%

6676 Melco Technology 680 405 .3x 1.6x 16% 11x 9x 4%

7545 Nishimatsu Chain Services 555 242 .2x 1.0x 7% 8x 9x 9%

3738 T-Gaia Services 827 1,106 .2x 2.8x 5% 7x 9x 2%

4711 Tokyu Community Services 404 313 .2x 1.1x 3% 10x 9x 5%

2726 PAL Co. Services 349 155 .2x 1.4x 16% 11x 9x 7%

9422 ITC Networks Services 249 200 .1x 1.4x 15% 6x 9x 3%

7278 EXEDY Consumer Cyclical 1,399 1,157 .6x 1.1x 8% 19x 9x 9%

2659 SAN-A Services 614 448 .3x .9x 11% 10x 9x 7%

9433 KDDI Services 27,597 37,987 .9x 1.3x 10% 8x 9x 9%

9682 DTS Technology 249 138 .2x .9x 9% 15x 10x 7%

2695 KURA Services 305 299 .3x 1.6x 9% 9x 10x 5%

9787 Aeon Delight Services 895 756 .4x 1.9x 5% 9x 10x 6%

4095 Nihon Parkerizing Basic Materials 894 702 .8x 1.1x 13% 15x 10x 12%

7739 Canon Electronics Technology 1,145 818 .6x 1.6x 13% 10x 10x 11%

5713 Sumitomo Metal Basic Materials 10,120 11,046 1.3x 1.4x 8% 15x 10x 10%

7222 Nissan Shatai Consumer Cyclical 1,127 1,105 .2x .6x 20% 7x 10x 4%

2685 Point Services 1,025 803 .7x 2.5x 3% 8x 10x 17%

3636 Mitsubishi Research Technology 334 206 .2x 1.1x 13% 11x 10x 7%

7606 United Arrows Services 587 764 .8x 3.6x 7% 19x 11x 7%

4021 Nissan Chemical Basic Materials 1,727 1,902 1.1x 1.4x 8% 11x 11x 12%

8096 Kanematsu Technology 286 13 .0x .8x 5% 11x 11x 7%

5186 Nitta Capital Goods 554 499 1.1x .9x 2% 39x 11x 3%

5563 Nippon Denko Basic Materials 657 637 .7x 1.1x 12% 9x 11x 11%

3593 Hogy Medical Healthcare 688 500 1.3x 1.0x 5% 11x 11x 23%

1379 Hokuto Consumer/Non-Cyclical 741 838 1.4x 1.4x 5% 12x 11x 16%

4708 Moshi Moshi Services 654 526 .6x 1.7x 4% 11x 11x 12%

3433 Tocalo Basic Materials 277 216 1.0x 1.2x 16% 16x 11x 19%

6459 Daiwa Industries Capital Goods 268 n/m n/m .6x 27% 6x 12x 22%

8227 Shimamura Services 3,482 2,875 .5x 1.4x 5% 11x 12x 8%

6737 Eizo Nanao Technology 532 233 .2x .8x 1% 8x 12x 10%

4521 Kaken Pharma Healthcare 1,219 1,159 1.1x 1.7x 5% 14x 12x 12%

2875 Toyo Suisan Consumer/Non-Cyclical 2,372 1,826 .5x 1.2x 6% 9x 12x 7%

6923 Stanley Electric Consumer Cyclical 2,899 2,305 .8x 1.2x 6% 18x 12x 11%

6379 Shinko Plantech Energy 534 358 .3x 1.7x 13% 10x 12x 8%

7296 F.C.C. Consumer Cyclical 1,265 1,040 .9x 1.5x 11% 39x 12x 10%

9728 Nippon Kanzai Services 350 243 .3x 1.3x 9% 13x 12x 5%

Detailed screening criteria: Market value > $235 million, 0x < Forward P/E < 12x, 5-year average return on assets > 5%, Trailing free cash flow > 0



Cheapest Based on Tangible Book to Market Value Market Enter. Debt/ Trailing Tang. EPS Yield LTM EBIT

Value Value Tang. Sales Book/ Last This FCF Margin

Company Industry ($mn) ($mn) Book to EV MV Year Year Yield (5-Yr)

8037 Kamei Oil & Gas Operations 151 619 80% 848% 389% 16% 2% 63% 1%

8515 Aiful Consumer Financial 294 n/m 438% n/m 368% n/m n/m n/m n/m

7972 Itoki Furniture & Fixtures 121 113 -2% 892% 343% 3% 2% -7% 0%

4464 SOFT99 Auto & Truck Parts 131 26 -24% 932% 341% 10% 7% -1% 3%

1820 Nishimatsu Construction Services 436 604 12% 793% 327% n/m n/m 65% -2%

7913 Tosho Printing Printing & Publishing 132 34 -23% 2124% 326% n/m 2% 2% 2%

7744 Noritsu Koki Photography 214 -92 -44% n/m 325% n/m n/m -32% -8%

5658 Nichia Steel Constr. Supplies 146 179 7% 190% 319% 5% 2% 10% 3%

3443 Kawada Tech. Constr. Supplies 113 395 80% 334% 313% 47% 54% 68% n/a

9537 Hokuriku Gas Natural Gas Utilities 127 210 21% 245% 304% 11% 6% 27% 3%

8983 Japan Office Real Estate Operations 264 834 71% 12% 303% 5% n/m 13% n/a

2116 Nissin Sugar Food Processing 113 68 -13% 765% 302% 14% 13% 8% 1%

7885 Takano Electronic Instruments 103 -15 -38% n/m 300% n/m 8% 29% 3%

7226 Kyokuto Kaihatsu Misc. Capital Goods 211 169 -7% 387% 296% n/m 1% 14% 1%

7989 Tachikawa Constr. Supplies 106 18 -28% 2448% 292% 6% 4% 4% 2%

7914 Kyodo Printing Printing & Publishing 204 261 10% 483% 290% 5% n/m -13% 0%

3877 Chuetsu Paper Products 208 906 117% 134% 287% 6% 2% 33% 1%

8150 Sanshin Electronics Electronic Instruments 250 217 -5% 993% 284% 7% 8% -37% 2%

7494 Konaka Retail (Apparel) 141 272 33% 303% 280% n/m 20% 40% -4%

8266 Izumiya Retail (Dep’t/Discount) 373 1,351 94% 329% 280% n/m 2% 2% 0%

8574 Promise Consumer Financial 939 n/m 251% n/m 279% 30% n/m n/m n/m

4033 NITTO FC Chemical Manufacturing 162 51 -25% 404% 279% 9% 6% 12% 9%

9070 Tonami Trucking 188 389 38% 353% 279% 6% 4% -4% 0%

8046 Marufuji Sheet Construction Materials 100 119 7% 269% 277% 5% n/m 7% 2%

1939 Yondenko Construction Services 182 139 -9% 616% 274% 10% 10% 27% 3%

7414 Onoken Fabricated Products 195 327 25% 428% 271% 9% 13% -54% 3%

1937 Seibu Electric Construction Services 102 120 6% 542% 266% 5% 7% -22% 2%

5408 Nakayama Steel Iron & Steel 187 1,156 196% 163% 265% n/m n/m -20% 1%

1822 Daiho Construction Services 102 -7 -41% n/m 257% 13% 8% 57% 1%

1941 Chudenko Construction Services 825 456 -17% 308% 256% 1% 2% 3% -3%

7949 Komatsu Wall Constr. Supplies 109 34 -27% 864% 252% n/m 6% -26% 5%

5915 Komai Tekko Construction Services 141 174 9% 321% 251% 6% 19% 16% -5%

7925 Maezawa Kasei Containers & Packaging 157 31 -32% 796% 248% 3% 4% 11% 2%

5410 Godo Steel Iron & Steel 445 861 40% 134% 235% n/m n/m 0% 6%

5445 Tekyo Tekko Iron & Steel 147 199 15% 269% 232% 36% 5% -7% 11%

1896 Obayashi Road Construction Services 129 80 -17% 1387% 222% 16% 3% -23% 2%

7822 Eidai Forestry & Wood 213 32 -40% 2098% 214% 0% 5% 14% 0%

1914 Japan Foundation Construction Services 123 11 -43% 1738% 213% 2% 1% -4% 0%

1934 Yurtec Construction Services 497 286 -21% 690% 204% 4% 3% 4% 2%

1884 Nippon Road Construction Services 320 216 -16% 785% 202% 16% 8% 4% 2%

8519 Pocket Card Consumer Financial 254 n/m 222% n/m 201% n/m 9% n/m n/m

8066 Mitani Construction Materials 374 29 -50% 13707% 186% 18% 14% 6% 3%

5262 Nippon Hume Construction Materials 136 99 -15% 353% 185% 9% 7% 16% 4%

9234 Kokusai Kogyo Business Services 146 314 62% 190% 185% 1% n/m -15% n/a

1899 Fukuda Construction Services 181 427 80% 321% 170% 10% 5% 34% -1%

1865 Asunaro Aoki Construction Services 365 87 -45% 1709% 169% 4% 10% 15% 1%

5602 Kurimoto Iron & Steel 288 736 93% 195% 167% 2% 6% 23% -5%

1882 Toa Road Construction Services 127 234 51% 540% 165% 34% 7% -5% 0%

5269 Nippon Concrete Construction Materials 167 255 32% 158% 161% 1% 3% 4% 1%

Detailed screening criteria: Market value > $100 million; traded on Tokyo Stock Exchange; regional banks excluded.



Profiles of 20 Japanese Investment Candidates Advantest (Tokyo: 6857, NYSE: ATE)

Technology: Semiconductors Chiyoda-ku, TK, Japan, 81-3-321-7500 www.advantest.co.jp

Trading Data Consensus EPS Estimates Valuation

Price: $18.02 (as of 4/21/11) Month # of P/E FYE 3/31/10 n/m

52-week range: $15.36 - $27.13 Latest Ago Ests P/E FYE 3/31/11 n/a

Market value: $3.6 billion This quarter n/a n/a n/a P/E FYE 3/30/12 n/a

Enterprise value: $2.6 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a

Shares out: 200.8 million FYE 3/31/11 n/a n/a n/a EV/ LTM revenue 2.1x

Ownership Data FYE 3/30/12 n/a n/a n/a EV/ LTM EBIT 29x

Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 2.3x

Insider buys (last six months): 0 LT growth n/a n/a n/a Greenblatt Criteria

Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 3%

Institutional ownership: 1% n/a n/a n/a LTM pre-tax ROC 15%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended LTME FQE FQE

per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 2,045 2,811 2,981 2,759 2,145 900 625 1,211 151 299

Gross profit 1,041 1,449 1,555 1,482 1,103 233 304 587 50 140

Operating income 363 713 757 667 251 (622) (140) 89 (59) 14

Net income 203 447 486 417 194 (879) (134) 54 (67) 8

Diluted EPS 1.03 2.28 2.61 2.22 1.06 (4.92) (0.75) 0.32 (0.37) 0.05

Shares out (avg) 197 196 185 187 182 179 179 177 179 173

Cash from operations 331 1,060 698 575 284 28 (208) (1) (74) 8

Capex 64 108 89 99 153 65 35 34 11 9

Free cash flow 268 952 609 476 131 (38) (244) (35) (85) (1)

Cash & investments 1,187 1,420 1,854 2,305 1,730 1,533 1,255 1,023 1,250 1,023

Total current assets 3,002 2,629 3,235 3,460 2,623 1,846 1,687 1,649 1,648 1,649

Intangible assets 44 36 34 36 41 17 17 17 17 17

Total assets 3,883 3,483 4,117 4,300 3,506 2,372 2,215 2,151 2,173 2,151

Short-term debt 53 235 0 0 0 0 0 0 0 0

Total current liabilities 782 869 901 712 372 253 257 318 237 318

Long-term debt 236 1 0 0 0 0 0 0 0 0

Total liabilities 1,280 1,057 1,090 840 522 451 451 539 442 539

Common equity 2,603 2,427 3,028 3,460 2,984 1,921 1,764 1,612 1,731 1,612

EBIT/capital employed 22% 50% 67% 63% 23% -79% -28% 15% n/m n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

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BUSINESS OVERVIEW Advantest manufactures semiconductor testing equipment.

In March 2011, Advantest and competitor Verigy (VRGY) announced a definitive agreement under which Advantest will acquire Verigy for $15 per share in cash (~$1.1 billion). INVESTMENT HIGHLIGHTS

#1 producer of semiconductor testing equipment, pending the $1.1 billion acquisition of Verigy. Advantest would overtake incumbent #1 Teradyne (TER) in the largely consolidated industry.

Verigy adds scale and testing expertise in non-memory semiconductors such as system-on-a-chip (SoC). Both company’s testing equipment enables chip manufacturers to lower costs, get products to market quickly, and improve their products’ quality.

Pro-forma EV-to-5-year average revenue and EBIT is ~1.0x and ~10x. (pro-forma EV-to-prior peak EBIT is ~3x). While trailing pro-forma revenue remains ~30% below the 5-year average, revenue is growing rapidly due to a cyclical demand upturn.

Strong post-deal balance sheet with an estimated ~¥40 billion of pro-forma net cash.

INVESTMENT RISKS & CONCERNS

Advantest may be overpaying for Verigy in its quest to catch up to Teradyne, and prevent the previously announced merger between Verigy and LTX-Credence. Advantest is paying 1.9x tangible book, 14x trailing EBITDA and 1.1x trailing revenue.

Verigy integration risks due to different corporate cultures and global operations. Semiconductor manufacturers may move business to competitors.

Exposed to price pressure and cyclicality of the semiconductor industry. A high proportion of fixed costs increases the risk of operating losses.

Top 5 customers typically account for 30-50+% of revenue. Intel and Samsung are key customers.

Exposed to yen strength as most products are made in Japan. The addition of Verigy may mitigate this.

COMPARABLE PUBLIC COMPANY ANALYSIS

P / This Next MV EV EV / Tang. FY FY ($mn) ($mn) Rev. Book P/E P/E

TER 3,300 2,650 1.6x 3.3x 10x 9x

LTXC 440 320 1.2x 2.9x 8x 7x

ATE 3,620 2,600 2.1x 2.3x n/a n/a

MAJOR HOLDERS (notable non-trustees only) Insiders 1% | Fujitsu 10% | MUFJ 9% | Manning & Napier 4%

SELECTED OPERATING DATA — ADVANTEST1 FYE March 31 2007 2008 2009 2010 2011 revenue -7% -22% -58% -31% 87% employees (end) 1% 1% -13 -1% n/a assets (end) 4% -18% -32% -7% -4% TBV/share (end) 14% -10% -35% -8% -5% TBV/share (end) (¥) 1,554 1,403 907 833 788 Revenue (¥bn) 235 183 77 53 100 % of revenue by segment: Semiconductor test products 70% 70% 63% 57% 67% Mechatronics products 22% 19% 16% 21% 18% Services 8% 11% 21% 22% 14% EBITDA margin by segment: Semiconductor test products 31% 21% -51% -19% 17% Mechatronics products 29% 13% -82% -13% 2% Services 36% 34% 10% 35% 27% Corporate -3% -3% -9% -8% -5%

Total EBITDA margin 28% 17% -53% -14% 10% % of revenue by geography (based on customers’ location): Asia (excluding Japan) 60% 59% 49% 64% 66% Japan 31% 31% 32% 23% 22% Americas/Europe 9% 10% 19% 13% 12% Selected items as % of revenue: Gross profit 52% 54% 51% 26% 49% R&D 11% 13% 17% 31% 21% EBIT 25% 24% 12% -65% 6% Net income 16% 15% 9% -98% 3% D&A 3% 3% 5% 11% 4% Capex 3% 4% 7% 7% 3% Employees (end) 3,637 3,666 3,187 3,151 n/a Return on tang. equity 13% 6% -36% -7% 2% Tangible equity/assets 77% 82% 83% 80% 78% shares out (end) 1% -5% 0% 0% -3%

1 Based on U.S. GAAP. TBV=tangible book value.

SELECTED OPERATING DATA — VERIGY

FYE October 31 2007 2008 2009 2010 YTD

1/31/11 revenue -2% -9% -53% 67% 13% employees (end) 3% 6% -9% -2% n/a Revenue ($mn) 761 691 323 539 120 % of revenue by geography (based on customers’ location): Asia 74% 79% 72% 84% n/a North America/Europe 26% 21% 28% 16% n/a Selected items as % of revenue: Gross profit 45% 44% 33% 48% 47% R&D 12% 15% 28% 18% 19% EBIT 13% 7% -34% 4% -4% D&A 2% 2% 5% 4% 4% Capex 2% 2% 2% 4% -2% Employees (end) 1,550 1,650 1,500 1,470 n/a

RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE The proposed $1.1 billion acquisition of Verigy would make Advantest the largest global producer of semiconductor testing equipment (ahead of Teradyne). As the upturn in the semiconductor industry has led to strong recent revenue growth, and likely optimistic management outlooks, we are concerned Advantest may be overpaying. Given the notoriously cyclical chip industry, and integration risks, a commensurate margin of safety is required. Despite the strong post-deal balance sheet, we are therefore not enticed by the pro-forma valuation, which we estimate implies an EV-to-”through the cycle” EBIT of ~10x.



ADVANTEST – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions)

Selected historic financial information:

Advantest five-year average financials:2

Revenue 160

EBIT 17

Implied EBIT margin 10%

Verigy five-year average financials:3

Revenue 50

EBIT 2


Advantest/Verigy pro forma five-year average financials:

Revenue 210

as % of trailing pro-forma revenue4 145%

EBIT 19

as % of trailing pro-forma EBIT 204%


Valuation summary (pro forma Advantest/Verigy): Conservative Base Case Aggressive

Valuation methodology

10x estimated ¥20 billion of normalized EBIT after merger

synergies


synergies


synergies

Normalized pro-forma revenue5 ¥200 ¥200 ¥200

Normalized pro-forma EBIT margin6 10% 10% 10%

Normalized pro-forma EBIT before synergies ¥20 ¥20 ¥20

Estimated merger synergies7 0 5 10

Normalized pro-forma EBIT after synergies ¥20 ¥25 ¥30

Fair value multiple 10.0x 10.0x 10.0x

Estimated enterprise value ¥200 ¥250 ¥300

Plus: Advantest net cash (as of 3/31/2011) 95 95 95

Plus: Acquired net cash at Verigy (as of 1/31/2011) 37 37 37

Minus: Purchase consideration for Verigy (100% cash) (91) (91) (91)

Minus: Estimated present value of cash restructuring costs7 (10) (10) (10)

Minus: Advantest post-retirement liabilities, net (as of 3/31/2011) (14) (14) (14)

Estimated fair value of the equity of Advantest (¥ in billions)8 ¥220 billion ¥270 billion ¥320 billion

¥1,270 per share ¥1,560 per share ¥1,850 per share

Estimated fair value of the equity of Advantest (US$ in billions)8 $2.7 billion $3.3 billion $3.9 billion

$15.30 per ADS $18.80 per ADS $22.30 per ADS

Implied EV-to-trailing pro-forma revenue 1.4x 1.7x 2.1x

Implied EV-to-trailing pro-forma EBIT 22x 27x 32x

Implied EV-to-5-year average pro-forma revenue 1.0x 1.2x 1.4x

Implied EV-to-5-year average pro-forma EBIT (before synergies) 11x 13x 16x

Implied EV per pro-forma employee ($)9 $520,000 $650,000 $780,000

1 In March 2011, Advantest and Verigy (Nasdaq: VRGY) announced a definitive agreement under which Advantest will acquire Verigy for $15.00 per share in cash. The implied total acquisition price is $1.1 billion (approximately ¥91 billion based on the exchange rate of $1=¥83). 2 Averages are based on the fiscal years 2006-10 (ended March 2010). This period includes three profitable and two unprofitable years, which we assume represents a full industry cycle. For reference, Advantest reported revenue and EBIT of ¥100 billion and ¥6 billion, respectively, for the year ended March 2011. 3 Averages are based on calendar years 2006-10 and recent exchange rate of $1=¥83. 4 Trailing pro-forma revenue is the sum of Advantest’s revenue for the year ended March 2011 and Verigy’s revenue for the year ended January 2011 (converted into yen at the recent exchange rate of $1=¥83). 5 Approximates the five-year average pro-forma revenue of Advantest and Verigy. 6 Approximates the five-year average pro-forma EBIT margin of Advantest and Verigy. 7 These figures are “guesses.” 8 Based on 173 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 9 Based on ~4,600 pro-forma employees.

Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

Advantest and Verigy ‘s 5-year average pro-forma revenue is

~45% higher than their pro-forma trailing revenue



ADVANTEST & VERIGY – PORTFOLIO OF SEMICONDUCTOR TEST SOLUTIONS

ADVANTEST & VERIGY – SELECTED PRO FORMA FINANCIAL INFORMATION

ADVANTEST & VERIGY – TRANSACTION TERMS

Source: Company presentation dated March 28, 2011.



Canon (Tokyo: 7751, NYSE: CAJ) Technology: Computer Peripherals Ohta-ku, TK, Japan, 81-3-375-2111 www.canon.com


Price: $43.20 (as of 4/21/11) Month # of P/E FYE 12/31/10 18x

52-week range: $36.80 - $52.30 Latest Ago Ests P/E FYE 12/31/10 18x

Market value: $57.2 billion This quarter n/a n/a n/a P/E FYE 12/31/11 18x

Enterprise value: $46.5 billion Next quarter n/a n/a n/a P/E FYE 12/30/12 17x

Shares out: 1,324.3 million FYE 12/31/10 2.45 2.45 1 EV/ LTM revenue 1.0x

Ownership Data FYE 12/31/11 2.44 3.16 1 EV/ LTM EBIT 10x

Insider ownership: <1% FYE 12/30/12 2.61 3.46 1 P / tangible book 2.0x

Insider buys (last six months): 0 LT growth 4.4% 21.7% 1 Greenblatt Criteria


Institutional ownership: 3% 10/27/10 n/a n/a LTM pre-tax ROC 25%


($ millions, except Fiscal Years Ended December 31, LTME FQE FQE

per share data) 2004 2005 2006 2007 2008 2009 2010 12/31/10 12/31/09 12/31/10

Revenue 40,705 44,066 48,791 52,601 48,056 37,669 43,511 45,300 11,199 12,534

Gross profit 20,111 21,352 24,185 26,375 22,748 16,754 20,930 21,455 5,092 5,778

Operating income 6,383 6,844 8,299 8,882 5,823 2,548 4,549 4,736 1,081 973

Net income 4,030 4,508 5,345 5,732 3,629 1,545 2,895 2,895 723 633

Diluted EPS 3.03 3.38 4.01 4.43 2.89 1.25 2.34 2.44 0.59 0.52

Shares out (avg) 1,328 1,331 1,332 1,293 1,256 1,234 1,235 1,235 1,234 1,229

Cash from operations 6,591 7,109 8,161 9,851 7,239 7,175 8,738 8,738 2,778 2,641

Capex 3,013 4,637 4,987 5,567 5,026 3,850 2,338 2,338 776 733

Free cash flow 3,578 2,472 3,174 4,284 2,213 3,325 6,400 6,400 2,003 1,908



Intangible assets 0 0 0 1,321 1,398 1,378 1,796 1,796 1,378 1,796

Total assets 42,104 47,462 53,077 52,968 46,598 45,162 46,761 46,761 45,162 46,761

Short-term debt 716 266 367 416 236 147 245 245 147 245

Total current liabilities 11,540 12,661 13,655 14,751 11,081 9,199 10,528 10,528 9,199 10,528

Long-term debt 336 318 185 102 99 58 49 49 58 49

Total liabilities 16,164 16,889 18,021 18,667 15,378 13,609 15,706 15,706 13,609 15,706

Preferred stock 0 0 0 0 0 0 0 0 0 0

Common equity 25,939 30,573 35,056 34,302 31,220 31,552 31,056 31,056 31,552 31,056

EBIT/capital employed 39% 40% 43% 43% 28% 12% 24% 25% n/m n/m


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BUSINESS OVERVIEW Canon manufactures imaging products in three segments:

Office (53% of 2010 revenue): multifunction devices (~50% of segment sales), color copiers (17%), b&w copiers (15%).

Consumer (37% of revenue): includes mainly cameras (~70% of segment revenue) and inkjet printers (~25%).

Industry and Others (~10% of revenue): includes lithography (~25% of segment revenue), medical and other products. INVESTMENT HIGHLIGHTS

One of the world’s largest manufacturers of cameras, printers and copiers, and related imaging products. Canon is both incumbent and innovator in shifts from traditional copiers to digital MFDs, and from monochrome to color products.

Shares trade at an ~8% FCF yield on average 2006-10 free cash flow despite a strong balance sheet, decent free cash flow growth prospects, and a history of capital return to shareholders.

~¥900 billion of net cash (20+% of recent market value), as of March 31. Upon becoming CEO in 1995, Fujio Mitarai (75) has cut debt from ~35% of assets to <1% in 2005. Despite an unlevered balance sheet, ROEs have been in the midteens historically.

2015 revenue target of ¥5+ trillion implies an 8% 2010-15 revenue CAGR. Based on a 20+% EBIT margin target, Canon trades at ~4x implied 2015 EBIT. Canon targets an equity ratio of 75+%.

Returned ~¥1.3 trillion in dividends and share buybacks during 2006-10 (30% of market value).


Earnings pressure due to production issues related to the March earthquake and yen strength.* Revised 2011 guidance: revenue of ¥3,730 billion (up 1% y-y), EBIT of ¥335 billion (down 14% y-y), and attributable net income of ¥220 billion (down 11% y-y). Guidance assumes a rate of ¥85 per $.

Dependence on the success of new products, especially in the fickle consumer segment, as a majority of revenue is from 2-3 year-old products.

Technology risk. For example, interchangeable lens, or so-called “mirrorless,” cameras are a threat to conventional digital single-lens-reflex cameras.

Derives ~20% of revenue from Hewlett-Packard, Canon sells laser printers on an OEM basis to HP.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Dai-Ichi Mutual Life 6% | Mizuho 6% | Sompo Japan Insurance 2% | Brandes <1% | Scout <1% * Despite a global presence, Canon still makes a majority of products in Japan.

SELECTED OPERATING DATA1

FYE December 31 2006 2007 2008 2009 2010 YTD

3/31/11 revenue 11% 8% -9% -22% 16% 11% EBIT 21% 7% -34% -56% 79% -5% employees (end 3% 11% 27% 1% 17% 5% assets (en ) 12% 0% -12% -3% 4% -2% TBV/share (end) 15% -3% -2% 1% -6% -5% TBV/share (end) (¥) 2,192 2,118 2,076 2,096 1,974 1,9 3 Revenue (¥tn) 4.2 4.5 4.1 3.2 3.7 0.8 % of revenue by major product type:2 Computer peripherals 34% 34% 36% 35% 36% n/a Office imaging products 29% 29% 27% 26% 26% n/a Cameras 25% 26% 25% 29% 29% n/a % of revenue by segment: Office 54% 55% 54% 51% 53% 57% Consumer 35% 35% 36% 40% 37% 34% Industry and others 11% 9% 10% 9% 9% 8% EBIT margin by segment: Office 23% 23% 21% 14% 15% 13% Consumer 19% 21% 15% 14% 17% 14% Industry and others 8% 6% -12% -28% -3% 10% Corporate/eliminations -3% -4% -3% -4% -4% -3% Total EBIT margin 17% 17% 12% 7% 10% 10% % of revenue by geography:3 Japan 22% 21% 21% 22% 19% 19% Americas 31% 30% 28% 28% 28% 26% Europe 32% 33% 33% 31% 32% 33% Asia and Oceania 15% 16% 18% 19% 22% 22% Selected items as % of revenue: Gross profit 50% 50% 47% 44% 48% 48% R&D 7% 8% 9% 10% 9% 8% Net income 11% 11% 8% 4% 7% 7% Net cash from ops 17% 19% 15% 19% 20% 9% D&A 6% 8% 8% 10% 7% 7% Capex 10% 11% 10% 10% 5% 6% Return on tang. equity 17% 17% 12% 5% 10% 9%4 Tangible equity/assets 64% 64% 64% 67% 66% 65% shares out (end) 0% 0% -8% 0% 0% 0%

1 Based on U.S. GAAP. TBV=tangible book value. 2 2010 data represents The Manual of Ideas estimates. 3 Based on the location where the product is shipped to. 4 Annualized. COMPARABLE PUBLIC COMPANY ANALYSIS


HPQ 88,700 99,170 .8x n/m 8x 7x

PC 29,770 37,240 .3x 2.2x 22x 45x

XRX 14,310 22,920 1.0x 30.1x 9x 8x

RICOY 8,480 14,310 .6x 1.3x 16x 15x

CAJ 57,210 46,500 1.0x 2.0x 18x 18x RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Imaging industry giant Canon differentiates itself from other Japanese companies through superior returns on capital as well as consistent returns of capital to shareholders. This is despite operating in an industry that is competitive, new feature-driven and economically sensitive. While production problems due to earthquake-related supply chain issues, as well as the strong yen, pose headwinds, the shares are undervalued based on “normalized” free cash flow generation and the strong balance sheet.



CANON – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE

(¥ in billions) Conservative Base Case Aggressive


10x estimated ¥350 billion of normalized EBIT (approximates

2011 EBIT guidance)


2006-10 average EBIT)

10x estimated ¥675 billion of normalized EBIT (approximates prior peak EBIT in

2006/07)

Normalized revenue1 ¥3,500 ¥4,000 ¥4,500

Normalized EBIT margin2 10.0% 12.5% 15.0%

Normalized EBIT3 ¥350 ¥500 ¥675


Estimated enterprise value ¥3,500 ¥5,000 ¥6,750

Plus: Net cash4 904 904 904

Minus: Net post-retirement liability4 (202) (202) (202)

Minus: Non-controlling interest4 (164) (164) (164)

Estimated fair value of the equity of Canon (¥ in billions)5 ¥4,040 billion ¥5,540 billion ¥7,290 billion


Estimated fair value of the equity of Canon (US$ in billions)5 $48.7 billion $66.7 billion $87.8 billion


Implied trailing FCF yield 11% 8% 6%

Implied FCF yield based on FY06-10 average FCF 8% 6% 5%

Implied dividend yield6 4% 3% 2%

Implied EV-to-trailing revenue 0.9x 1.3x 1.8x

Implied EV-to-trailing EBITDA 5.3x 7.6x 10.2x

Implied EV-to-trailing EBIT 9.1x 13.0x 17.6x

Implied fair value of the equity to tangible book 1.7x 2.3x 3.1x 1 Management’s revenue guidance for 2011 is ¥3,730 billion (up 1% y-y). Average revenue during 2006-10 is ~¥3,950 billion with a peak of ~¥4,500 billion in 2007 and a trough of ~¥3,200 billion in 2009. 2 Average EBIT margin during 2006-10 is 12.5%, with a peak of ~17% in 2006/07 and a trough of 7% in 2009. Management’s EBIT guidance for 2011 is ¥335 billion (down 14% y-y), which implies an EBIT margin of 9%. 3 Our base case EBIT of ¥500 billion approximates Canon’s “pre-earthquake” 2011 EBIT guidance of ~¥530 billion (~13% EBIT margin). Excluding a negative ~¥200 billion impact due to the earthquake, actual EBIT guidance for 2011 is ¥335 billion. 4 Based on balance sheet values as of March 31, 2011. 5 Based on 1,200 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 6 Based on a per share dividend of ¥120 for the fiscal year ended December 2010. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. CANON – CAPITAL EXPENDITURE AND FREE CASH FLOW, 2008-2011 (¥ in billions)

Source: Company presentation dated April 26, 2011.



CANON – RESULTS OVER PAST 15 YEARS, AND MANAGEMENT TARGETS FOR 2015

Source: Company presentation dated March 1, 2011.



Fujifilm (Tokyo: 4901, OTC: FUJIY) Basic Materials: Fabricated Plastic & Rubber Minato-ku, TK, Japan, 81-3-340-2111 www.fujifilm.com






Shares out: 516.4 million FYE 3/31/11 1.62 1.61 1 EV/ LTM revenue 0.5x








per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 30,128 29,666 31,311 32,661 33,415 28,574 25,608 27,328 6,499 6,413

Gross profit 12,476 11,934 12,603 13,430 13,546 10,835 10,152 11,004 2,622 2,642

Operating income 2,165 1,927 827 1,046 2,424 357 (507) 1,012 72 430

Net income 966 992 435 404 1,226 124 (451) 317 (19) 213

Diluted EPS 1.88 1.93 0.85 0.76 2.27 0.25 (0.92) 0.55 (0.04) 0.40

Shares out (avg) 513 513 510 511 508 499 489 488 489 486

Cash from operations 3,843 2,575 3,199 3,489 3,499 2,459 3,695 2,675 321 168

Capex 2,318 2,159 2,391 2,266 2,193 2,083 1,092 1,142 311 266

Free cash flow 1,525 416 809 1,223 1,306 376 2,603 1,533 10 (98)



Intangible assets 2,939 3,247 3,361 3,724 4,912 4,733 4,355 4,365 4,469 4,365

Total assets 35,489 35,019 35,536 38,959 38,340 34,000 33,188 32,641 33,234 32,641

Short-term debt 1,682 1,451 1,163 1,245 1,336 793 1,824 2,356 719 2,356


Long-term debt 1,371 1,127 873 3,145 3,007 2,981 1,646 1,394 2,848 1,394



Common equity 20,540 21,704 23,047 23,200 22,564 20,615 20,495 20,226 20,681 20,226

EBIT/capital employed 17% 15% 6% 7% 16% 2% -4% 8% n/m n/m


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BUSINESS OVERVIEW Fujifilm produces imaging-related products in three segments:

Document Solutions (44% of revenue*): operates as Fuji Xerox (75%-owned), the segment manufactures office copiers, printers, and consumables, and provides related services.

Information Solutions (41% of revenue): produces equipment and materials for medical systems, life sciences and graphic arts, as well as flat panel display materials, recording media, optical devices, electronic and inkjet materials.

Imaging Solutions (15% of revenue): color films, digital cameras, photofinishing equipment, color paper, chemicals. INVESTMENT HIGHLIGHTS

Transforming into office equipment and digital imaging company, from a legacy in film production.

Last five years’ cumulative FCF is 40+% of market value despite restructuring cash outflow related to the downsizing of the imaging solutions business and the financial crisis of 2007-08.

Strong balance sheet with ~¥285 billion of net cash including investments in securities.

Legacy businesses may no longer be a material drag on revenue growth due to their small size.

Guiding for an increase “both in sales and profit” for the year ended March 2012.


Product/materials-driven business model leads to commoditization and technology risk. Unlike some rivals, Fujifilm lacks meaningful services capabilities that can be a source of recurring revenue.

Low returns on equity likely to persist without more aggressive return of excess capital to shareholders through asset sales/rationalizations.

“Surge in raw materials prices and movements in currency exchange rates” are challenges, which threaten recent profitability improvements.

Significant minority interest related to the Fuji Xerox business – a key earnings driver. Xerox, owns 25% of the entity, which manufactures and distributes document processing products.

* Based on the year ended March 2011. COMPARABLE PUBLIC COMPANY ANALYSIS


CAJ 57,210 46,500 1.0x 2.0x 18x 18x

XRX 14,310 22,920 1.0x 30.1x 9x 8x

RICOY 8,480 14,310 .6x 1.3x 16x 15x

FUJIY 15,740 14,350 .5x 1.0x 19x 12x

SELECTED OPERATING DATA1 FYE March 31 2007 2008 2009 2010 2011 revenue 4% 2% -14% -10% 2% employees (end) 1% 3% -3% -3% 6% assets (end) 10% -2% -11% -2% -4% TBV/share ( nd) -1% -8% -7% 2% -2% TBV/share (end) (¥) 3,246 2,982 2,769 2,814 2,769 Revenue (¥bn) 2,783 2,847 2,434 2,182 2,217 % of revenue by segment: Document solutions 41% 42% 44% 43% 44% Information solutions 37% 39% 39% 41% 41% Imaging solutions 22% 19% 17% 16% 15% Revenue growth by segment: Document solutions 5% 4% -10% -13% 4% Information solutions 17% 8% -15% -5% 2% Imaging solutions -12% -10% -25% -16% -6% Adj. EBIT margin by segment:2 Document solutions 7% 7% 5% 7% 9% Information solutions 11% 11% 2% 8% 12% Imaging solutions 3% 0% -7% -3% 0% Corporate3 0% 0% 0% -1% -1%

Total adj. EBIT margin 7% 7% 2% 5% 8% % of revenue by geography:4 Japan 47% 44% 47% 49% 47% Asia and others 17% 20% 21% 23% 25% Americas 21% 20% 18% 16% 17% Europe 15% 16% 14% 12% 12% Selected items as % of revenue: Gross profit 41% 41% 38% 40% 41% R&D 6% 7% 8% 8% 7% EBIT – reported5 4% 7% 2% -2% 6% EBIT – adjusted 7% 7% 2% 5% 8% Net income 1% 4% 0% -2% 3% Net cash from ops 11% 10% 9% 14% 9% D&A 8% 8% 9% 9% 7% Capex6 7% 7% 7% 4% 5% Return on tang. equity 2% 7% 1% -3% 5% Tangible equity/assets 58% 54% 53% 55% 57% shares out (end) 0% -1% -3% 0% -1%

1 Based on U.S. GAAP. TBV=tangible book value. 2 Stated before restructuring charges. Also excludes equity in net earnings of affiliates, gains/losses on forex and securities, as well as other items. 3 FY07-09 is based on old corporate expense allocation policy. 4 Based on sales destination. 5 Includes restructuring charges, but excludes equity in net earnings of affiliates, gains/losses on forex and securities, as well as other items. 6 Includes purchases of software.

MAJOR HOLDERS* (notable non-trustees only) Insiders <1% | Nippon Life 4% | Chuo Mitsui 2% * The underlying share count excludes ~33 million treasury shares (~6% of total issued Fujifilm shares as of March 31, 2011). RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Investors may dismiss Fujifilm as it evokes memories of a declining film-based imaging business. While this remains true to an extent, the company’s key earnings contributors are the manufacture of office equipment via 75%-owned Fuji Xerox, as well as imaging applications that target growth areas including in health care and inkjet. The valuation may not properly reflect this, despite commoditization and technology risks tied to a product and materials-driven business model. Given a history of frequent share buybacks, the strong balance sheet is a potential source of increasing returns to shareholders.



FUJIFILM – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



8x estimated ~¥90 billion of normalized EBIT (approximates

FY07-11 average EBIT including restructuring

charges)

8x estimated ~¥130 billion of normalized

EBIT (approx. trailing EBIT including restructuring

charges)


trailing EBIT excluding

restructuring charges)



Normalized EBIT ¥88 ¥132 ¥176


Estimated enterprise value ¥880 ¥1,320 ¥1,760


Plus: Investments3 182 182 182



Estimated fair value of the equity of Fujifilm (¥ in billions)4 ¥1,000 billion ¥1,380 billion ¥1,750 billion


Estimated fair value of the equity of Fujifilm (US$ in billions)4 $12.0 billion $16.6 billion $21.1 billion $25 per ADS $35 per ADS $44 per ADS

Implied fair value of the equity to tangible book 0.7x 1.0x 1.3x





Implied EV-to-trailing EBITDA excluding restructuring charges 2.7x 4.1x 5.4x

Implied EV-to-trailing adj. EBITDA minus capex 4.2x 6.3x 8.3x

1 Revenue for the year ended March 2011 is ¥2,217 billion (up 2% y-y). 2 EBIT margin for FY11 is ~7.5%, excluding restructuring charges (~6% including restructuring charges). Both EBIT measures exclude equity in net earnings of affiliates, gains/losses on forex and securities, as well as other items. 3 Based on balance sheet values as of March 31, 2011. Non-controlling interest, which is stated at its balance sheet value in the conservative case, is adjusted in the base and aggressive cases. 4 Based on 482 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 5 Based on the dividend of ¥30 per share for the fiscal year ended March 2011.

Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. FUJIFILM – SELECTED FINANCIAL DATA AND MANAGEMENT GUIDANCE (¥ in billions)




FUJIFILM – OPERATING INCOME BRIDGE, ex. Restructuring and Other Charges (¥ in billions)

FUJIFILM – CALCULATION OF FREE CASH FLOW (¥ in billions)

FUJIFILM – STOCK REPURCHASES AND DIVIDENDS




Fujitsu (Tokyo: 6702, OTC: FJTSY) Technology: Computer Services Minato-ku, TK, Japan, 81-3-625-2220 jp.fujitsu.com



52-week range: $26.01 - $37.34 Latest Ago Ests P/E FYE 3/31/11 n/a

Market value: $11.6 billion This quarter n/a n/a n/a P/E FYE 3/30/12 n/a


Shares out: 417.5 million FYE 3/31/11 n/a n/a n/a EV/ LTM revenue 0.2x

Ownership Data FYE 3/30/12 n/a n/a n/a EV/ LTM EBIT 9x




Institutional ownership: 1% n/a n/a n/a LTM pre-tax ROC 17%



per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 57,034 56,984 57,327 61,021 63,782 56,150 55,989 68,638 39,883 13,118

Gross profit 15,625 14,958 15,171 15,776 16,107 14,375 14,873 18,990 10,510 3,614

Operating income 1,308 1,494 2,135 1,823 1,441 (813) 480 1,722 (310) 245

Net income 588 375 812 1,225 576 (1,345) 1,114 1,023 567 198

Diluted EPS 1.33 0.83 1.77 2.69 1.17 (3.25) 2.52 2.35 1.30 0.46

Shares out (avg) 400 407 414 413 412 414 412 412 411 414

Cash from operations 3,676 3,185 4,853 4,899 3,865 3,073 3,534 2,720 109 (157)

Capex 2,405 2,387 3,389 3,094 3,961 2,895 2,074 2,227 443 480

Free cash flow 1,271 798 1,463 1,804 (96) 178 1,460 493 (334) (637)




Total assets 46,250 43,554 45,551 47,185 45,728 38,550 38,622 35,824 38,425 35,824

Short-term debt 4,579 2,507 2,810 2,707 2,378 5,603 2,994 3,837 4,353 3,837


Long-term debt 10,701 10,448 8,301 6,216 9,449 6,029 4,744 3,718 4,780 3,718



Common equity 9,897 10,254 10,972 11,600 11,345 8,961 9,556 9,485 8,945 9,485

EBIT/capital employed 10% 12% 19% 16% 12% -7% 5% 17% n/m n/m


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BUSINESS OVERVIEW

Fujitsu provides IT products and services in three segments:

Technology Solutions (~65% of revenue): IT systems integration, outsourcing and maintenance; IT products, including servers, storage, base stations, optical transmission.

Ubiquitous Product Solutions (~23% of revenue): PCs and mobile phones. Since April 2010, also includes car audio and navigation systems, comms equipment, and auto electronics.

Device Solutions (~13% of revenue): manufactures integrated circuits and other electronic components. INVESTMENT HIGHLIGHTS

World’s third-largest IT services provider, and the #1 in Japan, based on company data. Fujitsu has parlayed strong product expertise, including in servers (a top five global provider) into services such as IT systems integration and outsourcing.

Low EV-to-revenue of ~30% — but can margins be improved? EV-to-EBIT is 9x based on EBIT guidance of ¥145 billion for the year ended March 2011. This implies an EBIT margin of 3.2%, which approximates the 2005-10 average EBIT margin.

Turnaround potential of non-Japanese operations (~35% of revenue), which have a 1% EBIT margin versus 5+% at Japanese operations. While Japan margins approximate their historical average, non-Japan margins are below the 4% achieved in 2005.

Customers include nearly half of the Fortune Global 500. This indicates Fujitsu’s products and services are able to compete on a global scale.


Shares appear fairly valued based on stagnating revenue and average historic margins, which imply an EV-to-EBIT of ~10x. The margin of safety is only modest with a price-to-tangible book of 1.7x.

Vulnerable to technological change and competition from the likes of IBM. Low margins may be a sign Fujitsu is losing on the product front.

Threat of commoditization in certain business lines despite Fujitsu’s brand, scale and integrated offering.

¥87 billion of net debt; large pension liabilities. COMPARABLE PUBLIC COMPANY ANALYSIS


IBM 205,220 222,190 2.2x n/m 13x 12x

ACN 40,610 35,930 1.4x 15.5x n/a n/a

FJTSY 11,560 15,080 .2x 1.8x n/a n/a


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 revenue 1% 6% 5% -12% 0% -3% employees (end) 5% 2% 4% -1% 4% -1% assets (end) 5% 4% -3% -16% 0% -7% TBV/share (end) 8% 8% -1 - 6% -3% 17% TBV/share (end) (¥) 329 355 352 260 252 260 Revenue (¥tn) 4.8 5.1 5.3 4.7 4.7 3.2 % of revenue by segme t: Technology 61% 60% 59% 64% 65% 64% Ubiquitous products 19% 19% 20% 18% 17% 23%2 Device 14% 14% 14% 12% 11% 13% Other 6% 7% 7% 7% 7% 1%3 Revenue growth by selected segment: Technology 2% 6% 3% -6% 2% -3% Ubiquitous products 3% 7% 6% -20% -3% 18%2 EBIT margin by segment:4 Technology 5% 5% 6% 6% 5% 4% Ubiquitous products 4% 4% 5% 0% 3% 3% Device 5% 3% 2% -13% -2% 5% Other3 3% 3% 4% 1% 3% -21% Corporate -1% -1% -1% -1% -2% -1%

Total EBIT margin 4% 4% 4% 1% 2% 2% % of revenue by geography (based on customer location): Japan 72% 69% 69% 72% 66% 64% International 28% 31% 31% 28% 34% 36% EBIT margin by geography (before corporate costs): Japan 5% 5% 7% 3% 5% n/a International 4% 3% 1% 1% 1% n/a Selected items as % of revenue: Gross profit 26% 26% 26% 26% 27% 28% R&D 5% 5% 5% 5% 5% 5% Net income 1% 2% 1% -2% 2% 1% Net cash from ops 8% 8% 6% 5% 6% 2% D&A 5% 5% 5% 6% 5% 5% Capex 6% 6% 6% 5% 4% 4% Employees (end) (k) 158 161 167 166 172 172 Return on tang. equity 10% 14% 7% -18% 18% 10% Tangible equity/assets 19% 19% 20% 19% 18% 18% shares out (end) 0% 0% 0% 0% 0% 0%

1 Based on Japanese GAAP. 2 Includes car audio/navigation systems, mobile communications equipment, and automotive electronics, which were reported within “Other” prior to April 2010. Excludes the hard disk drive business since it was sold in October 2009. 3 From April 2010 onward, includes Japan’s “supercomputer project,” facility services, internal IT development, and employee retirement/healthcare benefits. 4 As reported (excludes special items, affiliate earnings and dividend income).

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Fuji Electric 11% | State Street 5% | Asahi Mutual Life 2% | Fujitsu Employee Ass’n 2% | Mizuho 2% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Fujitsu has a strong heritage in IT product innovation, having developed Japan’s first computer in the 1950s. More recently, the company is using its expertise in servers and storage products to expand into services such as systems integration and outsourcing. However, stagnating overall revenue and low margins indicate that Fujitsu remains behind competitors such as IBM, who have more aggressively exited commoditizing products to focus on value-added services. While the valuation appears fair on historic margins, shares have material upside potential if margins can be improved (EV-to-revenue is ~30%).



FUJITSU – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE


Valuation methodology 1.25x tangible

common equity

10x estimated normalized EBIT of

¥150 billion (approximates FY06-

10 average EBIT)

10x estimated normalized EBIT of

¥200 billion (approximates FY06-

08 average EBIT)

Conservative case metrics:

Tangible common equity as of 12/31/2010 ¥539

Fair value multiple 1.25x

Estimated equity value ¥673

Base/aggressive case metrics:

Normalized revenue1 ¥5,000 ¥5,000

Normalized EBIT margin2 3.0% 4.0%

Normalized EBIT (EBIT guidance: ¥145 billion for year to 3/2011) ¥150 ¥200

Fair value multiple 10.0x 10.0x

Estimated enterprise value ¥1,500 ¥2,000

Minus: Net debt3 (87) (87)

Minus: Net post-retirement liability4 (192) (192)

Minus: Non-controlling interest5 (135) (135)

Estimated fair value of the equity of Fujitsu (¥ in billions)6 ¥673 billion ¥1,086 billion ¥1,586 billion

¥330 per share ¥520 per share ¥770 per share

Estimated fair value of the equity of Fujitsu (US$ in billions)6 $8.1 billion $13.1 billion $19.1 billion

$20 per ADS $32 per ADS $46 per ADS



Implied trailing earnings yield 12% 7% 5%

Implied FCF yield based on average FCF during FY06-10 10% 6% 4%



Implied EV-to-trailing Japan revenue8 0.30x 0.48x 0.64x

Implied EV-to-trailing EBITDA less capex 5.1x 8.1x 10.7x

Implied EV per employee ($) $67,000 $105,000 $140,000

1 Revenue for the year ended December 2010 was ~¥4,600 billion. Revenue peaked at ~¥5,300 billion in FY08 (ended March 2008) and averaged ~¥4,900 billion during FY06-10 (not directly comparable due to inclusion of discontinued businesses). 2 EBIT margin for the year ended December 2010 was 3.2%. EBIT margin peaked at 3.8% in FY08 (ended March 2008) and averaged ~3.0% during FY06-10 (not directly comparable due to inclusion of discontinued businesses). 3 Based on balance sheet values of cash and debt as of December 31, 2010. Our cash figure includes marketable and investment securities (at reported values). 4 Based on reported retirement benefits as of December 31, 2010. The related gross benefit obligation was ¥1.3 trillion at March 2010 based on a 2.5% discount rate (~$15 billion at recent exchange rates). 5 Based on the balance sheet value as of December 31, 2010. 6 Based on 2,070 million common shares outstanding (1 ADS = 5 shares). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 7 Based on dividend guidance of ¥10 per share for the fiscal year ended March 2011. 8 EBIT margins in Japan have averaged 5% during FY06-10, while EBIT margins outside of Japan have averaged 2% during the same period. This suggests Fujitsu’s non-Japan revenue may be of relatively little value.




FUJITSU – SEGMENT CLASSIFICATION

Source: Company data book dated October 2010.

FUJITSU – RESEARCH CAPABILITY, AS INDICATED BY PATENT ACTIVITY

Source: Fujitsu Annual Report 2010.



Hitachi (Tokyo: 6501, NYSE: HIT) Technology: Electronic Instruments & Controls Chiyoda-ku, TK, Japan, 81-3-325-1111 www.hitachi.co.jp




Market value: $23.4 billion This quarter $1.56 $1.56 1 P/E FYE 3/30/12 10x

Enterprise value: $44.9 billion Next quarter 1.08 1.08 1 P/E FYE 3/30/13 n/a






Institutional ownership: 1% 11/4/10 $1.77 $1.48 LTM pre-tax ROC 14%



per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 103,284 108,005 113,242 122,612 134,323 119,650 107,305 115,503 25,818 27,081

Gross profit 23,000 24,716 24,851 25,838 29,302 26,133 25,356 29,081 6,386 7,028

Operating income 1,557 2,620 2,682 2,017 2,870 (289) 1,816 5,587 755 1,413

Net income 190 616 447 (392) (695) (9,420) (1,280) 2,686 262 743

Diluted EPS 0.57 1.81 1.30 (1.18) (2.09) (28.34) (3.49) 5.68 0.72 1.54

Shares out (avg) 330 332 333 333 332 332 366 388 354 452


Capex 9,693 11,648 11,618 12,722 11,894 10,614 7,690 7,544 1,641 1,842

Free cash flow (2,436) (4,883) (3,352) (5,363) (2,420) (3,927) 1,862 2,540 (988) (1,338)




Total assets 114,744 116,490 119,899 127,354 125,997 112,512 107,104 111,333 107,424 111,333

Short-term debt 14,968 14,912 12,792 15,349 14,072 18,788 9,343 11,432 13,879 11,432


Long-term debt 15,723 15,782 16,972 17,825 17,009 15,430 19,287 16,913 18,925 16,913



Common equity 25,941 27,612 30,005 29,227 25,971 12,562 15,370 17,345 13,933 17,345



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BUSINESS OVERVIEW Hitachi is a conglomerate that operates in eleven segments:

Information and Telecommunication Systems includes IT services, software, servers, mainframes, telco products, ATMs.

High Functional Materials & Components includes wires, cables, copper products, specialty steels, and circuit boards.

Social Infrastructure & Industrial Systems includes industrial machinery, elevators, escalators and railway vehicles.

Digital Media & Consumer Products: includes optical disk drives, TVs, projectors, mobiles, and home appliances.

Electronic Systems & Equipment includes semiconductor and LCDs cap equipment, test and medical equipment, and tools.

Power Systems includes thermal, nuclear, hydro and wind power generation systems.

Components & Devices includes hard disk drives, LCDs, information storage media and batteries.

Construction Machinery includes hydraulic excavators, wheel loaders and mining dump trucks.

Automotive Systems includes engine management systems, powertrains, drive control and car information products.

Financial Services includes leasing and loan guarantees.

Others includes logistics, property, and other activities. INVESTMENT HIGHLIGHTS

One of world’s largest providers of electronic and electrical products, ranging from IT products to home appliances and electricity generation plants.

Shares trade at 8-9x trailing P/E — a modest valuation if record 2010 earnings are sustained. Hitachi is benefiting from the global cyclical upturn.

Reaffirmed dividend guidance following the Japan earthquake in March. This suggests Hitachi expects no material liability from the related nuclear disaster (Hitachi’s nuclear power joint venture with GE helped build the Fukushima nuclear plant).

To receive $3.5 billion cash (~15% of market value) from selling the hard disk drive business.


Unwieldy conglomerate with low historic return on capital. The strategy of CEO Hiroaki Nakanishi (65) to create a “social innovation business” appears unlikely to improve shareholder value creation.

Trades at 2x tangible book and >13x last 5-years’ average FCF of ~¥150 billion (years to March ‘10).

Dilutive equity raise in 2009 highlights risks to shareholders of a levered, cyclical model with little recurring revenue; ~90% of revenue is from products.

¥1.8 trillion of net debt (1.8x 2010 adj. EBITDA); ¥0.9 billion of net pension liabilities at yearend ‘10.


FYE March 31 2008 2009 2010 YTD

12/31/10 revenue 10% -11% -10% 8% employees (end) -1% 4% -1% -1% assets (end) -1% -11% -5% 4% TBV/share (end) -13% -63% -4% 29% TBV/share (end) (¥) 487 179 171 208 Revenue (¥tn) 11.2 10.0 9.0 6.8 % of revenue by selected segment: Information & telco 16% 17% 17% 15% High functional materials 15% 15% 13% 15% Social infrastructure & industrial 10% 11% 12% 9% Digital media & consumer 11% 10% 10% 10% Electronic systems & equipment 9% 8% 10% 10% Power 6% 8% 9% 8% All Other2 33% 31% 30% 33% Adj. EBIT margin by selected segment: Information & telco 8% 8% 6% 5% High functional materials 8% 2% 4% 7% Social infrastructure & industrial 3% 3% 4% 4% Digital media & consumer -10% -11% -1% 3% Electronic systems & equipment 6% 3% -1% 4% Power -2% 0% 3% 4% All Other2 4% 1% 2% 6% Total adj. EBIT margin3 3% 1% 2% 5% % of revenue by geography:4 Japan 66% 59% 59% 56% Non-Japan 34% 41% 41% 44% Adj. EBIT margin by geography (before corporate costs): Japan 4% 1% 3% n/a Non-Japan 2% 2% 3% n/a Selected items as % of revenue: Gross profit 22% 22% 24% 26% R&D 4% 4% 4% 4% Special items5 0% -2% -1% 1% Net income (after minorities) -1% -8% -1% 3% Net cash from ops (after minorities) 7% 5% 9% 6% D&A 6% 7% 6% 5% Capex6 5% 5% 4% 4% Tangible equity / assets (end) 16% 7% 9% 11% shares out (end) 0% 0% 35%7 1%

1 Based on U.S. GAAP. TBV=tangible book value. 2 Includes the following segments: Components & Devices, Construction Machinery, Automotive Systems, Financial Services, and Others. 3 Gross profit less SG&A (excludes special items and affiliates earnings/losses). 4 Based on customer location. Asia represents 52% of YTD non-Japan revenue. 5 Includes impairments, restructuring charges, and various gains/losses. 6 Includes purchase of intangibles; excludes capex of assets to be leased. 7 Hitachi issued 1.150 billion shares for ¥254 billion (~¥220/share) in 12/2009.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | MUFJ 6% | Hitachi Employees Ass’n 3% | Nippon Life 2% | Dai-Ichi Life 2% | RenTech <1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Conglomerate Hitachi is benefiting from the global economic upturn and significant emerging markets’ exposure (25% of revenue is from non-Japan Asia). The levered, cyclically-exposed business model, however, puts shareholders’ capital at significant risk and has destroyed value in the past. The valuation is not enticing based on through-the-cycle earning power.



HITACHI – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE


Valuation methodology 10x “normalized”

FCF 12.5x “normalized”

FCF 15x “normalized”

FCF

Average net cash from operations (FY06-10)1 ¥668 ¥668 ¥668

Minus: Average capex (FY06-10)2 (519) (519) (519)

Average FCF (FY06-10)3 ¥148 ¥148 ¥148


Estimated fair value of the equity of HItachi (¥ in billions)4 ¥1,480 billion ¥1,850 billion ¥2,220 billion


Estimated fair value of the equity of Hitachi (US$ in billions)4 $17.8 billion $22.3 billion $26.7 billion



Implied run-rate dividend yield5 2% 2% 1%

Implied fair value of the equity to adj. tangible book6 1.4x 1.8x 2.1x 1 Net cash from operations is stated after cash dividends paid to noncontrolling interests. Fiscal years refer to the twelve months ended in March of the stated year (e.g. FY10 is the year ended in March 2010). 2 Capex includes the purchase of intangible assets but excludes purchases of tangible assets and software to be leased. Based on this definition, our capex figure approximated 85% of reported average D&A during the period. 3 In our view, the average free cash flow during fiscal years 2006-10 is representative of Hitachi’s cash generation capability through a full economic cycle. In addition, due to the company structure, including significant non-controlling interests in many of Hitachi’s segments, free cash flow is our preferred metric to use for valuation purposes. Using our definition of FCF, HItachi generated ~¥155 billion of FCF during the nine months to December 2010, which puts the recent annual run-rate cash generation above the five year average. This appears to be in-line with a 5% adj. EBIT margin for the recent nine-month period versus an average adj. EBIT margin of ~2% during FY06-10. Adjusted EBIT is based on reported gross profit minus SG&A (excludes various special items). As the recent record EBIT margins may not be sustainable over a full-economic cycle, we use our average FCF figure rather than to rely on the higher, more recent free cash flow in our valuation. Our “normalized” FCF figure of ~¥150 billion is 25% below management’s target to “consistently generate at least ~¥200 billion” of net income attributable to Hitachi, Ltd. shareholders (based on the presentation from May 2010, which outlined the “mid-term management plan”). A 25% discount appears warranted in our view, based on management’s mixed track record and actual FCF generation to date. 4 Based on ~4,830 million common shares outstanding, including estimated dilution from convertible debt (1 ADS = 10 shares). Estimated fair value in US$ is based on a conversion of the recent exchange rate at 1US$=¥83. 5 Based on a per share dividend of ¥6. This is based on an interim dividend of ¥3 yen paid in 2010 (excluding the ¥2 of “commemorative dividends” paid per share for Hitachi’s centennial anniversary) and yearend dividend guidance of ¥3 (based on Hitachi’s announcement affirming the previous yearend dividend guidance following the Japan earthquake in March 2011). 6 Adjusted tangible book is based on reported shareholders’ equity of ¥1,450 billion at yearend 2010 less goodwill/intangibles of ~¥510 billion plus ¥100 billion of convertible bonds due 2014 (accounted for in the diluted share count). Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. HITACHI – MANAGEMENT TARGETS FOR FY2012

Source: Company presentation dated May 2010.



HITACHI – GLOBAL GROWTH STRATEGY

HITACHI – OUTLOOK FOR CAPEX AND OTHER INVESTMENT SPENDING




Konami (Tokyo: 9766, NYSE: KNM) Technology: Software & Programming Minato-ku, TK, Japan, 81-3-522-0573 www.konami.com














per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 3,286 3,133 3,151 3,369 3,574 3,723 3,151 3,172 926 872

Gross profit 1,133 965 930 1,043 1,108 1,167 918 815 328 246

Operating income 489 338 30 338 407 329 224 221 150 102

Net income 242 126 277 195 221 131 160 148 101 65

Diluted EPS 2.01 1.05 2.11 1.42 1.61 0.95 1.20 1.13 0.76 0.49

Shares out (avg) 120 120 131 137 137 137 133 133 133 133

Cash from operations 413 334 287 383 370 362 172 330 128 138

Capex 106 190 174 112 144 103 76 112 22 36

Free cash flow 307 144 113 271 226 260 96 217 106 102

Cash & investments 1,044 1,077 826 689 627 644 610 625 527 625



Total assets 3,539 3,658 3,637 3,662 3,837 3,626 3,584 3,689 3,642 3,689

Short-term debt 66 304 306 277 98 44 29 82 32 82

Total current liabilities 875 1,200 976 991 903 750 643 779 723 779

Long-term debt 820 634 428 291 428 454 479 432 481 432



Common equity 1,227 1,272 1,969 2,099 2,197 2,147 2,217 2,226 2,183 2,226



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BUSINESS OVERVIEW Gaming company Konami operates in four segments:

Digital Entertainment (54% of CY10 revenue; ¥18 billion of CY10 EBIT): develops and distributes computer and video game software (50+% of segment revenue), video games for amusement arcade machines, card games, and online games.

Health & Fitness (33%; -¥2 billion): entered the fitness club business in 2001; operates 200+ own clubs (mostly leased) and ~115 clubs on an outsourced basis. ~10% of revenue derives from the manufacture and supply of fitness equipment.

Gaming & System (8%; ¥5 billion): Develops and services casino machines and systems, mostly for the U.S. market.

Other (6%; -¥3 billion): includes corporate/other activities. INVESTMENT HIGHLIGHTS

One of the largest global publishers of video game software for gaming consoles such as Sony PlayStation, Nintendo Wii, and Microsoft Xbox. Computer and video game software, which represents ~30% of total revenue, is a key earnings contributor.

Valuable content franchise as Konami produces its own games, which can then be monetized across various channels. DanceDanceRevolution, for example, was first sold as an arcade game, then as a home title, and, most recently, as an iPhone game.

Valuation ignores the earning power of the games business and value of non-core fitness operations, which contribute a third of revenue and little EBIT. EV-to-revenue is <0.8x and EV-to-prior peak EBIT is <6x. The FCF yield is 8% on 5-year average FCF.

Non-core fitness segment is the largest fitness club operator in Japan with ~20% market share.

Owns gaming licenses in the U.S. and other jurisdictions tied to the supply of gaming machines.

Chairman and CEO Kagemasa Kozuki (70) founded Konami as an arcade games producer in 1969. Kozuki owns 28% of the company.

¥9 billion of net cash at yearend 2010.

INVESTMENT RISKS & CONCERNS Emergence of the Internet as a medium for

creative collaboration and games distribution threatens the company’s competitive advantages.

Gaming software business depends on “hit” products and is vulnerable to new entrants such as online-based gaming providers. Konami’s content ownership and online gaming efforts mitigate this.

Losses in non-core fitness club operations destroy value and divert management attention. A turnaround and subsequent sale should be pursued.

Sony devices drive 50+% of video game unit sales.


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 revenue 1% 7% 6% 4% -15% -1% employees (end) 13% 1% 6% 3% 1% n/a assets (end) -1% 1% 5% - % -1% 1% Revenue (¥bn) 262 280 297 310 262 188 % of revenue by segment: Digital entertainment 62% 59% 60% 60% 54% 52% Health & fitness 31% 32% 29% 29% 33% 34% Gaming & system 4% 6% 6% 6% 8% 8% Other/eliminations 3% 4% 5% 5% 6% 6% Revenue growth by selected segment: Digital entertainment 1% 1% 8% 5% -24% -3% Health & fitness 3% 9% -2% 4% -5% 1% EBIT margin by selected segment: Digital entertainment 21% 18% 20% 22% 15% 13% Health & fitness -21% 9% 6% -9% -2% 2% Gaming & system 1% 13% 15% 19% 23% 26%

Total EBIT margin2 1% 10% 11% 9% 7% 9% Japan as % of sales3 74% 74% 74% 72% 76% 75% Selected items as % of revenue: Gross profit 30% 31% 31% 31% 29% 27% EBIT – adjusted4 8% 10% 11% 12% 8% 9% Net income 9% 6% 6% 4% 5% 5% Net cash from ops 9% 11% 10% 10% 5% 9% D&A 5% 4% 4% 4% 5% 5% Capex 6% 3% 4% 3% 2% 4% Employees (end) (k)5 5.1 5.2 5.5 5.6 5.7 n/a Return on tang. equity 28% 15% 16% 9% 11% 10%6 Tangible equity/assets 32% 45% 47% 48% 51% 51% shares out (end) 12% 0% 0% -7% 0% 0%

1 Based on U.S. GAAP. TBV=tangible book value. 2 Includes corporate costs and EBIT of “other/eliminations” segment. 3 Based on where the company sold products or rendered services. 4 Excludes restructuring and impairment charges. 5 On full-time basis (excl. ~7,400 part-time staff at 3/2010). 6 Annualized.



ATVI 13,030 9,520 2.1x 5.4x 16x 13x

ERTS 6,820 4,850 1.4x 6.3x 30x 24x

TTWO 1,330 1,140 1.0x 4.6x 18x 14x

THQI 290 280 .4x 2.5x n/m 14x

KNM 2,730 2,620 .8x 1.8x 15x 12x

MAJOR HOLDERS (notable non-trustees only) Founder and CEO Kozuki 28% | Other insiders <1% | MUFJ 4% | AllianceBernstein <1% | Jane Street <1% | DFA <1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Under the direction of CEO and founder Kagemasa Kozuki, Konami has expanded from an arcade games producer in the 1970s to one of the world’s major gaming companies, with a strong franchise in video game software publishing. Despite conglomerate tendencies, including a loss-making foray into fitness clubs, Kozuki remains incentivized to create long-term value as the largest shareholder with 28%. Recent valuation is attractive relative to the earning power inherent in Konami’s businesses.



KONAMI – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE


Valuation methodology Sum-of-the-parts

(see detailed assumptions below)

Sum-of-the-parts (see detailed

assumptions below)

Sum-of-the-parts (see detailed

assumptions below)

Digital Entertainment (video game development):

Normalized revenue1 ¥125 ¥150 ¥175


Estimated normalized EBIT ¥13 ¥23 ¥35


Estimated enterprise value of Digital Entertainment (A) ¥125 ¥225 ¥350

implied EV-to-trailing segment revenue 0.9x 1.6x 2.5x

implied EV-to-trailing segment EBIT 6.9x 12.5x 19.4x

Health & Fitness (operation of fitness clubs):





Estimated enterprise value of Health & Fitness (B) ¥43 ¥64 ¥85


implied EV-to-prior peak segment EBIT (year ended March ‘07) 5.7x 8.5x 11.3x

Gaming & System (manufacture of casino gaming machines):





Estimated enterprise value of Gaming & System (C) ¥23 ¥40 ¥63


implied EV-to-trailing segment EBIT 4.9x 8.7x 13.6x

Other/Corporate (other businesses and corporate activities):

Trailing segment EBIT (¥3) (¥3) (¥3)


Estimated value drag of Other/Corporate (D) (¥30) (¥30) (¥30)

Estimated total enterprise value = (A) + (B) + (C) + (D) ¥160 ¥299 ¥468




Estimated fair value of the equity of Konami (¥ in billions)8 ¥161 billion ¥300 billion ¥469 billion


Estimated fair value of the equity of Konami (US$ in billions)8 $1.9 billion $3.6 billion $5.6 billion






Implied EV-to-trailing EBITDA 5.2x 9.8x 15.3x

Implied EV-to-trailing EBIT 8.8x 16.5x 25.8x


1 Calendar year 2010 revenue is ¥140 billion. Revenue averaged ¥167 billion during fiscal years 2006-10 (ended March 2010). 2 Calendar year 2010 EBIT margin is 13%. EBIT margin averaged 19% during fiscal years 2006-10. 3 Calendar year 2010 revenue is ¥86 billion. Revenue averaged ¥86 billion during fiscal years 2006-10. 4 Calendar year 2010 EBIT margin is -2%. EBIT margin averaged -4% during fiscal years 2006-10, with a peak of 9% in FY07 and a trough of -21% in FY06. 5 Calendar year 2010 revenue is ¥20 billion. Revenue averaged ¥17 billion during fiscal years 2006-10. 6 Calendar year 2010 EBIT margin is 23%. EBIT margin averaged 14% during fiscal years 2006-10. 7 Based on balance sheet values at yearend 2010. 8 Based on 133 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 9 Based on dividend guidance of ¥32 per share for the fiscal year ended March 2011.




KONAMI – A CLOSER LOOK AT THE DIGITAL ENTERTAINMENT BUSINESS Operating income by segment:

Recent Digital Entertainment segment performance:

Video game unit sales:

Source: Company presentation dated February 3, 2011.



Kubota (Tokyo: 6326, NYSE: KUB) Capital Goods: Construction & Agricultural Machinery Osaka-shi, OS, Japan, 81-6-664-2622 www.kubota.co.jp














per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 11,176 11,817 12,809 13,550 13,876 13,310 11,185 11,458 2,745 2,776

Gross profit 2,742 3,244 3,747 3,999 3,972 3,573 2,996 3,130 730 793

Operating income 259 1,038 1,450 1,560 1,564 1,132 836 1,038 226 290

Net income 141 1,417 974 919 818 578 509 666 140 221

Diluted EPS 0.55 4.73 3.71 3.61 3.16 2.26 2.00 2.66 0.55 0.87

Shares out (avg) 268 265 261 259 258 255 254 254 254 254

Cash from operations 1,317 804 1,056 1,164 1,083 (271) 1,431 1,305 427 165

Capex 318 250 309 412 430 396 320 313 97 76

Free cash flow 999 554 747 752 654 (667) 1,111 992 330 89

Cash & investments 1,012 896 1,104 993 1,067 835 1,339 1,276 1,165 1,276



Total assets 13,512 14,339 16,891 18,058 17,598 16,656 16,935 16,764 16,749 16,764

Short-term debt 1,889 2,648 2,594 2,768 2,407 2,511 2,092 2,159 2,352 2,159


Long-term debt 1,741 1,412 1,827 1,804 2,211 2,507 2,925 2,388 2,770 2,388



Common equity 4,700 5,781 7,289 7,928 7,789 6,950 7,528 7,642 7,240 7,642



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BUSINESS OVERVIEW Machinery manufacturer Kubota has two key segments:

Farm & Industrial Machinery (69% of CY10 revenue): manufactures agricultural machinery and engines (~90% of segment revenue) as well as construction machinery such as excavators. 60+% of segment revenue is from outside Japan.

Water & Environment Systems (21%): manufactures pipes (~65% of segment revenue) such as ductile iron pipes for water supply and sewage systems. ~90% of segment revenue is from Japan (mainly from government customers). INVESTMENT HIGHLIGHTS

One of the largest manufacturers of agricultural machinery worldwide. Farm machinery and engines represent ~80% of EBIT (before corporate costs).

Diesel engine know-how provides competitive advantages, and is likely a key driver of 15+% segment EBIT margins. Engines are used in own machinery as well as sold to other manufacturers.

Investments and finance receivables represent ~50% of market value. Monetizing and returning these non-core assets to shareholders would leave net debt/trailing EBITDA at a still reasonable ~2.5x.

Consistent dividends and some share buybacks, as well as improving governance under Chairman and CEO Yasuo Masumoto (64).

Expanding profitably into non-Japanese markets (~50% of revenue), including the U.S. and Asia.

INVESTMENT RISKS & CONCERNS Shares appear fairly valued at 1.5x tangible book

and ~17x calendar year 2010 net income of ~¥55 billion (~15% below FY06-10 average net income).

Japanese revenue (~50% of total) has declined every year since ‘06. If this does not reverse, growth will depend on a continued boom in China and other emerging markets. A stronger yen is a negative.

Financing business ties up capital and is a source of credit risk. Net finance receivables of ~¥300 billion, which arise due to Kubota’s financing of its equipment sales, represent 30+% of market value.



CAT 70,540 95,370 2.2x 9.5x 18x 13x

DE 40,100 60,830 2.2x 7.4x 15x 13x

KMTUY 33,860 39,210 1.9x 3.8x 18x 14x

CNH 11,400 22,730 1.4x 2.5x n/a n/a

KUB 12,100 15,370 1.3x 1.6x 18x 16x


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 revenue 7% 6% 2% -4% -16% 1% employees (end) 1% 3% 3% 3% -1% n/a assets (end) 18% 7% -3% -5% 2% 0% TBV/share (end 2 % 9% -1% -10% 8% 6% Revenue (¥tn)2 1.1 1.1 1.2 1.1 0.9 0.7 % of revenue by selected se ment: Farm & ind. machinery 63% 66% 69% 68% 66% 72% Other3 37% 34% 31% 32% 34% 28% Revenue growth by selected segment: Farm & ind. machinery 16% 11% 6% -5% -18% 7% Other -5% -3% -5% -2% -11% -12% EBIT margin by selected segment: Farm & ind. machinery 16% 17% 17% 14% 10% 15% Other 7% 6% 5% 4% 8% 5% Corporate -1% -2% -1% -1% -2% -2% Total EBIT margin 11% 12% 12% 9% 7% 10% % of revenue by destination: Japan 62% 57% 53% 53% 58% 50% North America 27% 29% 29% 25% 19% 20% Asia

11% 6% 7% 11% 15% 18%

Other 8% 12% 11% 8% 12% Revenue growth by selected destination: Japan 0% -3% -5% -3% -7% -4% North America 23% 14% 2% -16% -38% 5% Asia n/a n/a 12% 54% 11% 10% EBIT margin by selected destination (before corporate costs): Japan 16% 15% 15% 9% 10% n/a North America 9% 11% 11% 10% 8% n/a Asia n/a 13% 12% 12% 11% n/a Selected items as % of revenue: Gross profit 29% 30% 29% 27% 27% 28% EBIT 11% 12% 12% 9% 7% 10% Net income 8% 7% 6% 4% 5% 6% Net cash from ops 8% 9% 8% -2% 13% 10% D&A 2% 2% 3% 3% 3% 3% Capex4 2% 3% 3% 3% 3% 3% TBV/share (end) (¥) 467 511 506 455 493 500 Return on tang. equity 15% 12% 10% 8% 7% 9%5 Tangible equity/assets 42% 44% 44% 43% 43% 44% shares out (end) 0% -1% -1% -1% 0% 0%

1 Based on U.S. GAAP. TBV=tangible book value. 2 Includes finance income from owned finance receivables. Net finance income of ¥11 billion represented ~5% of gross profit and ~15% of EBIT in FY10. Net finance receivables of ~¥300 billion represent ~20% of assets as of 12/31/2010. 3 Includes 1) Water & environment systems; 2) Social infrastructure; and 3) Other. 4 Excludes net changes in owned finance receivables. 5 Annualized. MAJOR HOLDERS (notable non-trustees only) Insiders <1% | MUFJ 8% | Nippon Life 6% | Meiji Yasuda Life 5% | Sumitomo Mitsui 4% | Mizuho 3% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Agricultural machinery producer Kubota has a track record of decent profitability and return of capital to shareholders. Like Caterpillar and Deere, the company is benefiting from booming demand in China and the rest of Asia. While the shares are not as expensive as those of its U.S.-based counterparts, they are not a bargain trading at a trailing P/E of 17x and 1.5x tangible book. The margin of safety is insufficient to compensate for cyclical end-markets as well as credit risk in the financing business.



KUBOTA – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



10x estimated ~¥70 billion of normalized EBIT of the industrial business plus/minus other assets/liabilities

(including assets/liabilities of the

financing business)



financing business)



financing business)

Industrial business:

Normalized revenue2 ¥900 ¥1,000 ¥1,100




Estimated enterprise value of industrial business ¥720 ¥1,000 ¥1,320

Other assets/liabilities:4

Plus: Cash 106 106 106

Plus: Investments and finance receivables5 426 426 426

Plus: Excess real estate6 0 0 0

Minus: Debt (365) (365) (365)

Minus: Net post-retirement liability (34) (34) (34)

Minus: Non-controlling interest (48) (48) (48)

Estimated fair value of the equity of Kubota (¥ in billions)7 ¥805 billion ¥1,085 billion ¥1,405 billion

¥630 per share ¥850 per share ¥1,100 per share

Estimated fair value of the equity of Kubota (US$ in billions)7 $9.5 billion $12.8 billion $16.6 billion






1 While Kubota’s core business is the manufacture and sale of farm machinery, the company also provides retail finance and finance leases to customers “in order to facilitate machinery sales.” Our valuation accounts for this by valuing the industrial business separately. We then add owned finance receivables and subtract the related debt to/from our EV estimate for the industrial business. Although our approach is quite crude, it highlights the different sources of value within Kubota. 2 Average revenue during FY06-10 is ¥1,077 billion. Management’s revenue guidance for the year ended March 2011 is ¥960 billion (up 3% y-y). Finance income from owned finance receivables (~¥20 billion in FY10) is included in these revenue figures, but excluded in our normalized revenue estimate. 3 Average EBIT margin during FY06-10 is ~10%. Management’s EBIT guidance for the year ended March 2011 is ¥90 billion (up ~30% y-y), which implies an EBIT margin of ~9%. As our valuation excludes the contribution from the financing business, our normalized EBIT margin estimates are not directly comparable. Net finance income related to owned finance receivables (included in gross profit) was ~¥11 billion in FY10, which represents ~1% of FY10 revenue. 4 Based on balance sheet values as of December 31, 2010. 5 Includes an estimated ~¥125 billion of investments (primarily in available-for-sale equity securities). The remainder is represented by net finance receivables of the company’s financing business. 6 While we do not include any value for excess real estate, Kubota may have significant real estate that could be monetized. The company owns ~2.5 million square meters of land (~300,000 square meters of floor space) in Japan, “used for the head office, branches, business offices and research facilities.” This is in addition to 4+ million square meters of land (~1.2 million square meters of floor space) underlying the company’s manufacturing facilities, primarily in Japan. 7 Based on 1,272 million common shares outstanding (1 ADS = 5 shares). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥85. 8 Based on a per share dividend of ¥14 as forecast by management for the fiscal year ended March 2011.




KUBOTA – A LOOK AT RETURN OF CAPITAL TO SHAREHOLDERS

(¥ in billions) YTD

FYE March 31 2006 2007 2008 2009 2010 12/31/10

Cash dividends 11.8 14.3 16.8 19.2 17.8 15.3

Purchases of treasury stock 14.9 8.5 8.0 5.3 0.2 0.0

Total return of capital 26.7 22.8 24.8 24.5 18.0 15.3

Cumulative return of capital (FY2006-11) 132.1

as a % of recent market value 14%

recent dividend yield1 2%

Cash dividends per share (¥)2 9 11 13 15 14 12

cash dividends per share 50% 22% 18% 15% -7% -14%

1 Based on management guidance for a dividend of ¥14 per share for the fiscal year ended March 31, 2011. 2 Based on dividends paid during the stated fiscal year. Source: Company data, The Manual of Ideas analysis. KUBOTA – A LOOK AT THE FINANCING BUSINESS

(¥ in billions) FYE March 31 (at period-end) 2007 2008 2009 2010

Retail receivables 254 274 219 212

Finance leases 18 40 59 107

Total finance receivables - gross 272 313 278 319

Less: Unearned income 3 7 10 16

Less: Allowance for credit losses 1 1 2 2

Total finance receivables - net 268 305 267 301

Y-Y change in gross finance receivables 272 42 -35 40

as a % of revenue 24% 4% -3% 4%

Period-end net finance receivables as a % of:

...assets 18% 21% 19% 21%

...shareholders’ equity 41% 47% 46% 48%

Related finance income and expenses (for the fiscal year):1

Finance income (included in revenue) 22 28 23 21

Less: Finance expenses (included in cost of revenue) 12 15 12 10

Net finance income (included in gross profit) 10 12 12 11

as a % of gross profit 3% 4% 4% 5%

as a % of EBIT 8% 9% 11% 16%

1 Excludes interest income and expenses related to cash, investments and other debt. Source: Company data, The Manual of Ideas analysis. KUBOTA – MANAGEMENT GUIDANCE FOR THE JUST-COMPLETED FISCAL YEAR

Source: Company press release dated February 4, 2011.



Kyocera (Tokyo: 6971, NYSE: KYO) Technology: Electronic Instruments & Controls Fushimi-ku,, KY, Japan, 81-75-604-3500 www.kyocera.co.jp














per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 13,711 14,190 14,104 15,431 15,509 13,564 12,906 15,420 3,426 3,840

Gross profit 3,372 3,913 4,068 4,608 4,888 3,509 3,435 4,503 984 1,145

Operating income 1,297 1,212 1,156 1,624 1,829 436 765 1,777 350 457

Net income 818 552 838 1,280 1,289 355 482 1,386 117 382

Diluted EPS 4.38 2.94 4.23 6.46 6.80 1.89 2.63 7.68 0.64 2.08

Shares out (avg) 187 187 188 188 189 188 184 184 184 184

Cash from operations 752 1,749 2,056 1,799 2,367 1,175 1,654 1,707 14 (110)

Capex 708 772 1,226 877 941 1,024 485 799 93 225

Free cash flow 45 977 830 922 1,426 151 1,168 908 (78) (335)



Intangible assets 504 528 752 692 837 1,482 1,409 1,276 1,440 1,276

Total assets 21,570 20,979 23,214 25,605 23,758 21,319 22,219 22,365 21,531 22,365

Short-term debt 1,554 1,329 1,289 254 129 299 211 160 217 160


Long-term debt 849 403 401 88 100 343 349 282 374 282



Common equity 13,866 14,120 15,493 18,203 17,441 15,909 16,168 16,453 15,879 16,453



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BUSINESS OVERVIEW Kyocera produces components and equipment used mainly for IT and telecommunications. It has three main segments:

Components (~55% of revenue; 17% EBIT margin):* includes the original business of manufacturing electronic device components such as capacitors, ceramic packages and sapphire substrates. Over time, Kyocera has expanded into the production of applied ceramic products, including cutting tools, medical applications, jewelry and solar energy products.

Equipment (~35% of revenue; 6% EBIT margin): built largely through M&A, this segment provides mobile phones and telecommunication equipment such as PHS handsets and base stations (notable acquisitions include the CDMA mobile phone business from QUALCOMM in 2000 and the mobile phone business of Sanyo Electric in 2008). The segment is also a provider of copiers, Ecosys printers and other office information equipment through Kyocera Mita Corporation.

Other (~10% of revenue; 7% EBIT margin): includes telecom engineering, management consulting, chemical materials, electrical insulators, real estate and other businesses. INVESTMENT HIGHLIGHTS

Component and equipment provider to the IT and telecommunications industries with strong expertise in ceramic materials and applications.

Commodity businesses mask more valuable segments such as applied ceramic parts (15+% of revenue). This business, which includes solar cell products, medical implants, and cutting tools, is higher-margin, faster-growing and less cyclical.

Implied EV-to trailing EBIT is <5x despite management projecting 8% y-y EBIT growth to ¥168 billion in the year ended March 2012. Revenue guidance is ¥1,360 billion (up 7% y-y).

Net cash and investments of ¥870 billion represent ~55% of market cap. Price to tangible book is 1.2x.


Recent record profitability may not be sustained due to cyclical and commoditization risks. EV-to-average five-year EBIT is 7-8x, which appears appropriate for most Kyocera’s businesses.

Net cash and investments are unlikely to be returned to shareholders. Roughly half of the ~¥640 billion of investments is represented by a 13% equity stake in KDDI, a major telco provider and key customer accounting for ~10% of revenue.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | MUFJ 7% | Bank of Kyoto 4% | Kazuo Inamori (founder) 4% | Scout <1% | RenTech <1%

SELECTED OPERATING DATA1 FYE March 31 2006 2007 2008 2009 2010 2011 revenue 0% 9% 1% -13% -5% 18% employees (end) 5% 3% 5% -10% 7% 4% assets (end) 11% 10% -7% -10% 4% 5% TBV/share (end) 8% 18% -6% -10% 2% 7% TBV/share (end) (¥) 6,532 7,723 7,293 6,540 6,692 7,157 Revenue (¥bn) 1,174 1,284 1,290 1,129 1,074 1,267 % of revenue by segment: Electronic devices 22% 22% 23% 20% 19% 19% Applied ceramic 10% 10% 12% 13% 15% 16% Semiconductor parts 12% 12% 12% 12% 13% 14% Fine ceramic parts 6% 6% 6% 5% 5% 6% Total components 50% 51% 53% 51% 51% 55% Information equipment 21% 21% 21% 20% 22% 19% Telco equipment 20% 20% 17% 19% 18% 18% Total equipment 41% 40% 39% 40% 39% 37% Other 11% 11% 11% 11% 12% 11% Adjustments -2% -2% -2% -2% -2% -2% Revenue growth by selected segment: Total components 4% 12% 4% -15% -5% 26% Total equipment -3% 9% -4% -10% -6% 10% Adj. EBIT margin by segment:2 Electronic devices 10% 16% 12% -2% 7% 17% Applied ceramic 19% 17% 22% 18% 13% 15% Semiconductor parts 13% 15% 13% 6% 12% 21% Fine ceramic parts 16% 19% 14% 0% -1% 16% Total components 13% 16% 15% 6% 9% 17% Information equipment 11% 13% 14% 6% 10% 11% Telco equipment -1% 0% 3% -8% -8% 1% Total equipment 5% 7% 9% -1% 2% 6% Other 2% 5% 7% 11% 5% 7% Corporate -1% -1% 0% 0% 0% 0%

Adj. EBIT margin 8% 11% 12% 4% 6% 12% % of revenue by geographic destination: Japan 40% 39% 39% 42% 44% 45% Non-Japan 60% 61% 61% 58% 56% 55% Selected items as % of revenue: Gross profit 29% 30% 32% 26% 27% 30% R&D 5% 5% 5% 6% 5% 4% Special items3 1% 0% 0% -1% 0% 0% Net income 6% 8% 8% 3% 4% 10% Net cash from ops 15% 12% 15% 9% 13% 9% D&A 6% 6% 7% 9% 7% 6% Capex4 9% 6% 6% 8% 4% 6% Return on tang. equity 6% 8% 8% 2% 3% 10% Tangible equity/assets 66% 68% 71% 73% 72% 71% shares out (end) 0% 0% 0% -3% 0% 0%

1 Based on U.S. GAAP. TBV=tangible book value. 2 Excludes special items and equity in earnings/loss of affiliated companies. 3 Includes gains/losses on foreign currency and securities’ sales, as well as impairments of securities, and other items. 4 Includes purchases of intangibles.

RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends? * Financials are based on the year ended March 2011.

THE BOTTOM LINE Kyocera’s profitability has improved to record levels as a result of higher demand from customers including electronic equipment manufacturers and telecom operators. While this makes the shares look cheap on recent financials, the valuation is not compelling using more normalized profitability. We would be more favorable if management were to use its strong balance sheet to return capital to shareholders. As this appears unlikely, the risk-reward may be lower than it appears.



KYOCERA – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE




FY06-11 average EBIT)









Estimated enterprise value ¥720 ¥960 ¥1,200





Estimated fair value of the equity of Kyocera (¥ in billions)5 ¥1,500 billion ¥1,740 billion ¥1,980 billion


Estimated fair value of the equity of Kyocera (US$ in billions)5 $18.1 billion $21.0 billion $23.9 billion



Implied forward earnings yield6 7% 6% 6%

Implied EV-to-forward revenue6 0.5x 0.7x 0.9x

Implied EV-to-forward EBIT6 4.3x 5.7x 7.1x

Implied EV-to-EBIT based on FY06-11 average EBIT 6.7x 8.9x 11.1x



Implied dividend yield7 2% 1% 1% 1 Average revenue during FYE March 2006-11 is ~¥1,200 billion with a peak of ~¥1,300 billion in FY08 and a trough of ~¥1,050 billion in FY09. Note that this approximates revenue for the year ended March 2011 and is ~13% below management guidance of ¥1,360 billion for the year ended March 2012 (up 7% y-y). 2 Average EBIT margin during FY2006-11 is ~9%, with a peak of 12% in FY08 and a trough of 4% in FY09. Management’s EBIT guidance for the fiscal year ended March 2012 is ¥168 billion (up 8% y-y), which implies an EBIT margin of 12%. 3 Our “normalized” EBIT of ¥120 billion approximates the average EBIT during FY06-11, which we believe is representative of “through-the-cycle” earnings for the company. Note that our “normalized” EBIT figure is ~20% below trailing EBIT and ~30% below management’s EBIT guidance for the year ended March 2012. 4 Based on balance sheet values as of March 31, 2011. 5 Based on 184 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 6 Based on management guidance for the year ended March 2012. 7 Based on management’s dividend guidance of ¥130 per share for the fiscal year ended March 2012 (flat y-y). Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

KYOCERA – MANAGEMENT GUIDANCE FOR THE YEAR ENDING MARCH 31, 2012

“Kyocera expects that the Asian economy, led by China, will continue to grow and that the economies of Europe and the United States will maintain steady growth in the year ending March 31, 2012 (‘fiscal 2012’). However, Japanese economy will temporarily slow as a result of the Great East Japan Earthquake, and it requires some time until supply chain systems including procurement of raw materials and components will be normalized. Consequently, Kyocera anticipates that stagnated production in Japan may negatively affect the global economy from now on. In spite of a considerable uncertainty regarding the financial forecast 2012, Kyocera will seize market demand and aim to expand the sales and profit in each business. At this point, Kyocera announces following full-year financial forecast for fiscal 2012.”

Source: Consolidated Financial Results of Kyocera Corporation and its Subsidiaries for the Year Ended March 31, 2011.



KYOCERA – SELECTED SEGMENT INFORMATION

Source: Consolidated Financial Results of Kyocera Corporation and its Subsidiaries for the Year Ended March 31, 2011.



Mitsubishi UFJ Financial (Tokyo: 8306, NYSE: MTU) Financial: Regional Banks Chiyoda-Ku, TK, Japan, 81-3-324-8111 www.mufg.jp





Shares out: 14,347.1 million Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a

Ownership Data FYE 3/31/11 0.47 0.47 1 P / tangible book 0.8x

Insider ownership: 0% FYE 3/30/12 0.47 0.47 1 Latest EPS Surprise

Insider buys (last six months): 0 FYE 3/30/13 n/a n/a n/a Report date: 7/30/10

Insider sales (last six months): 0 LT growth 11.7% 11.7% 1 Estimated EPS: n/a

Institutional ownership: 2% Actual EPS: n/a



per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 9/30/10 9/30/08 9/30/10

Interest income 16,791 16,991 29,887 46,244 51,571 46,009 32,578 31,691 23,691 15,251

Interest expense 5,037 5,546 10,417 18,730 24,648 18,889 9,146 21,602 10,471 4,039

Pretax income 13,851 8,410 3,807 10,074 (47) (20,685) 14,705 9,752 (7,877) 11,284

Net income 9,625 4,822 1,852 3,546 (6,578) (17,616) 9,898 4,190 (5,063) 6,845

Diluted EPS 1.48 0.74 0.22 0.35 (0.64) (1.63) 0.80 0.90 (0.49) 0.48

Shares out (avg) 6,350 6,510 8,121 10,053 10,306 10,821 12,324 12,777 10,438 14,133

Cash from ops 7,295 2,451 4,182 18,459 6,536 (11,411) 27,281 34,368 (33,055) (19,432)

Cash 36,752 49,843 73,638 33,628 48,311 36,271 33,806 34,610 51,988 34,610

ST investments 235,668 235,544 311,544 354,774 495,907 531,374 519,123 585,899 545,206 585,899

LT investments 341,438 340,043 567,425 576,104 491,762 434,808 637,618 662,520 356,417 662,520

Fixed assets, net 6,851 6,722 13,860 13,552 12,705 12,323 11,753 11,489 12,471 11,489

Loans, other assets 600,529 644,286 1,193,215 1,184,245 1,234,788 1,251,868 1,142,983 1,095,217 1,257,691 1,095,217


Total assets 1,224,672 1,280,450 2,199,226 2,199,031 2,311,970 2,285,201 2,362,969 2,406,623 2,251,632 2,406,623

Short-term debt 124,766 96,356 135,930 170,165 227,654 199,070 200,293 227,535 188,893 227,535

Long-term debt 66,842 70,644 164,033 169,943 161,503 156,756 167,256 158,942 161,140 158,942

Deposits, other liab. 987,655 1,061,804 1,785,083 1,735,707 1,822,546 1,855,742 1,890,703 1,916,279 1,810,131 1,916,279

Preferred stock 1,619 2,918 2,918 2,918 2,918 5,221 5,221 5,221 2,918 5,221

Common equity 43,790 48,728 111,261 120,298 97,349 68,412 99,496 98,646 88,549 98,646


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BUSINESS OVERVIEW Mitsubishi UFJ is one of the world’s largest banks. INVESTMENT HIGHLIGHTS

One of three Japanese “mega banks” next to Sumitomo Mitsui (SMFG) and Mizuho (MFG).* The company was formed in 2005 via the merger of Japan’s #2 bank, Mitsubishi Tokyo, and #4, UFJ.

Valuable retail banking franchise, with customer deposits representing two thirds of total assets (~85% of deposits are Japan-based; ~55% are from individuals). The large retail and commercial banking operations, relative to investment banking, potentially make the franchise more valuable.

~25% discount to tangible book may be too high relative to ROE prospects and risk profile. ROE, which averaged ~10% over the last two years, may be sustained at that level in the future (implies a recent P/E of 6x). While tangible equity is <4% of assets, a focus on traditional banking (versus trading) and the home market in Japan may mitigate risk.

Japan represents ~75% of total assets of ~¥200 trillion and nearly 80% of total gross loans of ~¥85 trillion. Roughly three quarters of total interest and non-interest income relate to Japanese income.

Earthquake-related reconstruction may accelerate shift “from risk management to growth,” a stated focus of new CEO Katsunori Nagayasu (63). Risk-adjusted ROEs for construction loans may be high.

Shrewd overseas strategy? Management has shown a contrarian mindset by making a $9 billion preferred equity investment in Morgan Stanley in 2008 (for a 20% fully diluted stake) and acquiring two FDIC-seized U.S. community banks in 2010.**

INVESTMENT RISKS & CONCERNS Tangible book value per share declined ~15%

since 2006. While shares trade well below tangible book, this may be justified if future ROEs mirror the past. Recent ROEs, however, are more encouraging.

Balance sheet risks include non-performing loans (~20% of tangible book) and credit default swaps (notional amount is ~50% of tangible book). Off-balance sheet exposure via derivatives is significant.

Market-related risks include potentially rising interest rates (Japan gov’t bonds are ~20% of assets). Non-Japan investors are also exposed to a potentially weaker yen (most assets are yen-denominated).

* Japan Post, a government-run entity and the world’s largest holder of deposits, is another key competitor in the domestic market. ** Acquired indirectly via the company’s ownership of Union Bank, which ranks fifth and 21st in deposits in California and the U.S., respectively.


FYE March 31 2007 2008 2009 2010 YTD2

12/31/10 tangible BV/share (end) 10% -18% -32% 35% 3% assets (end) 0% 2% 1% 3% 1% employees (end) -2% 0% 2% -1% n/a net interest income 41% -2% 1% -14% -9% TBV/share (end) ¥651 ¥537 ¥362 ¥490 ¥507 Assets (¥tn) 186.2 1 0.7 193.5 200.1 202.6 Selected items as % of total assets: Loans, net 51% 51% 5 % 45% 42% Other assets 49% 49% 49% 55% 58% Customer deposits 68% 68% 66% 68% 64% Other liabilities 27% 28% 31% 28% 32% Common equity 5% 4% 3% 4% 4% Revenue (¥tn)3 4.3 4.1 2.5 4.4 3.5 % of revenue by type: Net interest income 54% 56% 93% 45% 43% Non-interest income 46% 44% 7% 55% 57% % of revenue by major segment (based on JGAAP): Retail banking 33% 37% 40% 40% n/a Corporate banking 53% 50% 50% 43% n/a Trust assets 5% 5% 5% 4% n/a Global markets 8% 8% 12% 15% n/a Adj. pre-provision income margin by selected segment (based on JGAAP):4 Retail banking 33% 29% 26% 31% n/a Corporate banking 53% 48% 47% 43% n/a Trust assets 46% 50% 45% 42% n/a Global markets 84% 80% 84% 88% n/a

Pre-provision profit margin 44% 38% 34% 39% 35% Selected income statement items (¥tn): Pre-provision profit 1.5 0.4 -1.1 1.9 1.2 Loss provision 0.4 0.4 0.6 0.6 0.3 Net income to common 0.3 -0.6 -1.5 0.8 0.5 Loan loss reserve ratio 1.2% 1.1% 1.2% 1.4% n/a NPLs/gross loans5 1.8% 1.7% 1.8% 2.2% n/a Net interest margin 1.2% 1.2% 1.2% 1.1% n/a ROE (as reported)6 2.8% -5.6% -18.5% 10.7% 8.8% Tang. equity/assets (end) 3.9% 3.1% 2.2% 3.5% 3.6% Tier 1 capital ratio (JGAAP) 7.6% 7.6% 7.8% 10.6% 11.7% shares out (end) 6% 0% 7% 21% 0%

1 Based on U.S. GAAP, unless stated otherwise. 2 YTD figures reflect Japanese GAAP (not comparable to FY07-10 figures). The company reports U.S. GAAP figures only for September/March period-ends. 3 Stated net of interest expense. 4 Reflects “operating profit” per JGAAP (excludes, among others, provisions for credit losses, gains/losses on trading assets/securities and foreign exchange). 5 Includes nonaccrual/restructured loans, and accruing loans past due 90 days. 6 YTD figure is annualized. ROE is based on returns to common equity.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Nippon Life 2% | Meiji Yasuda Life 1% | Toyota 1% | Fisher <1% | Brandes <1% | Thornburg <1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Mitsubishi UFJ is one of the dominant players in Japanese banking. A strong domestic deposit base has enabled it to not only withstand the 2008/09 crisis, but to expand overseas, including via a $9 billion investment in Morgan Stanley in 2008. While poor historic returns on equity explain a valuation well below tangible book, the latter may not properly reflect recent improvements in ROE and capital ratios. Earthquake-related reconstruction could provide incremental growth opportunities.



MITSUBISHI UFJ FINANCIAL – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE


Valuation methodology 1.0x tangible common

equity

10x “normalized” net income to common

(based on implied net income assuming a

10% return on common equity)1




Conservative case metrics: Tangible common equity as of 12/31/2010 (estimated) ¥7,179 Fair value multiple 1.0x Estimated equity value ¥7,179 Base case metrics: “Normalized” net income to common (assuming 10% ROE) ¥866 Fair value multiple 10x Estimated equity value ¥8,659 Aggressive case metrics: “Normalized” net income to common (assuming 15% ROE) ¥1,299 Fair value multiple 10x Estimated equity value ¥12,989

Estimated fair value of the equity of MTU (¥ in billions)2 ¥7,179 billion ¥8,659 billion ¥12,989 billion


Estimated fair value of the equity of MTU (US$ in billions)2 $85 billion $102 billion $153 billion

$6.00 per ADS $7.20 per ADS $10.80 per ADS Implied equity fair value to tangible book 1.0x 1.2x 1.8x Implied trailing dividend yield3 2.4% 2.0% 1.3% Implied ratios based on net income to common during… …year to March 2011 (management guidance based on JGAAP) 14.4x 17.3x 26.0x …year to March 2010 (actual reported U.S. GAAP net income) 8.6x 10.3x 15.5x

1 The return on common equity was 11% in the year ended March 2010. Annualized ROE based on the nine months to December 2010 is 9% (including 9% in the December 2010 quarter). Tangible common equity to assets was 3.6% as of yearend 2010. 2 Based on 14.2 billion common shares outstanding (1 ADS = 1 share). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥85. 3 Based on management guidance for a dividend of ¥12 per share for the year ended March 2011. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. MITSUBISHI UFJ FINANCIAL – COMPARISON WITH MIZUHO AND SUMITOMO MITSUI FINANCIAL GROUP

Source: Company presentation dated February 2011.



MITSUBISHI UFJ FINANCIAL – LOANS AND DEPOSITS

MITSUBISHI UFJ FINANCIAL – SELECTED MEASURES OF LOAN QUALITY




Mitsui (Tokyo: 8031, OTC: MITSY) Capital Goods: Misc. Capital Goods Chiyoda-ku, TK, Japan, 81-3-328-1111 www.mitsui.co.jp














per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 34,867 41,019 48,307 56,266 67,362 64,614 48,083 54,730 11,518 13,727

Gross profit 7,172 8,321 9,605 10,168 11,598 11,729 8,240 10,035 2,067 2,530

Operating income 913 1,800 2,738 2,760 3,659 2,453 909 3,136 23 859

Net income 803 1,422 2,376 3,539 4,813 2,085 1,757 3,903 237 1,087

Diluted EPS 11.13 15.93 29.77 38.50 43.64 22.33 19.38 44.62 2.57 11.91

Shares out (avg) 79 79 80 87 90 91 91 91 91 91


Capex 1,329 1,996 2,900 3,842 3,311 2,977 2,725 3,515 839 820

Free cash flow (154) 352 (1,182) (1,034) 1,570 3,862 4,698 2,943 452 186



Intangible assets 1,066 1,224 1,160 1,226 1,508 1,133 995 999 962 999

Total assets 78,831 89,130 100,635 115,187 111,953 98,178 98,233 100,779 98,676 100,779

Short-term debt 13,249 11,982 11,672 13,250 9,632 10,309 7,027 6,565 8,528 6,565


Long-term debt 29,828 34,097 34,167 33,893 34,561 33,351 34,155 33,668 33,345 33,668



Common equity 11,307 13,180 19,695 24,770 25,631 22,087 26,177 26,814 24,809 26,814



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BUSINESS OVERVIEW Conglomerate Mitsui engages mainly in commodities trading and investment activities, with total assets of ¥8.6 trillion.

The main two operating segments (out of a total eleven*) are:

Energy (~18% of assets; ¥126 billion of CY10 net income): owns interests in oil and gas projects. Attributable proved reserves to Mitsui are ~370 million oil-equivalent barrels (~70% natural gas). Mitsui has a 33% share of the Marcellus Shale gas project in the U.S., which is operated by Anadarko.

Mineral & Metal Resources (~12% of assets; ¥141bn of CY10 net income): owns a 5.0% effective interest in Vale’s (VALE) production and reserves. It also includes Australian iron ore mining assets, Chilean copper and other assets.

Other segments (~60% of assets; ¥100bn of CY10 net income) manufacture, trade, and/or finance assets in: 1) Machinery & Infrastructure; 2) Foods & Retail; 3) Chemical; 4) Iron & Steel; 5) Consumer & IT; and 6) Logistics & Financial. Three geographic-focused segments trade commodities in Asia, the Americas and EMEA, respectively. Corporate costs and inter-segment eliminations reduced CY10 net income by ~¥35 bn. INVESTMENT HIGHLIGHTS

Key earnings drivers are iron ore mining and oil/gas production, which contribute a majority of net income. Similar to Glencore, Mitsui is not just a trader of commodities and other products (acting as agent), but takes equity risk as an investor/owner.

Liquid balance sheet. Current assets and investments are ~50% and ~35% of total assets. A 5.0% interest in Vale’s (VALE) production and reserves may be worth ~30% of Mitsui’s recent market value.

Undemanding valuation of 7x run-rate earnings, if F3Q11 net income of ¥93 billion is sustained. A 25% premium to tangible book appears low given a near doubling of tangible book per share since 2005.


Commodities/emerging markets boom (and potential bust?). As cyclical factors drive ROE, a high premium to tangible book may not be justified.

Conglomerate structure hinders focus and value-add. 63% of CY10 net income is from associates, over which Mitsui does not have much control.

Counterparty credit risks due to significant trade receivables, project financing and derivatives.

¥2.0 trillion of net debt at yearend 2010 (~70% of debt is floating rate and ~50% is yen-denominated).

U.S. Gulf of Mexico oil spill liability? To date, BP is seeking ~$3 billion from Mitsui affiliate MOEX.


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 trading transactions2 10% 3% -3% -11% -29% 5% revenue 15% 19% 20% -4% -26% 13% net income 89% 39% 11% -48% -13% 195% TBV/share (end)3 42% 23% 1% -13% 20% 8% assets (end) 13% 14% -3% -12% 0% 2% employees (end) 7% 2% -6% 2% 4% 0% TBV/share (end) (¥) 917 1,124 1,131 980 1,176 1,205 Assets (¥tn) .6 9.8 9.5 8.4 8.4 8.6 Selected items as % of total assets: Investments4 33% 35% 34% 34% 36% 34% Net PP&E 9% 10% 11% 11% 12% 12% Other assets5 58% 54% 55% 54% 52% 54% Debt 41% 40% 39% 44% 41% 39% Other liabilities 39% 39% 38% 34% 32% 34% Common equity 20% 22% 23% 22% 27% 27% Trading transactions (¥tn) 14.9 15.3 14.8 13.1 9.4 7.4 Revenue (¥tn) 4.0 4.8 5.7 5.5 4.1 3.4 Selected items as % of revenue: Gross profit 19% 18% 17% 18% 17% 19% EBIT 7% 7% 8% 5% 3% 8% Net income 5% 6% 6% 3% 4% 8% Net cash from ops 3% 5% 7% 10% 15% 11% D&A 2% 2% 2% 3% 3% 3% Capex 4% 6% 3% 4% 5% 6% Net income by key segment (¥bn): Minerals & metals 45 98 177 90 63 124 Energy 51 76 124 153 84 94 Other 142 141 128 -19 37 88 Eliminations6 -23 -16 -97 -51 -33 -30 Total net income 215 299 333 174 151 276 % from associates 66% 71% 64% 70% 87% 62% Return on tang. equity 17% 17% 16% 9% 8% 17% Tangible equity/assets 16% 20% 21% 22% 24% 25% shares out (end) 9% 4% 2% 0% 0% 0%

1 Based on U.S. GAAP and continuing operations, unless stated otherwise. 2 Represents the aggregate nominal value of the sales contracts in which Mitsui acts as a principal and transactions in which it serves as an agent. 3 TBV=tangible book value. 4 Investments in associated companies represents ~50% of yearend 2010 figure with another ~30% comprised of non-/marketable equity and other securities. 5 95+% of yearend 2010 figure is represented by current assets. 6 Nets out intersegment eliminations, corporate costs, and discontinued ops.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | MUFJ 7% | Sumitomo Mitsui 2% | Nippon Life 2% | Chuo Mitsui 2% | Mitsui Sumitomo Insurance 1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends? * Segments operate worldwide and include both principal activities as well as activities in which Mitsui acts as a trading agent for the respective products.

THE BOTTOM LINE Conglomerate Mitsui has ~300 subsidiaries and ~170 associated companies across various industry sectors, exemplifying the keiretsu corporate structure. While returns on equity have been surprisingly robust through the 2008/09 downturn, Mitsui’s exposure to booming commodities and emerging markets remains a key risk. As earnings are highly dependent on cyclical factors, a valuation at a 25% premium to tangible book may not be justified. We would be more favorable if Mitsui were to monetize the relatively liquid balance sheet, return capital, and focus on activities where it has a sustainable competitive edge.



MITSUI – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



common equity

10x estimated normalized net income of ¥250 billion (approx.

average net income during FY06-10)

10x estimated normalized net income of ¥350 billion (approx. annualized net

income based on December 2010

quarter)


Tangible common equity as of 12/31/2010 ¥2,199


Estimated equity value ¥2,199

Base/aggressive case metrics:

Normalized net income1 ¥250 ¥350

Fair value multiple 10.0x 10.0x

Estimated fair value of the equity of Mitsui & Co. (¥ in billions)2 ¥2,199 billion ¥2,500 billion ¥3,500 billion


Estimated fair value of the equity of Mitsui & Co. (US$ in billions)2 $25.9 billion $29.5 billion $41.3 billion


Implied equity fair value to tangible book 1.0x 1.1x 1.6x





Implied earnings yield based on average net income during FY06-10 11% 9% 7%

1 Average net income to common shareholders was ¥235 billion during FY06-10 with a peak of ~¥335 billion in FY08 and a trough of ~¥150 billion in FY10. Trailing net income through December 2010 is ~¥335 billion. Annualized net income based on the December 2010 quarter is ~¥370 billion (in line with management’s guidance for the fiscal year ended March 2011). Our net income estimates for the base and aggressive cases imply an ROE of 11% and 15%, respectively, based on yearend 2010 shareholders’ equity of ~¥2,285 billion. 2 Based on 1,825 million shares outstanding (1 ADS=20 shares). Estimated fair value in US$ is based on a conversion of the recent exchange rate at 1US$=¥85. 3 Based on a per share dividend of ¥47 forecast by management for the fiscal year ended March 2011.

Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. MITSUI – SNAPSHOT OF TOTAL ASSETS (¥ in billions)

Source: Company data book dated February 2011.



MITSUI – GROSS PROFIT BREAKDOWN (¥ in billions)

MITSUI – NET INCOME BREAKDOWN (¥ in billions)

Source: Company data book dated February 2011.



Nomura Holdings (Tokyo: 8604, NYSE: NMR) Financial: Investment Services Chuo-ku, TK, Japan, 81-3-525-1000 www.nomura.com





Enterprise value: n/m Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a

Shares out: 3,805.5 million FYE 3/31/11 0.12 0.12 1 EV/ LTM revenue n/m








per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 12,514 13,475 21,451 24,517 19,068 7,951 16,233 16,334 3,848 4,619

Gross profit 6,135 5,451 8,836 7,623 3,951 (3,022) 6,442 6,155 1,500 1,540

Operating income 3,382 2,451 5,331 3,850 (777) (9,336) 1,259 1,032 215 332

Net income 2,062 1,133 4,260 2,104 (812) (8,473) 811 421 123 160

Diluted EPS 1.06 0.58 1.60 1.10 (0.43) (4.36) 0.26 0.12 0.03 0.04

Shares out (avg) 1,940 1,941 1,914 1,906 1,908 1,942 3,127 3,245 3,521 3,600

Cash from operations (938) (3,939) (5,194) (19,468) (7,752) (8,526) (17,956) (7,138) (9,205) 7,443

Capex 470 710 1,005 1,218 1,511 1,148 994 2,152 170 636

Free cash flow (1,408) (4,649) (6,199) (20,686) (9,263) (9,675) (18,950) (9,291) (9,375) 6,807


Total current assets 0 0 0 0 0 0 0 0 0 0


Total assets 355,982 412,645 419,072 429,210 301,939 297,175 385,624 398,432 356,660 398,432

Short-term debt 5,230 6,229 8,277 13,084 17,065 14,159 15,574 11,996 14,796 11,996


Long-term debt 28,541 33,831 43,056 59,858 62,508 65,602 86,134 96,341 79,470 96,341



Common equity 21,365 22,355 24,687 26,154 23,787 18,418 25,448 24,665 25,243 24,665

EBIT/capital employed n/m n/m n/m >100% -12% -166% 25% 12% n/m n/m


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BUSINESS OVERVIEW Investment bank Nomura operates in three segments:

Retail (CY2010 pre-tax income: ¥107 billion): receives commissions/fees from investment services to individuals mainly in Japan; fees from asset managers related to trust certificates that it distributes; and commissions from insurers related to products it sells as an agent. Underlying retail client assets increased 2% y-y to ¥72.3 trillion at yearend 2010.

Wholesale (CY2010 pre-tax income: ¥12 billion): formed in April 2010, this new segment consists mainly of former global markets (fixed income, equities and asset finance), investment banking and merchant banking segments.

Asset Management (CY2010 pre-tax income: ¥22 billion): manages investment trusts and provides advisory services. Underlying AUM rose 4% y-y to ¥24.1 trillion at yearend ‘10. INVESTMENT HIGHLIGHTS

Strong position in Japanese securities markets. In Japan, Nomura has ~9% share of equity trading (~17% of the off-floor/exchange market), ~11% of bond trading, and a large presence in underwriting markets. It manages ~20% of publicly offered investment trusts in Japan (40+% of bond trusts).

~25% discount to tangible book is undemanding if management can reach/sustain its ROE target of 10-15% in the “medium to long term.” Return on equity averaged ~10% in FY03-07 (negative since).

May benefit if Japan’s people shift more of their financial assets from savings into investments. Nomura is one of the largest asset managers in Japan and has a significant retail client base.

Seven of the 12 board members are “outside” directors, defined as non-executive directors who have never been employees of the company.


Tangible book value per share declined ~50% since 2006. Most of the value destruction occurred since Kenichi Watanabe (58) became CEO in 2008.

Management’s vision to establish Nomura as a “globally competitive financial services group” may not yield good returns for shareholders. A focus on core capabilities in the Japanese home market may provide better risk-adjusted returns.

Struggling non-Japan operations (~50% of FY10 revenue), which likely do not have a sustainable competitive edge. A weak U.S. presence appears incompatible with management’s stated strategy.

Cyclical and leveraged business model subjects shareholders to significant market-related risks.


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 TBV/share (end)2 12% -2% -6% -45% 0% -1% assets (end) 1% 3% -29% -2% 30% 12% employees (end) 2% 10% 12% 42%3 3% 4% TBV/share (end) (¥) 1,076 1,053 989 541 543 535 Assets (¥tn) 34.7 35.6 25.2 24.8 32.2 33.3 Selected items as % of total assets: Trading assets 39% 37% 42% 47% 46% 45% Collateral. agreements 49% 50% 41% 34% 39% 38% Other assets 11% 13% 17% 19% 16% 17% Trading liabilities 19% 13% 20% 19% 26% 24% Collateral. financing 58% 58% 42% 41% 35% 36% Other liabilities 17% 22% 30% 34% 33% 34% Common equity 6% 6% 8% 6% 7% 6% Revenue (¥tn)4 1.1 1.1 0.8 0.3 1.2 0.8 % of revenue by segment: Retail 39% 40% 51% 93% 34% 36% Global markets 32% 27% 12% -50% 57%

53%5 Investment banking 9% 9% 11% 20% 10% Merchant banking 6% 6% 8% -22% 1% Asset management 6% 8% 11% 19% 6% 7% Other/Eliminations6 8% 10% 7% 40% -8% 4% Pre-tax income margin by segment: Retail 44% 37% 30% 6% 29% 28% Global markets 43% 20% -237% n/m 26%

-5%5 Investment banking 52% 45% 27% -90% 1% Merchant banking 81% 81% 82% n/m 12% Asset management 31% 40% 38% 12% 26% 29% Other6 -3% -3% -9% -28% -18% -3%

Total pre-tax margin 39% 29% -8% -250% 9% 7% Net income margin 22% 16% -9% -227% 6% 2% ROE (as reported)7 16% 8% -3% -40% 4% 1% T. equity/assets (end) 6% 6% 8% 6% 6% 6% Tier 1 ratio (Basel II) n/a n/a n/a 12% 17% 17% Employees (end, 000s) 14.7 16.1 18.0 25.6 26.4 27.2 shares out (end) -2% 0% 0% 37% 41% -2%

1 Based on U.S. GAAP. 2 TBV=tangible book value. 3 In 2008, Nomura acquired the majority of Lehman Brothers’ operations in Asia-Pacific, its equities and i-banking operations in Europe and the Mideast, and hired certain of its fixed income personnel in Europe. Costs incurred totaled $500+ million. 4 Stated net of interest expense. 5 In April 2010, Nomura formed a new segment called “Wholesale.” 6 Includes gain/(loss) on investments in equities, share of affiliate results, impairment losses, corporate items and other financial adjustments. 7 Net income/(loss) attributable to Nomura Holdings, Inc. divided by average total Nomura Holdings, Inc. shareholders’ equity. YTD figure is annualized.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Sunrise Partners <1% | Jefferies <1% | Clearbridge <1% | Bridgeway <1% | SAC <1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Nomura has not been able to parlay its strong position in Japanese securities markets into shareholder value creation. While the 2008/09 financial crisis has not helped, management’s strategy to create a “globally competitive financial services group” puts shareholders’ capital at significant risk. The ill-conceived $1 billion investment into Fortress in 2007 may portend more value-destruction to come in the pursuit of global market share. Given already high market-related risks of a cyclical and leveraged model, a focus on core capabilities in the Japanese home market may provide better risk-adjusted returns.



NOMURA – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



common equity








Tangible common equity as of 12/31/2010 (estimated) ¥1,927



Base case metrics:

“Normalized” net income to common (assuming 10% ROE) ¥206

Fair value multiple 10x


Aggressive case metrics:

“Normalized” net income to common (assuming 15% ROE) ¥309



Estimated fair value of the equity of Nomura (¥ in billions)2 ¥1,927 billion ¥2,061 billion ¥3,092 billion


Estimated fair value of the equity of Nomura (US$ in billions)2 $22.7 billion $24.3 billion $36.5 billion



Implied trailing dividend yield3 1.5% 1.4% 0.9%

Implied ratios based on net income to common during…

…year to December 2010 (based on U.S. GAAP net income) 55x 59x 88x

…December Q annualized (based on U.S. GAAP net income) 36x 38x 58x

Implied equity fair value per employee (in $ millions)4 $0.8 $0.9 $1.3

1 Return on equity averaged ~10% in FY03-07. ROE was 4% in the year ended March 2010. Annualized ROE based on the nine months to December 2010 is 1% (including 3% in the December 2010 quarter). Management targets an average consolidated return on equity of 10-15% “over the medium to long term, subject to change depending on capital regulation developments.” Tangible common equity to assets was 5.8% as of yearend 2010. 2 Based on 3.6 billion common shares outstanding (1 ADS = 1 share). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥85. 3 Based on a trailing dividend of ¥8 per share for the year to September 2010. 4 Based on 27,215 employees as of yearend 2010. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. NOMURA – COMPONENTS OF ROE




NOMURA – RETAIL BUSINESS: COMMISSIONS REVENUE

NOMURA – RETAIL BUSINESS: CLIENT ASSETS

NOMURA – ASSET MANAGEMENT BUSINESS SNAPSHOT




Nippon Telephone and Telegraph (Tokyo: 9432, NYSE: NTT) Services: Communications Services Chiyoda-ku, TK, Japan, 81-3-520-5581 www.ntt.co.jp














per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 130,237 126,837 126,077 126,305 125,370 122,264 119,507 124,629 29,668 29,857

Gross profit 81,572 77,521 77,208 74,703 72,822 73,427 72,054 73,936 18,262 18,174

Operating income 18,315 14,217 13,976 12,994 15,313 13,026 13,119 15,091 3,537 3,972

Net income 7,558 8,336 5,853 5,650 7,455 6,323 5,778 6,240 1,605 1,680

Diluted EPS 2.38 2.69 2.04 2.04 2.71 2.35 2.18 2.45 0.61 0.63

Shares out (avg) 3,171 3,095 2,863 2,764 2,755 2,691 2,647 2,646 2,647 2,646


Capex 20,726 18,910 19,911 18,880 14,786 16,574 16,092 16,021 3,988 3,689

Free cash flow 20,129 14,306 18,153 8,836 21,493 12,936 16,984 18,010 819 734




Total assets 228,122 224,175 221,682 214,697 217,369 220,628 222,302 227,463 218,503 227,463

Short-term debt 13,681 14,110 14,964 14,697 14,410 11,633 12,817 16,702 9,905 16,702


Long-term debt 58,852 52,956 47,466 42,334 40,815 43,889 40,116 39,044 45,225 39,044



Common equity 75,098 79,448 79,577 83,582 86,986 85,664 91,416 94,478 88,884 94,478



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BUSINESS OVERVIEW NTT provides communications services in five segments:

Mobile (~50% of CY10 EBITDA): represents NTT DoCoMo (DCM) in which NTT owns 67%.* DoCoMo is the largest mobile communications provider in Japan, with 57 million subscribers at yearend 2010 (~50% market share).

Regional (~30% of CY10 EBITDA): includes NTT East and NTT West, which provide intra-prefectural fixed voice and broadband services in Japan. NTT is Japan’s largest provider of fixed-line phone services (~36 million lines), and the #1 broadband provider with ~18 million users (50+% share).

Long distance and International (7% of CY10 EBITDA): includes NTT Communications as well as Dimension Data, an IT services provider acquired in 2010.

Data (7% of CY10 EBITDA): provides system integration services mainly through 54%-owned NTT Data Corp.*

Other (5% of CY10 EBITDA): includes the operations of NTT holding company, in addition to other businesses. INVESTMENT HIGHLIGHTS

Japan’s largest provider of telecommunications services, with leading market share in mobile (via 67%-owned NTT DoCoMo), fixed-line, broadband, and IT services (via 54%-owned NTT Data).

Shares are modestly undervalued trading at 85% of tangible book and a P/E of less than 10x, based on attributable net income guidance of ¥500 billion for the year ended March 2011 (up 2% y-y).

Decent balance sheet, with consolidated debt to trailing EBITDA of just ~1.0x. NTT had ~¥3.2 trillion of net debt at yearend 2010, which includes ¥270 billion of DoCoMo net cash (incl. investments).

Data communications and IT services (~50% of total revenue) represent growth opportunities.

Paid dividends every year since formation in 1985.** In 2010, NTT decided to cancel all treasury shares (~15% of total issued shares) by March 2012.


Declining fixed-line and mobile voice businesses represent 22% and 21% of CY10 revenue, respectively. While this is offset by increasing data-driven revenue, overall growth remains a challenge.

Controlled by the Japanese government, which owns ~40% and is obligated to own at least one third of issued shares pursuant to the “NTT Law.” After NTT cancels its treasury stock, the government may become a seller of some shares.

* NTT consolidates both DoCoMo and NTT Data Corp. in its financials. ** Based on the per share dividend guidance of ¥120 for the year ended March 2011 (flat y-y; ~32% payout ratio), the implied yield is 3+%.


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 revenue -1% 0% -1% -2% -2% 0% employees (end) -1% 0% -3% 1% -1% n/a assets (end) -1% -3% 1% 1% 1% 4% TBV/share (end)2 7% 7% 5% 0% 7% 2% TBV/share (end) (¥k) 3.7 3.9 4.1 .1 4.4 4.4 Revenue (¥tn) 10.7 10.8 10.7 10.4 10.2 7.5 % of revenue by segment: Mobile (NTT DoCoMo) 44% 44% 43% 42% 42% 42% Fixed: regional 35% 34% 34% 34% 34% 34% Fixed: long distance/int’l 11% 11% 11% 11% 11% 11% Data: system integration 7% 8% 9% 10% 10% 10% Other 3% 3% 3% 3% 3% 3% Revenue growth by selected segment: Mobile (NTT DoCoMo) -2% 0% -2% -5% -4% -1% Fixed: regional -4% -3% -2% -3% -1% 1% Fixed: long distance/int’l 9% 2% 3% -1% -4% 0% Data: system integration 7% 13% 6% 7% 1% 2% EBITDA margin by segment:3 Mobile (NTT DoCoMo) 33% 32% 34% 37% 36% 40% Fixed: regional 29% 29% 35% 28% 28% 30% Fixed: long distance/int’l 18% 18% 21% 20% 21% 20% Data: system integration 27% 27% 22% 24% 21% 22% Other 56% 51% 57% 42% 41% 56% Total EBITDA margin 31% 30% 32% 31% 31% 33% Capex (¥tn)4 2.2 2.2 2.0 2.0 1.9 1.4 % of capex by selected segment: Mobile (NTT DoCoMo) 40% 42% 36% 34% 35% n/a Fixed: regional 42% 39% 40% 41% 44% n/a Other 18% 19% 24% 25% 21% n/a Selected items as % of revenue: Gross profit 61% 59% 58% 60% 60% 61% EBIT 11% 10% 12% 11% 11% 14% Net income (pre-minority) 7% 6% 8% 7% 7% 8% Net income (post-minority) 5% 4% 6% 5% 5% 6% D&A 20% 19% 20% 21% 20% 19% Capex4 20% 21% 19% 19% 19% 19% Return on tang. equity 10% 9% 12% 10% 9% 11%5 Tangible equity/assets 29% 31% 33% 33% 33% 34% shares out (end) -7% 0% -1% -3% 0% 0%

1 Based on U.S. GAAP. Due to, among others, the consolidation of NTT DoCoMo (NTT owns 67%), NTT reports a significant minority interest in its financials. 2 TBV=tangible book value. 3 Corporate costs are allocated to segments. 4 Includes purchases of intangibles and other assets. 5 Annualized.

MAJOR HOLDERS* (notable non-trustees only) Japanese gov’t 40% | Other insiders <1% | NTT Employee Association 1% | Tradewinds 1% | Brandes <1% * Based on 1,323 million shares (excl. 126 million treasury shares at 12/31/10). RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE NTT is Japan’s largest provider of telecommunications with leading positions in mobile (via 67%-owned NTT DoCoMo), fixed-line, and broadband services. Growth in data communications and IT services (~50% of total revenue) is offsetting revenue declines in fixed-line and mobile voice services. While overall growth will likely remain a challenge, the shares are modestly undervalued trading at 85% of tangible book, and a trailing P/E of <10x, on a relatively unlevered balance sheet.



NTT – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



Sum-of-the-parts (see detailed assumptions

below)


below)


below)

Value of mobile business (NTT DoCoMo):1

Normalized revenue ¥4,200 ¥4,200 ¥4,200

Normalized EBITDA margin 37.0% 37.0% 37.0%

Normalized EBITDA ¥1,554 ¥1,554 ¥1,554

Minus: Normalized capex (800) (800) (800)

Estimated normalized EBITDA minus capex ¥754 ¥754 ¥754


Estimated enterprise value of NTT DoCoMo ¥6,032 ¥7,540 ¥9,048

Plus: Net cash 268 268 268

Plus: Value of equity affiliates 547 547 547

Minus: Net post-retirement liability (144) (144) (144)


Estimated fair value of the equity of NTT DoCoMo ¥6,676 ¥8,184 ¥9,692

Estimated fair value of NTT’s 67% equity stake in NTT DoCoMo 4,473 5,483 6,494

as % of NTT recent market value 91% 112% 133%

Value of NTT’s other businesses (fixed-line and IT data services):


Normalized EBITDA margin3 27.5% 27.5% 27.5%


Minus: Normalized capex4 (1,000) (1,000) (1,000)



Estimated enterprise value of NTT excluding NTT DoCoMo ¥5,200 ¥5,850 ¥6,500

Minus: Net debt5 (3,514) (3,514) (3,514)

Minus: Net post-retirement liability5 (1,333) (1,333) (1,333)


Estimated fair value of the equity of NTT excluding NTT DoCoMo ¥3 ¥653 ¥1,303

as % of NTT recent market value 0% 13% 27%

Estimated fair value of the equity of NTT (¥ in billions)7 ¥4,480 billion ¥6,140 billion ¥7,800 billion


Estimated fair value of the equity of NTT (US$ in billions)7 $54 billion $74 billion $94 billion


Implied earnings yield based on guidance for the year ended 3/20118 11% 8% 6%



1 See our analysis of NTT DoCoMo elsewhere in this report for further detail regarding the assumptions underlying our valuation. 2 Revenue excluding the mobile segment (NTT DoCoMo) was ~¥6,000 billion for the year ended December 2010 (FY06-10 average: ~¥6,000 billion). 3 EBITDA margin excluding the mobile segment was 27% for the year ended December 2010 (FY06-10 average: 28%). 4 Capex excluding the mobile segment was ~¥1,150 billion for the year ended December 2010 (FY06-10 average: ~¥1,250 billion). Our normalized capex estimate of ¥1,000 billion represents 17% of our normalized revenue estimate. 5 Estimated based on NTT balance sheet values as of yearend 2010, excluding values attributable to NTT DoCoMo. 6 Estimated value attributable to non-controlling interests other than the minority interest related to NTT DoCoMo. Our figure largely represents the value of the 46% minority interest in NTT Data, based on our estimate. 7 Based on 1,323 million common shares outstanding (1 share = 2 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 8 NTT is guiding for net income of ¥500 billion (up 2% y-y) for the year ended March 2011. The guidance is for net income attributable to NTT Corp. shareholders after attribution of net income to minority interests. 9 Based on a per share dividend of ¥120 per management guidance for the fiscal year ended March 2011. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.



NTT – COMPARISON OF SELECTED GLOBAL BROADBAND MARKETS

NTT – SUBSCRIBERS AND MARKET SHARE IN JAPAN’S BROADBAND MARKET

Source: Company presentation dated March 2011.



NTT DoCoMo (Tokyo: 9437, NYSE: DCM) Services: Communications Services Chiyoda-ku, TK, Japan, 81-3-515-1111 www.nttdocomo.com














per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 59,253 56,865 55,941 56,202 55,306 52,209 50,289 51,951 12,871 12,571

Gross profit 38,044 34,999 34,114 32,894 32,284 32,252 31,519 32,184 8,147 7,905

Operating income 12,946 9,204 9,773 9,080 9,354 9,075 9,745 10,877 2,552 2,665

Net income 7,630 8,775 7,166 5,367 5,766 5,539 5,808 6,097 1,580 1,576

Diluted EPS 1.54 1.85 1.58 1.22 1.34 1.31 1.39 1.53 0.38 0.38

Shares out (avg) 4,962 4,740 4,525 4,399 4,312 4,224 4,171 4,168 4,170 4,160

Cash from operations 20,075 13,869 18,909 11,510 18,313 13,776 13,884 15,790 981 1,423

Capex 9,425 10,694 9,788 11,136 8,983 8,911 8,517 8,043 2,008 2,026

Free cash flow 10,650 3,175 9,121 374 9,329 4,866 5,367 7,748 (1,027) (603)




Total assets 73,505 72,029 74,714 71,791 72,901 76,157 79,310 80,387 76,232 80,387

Short-term debt 1,604 1,764 2,276 1,539 908 340 2,122 4,155 166 4,155


Long-term debt 11,209 9,369 7,025 5,539 4,708 7,163 5,042 2,994 7,170 2,994



Common equity 43,485 45,870 47,562 48,845 50,197 50,961 54,415 56,785 53,151 56,785



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BUSINESS OVERVIEW NTT DoCoMo provides mobile communications services. INVESTMENT HIGHLIGHTS

#1 mobile communications provider in Japan, with 57 million subscribers at yearend 2010 (~50% market share), ahead of KDDI (~28% share), Softbank (~20%) and Emobile (~2%).

Shares trade at a low-teens trailing FCF yield (3-4% dividend yield) despite a solid balance sheet with ~¥270 billion of net cash and investments as of yearend 2010. Cumulative FCF of ~¥3.0 trillion in CY05-10 approximates 50% of recent market value.

Strong history of capital return to shareholders with ~¥1.1 trillion of dividends and ~¥800 billion of share repurchases during calendar years 2005-10. The overcapitalized balance sheet is a potential source of significant further capital return.

Benefits from share leadership in a consolidated market. Margin expansion is offsetting revenue pressure due to lower voice ARPU. Revenue may stabilize as data-driven ARPU approximates 50% of total ARPU, up from ~25% in FY05.

Exploiting growth opportunities in mobile Internet applications and overseas markets. Mobile Internet applications should grow data ARPU over time. DoCoMo has a stake in mobile market growth in India and the Philippines, among others, through stakes in affiliated companies.


Parent NTT, which owns 67% of shares, may not act in the best interests of minority shareholders. Telecommunications provider NTT, which is controlled by the Japanese government, “intends to maintain its ownership stake at 51% or above.”

Increasing capex requirements. While a transition from 2G to 3G services (based on W-CDMA) is nearly complete, growing data services will require the buildout of fourth-generation networks.

Limited subscriber growth opportunities in Japan given a mature mobile phone market with high penetration, and unfavorable demographics.

Yen exposure, as profits are largely in from Japan. COMPARABLE PUBLIC COMPANY ANALYSIS


VOD 142,680 195,960 2.6x 5.2x 10x 10x

DCM 77,130 75,610 1.5x 1.7x 13x 12x


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 subscribers (end) 5% 3% 1% 2% 3% 3% voice ARPU2 -6% -7% -11% -20% -13% -12% data ARPU 1% 7% 9% 8% 3% 4% total ARPU -4 -3% -5% -10% -6% -5% revenue -2% 0% -2% -6% -4% -1% employees (end) % 0% 2% -1% 2% n/a assets (end) 4% -4% 2% 4% 4% 5% TBV/share (end)3 8% 5% 5% 3% 6% 7% TBV/share (end) (¥k) 76 79 84 86 92 96 Revenue (¥tn) 4.8 4.8 4 7 4.4 4.3 3.2 % of revenue by type: Mobile voice services 64% 61% 56% 48% 45% 42% Mobile data services4 23% 26% 29% 34% 37% 39% Other mobile services 3% 3% 3% 4% 6% 8% Equipment sales 10% 10% 12% 14% 12% 11% Revenue growth by type: Mobile voice services -2% -3% -10% -19% -11% -10% Mobile data services 6% 11% 11% 10% 5% 6% Other mobile services -8% -4% 11% 23% 54% 28% Equipment sales -14% 1% 15% 11% -16% -6% Selected items as % of revenue: Gross profit 61% 59% 58% 62% 63% 64% R&D 2% 2% 2% 2% 3% 2% EBITDA 33% 32% 34% 37% 36% 39% Net income 13% 10% 10% 11% 12% 14% Net cash from ops 34% 20% 33% 26% 28% 24% D&A 15% 16% 16% 18% 16% 15% Capex5 17% 20% 16% 17% 17% 16% Selected operating statistics: Subscribers (mn) (end) 51 53 53 55 56 57 Market share (end)6 56% 54% 52% 51% 50% n/a Voice ARPU (¥k/month) 5.0 4.7 4.2 3.3 2.9 2.6 Data ARPU (¥k/month) 1.9 2.0 2.2 2.4 2.5 2.5 Total ARPU (¥k/month) 6.9 6.7 6.4 5.7 5.4 5.2 Avg monthly churn 0.8% 0.8% 0.8% 0.5% 0.5% 0.5% Return on tang. equity 19% 13% 14% 13% 13% 15%7 Tangible equity/assets 59% 62% 64% 64% 63% 66% shares out (end) -4% -2% -2% -2% 0% 0%

1 Based on U.S. GAAP. 2 ARPU=average revenue per user. 3 TBV=tangible book value. 4 Referred to as “packet communications revenue” by the company. 5 Includes “purchases of intangible and other assets.” 6 Subscriber data source: Telecommunications Carriers Association. 7 Annualized.

MAJOR HOLDERS (notable non-trustees only) NTT 67% | Other insiders <1% | Scout <1% | RenTech <1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE NTT DoCoMo, a subsidiary of NTT, is the largest mobile network operator in Japan with 50% market share. While shareholders are exposed to control by NTT (and implicitly the Japanese government, which controls NTT), DoCoMo has a strong record of capital return to all shareholders. Trading at a 10+% trailing FCF yield on a strong balance sheet with net cash, the shares are too cheap to ignore. Despite limited subscriber growth potential in Japan, and uncertain future capex requirements, free cash flow may remain stable over time based on continued growth in data revenue (~50% of total ARPU).



NTT DOCOMO – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



8x estimated normalized EBITDA

minus capex of ~¥750 billion (~5%

below 5-year average EBITDA

minus capex)




minus capex)




minus capex)


Normalized EBITDA margin2 37.0% 37.0% 37.0%


Minus: Normalized capex3 (800) (800) (800)





Plus: Value of equity affiliates5 547 547 547



Estimated fair value of the equity of NTT DoCoMo (¥ in billions)7 ¥6,680 billion ¥8,180 billion ¥9,690 billion

¥161,000 / share ¥197,000 / share ¥233,000 / share

Estimated fair value of the equity of NTT DoCoMo (US$ in billions)7 $80 billion $99 billion $117 billion

$19.40 / ADS $23.70 / ADS $28.10 / ADS


Implied FCF yield on average FY06-10 FCF 7% 6% 5%


Implied EV-to-calendar year 2010 EBITDA 3.8x 4.8x 5.7x

Implied EV-to-calendar year 2010 revenue 1.4x 1.8x 2.1x


Implied EV per subscriber ($)9 $1,270 $1,590 $1,910

1 Revenue guidance for the year ended March 2011 is ¥4,209 billion (down 2% y-y). 2 Approximates the trailing EBITDA margin of 37% (year ended December 2010). EBITDA margin averaged 34% during FY06-10 (ended March 2010). Our normalized EBITDA estimate of ~¥1,550 billion approximates the average annual EBITDA during FY06-10. 3 Approximates average annual capex during FY06-10. Capex was ¥685 billion for the year ended December 2010 (~16% of revenue). Our normalized capex estimate of ¥800 billion represents 19% of our normalized revenue estimate. 4 Based on balance sheet values of cash and debt as of yearend 2010. Cash includes short-term investments and long-term marketable securities and other investments (excluding investments in affiliates). The overcapitalized balance sheet is a major source of downside protection and potential return of capital to shareholders. Assuming a net debt-to-EBITDA ratio of 2.0x (not uncommon among major mobile communications providers), the company could return 50+% of recent market value to shareholders. While this is conceptually important, we ascribe little probability to this scenario playing out due to the Japanese government’s control of the company’s parent NTT, which in turn owns 66% of NTT DoCoMo. 5 Based on the carrying value on the balance sheet as of yearend 2010. The company has ~25 affiliates, including a ~27% stake in Tata Teleservices Ltd. and a ~14% stake in Philippine Long Distance Telephone Co. Dividends from affiliates totaled ¥13 billion in the fiscal year ended March 2010. Dividends from affiliates are included in the company’s net cash from operations; earnings from affiliates are reported below the EBIT line in the company’s income statement. 6 Based on balance sheet values as of yearend 2010. 7 Based on 41.6 million common shares outstanding, excluding 2.2 million treasury shares (1 share = 100 ADS). Estimated fair value in US$ is based on a conversion of the recent exchange rate at 1US$=¥83. 8 Based on a per share dividend of ¥5,200 forecast by management for the fiscal year ended March 2011. 9 Based on 57.2 million cellular subscribers as of yearend 2010.




NTT DOCOMO – MANAGEMENT’S FY 2011 EBIT GUIDANCE

Source: Company presentation dated April 28, 2011. NTT DOCOMO – MARKET SHARE OF JAPAN’S MOBILE TELEPHONY MARKET

Source: NTT presentation dated March 2011.



ORIX (Tokyo: 8591, NYSE: IX) Services: Rental & Leasing Minato-ku, TK, Japan, 81-3-541-5000 www.orix.co.jp











Institutional ownership: 1% 1/31/11 n/a n/a LTM pre-tax ROC >100%



per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 8,977 10,901 10,915 13,175 13,517 12,366 10,950 11,645 2,631 2,699

Gross profit 4,467 5,479 6,493 8,111 7,834 6,712 6,087 6,279 1,434 1,476

Operating income 1,026 1,546 2,523 3,299 2,207 626 347 757 110 210

Net income 658 1,130 2,079 2,395 2,168 361 499 717 86 197

Diluted EPS 3.42 5.44 9.47 11.58 9.20 0.65 1.56 2.64 0.29 0.61

Shares out (avg) 167 168 177 181 182 178 204 207 215 215

Cash from operations 1,794 1,484 1,596 2,654 1,835 3,624 2,457 2,490 (23) (86)

Capex 10,250 11,063 13,340 12,109 12,774 10,061 4,571 6,167 1,013 1,412

Free cash flow (8,456) (9,578) (11,744) (9,454) (10,939) (6,436) (2,114) (3,677) (1,036) (1,497)


Total current assets 0 0 0 0 0 0 0 0 0 0


Total assets 66,025 71,236 85,010 96,334 105,581 98,242 90,848 100,116 93,413 100,116

Short-term debt 10,610 11,126 15,687 13,785 15,613 9,369 6,732 5,672 8,628 5,672


Long-term debt 31,254 33,592 37,984 45,344 52,376 52,278 45,029 53,775 46,162 53,775



Common equity 6,621 8,537 11,194 14,018 14,883 13,704 15,244 15,209 14,984 15,209

EBIT/capital employed 11% 16% 21% 25% 17% 7% 13% >100% n/m n/m


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BUSINESS OVERVIEW Financial conglomerate Orix operates through six segments:

Retail (19% of assets; ¥32 billion of CY10 pre-tax income):* consists of four businesses serving mainly individual clients: 1) life insurance; 2) banking (incl. housing loans); 3) cards (via Sumitomo JV); 4) online securities brokerage (via Monex JV).

Real Estate (19%; ¥2 billion): commercial and residential development and leasing; asset management, incl. REITs.

Corporate Financial Services (12%; ¥3 billion): provides loans and leasing to core customer base of small and medium enterprises in Japan (dating back to Orix’ founding in 1964).

Overseas Business (11%; ¥39 billion): includes leasing, corporate financial services (including U.S.-based corporate advisory firm Houlihan Lokey), and principal investments.

Investment Banking (6%; ¥16 billion): next to traditional M&A advisory, the segment includes real estate-related finance, principal investing, loan servicing and securitization.

Maintenance Leasing (6%; ¥25 billion): provides leasing and rentals for autos, IT and precision measuring equipment.

The remaining assets (27%) are mainly variable interest entities (~45%) and cash (~30%); CY10 corporate costs: -¥22 billion. INVESTMENT HIGHLIGHTS

Evolved from leasing firm to a financial services conglomerate, providing products ranging from leases and corporate loans to life insurance, housing loans, and i-banking. 85+% of assets are in Japan.

~30% discount to tangible book ignores improving ROE and strong equity capitalization with tangible equity at 14% of assets. ROE is up from 2% during the 2008/09 crisis to 5% annualized in the December 2010 quarter. ROE averaged 15+% during 2005-07.

Management targets an ROE of “around 10%,” which implies a P/E of 6-7x, adjusted for dilution.


Adequate loss reserves? Non-performing loans of ~¥400 billion (10% of gross loans) exceed loan loss reserves by ~¥230 billion (~25% of market value).

Conglomerate strategy** of Chairman and CEO Yoshihiko Miyauchi (75). Miyauchi joined ORIX at its founding in 1964 and became CEO in 1980.

Reliance on wholesale markets for funding as deposits represent only 12% of total assets.

Dilution from ~25 million potential new shares underlying convertible bonds and other debt.

* Assets (12/31/10): ¥8.5 trillion; calendar 2010 pre-tax income: ¥94billion. ** At its extreme, the “strategy” included the purchase of a baseball team in 1988 to “raise our name recognition and promote our corporate image.”


FYE March 31 2007 2008 2009 2010 YTD

12/31/10 tangible BV/share (end)2 24% 7% -9% -5% 2% assets (end) 13% 10% -7% -8% 7% employees (end) 11% 12% 1% -6% -5% TBV/share (end) (¥)2 11,533 12,341 11,276 10,761 10,725 Assets (¥tn) 8.2 9.0 8.4 7 7 8.5 Selected items as % of total assets: Cash and equivalents 4% 5% 7% 9% 9% Finance leases/loans3 57% 53% 49% 40% 44% Op. leases/securities 21% 24% 26% 30% 28% Other assets 18% 18% 19% 21% 20% Debt 61% 64% 63% 57% 59% Deposits 5% 5% 8% 11% 12% Other liabilities 19% 16% 15% 15% 13% Common equity 15% 14% 14% 17% 15% % of assets by segment: Retail 17% 16% 19% 20% 19% Real estate 11% 12% 14% 14% 19% Corporate fin’l services 23% 22% 19% 16% 12% Overseas (non-Japan) 14% 12% 11% 11% 11% Investment banking 16% 19% 16% 15% 6% Maintenance leasing 8% 7% 8% 7% 6% Other4 11% 12% 14% 16% 27% Loan loss reserve ratio5 1.9% 2.1% 3.8% 4.9% 4.2% NPL6/(gross leases+loans) 2.8% 4.2% 11.7% 12.0% 10.2% ROE (as reported) 18.3% 13.8% 1.8% 3.1% 5.2%7 Tang. equity/assets (end) 13.1% 12.8% 12.6% 15.6% 14.0% Revenue (¥bn) 1,115 1,135 1,054 933 706 Selected items as % of revenue: Provision for credit losses 1% 3% 7% 8% 3% Pre-tax income 28% 22% 1% 6% 11% Net income to common 17% 13% 1% 3% 6% Pre-tax income by geography (¥bn): Japan 265 227 9 33 55 Non-Japan 69 59 21 36 31 Eliminations -19 -40 -21 -13 -11 Total pre-tax income 315 246 9 56 75 shares out (end)2 1% 1% 0% 20%8 0%

1 Based on U.S. GAAP and continuing operations, unless stated otherwise. 2 Based on basic shares (excludes potential dilution from convertible debt). 3 Stated net of loan loss reserve. Loans are ~80% of yearend 2010 gross figure. 4 Includes assets of certain variable interest entities (~45%) and cash (~30%). 5 Relates to direct financing leases and loans. 6 Relates to non-performing financing leases and loans defined as 90+ days past-due as well as loans individually evaluated as “impaired.” 7 Annualized. 8 Reflects the sale of 18 million shares at ¥4,830/share in 2009.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | FMR 15% | Nomura 9% | AllianceBernstein 8% | JPM 5% | MUFJ 5% | Mizuho 1% | Nippon Life 1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE An aggressive diversification strategy has transformed Orix from a corporate leasing provider into a global financial services group with assets of ~$100 billion. While 85+% of assets remain in Japan, Orix derived ~40% of 2010 pre-tax income from overseas, including from fee-based businesses such as Houlihan Lokey. With shares trading at a ~30% discount to tangible book, the valuation is undemanding relative to improving ROE and the solid tangible equity capitalization (14% of assets). Given management’s conglomerate strategy, and little regard for shareholders, however, the gap to intrinsic value may persist.



ORIX – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE


Valuation methodology 1.0x tangible common

equity








Tangible common equity as of 12/31/2010 (adjusted)2 ¥1,368



Base case metrics:

“Normalized” net income to common (assuming 10% ROE2) ¥148



Aggressive case metrics:

“Normalized” net income to common (assuming 15% ROE2) ¥222



Estimated fair value of the equity of Orix (¥ in billions)3 ¥1,368 billion ¥1,482 billion ¥2,223 billion


Estimated fair value of the equity of Orix (US$ in billions)3 $16.1 billion $17.5 billion $26.2 billion $61 per ADS $66 per ADS $99 per ADS


Implied dividend yield4 0.7% 0.7% 0.4%

Implied ratios based on net income to common during…

…year to December 2010 (based on U.S. GAAP net income) 25x 27x 41x

…FY-06-10 average (based on U.S. GAAP net income)5 13x 14x 21x 1 Return on equity averaged ~11% in FY06-10 (~15% during FY04-08). ROE was 3% in the year ended March 2010. Annualized ROE based on the nine months to December 2010 is 5% (including 5% in the December 2010 quarter). Management targets an ROE of “around 10%” in the “medium- to long-term.” Tangible common equity to assets was 14.0% as of yearend 2010. 2 Equity at yearend 2010 is adjusted to exclude convertible debt (accounted for under shares outstanding by using a diluted share count). 3 Based on ~132 million diluted common shares outstanding (1 share = 2 ADS), including potential new shares from convertible debt and Liquid Yield Option Notes outstanding. In 2008, Orix issued a ¥150 billion convertible bond, which is convertible into ~22 million shares at ¥6,843 per share. Also, the company issued dollar-denominated Liquid Yield Option Notes in 2002, which are convertible into 2+ million shares at ~$115 per share (1 share = 2 ADS). Estimated fair value in US$ is based on a conversion of the recent exchange rate at 1US$=¥85. 4 Based on a per share dividend of ¥75 declared for the fiscal year ended March 2010 (adjusted for dilution in our valuation). 5 Recent total assets approximate average total assets during fiscal 2006-10. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

ORIX – NET INCOME TREND

Source: Company presentation dated January 31, 2011.



ORIX – SELECTED BALANCE SHEET DATA (¥ in billions)

ORIX – BOND FINANCING OVERVIEW

ORIX – ASSET QUALITY

Source: Company presentation dated January 31, 2011.



Panasonic (Tokyo: 6752, NYSE: PC) Consumer Cyclical: Audio & Video Equipment Kadoma, OS, Japan, 81-6-690-1121 www.panasonic.net














per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 87,796 102,279 104,400 106,910 106,449 91,150 87,071 108,169 22,144 26,826

Gross profit 25,432 29,786 32,150 31,853 31,595 24,628 24,378 28,537 6,550 6,974

Operating income 2,295 3,621 4,275 5,394 6,098 855 2,236 3,657 1,186 1,119

Net income 495 686 1,812 2,549 3,309 (4,448) (1,215) 303 379 469

Diluted EPS 0.21 0.30 0.82 1.17 1.56 (2.14) (0.59) 0.15 0.18 0.23

Shares out (avg) 2,322 2,295 2,222 2,183 2,121 2,079 2,071 2,071 2,071 2,070


Capex 3,234 4,134 4,188 4,828 4,915 6,122 4,409 4,262 1,215 1,097

Free cash flow 2,507 1,482 2,567 1,423 (541) (4,753) 1,722 2,669 545 394




Total assets 87,306 94,570 93,487 92,693 87,372 75,161 98,105 95,527 101,826 95,527

Short-term debt 4,316 5,314 4,767 3,225 2,271 1,556 4,210 11,807 5,589 11,807


Long-term debt 5,407 5,601 3,100 2,662 2,727 7,645 12,077 9,823 13,129 9,823



Common equity 40,514 41,602 44,458 45,974 43,927 32,678 32,778 30,999 32,434 30,999



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BUSINESS OVERVIEW Panasonic, formerly Matsushita Electric, makes electronic and electric products. It operates in five major segments:

AVC Networks (35% of revenue*): includes plasma and LCD TVs, DVD recorders and players, camcorders, and digital cameras, as well as IT and telecommunications equipment.

SANYO (18%): acquired electronic/electric products maker SANYO in December 2009 (Panasonic consolidates SANYO).

PEW and PanaHome (18% of revenue): includes lighting fixtures, wiring devices, personal-care and health products.

Home Appliances (14% of revenue): includes mainly air conditioners and refrigerators, as well as other appliances.

Components and Devices (9% of revenue): includes semiconductors, batteries, and general components. INVESTMENT HIGHLIGHTS

One of the world’s leading manufacturers of electronic and electric products. Management’s strategy centers on the flagship Panasonic brand, a globally recognized consumer electronics leader.

EV-to-trailing revenue multiple of 0.4x may not adequately reflect profitability potential of Panasonic’s businesses and excess assets including real estate (proceeds from disposals of PP&E have averaged ¥100+ billion per year since at least 2005).

Targets a 5+% operating profit margin for the year to March 2013 on revenue of ¥9.4 trillion. This appears a realistic target based on historic performance and recent cost-cutting initiatives.

Returned ~¥700 billion in dividends and buybacks during FY06-10 (~35% of recent market value). The balance sheet has remained strong, with net debt close to zero after accounting for investments.


Large parts of the business are vulnerable to commoditization. More aggressive restructuring and a stronger focus on core businesses is likely required to achieve sustained profitability.

Restructuring costs may be higher than management estimates of ¥110 billion in fiscal year 2012 and ¥50 billion in fiscal year 2013.

COMPARABLE PUBLIC COMPANY ANALYSIS P / This Next MV EV EV / Tang. FY FY ($mn) ($mn) Rev. Book P/E P/E

SNE 30,410 24,090 .3x 1.4x 29x 19x

PHG 28,770 28,140 .8x 7.9x 13x 12x

SHCAY 10,300 18,000 .4x .9x 24x 29x

PC 29,770 37,240 .3x 2.2x 22x 45x

SELECTED OPERATING DATA1 FYE March 31 2007 2008 2009 2010 2011 revenue 2% 0% -14% -4% 17% employees (end) -2% -7% -4 32% -5% assets (end) -1% -6% -14% 31% 6% TBV2/share (end) 8% -5% -28% -44% -15% TBV/share (end) (¥) 1,594 1,515 1,088 611 516 Revenue (¥tn) 9.1 9.1 7.8 7.4 8.7 % of revenue by segment: AVC networks 41% 44% 45% 43% 35% Home appliances 13% 14% 15% 15% 14% Components and devices 12 13% 12% 11% 9% PEW and PanaHome 19% 19% 20% 19% 18% Other/SANYO (since 12/09) 14% 10% 8% 12% 24% Adj. EBIT margin by segment:3 AVC networks 6% 6% 0% 3% 4% Home appliances 7% 7% 4% 6% 8% Components and devices 9% 9% 1% 4% 4% PEW and PanaHome 5% 6% 3% 2% 5% Other/SANYO (since 12/09) 4% 6% 4% 2% 2% Total adj. EBIT margin 5% 6% 1% 3% 4% % of revenue by geography:4 Japan 51% 50% 53% 54% 52% Asia Pacific 21% 23% 22% 23% 26% Americas 15% 14% 13% 12% 12% Europe 13% 13% 12% 10% 10% Selected items as % of revenue: Gross profit 30% 30% 27% 28% 26% R&D 6% 6% 7% 6% 6% Special items5 0% -1% -6% -3% -1% Net income 2% 3% -5% -1% 1% Net cash from ops 6% 5% 1% 7% 5% D&A 3% 4% 5% 4% 4% Capex6 5% 5% 7% 5% 5% Return on tang. equity 6% 9% -14% -6% 6% Tangible equity/assets 45% 46% 43% 28% 18% shares out (end) -3% -2% -1% 0% 0%

1 Based on U.S. GAAP. Certain historical data is not comparable y-y due to, among others, the acquisition of SANYO in December 2009. 2 TBV=tangible book value (FY11-end tangible book value is estimated). 3 Gross profit less SG&A (excludes special items and equity in affiliate earnings). 4 Based on sales destination. 5 Includes earthquake-related losses in FY11, as well as the impact of restructuring including impairment losses and expenses associated with the implementation of early retirement programs. 6 Gross capex (excludes proceeds from disposals of PP&E).

MAJOR HOLDERS* (notable non-trustees only) Insiders 1% | MUFJ 5% | Nippon Life 3% | Sumitomo Mitsui 3% | PC Employee Ass’n 2% | Dodge & Cox 2% | Fisher 1% * Share count excludes ~380 million treasury shares (~15% of issued shares). RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends? * Financials are based on the year ended March 2011.

THE BOTTOM LINE Panasonic has a relatively strong brand in consumer electronics—a competitive, capital-intensive business. While shares trade below intrinsic value, “never-ending” restructuring is absorbing significant cash resources and is a cause of execution risk. In addition to near-term restructuring, investors need to scrutinize the rate of future compounding of intrinsic value. We would need to see the company’s prospective return on equity increase before considering it a compelling long-term investment.



PANASONIC – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



8x estimated ¥315 billion of norm. EBIT (approx.

FY12 EBIT guidance, ex. quake impact)

8x estimated ¥450 billion of

normalized EBIT

8x estimated ~¥550 billion of

normalized EBIT (10% higher than

FY13 EBIT guidance)






Plus: Long-term investments and advances4 570 570 570

Plus: Excess real estate5 100 250 500

Minus: Net debt4 (551) (551) (551)



Minus: Estimated PV of restructuring costs required for stated profitability6 (250) (350) (450)

Estimated fair value of the equity of Panasonic (¥ in billions)7 ¥1,570 billion ¥2,700 billion ¥3,570 billion

¥760 per share ¥1,300 per share ¥1,720 per share

Estimated fair value of the equity of Panasonic (US$ in billions)7 $18.9 billion $32.5 billion $43.0 billion


Implied EV-to-forward revenue8 0.29x 0.41x 0.49x

Implied EV-to-forward adj. EBIT8 8x 12x 14x



Implied fair value of the equity to tangible book10 1.5x 2.5x 3.3x 1 Panasonic is guiding for revenue of ~¥8,800 billion for the year ended March 2012 (up 1% y-y), excluding earthquake-related effects. Under the company’s “mid-term” targets, management expects FY13 revenue of ~¥9,400 billion. 2 Average adj. EBIT margin during FY2006-11 is ~4%. Management’s adj. EBIT guidance for the fiscal year ended March 2012 is ¥310 billion (up 2% y-y), which implies an EBIT margin of ~3.5%. Management’s “mid-term” plan targets a 5+% EBIT margin in FY13. Adjusted EBIT excludes special items such as earthquake-related and restructuring effects, and equity in affiliate earnings. 3 Our “normalized” EBIT of ¥120 billion approximates the average EBIT during FY06-11, which we believe is representative of “through-the-cycle” earnings for the company. Note that our “normalized” EBIT figure is ~20% below trailing EBIT and ~30% below management’s EBIT guidance for the year ended March 2012. 4 Based on balance sheet values as of March 31, 2011, except for net post-retirement liabilities (as of March 2010). 5 Panasonic’s real estate holdings are difficult to value but are likely worth a material percentage of enterprise value. While we note that proceeds from disposals of PPE have averaged ¥100+ billion per year since 2005, our estimates are pure “guesses.” 6 Management is guiding for “structural reform costs” of ¥110 billion in FY12 and ¥50 billion in FY13. Our estimates are modestly higher to reflect our view that restructuring costs are likely to be ongoing beyond FY13. 7 Based on 2,070 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 8 Based on management guidance for the year ended March 2012, excluding earthquake-related effects. 9 Based on the dividend of ¥10 per share for the fiscal year ended March 2011. 10 Based on an estimated tangible book of ~¥1,070 billion at March 31, 2011 (based on reported shareholders’ equity as of March 31, 2011 less goodwill and intangibles as of December 31, 2010). Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. PANASONIC – MANAGEMENT GUIDANCE FOR FY2012, ex. Earthquake Impact (¥ in billions)




PANASONIC – SALES BRIDGE, by Product, FY2010 – FY2011

PANASONIC – OPERATING PROFIT BRIDGE, FY2010 – FY2011

PANASONIC – FREE CASH FLOW, FY2009 – FY2011




Ricoh (Tokyo: 7752, OTC: RICOY) Technology: Office Equipment Tokyo, TK, Japan, 81-3-627-2111 www.ricoh.co.jp











Institutional ownership: n/a 10/28/10 n/a n/a LTM pre-tax ROC 12%



per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 20,896 21,294 22,410 24,285 26,058 24,552 23,667 24,205 5,704 5,496

Gross profit 8,987 8,857 9,332 10,123 10,889 10,029 9,653 9,787 2,467 2,307

Operating income 1,761 1,591 1,744 2,047 2,130 560 773 1,003 279 188

Net income 1,077 976 1,139 1,311 1,250 77 327 397 148 92

Diluted EPS 6.67 6.61 7.60 8.48 8.34 0.51 2.19 2.77 0.99 0.62

Shares out (avg) 148 148 147 146 146 145 145 145 145 145


Capex 885 987 1,195 1,007 1,000 1,138 786 933 234 250

Free cash flow 933 601 881 967 1,281 (111) 1,452 900 68 (170)



Intangible assets 804 1,372 1,539 1,807 2,664 4,877 4,631 4,021 4,687 4,021

Total assets 21,748 22,932 23,959 26,333 25,992 29,503 27,982 25,718 27,965 25,718

Short-term debt 2,126 2,503 2,480 2,393 2,082 3,318 2,136 1,673 2,756 1,673


Long-term debt 3,305 2,659 2,296 2,780 2,652 5,979 6,042 5,908 5,834 5,908



Common equity 9,333 10,130 11,271 12,570 12,679 11,449 11,425 10,653 11,295 10,653



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BUSINESS OVERVIEW Ricoh manufactures, services and finances office equipment. The Imaging & Solutions segment (~90% of revenue) includes mainly copiers and printers, and related products/services. INVESTMENT HIGHLIGHTS

One of the world’s largest providers of office printers and copiers. Ricoh benefits from scale, an installed base, and brand/technology leadership.

Annuity-like income from maintenance, rentals and consumables (~45% of revenue) generates predictable FCF and mitigates volatile product sales.

Trades at a 10+% FCF yield on average free cash flow of ~¥70 billion during FY06-11. This only partly includes the contribution from U.S.-based IKON (acquired for ¥170 billion in late ‘08).

Margin improvement potential. Ricoh’s average FY06-11 EBIT margin of 5-6% is below the 8% margin before the global crisis of 2008/09. While Ricoh’s FY12 guidance* implies a ~3.5% margin (5% excl. restructuring and earthquake-related cost), management targets a 10% EBIT margin by 2015.

~¥645 billion of finance receivables and ~¥200 billion of cash and investments offset debt of ¥630 billion at 3/31/11. Price to tangible book is ~1.1x.


Product commoditization. Unlike some of its rivals, who are developing value-add service capabilities (e.g. Xerox’ recent purchase of IT-outsourcer ACS), Ricoh remains a product-driven company. This exposes it to commoditization and technology risk.

Capital allocation. CEO Shiro Kondo (61) spent ¥250+ billion of cash to buy IKON and InfoPrint at the top of the market in 2007-08.

Leasing ties up capital and leads to credit risk. * For the year to 3/2012, Ricoh is guiding for revenue of ¥2,090bn (up 8% y-y), EBIT of ¥70bn (up 16% y-y), and net income of ¥29bn (up 48% y-y). COMPARABLE PUBLIC COMPANY ANALYSIS


XRX 14,310 22,920 1.0x 30.1x 9x 8x

CAJ 57,210 46,500 1.0x 2.0x 18x 18x

LXK 2,920 2,350 .6x 2.8x 8x 8x

RICOY 8,480 14,310 .6x 1.3x 16x 15x

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Nippon Life 5% | MUFJ 5% | Nipponkoa 3% | New Technology Foundation 2% | Ricoh Employee Ass’n 1%

SELECTED OPERATING DATA1 FYE March 31 2006 2007 2008 2009 2010 2011 revenue 5% 8% 7% -6% -4% -4% employees (end) 1% 8% 2% 30% 0% 0% financial receiv. (end) 6% 6% 2% 3% -3% 0% TBV/share (end)2 12% 11% 6% -35 3% 1% TBV/share (end) (¥) 1,137 1,256 1,184 772 798 810 Revenue (¥tn) 1.9 2.1 2.2 2.1 2.0 1.9 % of revenue by type: Products 58% 57% 58% 49% 48% 48%3 Maintenance/rentals4 36% 37 37% 46% 47% 47%3 Other5 6% 5% 5% 5% 5% 5%3 Revenue growth by selected type: Products 4% 7% 9% -20% -6% 0%3 Maintenance/rentals 10% 11% 6% 17% 0% -5%3 Gross margin by type: Products 33% 34% 34% 31% 29% 33%3 Maintenance/rentals 58% 56% 58% 54% 54% 51%3 Other 24% 21% 19% 21% 21% 20%3 Total gross margin 42% 42% 42% 41% 41% 41% % of revenue by segment: Imaging & solutions 86% 86% 86% 88% 89% 88% Other 14% 14% 14% 12% 11% 12% EBIT margin by segment:6 Imaging & solutions 12% 13% 12% 8% 8% 8% Other 1% 2% 2% -2% -2% -2% Corporate -3% -3% -3% -3% -3% -4%

Total EBIT margin 8% 8% 8% 4% 3% 3% Japan as % of revenue7 52% 50% 47% 46% 44% 46% EBIT margin by geography (includes allocated corporate expenses): Japan 10% 11% 10% 6% 4% 3% Non-Japan 6% 7% 6% 1% 3% 3% Selected items as % of revenue: R&D 6% 6% 6% 6% 5% 6% Net income 5% 5% 5% 0% 1% 1% Net cash from ops 9% 8% 9% 4% 9% 7% D&A 4% 4% 4% 5% 5% 5% Capex 5% 4% 4% 5% 3% 4% Fin. receiv. (¥bn) (end) 594 629 640 661 642 6448 Return on tang.equity 12% 13% 12% 1% 5% 3% Tangible equity/assets 42% 44% 43% 35% 28% 30% shares out (end) -1% 0% -1% 1% 0% 0%

1 Based on U.S. GAAP. The financials are not comparable throughout the period due to the purchase of IKON Office Solutions for ~¥170 billion in cash in October 2008 and InfoPrint Solutions for ~¥90 billion in cash in mid-2007. 2 TBV=tangible book value. 2008 and 2009 declines partly reflect the goodwill/ intangibles resulting from cash acquisitions of InfoPrint and IKON, respectively. 3 Estimated based on actual nine-month results through December 2010. 4 Based on maintenance contracts normally entered into when equipment is sold. 5 Consists mainly of interest income on sales-type and direct-financing leases. 6 Excludes, among others, gains/losses on currency and securities impairment. 7 By origin (by destination would not be materially different). 7 As of 12/31/10.

RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Office printer and copier manufacturer Ricoh derives high-margin, annuity-like income from equipment maintenance, rentals and consumables, which represent nearly half of revenue. This offsets the more volatile product sales and leads to relatively stable free cash flow generation. Ricoh’s modest valuation fails to reflect this, as shares trade at 1.1x tangible book and a 10+% FCF yield based on average free cash flow during FY06-10. The balance sheet is stronger than it may appear as cash and finance receivables offset the gross debt balance. Despite product commoditization risks, the risk-reward is attractive.



RICOH – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



8x estimated ¥80 billion of normalized EBIT of the industrial business plus/minus other assets/liabilities


financing business)



financing business)



financing business)

Industrial business:





Estimated enterprise value of industrial business ¥640 ¥900 ¥1,200

Other assets/liabilities:5

Plus: Cash 181 181 181

Plus: Finance receivables, net 644 644 644


Minus: Debt (630) (630) (630)



Estimated fair value of the equity of Ricoh (¥ in billions)8 ¥689 billion ¥949 billion ¥1,249 billion

¥950 per share ¥1,310 per share ¥1,720 per share

Estimated fair value of the equity of Ricoh (US$ in billions)8 $8.3 billion $11.4 billion $15.0 billion







Implied peak earnings yield (year ended March 2007) 16% 12% 9%

1 While Ricoh’s core business is the manufacture and sale of office equipment including printers and copiers, the company also provides related financing to customers. Our valuation accounts for this by valuing the manufacturing (~industrial) business independently of the financing business. We then add owned finance receivables and subtract the related debt to/from our enterprise value estimate for the manufacturing business. Although our approach is quite crude, it highlights the different sources of value within Ricoh. 2 Management’s revenue guidance for the year ended March 2012 is ¥2,090 billion (up 8% y-y). Average revenue during FY06-11 (ended March 2011) is ~¥2,050 billion. While this average understates Ricoh’s revenue potential due to the acquisition of IKON (included only since October 2008), interest income from leases (~5% of company revenue) is included in the average. As our normalized revenue estimate excludes the financing business, we assume these two factors roughly offset each other. IKON, which supplies and services office equipment mainly in North America and Europe, averaged $4+ billion of revenue and ~$200 million of EBIT in 2003-07. 3 Average EBIT margin during FY06-11 is ~6%. Management’s EBIT guidance for the year ended March 2012 is ¥70 billion (up 16% y-y), which implies an EBIT margin of ~3.5%. As our valuation excludes the contribution from the financing business, our normalized EBIT margin estimates are not directly comparable. We estimate the difference to be about one margin percentage point. Our estimates for all three valuation scenarios are well below management’s target for a “medium-term” EBIT margin of 10%. While Ricoh achieved 10+% EBIT margins in its Japan-based business (~45% of revenue) in the past, the target appears aggressive based on lower non-Japan margins as well as ongoing risks of commoditization and technological obsolescence. 4 Our “base” case EBIT figure of ¥100 billion approximates management’s EBIT guidance for the year ended 2012, excluding the impact of restructuring charges and earthquake-related costs (Ricoh is guiding for EBIT of ¥70 billion, which includes a negative impact of ¥20 billion from restructuring and ¥10 billion from earthquake-related sales impacts in Japan and temporary production-related costs). 5 Based on balance sheet values as of March 31, 2011, except finance receivables (based on yearend 2010). 6 Includes mainly available-for-sale equity securities. 7 The related gross benefit obligation was ~¥450 billion at March 31, 2010 based on a discount rate of 2.1% for domestic plans (domestic plans comprise ~60% of the total gross obligation). 8 Based on 726 million common shares outstanding (1 ADS = 5 shares). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 9 Based on a per share dividend of ¥33 for the fiscal year ended March 2011. 10 Based on management guidance for the year ended March 2012 for revenue of ¥2,090 billion (up 8% y-y), EBIT of ¥70 billion (up 16% y-y), and attributable net income of ¥29 billion (up 48% y-y).




RICOH – OPERATING INCOME BRIDGE, FYE 3/31/2010 – FYE 3/31/2011

RICOH – OPERATING INCOME BRIDGE BASED ON MANAGEMENT GUIDANCE, FYE 3/31/2011 – FYE 3/31/2012


FY11/03 FY12/03



Sharp (Tokyo: 6753, OTC: SHCAY) Consumer Cyclical: Audio & Video Equipment Abeno-ku, OS, Japan, 81-6-662-1221 sharp-world.com











Institutional ownership: n/a 10/27/10 n/a n/a LTM pre-tax ROC 8%



per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 27,129 30,525 33,617 37,591 41,076 34,219 33,122 45,630 24,326 9,921

Gross profit 6,540 6,973 7,596 8,571 9,074 5,375 6,327 8,684 4,429 1,794

Operating income 1,443 1,815 1,940 2,161 2,190 (2,205) 383 1,270 61 208

Net income 726 918 1,060 1,223 1,225 (1,512) 53 528 (103) 90

Diluted EPS 0.66 0.84 0.97 1.08 1.04 (1.37) 0.05 0.44 (0.09) 0.08

Shares out (avg) 1,090 1,091 1,091 1,091 1,094 1,101 1,100 1,100 1,100 1,100

Cash from operations 3,000 2,646 3,172 3,810 3,911 314 3,648 1,923 481 206

Capex 2,201 3,250 2,798 3,540 4,362 2,858 2,677 2,482 975 536

Free cash flow 799 (604) 374 270 (451) (2,544) 971 (560) (495) (330)



Intangible assets 489 451 577 730 1,131 1,001 915 1,017 913 1,017

Total assets 25,843 28,665 30,771 35,681 36,935 32,314 34,088 35,593 34,131 35,593

Short-term debt 2,519 4,255 3,240 2,740 3,707 4,788 3,538 4,624 4,046 4,624


Long-term debt 2,477 1,562 2,615 4,084 4,227 4,905 6,011 6,642 6,019 6,642



Common equity 11,340 12,071 13,207 14,219 14,802 12,489 12,553 12,233 12,368 12,233



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BUSINESS OVERVIEW Electronics manufacturer Sharp operates in two segments:

Consumer and Information Products (65% of revenue*): includes audio-visual and communication equipment (~70% of segment revenue; mainly LCD color TVs), health and environmental equipment (~15% of segment revenue; mainly refrigerators and other home appliances) and information equipment (includes point-of-sale products, electronic cash registers, multi-function printers and other IT products).

Electronic components (35% of revenue): includes liquid crystal displays (~60% of segment revenue), solar cells (25% of revenue), and other electronic devices. INVESTMENT HIGHLIGHTS

Electronics manufacturer focused on LCD color TVs and LCD components (~50% of revenue). Mobile phones are another key product area accounting for ~15% of trailing revenue.

Implied EV-to-prior peak EBIT is <5x. If Sharp can sustain recent profitability improvements, the recent enterprise value of less than 0.3x trailing revenue may be too low.

Measures to improve business performance include “producing small- and medium-size LCDs at the Kameyama No. 1 and No. 2 Plants, starting full-fledged production of large-size LCDs at the G6 plant in China, starting operations at a solar cell plant in Italy in the latter half of 2011, and working on solar power generation plant projects.”

~55% of revenue is from overseas production, which helps Sharp to stay competitive and close to customers. ~45% of staff are based outside Japan.

Cash and long-term investments of ~¥340 billion offset debt of ~¥290 billion, as of March 31.


Weak brand relative to competitors including Sony and Panasonic, who may be better-positioned to capture customers’ mind share. Sharp appears relegated to compete mainly on cost.

Pricing pressure reflects the competitive and global nature of the company’s products, with increasing competition from Chinese manufacturers. The gross profit margin decline from 23% in FY07 to 19% in FY11 may be a reflection of this.

“Expect a rough financial performance for the first quarter…as reflected by the suspension of glass input at the large-size LCD plants.” However, none of Sharp’s production facilities suffered “extensive damage” from the March earthquake.

* Based on the year ended March 2011.

SELECTED OPERATING DATA1 FYE March 31 2007 2008 2009 2010 2011 revenue 12% 9% -17% -3% 10% employees (end) 4% 10% 1% 0% 3% assets (end) 16% 4% -13% 5% 2% TBV2/share (end) 8% 3% -16% 1% -2% TBV/share (end) (¥)2 1,085 1,119 944 949 933 Revenue (¥bn) 3,128 3,418 2,847 2,756 3,022 % of revenue by segment: Consumer/information products 66% 67% 67% 67% 65% Electronic components 34% 33% 33% 33% 35% EBIT margin by segment:3,4 Consumer/information products 4% 3% -2% 2% 4% Electronic components 10% 9% -3% 2% 3%

Total EBIT margin 6% 5% -2% 2% 3% % of revenue by geography:5 Japan 49% 47% 46% 52% 53% China 10% 12% 14% 13% 17% Europe 17% 17% 16% 14%

30% Americas 19% 18% 17% 12% Other 6% 6% 7% 8% Selected items as % of revenue: Gross profit 23% 22% 16% 19% 19% R&D 6% 6% 7% 6% 6% Net income 3% 3% -4% 0% 1% Net cash from ops 0% 0% 0% 11% 6% D&A 7% 8% 10% 10% 9% Capex 9% 9% 9% 8% 6% Return on tang. equity 9% 8% -11% 0% 2% Tangible equity to assets 41% 40% 39% 38% 36% shares out (end) 0% 1% 0% 0% 0%

1 Based on Japanese GAAP. 2 TBV=tangible book value (FY11-end TBV est.). 3 EBIT is defined as gross profit less SG&A (excludes special items such as restructuring charges and gains/losses on foreign exchange and securities). Also excludes equity in net earnings of affiliates. 4 Figures may not be comparable year-on-year due to a change in allocation of corporate expenses. 5 Based on customer location.



SNE 30,410 24,090 .3x 1.4x 29x 19x

PC 29,770 37,240 .3x 2.2x 22x 45x

PHG 28,770 28,140 .8x 7.9x 13x 12x

SHCAY 10,300 18,000 .4x .9x 24x 29x

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Nippon Life 5% | Meiji Yasuda Life 4% | Mizuho 4% | MUFJ 4% | Dai-ichi Life 3% | Sompo 2% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE Given Sharp’s relatively weak brand positioning in a competitive and fast-changing global consumer electronics industry, we have little conviction that it can compete effectively over time. As a result, Sharp may be relegated to earning low rates of return in production-oriented businesses in which the investment of tangible capital into capacity expansion is more vital to success than is intellectual property. While the valuation is low relative to revenue, it remains high on average earnings.



SHARP – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE


Valuation methodology 8x estimated ¥90

billion of normalized EBIT

8x estimated ¥120 billion of normalized

EBIT

8x estimated ¥150 billion of normalized

EBIT





Estimated enterprise value ¥720 ¥960 ¥1,200

Plus: Long-term investments3 100 100 100

Minus: Net debt4 (39) (39) (39)



Estimated fair value of the equity of Sharp (¥ in billions)5 ¥750 billion ¥990 billion ¥1,230 billion

¥680 per share ¥900 per share ¥1,120 per share

Estimated fair value of the equity of Sharp (US$ in billions)5 $9.0 billion $11.9 billion $14.8 billion



Implied EV-to-trailing adj. EBIT 9x 12x 15x


Implied trailing FCF yield -3% -2% -2%


Implied fair value of the equity to tangible book7 0.7x 1.0x 1.2x

1 Approximates both trailing revenue as well as average revenue during FY07-11. 2 Average adj. EBIT margin during FY2007-11 is ~3% (FY11: ~2.5%). Adjusted EBIT excludes special items and equity in affiliate earnings. 3 Estimated value of long-term investments, including into affiliated companies. 4 Based on balance sheet values as of March 31, 2011, except for net post-retirement liabilities (as of March 2010). 5 Based on 1,100 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 6 Based on the dividend of ¥17 per share for the fiscal year ended March 2011. 7 Based on an estimated tangible book of ~¥1,025 billion at March 31, 2011 (based on reported shareholders’ equity as of March 31, 2011; assumes no goodwill and intangibles as, to our knowledge, none are disclosed in the company’s filings).

Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. SHARP – RESULTS FOR FYE MARCH 31, 2011 vs. MANAGEMENT GUIDANCE (¥ in billions)




SHARP – OPERATING INCOME

SHARP – CAPEX, D&A and R&D (¥ in billions)

SHARP – SALES BY PRODUCT CATEGORY (¥ in billions)

SHARP – MEASURES TO IMPROVE BUSINESS PERFORMANCE




Sony (Tokyo: 6758, NYSE: SNE) Consumer Cyclical: Audio & Video Equipment Minato-ku, TK, Japan, 81-3-674-2111 www.sony.net




Market value: $30.4 billion This quarter -$0.58 -$0.45 2 P/E FYE 3/30/12 19x







Institutional ownership: 8% 2/3/11 $0.89 n/a LTM pre-tax ROC n/m



per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 88,531 84,554 88,699 97,971 104,770 91,290 85,196 89,399 2,816 26,056

Gross profit 22,824 19,804 21,581 22,037 24,223 17,971 19,485 21,066 (17,001) 6,378

Operating income 973 1,302 2,628 832 5,459 (2,742) 340 2,419 (21,887) 1,624

Net income 1,047 1,934 1,445 1,492 4,363 (1,168) (482) 858 (22,678) 854

Diluted EPS 1.10 1.92 1.38 1.42 4.15 (1.16) (0.48) 0.88 (22.60) 0.85

Shares out (avg) 924 931 998 1,001 1,003 1,004 1,004 1,004 1,004 1,004


Capex 5,047 5,355 5,462 6,230 5,604 5,859 3,992 3,165 1,053 920

Free cash flow 2,424 2,286 (739) 396 3,344 (1,051) 6,789 5,982 2,607 2,518




Total assets 107,360 112,183 125,276 138,369 148,246 141,878 151,947 154,546 151,424 154,546

Short-term debt 5,610 2,719 3,972 1,127 4,194 5,328 3,361 2,509 4,000 2,509


Long-term debt 9,184 8,019 9,033 11,822 8,610 7,796 10,915 9,676 11,412 9,676



Common equity 28,084 33,898 37,837 39,808 40,922 35,012 35,027 34,489 35,490 34,489

EBIT/capital employed 8% 10% 21% 6% 40% -34% n/m n/m n/m n/m


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BUSINESS OVERVIEW Sony operates through the following main segments:

Consumer, Professional & Devices provides TVs, Blu-ray and other video/audio products, cameras, broadcast equipment, semiconductors and electronic components.

Networked Products and Services provides the PlayStation consoles and related software (~50% of revenue) and PCs.

Pictures produces and distributes film and TV programming.

Financial Services mainly includes the 60%-owned Sony Financial Holdings (Tokyo: 8729), which owns the insurance businesses Sony Life and Sony Assurance, and Sony Bank. INVESTMENT HIGHLIGHTS

Globally recognized consumer electronics brand and entertainment content owner. Sony has large market share in most businesses it competes in, with few rivals able to match its reputation and/or scale.

Non-financial business trades at ~0.4x implied EV-to-trailing revenue, assuming the financial segment is worth 2.0x tangible book of ~¥300 billion (approximates market value of Sony Fin’l Holdings).

Appears on track to achieve a 5+% EBIT margin in the non-financial business (~3% in the nine months to December 2010). At the recent valuation, the business may trade below 7x normalized EBIT.

Key initiatives to turn around profitability include improving the LCD television and game businesses, expanding networked products to 350 million units by end of FY13, and growing 3D-related revenue to ¥1+ trillion yen, excl. content, in FY13.


Strategy to “integrate hardware, content and networked services” businesses may fail. While Howard Stringer (69), chairman and CEO since ‘05, has cut costs, sustained profitability remains elusive. Execution is a risk in this ongoing turn-around.

Parts of the electronics businesses are vulnerable to commoditization. More aggressive restructuring and a stronger focus on core businesses is likely required to achieve sustained profitability.



PC 29,770 37,240 .3x 2.2x 22x 45x

PHG 28,770 28,140 .8x 7.9x 13x 12x

SHCAY 10,300 18,000 .4x .9x 24x 29x

SNE 30,410 24,090 .3x 1.4x 29x 19x


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 non-fin’l revenue 2% 13% 8% -13% -12% 3% employees (end) 5% 3% 11% -5% -2% 0% assets (end) 12% 10% 7% -4% 7% 2% TBV/share (end) 12% 9% 3% -35% 0% 1% TBV/share (end) (¥) 1,952 2,126 2,189 ,412 1,415 1,456 Revenue (¥tn) 7.5 8.3 8.9 7.7 7.2 5.6 % of revenue by selected segment: Audio/video/imaging 21% 20% 21% 19% 16% 15% Televisions 12% 15% 15% 17% 14% 17% Components 11% 10% 10% 9% 7% 6% Semiconductors2 2% 2% 3% 3% 10% 9% Consumer3 46% 48% 48% 47% 46% 47% Networked products 30% 30% 32% 31% 21% 21% Pictures 10% 12% 10% 9% 10% 8% Financial services 10% 8% 6% 7% 12% 11% Other4 5% 3% 4% 6% 12% 13% EBIT margin by selected segment: Consumer

0% -1% 4% -4% -2% 4%

Networked products -5% 4% Pictures 4% 4% 7% 4% 6% 1% Financial services 26% 13% 4% -6% 19% 18% Total EBIT margin5 3% 1% 5% -3% 0% 5% ex. fin’l services 1% 0% 5% -3% -2% 3% Net income margin 2% 2% 4% -1% -1% 2% % of revenue by customer location: Japan 29% 26% 23% 24% 29% 29% U.S. 26% 27% 25% 24% 22% 20% Europe 23% 25% 26% 26% 23% 22% Other 22% 23% 26% 26% 26% 28% Selected items as % of revenue (estimates excl. financial services): Gross profit 24% 23% 24% 22% 22% n/a R&D 8% 7% 6% 7% 7% 6% D&A 6% 5% 5% 6% 6% 5% Capex 6% 5% 6% 7% 5% 4% Return on tang equity 7% 6% 17% -5% -3% 12%6 Tang. equity/assets 21% 21% 20% 17% 13% 13% shares out (end) 0% 0% 0% 0% 0% 0%

1 Based on U.S. GAAP. TBV=tangible book value. 2 FY10 and YTD figures include broadcast- and professional-use products previously reported in consumer and networked segments. 3 Officially termed “consumer, professional & devices.” 4 Includes music segment and other businesses, as well as corporate activities. 5 Includes equity in net income/loss of affiliated companies such as the Sony Ericsson JV, businesses not separately listed, and corporate activities. 6 Annualized.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Dodge & Cox 3% | Primecap 2% | Invesco <1% | Fisher <1% | Brandes <1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

THE BOTTOM LINE We view Sony as one of Japan’s highest-quality exporters, based on intellectual property ownership and global brand ubiquity. While large parts of the business are exposed to strong competition and may be vulnerable to commoditization, the recent valuation appears too pessimistic regarding Sony’s earning power. With the non-financial business trading at an implied EV-to-trailing revenue multiple of ~0.4x, the risk-reward is attractive. Management retains plenty of restructuring and asset rationalization options. How quickly and successfully these are pursued will play a key part in closing the gap to intrinsic value.



SONY – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



Sum-of-the-parts: Non-financial

business valued at 10x normalized

EBIT (based on a 4% EBIT margin on

¥6.5 trillion of revenue); Financial business valued at 2.0x tangible book



EBIT (based on a 6% EBIT margin on




EBIT (based on an 8% EBIT margin on


Non-financial business





Estimated enterprise value of non-financial business ¥2,600 ¥3,900 ¥5,200

Minus: Net debt of non-financial business3 (195) (195) (195)

Estimated equity value of non-financial business ¥2,405 ¥3,705 ¥5,005

Financial services business

Estimated tangible shareholders’ equity3 ¥307 ¥307 ¥307


Estimated equity value of Financial Services (100%) ¥615 ¥615 ¥615

as % of Sony Financial Holdings (8729) recent market value4 95% 95% 95%

Estimated value of Financial Services attributable to Sony (~60%) ¥369 ¥369 ¥369

Other assets/liabilities

Less: PV of restructuring costs required to achieve stated profitability5 (100) (200) (300)

Less: Post-employment benefit provisions, net6 (265) (265) (265)

Less: Non-controlling interests7 (0) (0) (0)

Estimated fair value of the equity of Sony (¥ in billions)8 ¥2,410 billion ¥3,610 billion ¥4,810 billion


Estimated fair value of the equity of Sony (US$ in billions)8 $29.0 billion $43.5 billion $58.0 billion


Implied valuation ratios of the non-financial business: EV-to-calendar 2010 revenue 0.40x 0.60x 0.80x

EV-to-average revenue during FY06-10 0.36x 0.54x 0.72x

EV-to-prior peak EBIT (FY08 ended March 2008) 6x 9x 11x

Implied valuation ratios of Financial Services:

Implied P/E assuming a 15% ROE 6x 6x 6x

Other implied ratios (whole company):

Implied trailing earnings yield9 3% 2% 1%



1 Non-financial revenue was ~¥6,500 billion in calendar 2010 (FY06-10 average: ~¥7,250 billion). 2 Non-financial EBIT margin was 3% in the nine months to December 2010 (FY06-10 average: ~0%; FY06-10 peak: 5%). EBIT includes income from equity investees (~¥15 billion in calendar 2010). Investments in affiliated companies totaled ~¥220 billion per the balance sheet value as of December 31, 2010. 3 As of December 31, 2010 (Sony reports separate balance sheets for financial services and non-financial services businesses in its quarterly filings). 4 Most of Sony’ s financial services business is listed as Sony Financial Holdings, Inc. (Tokyo: 8729; listed since 2007), which is a holding company for Sony Life, Sony Assurance and Sony Bank. Sony Financial Holdings remains a consolidated subsidiary of Sony Corp., which owns 60%. Sony’s financial services segment has assets of ~¥7.0 trillion, implying that tangible book is 4-5% of total assets. 5 Sony recorded ~¥16 billion of restructuring charges within operating expenses in the December 2010 quarter. 6 Based on balance sheet value as of December 31, 2010. 7 Non-controlling interest was ~¥350 billion per its balance sheet value as of December 31, 2010. We assume most of the non-controlling interest resides within the financial services business (already accounted for in our valuation). 8 Based on 1,004 million common shares outstanding (1 ADS = 1 share). Estimated fair value in US$ is based on a conversion at the exchange rate of 1US$=¥83. 9 Based on net income guidance of ¥70 billion attributable to Sony Corp. for the year ended March 2011 (negative ¥41 billion in the year ended March 2010). 10 Based on a per share dividend of ¥25 for the year ended March 2010.




SONY – MANAGEMENT GUIDANCE FOR FY10 (¥ in billions)

SONY – MANAGEMENT GUIDANCE FOR FY10 CAPEX, D&A, R&D (¥ in billions)

SONY – EXCERPT FROM COMPANY PRESENTATION (units in millions)

Source: Company presentation of Q3 FY2010 Consolidated Results.



TDK (Tokyo: 6762, OTC: TTDKY) Technology: Electronic Instruments & Controls Chuo-ku, TK, Japan, 81-3-520-7116 www.tdk.co.jp














per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 7,698 7,722 9,334 10,118 10,168 8,538 9,494 10,675 2,484 2,582

Gross profit 2,106 2,037 2,458 2,808 2,709 1,426 2,243 2,669 628 636

Operating income 656 713 776 1,041 1,074 (958) 257 793 116 194

Net income 494 391 518 823 839 (741) 159 496 104 148

Diluted EPS 3.84 3.28 3.94 6.21 6.47 (5.75) 1.23 4.00 0.80 1.14

Shares out (avg) 132 132 132 132 130 129 129 129 129 129

Cash from operations 1,349 1,101 1,041 1,708 1,402 695 1,388 1,365 408 305

Capex 522 716 868 827 990 1,155 756 823 178 238

Free cash flow 827 385 174 881 412 (461) 632 542 229 67



Intangible assets 294 264 574 570 1,096 1,680 1,550 1,365 1,613 1,365

Total assets 9,042 9,484 10,840 11,612 10,981 12,924 12,811 12,293 13,011 12,293

Short-term debt 12 9 127 90 143 899 1,091 1,308 990 1,308


Long-term debt 0 1 5 6 2 2,466 2,108 1,787 2,394 1,787



Common equity 6,764 7,501 8,245 8,953 8,411 6,505 6,383 5,977 6,280 5,977



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BUSINESS OVERVIEW TDK provides components and magnetic products including hard disk drive (HDD) parts. It operates in three segments:

Passive components (49% of revenue; 6% EBIT margin):* comprises (i) capacitors (~35% of segment revenue), (ii) inductive devices (~30% of revenue), and (iii) other passive components such as sensors and piezoelectric materials.

Magnetic Application Products (42% of revenue; 13% EBIT margin): comprises (i) recording devices, mainly HDD heads and suspension assemblies (~70% of segment revenue), and (ii) other magnetic products including recording media.

Other (9% of revenue; 7% EBIT margin): includes rechargeable batteries, mechatronics, and other businesses. INVESTMENT HIGHLIGHTS

Founded in 1935 to commercialize ferrite, a magnetic material. TDK’s growth has centered on ferrite, which is used in electronic equipment.

Investors may underestimate the earning potential of the components business (~50% of revenue) as trailing segment earnings are well below peak historical earnings including German component maker EPCOS, which TDK acquired in late 2008. EPCOS had ~€1.5 billion of revenue in 2008.

Supplying components for smartphones and tablets has driven recent growth. ~25% of FY11 component revenue is from communications end-markets, and ~20% each from car/home electronics.

Views materials expertise as the “starting point for adding value to electronic components.” By emphasizing materials technology, TDK seeks to differentiate itself from rivals focused solely on cost.

80+% of staff and 85+% of sales are outside Japan. INVESTMENT RISKS & CONCERNS

Increased customer concentration may pressure profitability in HDDs, a key earnings contributor. Hard disk drive producers Western Digital and Seagate have recently proposed to acquire the HDD businesses of Hitachi and Samsung, respectively.

Competes in technology industries experiencing rapid change. Many competitors are Asian firms, with currency exchange affecting competitiveness.

Capital allocation. Management spent €1.4 billion of cash to acquire EPCOS at the top of the market in ‘08. Net debt is ¥13 billion after cash/investments.

Exposed to raw materials price increases and potential earthquake-related production issues.

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Panasonic 5% | Nippon Life 2%

SELECTED OPERATING DATA1 FYE March 31 2008 2009 2010 2011 revenue 0% -16% 11% 8% employees (end) 17% 10% 21% 9% assets (end) -5% 18% -1% -3% Tangible book value/share (end) -11% -34% 0% -2% TBV/share (end) (¥) 4,812 3,187 3,192 3,118 Revenue (¥bn) 866 727 809 876 % of revenue by segment: Passive components n/a 39% 45% 49% Magnetic application products n/a 51% 47% 42% Other n/a 10% 7% 9% Revenue growth by selected segment: Passive components n/a n/a 27% 18% Magnetic application products n/a n/a 4% -4% Adj. EBIT margin by major segment:2 Passive components n/a n/a -3% 6% Magnetic application products n/a n/a 12% 13%

Total adj. EBIT margin 8% -5% 4% 7% % of revenue by geography:3 Asia and others (ex-Japan) 65% 63% 63% 62% Europe 7% 10% 14% 15% Japan 18% 16% 13% 13% Americas 11% 11% 10% 10% Selected items as % of revenue: Gross profit 27% 17% 24% 25% R&D 7% 8% 7% 6% Special items4 1% -4% 0% 0% Net income 8% -9% 2% 5% Net cash from ops 14% 8% 15% 12% D&A 8% 12% 10% 9% Capex 10% 14% 8% 9% Return on tang. equity 11% -12% 3% 11% Tangible equity/assets 75% 57% 43% 43% shares out (end) -2% 0% 0% 0%

1 Based on U.S. GAAP. Certain historical data is not comparable y-y due to, among others, the acquisition of component maker EPCOS in October ‘08 and the sale of TDK Life on Record brand recording products to Imation in August ‘07. Segment information prior to FY10 is not available due to reporting changes. 2 Excludes special items and equity in earnings/losses of affiliates. 3 Based on the location of the customer. 4 Includes restructuring costs, gains/losses on foreign exchange and securities transactions, as well as certain non-recurring items.



VSH 3,050 2,580 .9x 2.2x 10x 9x

FCS 2,520 2,410 1.5x 2.5x 12x 11x

TTDKY 6,450 7,080 .7x 1.4x 12x 15x

RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends? * Financials are based on the year ended March 2011.

THE BOTTOM LINE TDK has strong market positions in the manufacture of hard disk drive parts and passive components used by electronic equipment manufacturers. Unfortunately, the HDD business is challenged by technology change and increasing customer concentration. While TDK has strengthened its component business via the €1.4 billion purchase of EPCOS in 2008, it has overpaid and turned its cash reserves into modest net debt. At the recent valuation, we are not overly interested in the shares.



TDK – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE




trailing EBIT1)

8x estimated ¥75 billion of normalized EBIT (approximates prior peak EBIT in

FY07/08, which excludes Epcos2)

8x estimated ¥100 billion of normalized EBIT (approximates component business EBIT guidance at the time of Epcos merger

in 2008 plus the trailing EBIT of the

rest of the business3)

Normalized revenue ¥850 ¥1,000 ¥1,000

Normalized EBIT margin 7.5% 7.5% 10.0%



Estimated enterprise value ¥510 ¥600 ¥800


Minus: Net debt4 (116) (116) (116)



Estimated fair value of the equity of TDK (¥ in billions)5 ¥410 billion ¥500 billion ¥700 billion


Estimated fair value of the equity of TDK (US$ in billions)5 $4.9 billion $6.0 billion $8.4 billion







Implied EV-to-trailing EBIT 8.0x 9.4x 12.5x 1 Adjusted EBIT for the year to March 2011 is ~¥64 billion (~7.5% EBIT margin). Adjusted EBIT excludes special items and equity in earnings/losses of affiliates (both were immaterial). 2 TDK reported adjusted EBIT of ¥72 billion for the year ended March 2008. This excludes any contribution from German-based component manufacturer EPCOS, which was acquired in October 2008. TDK paid an enterprise value of €1.4 billion for EPCOS, which implied an EV-to-trailing revenue multiple of ~1.0x at the time. 3 Based on TDK’s merger presentation from July 2008, management expected the combined TDK-EPCOS component business to achieve annual sales of ¥600-700 billion and an EBIT margin of “over 10%.” TDK reported trailing EBIT of ~¥40 billion, excluding the component segment. 4 Based on balance sheet values as of March 31, 2011. 5 Based on 129 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 6 Based on a dividend of ¥80 per share for the fiscal year ended March 2011. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. TDK – SELECTED FINANCIAL DATA




TDK – SELECTED FINANCIAL DATA (cont.)

Source: Company presentation dated April 27, 2011. TDK – SALES MOMENTUM, BY APPLICATION

Source: Company presentation dated April 27, 2011. TDK – CHANGE IN OPERATING INCOME (FY ended March 31, 2010 to FY ended March 31, 2011)




Toyota Motor (Tokyo: 7203, NYSE: TM) Consumer Cyclical: Auto & Truck Manufacturers Toyota-shi, AC, Japan, 81-565-282-212 toyota.jp




Market value: $138.8 billion This quarter $0.54 $0.54 1 P/E FYE 3/30/12 29x







Institutional ownership: 0% 11/5/10 $0.73 $0.67 LTM pre-tax ROC 5%



per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10

Revenue 207,857 222,962 252,832 287,820 315,958 246,735 227,762 239,913 63,613 56,164

Gross profit 41,154 44,245 49,179 56,724 57,315 24,924 27,248 31,374 8,797 6,948

Operating income 20,034 20,097 22,575 26,906 27,287 (5,541) 1,773 6,324 2,273 1,191

Net income 13,967 14,077 16,492 19,759 20,646 (5,251) 2,517 5,949 1,841 1,125

Diluted EPS 8.24 8.54 10.13 12.30 12.99 (3.34) 1.61 3.86 1.17 0.72

Shares out (avg) 1,695 1,648 1,627 1,605 1,589 1,570 1,568 1,568 1,568 1,568


Capex 17,890 23,115 33,306 32,332 33,171 27,942 17,278 19,929 4,124 4,363

Free cash flow 9,549 5,381 (3,074) 6,586 2,664 (10,192) 13,472 3,410 1,685 (1,851)




Total assets 264,891 292,471 345,311 391,500 390,101 349,282 364,753 351,353 355,177 351,353

Short-term debt 39,832 42,458 57,171 70,495 74,853 75,923 66,078 64,054 68,077 64,054


Long-term debt 51,046 60,272 67,790 75,279 71,894 75,734 84,315 80,596 83,112 80,596



Common equity 98,294 108,707 126,921 142,252 142,654 120,921 124,508 122,949 121,785 122,949



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BUSINESS OVERVIEW Toyota manufactures vehicles and provides related financing. INVESTMENT HIGHLIGHTS

One of the largest global vehicle producers, with ~10% market share based on global vehicle sales of 65 million in 2009 (down 4% y-y).* Toyota’s market share in 2009: Japan (~48%); North America (~16%); ex-Japan Asia (~13%); and Europe (~5%).

Asia (ex-Japan) represents ~60% of 2010 EBIT despite accounting for only ~15% of vehicles sold. This is due to losses in Japan, which accounts for ~30% of vehicles sold and ~40% of revenue.

Shares are cheap if vehicle EBIT margin reverts to 5% average, from 1% in 2010. This depends on turning around the Japanese operations, which had a 2010 EBIT margin of -2% versus 15+% in FY06-08.

Vehicle business trades at an implied EV-to-2010 revenue of ~0.4x, assuming the financial segment is worth 1.0x tangible book of ~¥1.0 trillion. Vehicle segment net cash was ~¥1.2 trillion at 3/31/10.

~40% of vehicles sold are “global models” using common platforms and parts. Global brands include IMV, Vitz/Yaris, Camry and Corolla/Auris.

U.S. recall may have increased accountability. Toyota reduced the board from 27 members to 11.


Industry challenges make it difficult to achieve good returns on capital. Challenges include capital intensity, cyclicality, and environmental regulation.

Profitability improvements may have to wait due to the Japan earthquake, which is causing supply chain problems and affecting Toyota’s production (~60% of Toyota’s vehicles are produced in Japan).

Fallout from the 2010 recall of faulty cars in the U.S. is resulting in market share losses there.

Credit risk due to the financial services business, which has ¥13+ trillion of assets (~1.3x market cap).

COMPARABLE PUBLIC COMPANY ANALYSIS P / This Next MV EV EV / Tang. FY FY ($mn) ($mn) Rev. Book P/E P/E

VLKAY 76,760 153,390 .8x 1.6x 10x 8x

HMC 69,620 103,860 .9x 1.4x 10x 10x

GM 48,310 43,680 .3x n/m 8x 6x

NSANY 42,700 78,520 .6x 1.3x 17x 17x

TM 138,840 241,220 1.0x 1.1x 43x 29x

MAJOR HOLDERS (notable non-trustees only) Insiders <1% | Toyota Industries Corp. 6% | MUFJ 5%


FYE March 31 2006 2007 2008 2009 2010 YTD

12/31/10 automotive revenue 13% 13% 10% -23% -7% 6% vehicles sold 8% 7% 5% -15% -4% 6% vehicles produced 7% 6% 4% -18% -3% 12% employees (end) 8% 5% 6% 1% 0% n/a assets (end) 18% 13% 0% -10% 4% -1% TBV/share (end) 1 % 14% 2% -15% 3% 1% TBV/share (end) (¥) 3,258 3,701 3,769 3,208 3,303 3,262 Revenue (¥tn) 21.0 23.9 26.3 20.5 19.0 14.4 % of revenue by segment: Automotive 92% 92% 92% 90% 91% 91% Financial services 5% 5% 6% 7% 7% 6% All other/Eliminations 3% 3% 2% 3% 3% 2% EBIT margin by segment: Automotive 9% 9% 9% -2% -1% 1% Financial services 16% 12% 6% -5% 20% 34% All other/eliminations 4% 6% 2% 1% -3% 6% Total EBIT margin 9% 9% 9% -2% 1% 3% % of revenue by geography:2 North America 35% 37% 35% 30% 29% 28% Japan 37% 34% 32% 36% 39% 37% Europe 12% 14% 14% 14% 11% 10% Asia/Other 16% 15% 18% 20% 21% 25% EBIT margin by major geography:3 North America 7% 5% 3% -6% 2% 6% Japan 14% 18% 17% -3% -3% -3% Europe 4% 4% 4% -5% -2% 0% Asia/Other 7% 5% 8% 6% 8% 10% Selected items as % of revenue: R&D 4% 4% 4% 4% 4% 4% Net income 7% 7% 7% -2% 1% 3% D&A 6% 6% 6% 7% 7% 6% Capex4 7% 6% 6% 7% 3% 3% Selected Automotive segment metrics (mn, worldwide): Vehicles sold 8.0 8.5 8.9 7.6 7.2 5.5 Vehicles produced 7.7 8.2 8.5 7.1 6.8 5.4 Gross margin 19% 19% 18% 9% 10% n/a Selected Financial Services segment metrics: Gross receiv. (¥tn)5 8.7 10.1 10.7 10.1 10.4 n/a Loan loss reserve 1.2% 1.1% 1.1% 2.4% 2.2% n/a Net income margin 11% 9% 3% -5% 10% n/a Return on tang. equity 14% 15% 14% -4% 2% 5%6 Tangible equity/assets 37% 37% 36% 36% 34% 35% shares out (end) -1% -1% -2% 0% 0% 0%

1 Based on U.S. GAAP. TBV=tangible book value. 2 Based on country location of subsidiary transacting the sale to the customer. 3 Excludes unallocated costs/eliminations, which are not material. 4 Excludes equipment leased to others. 5 Excludes operating leases (¥1.8 trillion at 3/10). 6 Annualized.

RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends? * Based on company data.

THE BOTTOM LINE Car industry pioneer Toyota is struggling following multiple “shocks” including the financial crisis of 2008/09, the massive U.S. vehicle recall in 2010, and most recently, due to production issues related to the Japanese earthquake. While it may take time, an eventual reversion to average profitability should reward long-term shareholders. Trading at tangible book, the shares offer an attractive risk-reward as Toyota is likely to deliver normalized ROEs of 10+%, in-line with historical experience.



TOYOTA MOTOR – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE



Sum-of-the-parts: Automotive valued at 10x normalized EBIT (based on a 4% EBIT margin on ¥18 trillion of revenue); Financial

business valued at 1.0x tangible book





Automotive business



Estimated normalized EBIT ¥720 ¥1,000 ¥1,320


Estimated enterprise value of Automotive ¥7,200 ¥10,000 ¥13,200

Plus: Automotive net cash3 1,162 1,162 1,162

Estimated equity value of Automotive ¥8,362 ¥11,162 ¥14,362

Financial services business

Estimated tangible shareholders’ equity4 ¥1,029 ¥1,029 ¥1,029


Estimated equity value of Financial Services ¥1,029 ¥1,029 ¥1,029

Other assets/liabilities

Plus: Estimated value of equity investees5, 6 ¥1,817 ¥1,817 ¥1,817

Less: Post-employment benefit provisions, net5 (682) (682) (682)

Less: Non-controlling interests5 (578) (578) (578)

Estimated fair value of the equity of Toyota (¥ in billions)7 ¥9,950 billion ¥12,750 billion ¥15,950 billion


Estimated fair value of the equity of Toyota (US$ in billions)7 $120 billion $154 billion $192 billion $76 per ADS $98 per ADS $123 per ADS



Implied valuation ratios of Automotive:

EV-to-calendar 2010 EBIT 47x 66x 87x

EV-to-average EBIT during FY06-10 7x 9x 12x

EV-to-calendar 2010 revenue 0.40x 0.56x 0.74x

EV-to-average revenue during FY06-10 0.36x 0.49x 0.65x

Implied valuation ratios of Financial Services:

Implied P/E assuming a 15% ROE 7x 7x 7x

1 Automotive revenue was ¥18.0 trillion in calendar 2010 (FY06-10 average: ~¥20 trillion). 2 Automotive EBIT margin was 1% in calendar 2010 (FY06-10 average: 5%). EBIT excludes income from equity investees. Toyota targets a “consolidated operating return on sales” of 5% (approx.¥1 trillion) “as soon as possible.” This is based on 7.5 million vehicles sold and an exchange rate of $1=¥85. Toyota sold 7.6 million vehicles in calendar 2010 (FY06-10 average: 8.0 million). 3 Based on automotive segment net cash, as of March 31, 2010, excluding non-current marketable securities and other securities investments (this may be a very conservative assumption!). Toyota reports separate balance sheets for financial services and non-financial services businesses in 20-F filings. 4 Estimated based on disclosure as of March 31, 2010. Financial services segment assets are ~¥13 trillion, implying that tangible book is ~8% of total assets. 5 Based on balance sheet values as of December 31, 2010. 6 Equity in earnings of affiliated companies totaled ¥223 billion in calendar 2010. 7 Based on 3,136 million common shares outstanding (1 ADS = 2 shares). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83. 8 Based on a trailing per share dividend of ¥45.




TOYOTA MOTOR – SELECTED MARKET SHARE DATA, by geographic region

The following table sets forth Toyota’s vehicle unit sales and market share in North America, Europe, Asia and Japan on a retail basis for the periods shown. Each market’s total sales and Toyota’s sales represent new vehicle registrations in the relevant year (except for the Asia market where vehicle registration does not necessarily apply). All information on Japan excludes mini-vehicles. The sales information contained below excludes unit sales by Daihatsu and Hino, each a consolidated subsidiary of Toyota. Vehicle unit sales in Asia do not include sales in Pakistan.

(units in millions) Calendar Years Ended December 31,

2004 2005 2006 2007 2008 2009

North America

Total market sales 20.1 20.4 20.0 19.4 16.3 12.7

Toyota sales (retail basis, excluding mini-vehicles) 2.3 2.5 2.8 2.9 2.5 2.1

Toyota market share 11.4% 12.4% 14.2% 15.1% 15.6% 16.2%

Europe


Toyota sales (retail basis) 1.0 1.0 1.1 1.3 1.1 0.9


Asia


Toyota sales (retail basis)1 0.7 0.8 0.8 0.8 0.8 0.8

Toyota market share 14.3% 16.1% 14.7% 14.3% 14.6% 13.1% 1 Toyota’s principal Asian markets are Thailand, Indonesia, India, Malaysia and Taiwan.

(units in millions) Fiscal Years Ended March 31,

2005 2006 2007 2008 2009 2010

Japan

Total market sales (excluding mini-vehicles) 3.9 3.9 3.6 3.4 2.9 3.2

Toyota sales (retail basis, excluding mini-vehicles) 1.8 1.7 1.6 1.6 1.3 1.5


(units in millions) CY Ended December 31,

2008 2009

Worldwide vehicle sales 68 65

Toyota worldwide vehicles sold 8.4 6.7

Toyota worldwide market share 12.4% 10.3%

Source: Company data, The Manual of Ideas analysis. TOYOTA MOTOR – U.S. VEHICLE SALES MARKET SHARE, by company *

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

GM 28% 28% 28% 28% 27% 26% 24% 23% 22% 20% 19%

Toyota 9% 10% 10% 11% 12% 13% 15% 16% 16% 17% 15%

Ford 23% 22% 20% 19% 18% 17% 16% 15% 14% 15% 16%

Honda 7% 7% 7% 8% 8% 8% 9% 9% 11% 11% 10%

Chrysler 14% 13% 13% 13% 13% 13% 13% 13% 11% 9% 9%

Nissan 4% 4% 4% 5% 6% 6% 6% 7% 7% 7% 8%

Other 15% 16% 17% 17% 17% 17% 18% 18% 19% 21% 22%

Source: Ward’s Automotive Group, a division of Penton Media Inc. * WardsAuto.com has more detailed U.S. sales data as well as other automotive data sets.



Appendix: Selected Statistics on Japan

Source: Japan Statistical Yearbook 2011, The Manual of Ideas analysis.



Favorite Stock Screens For Value Investors “Magic Formula,” based on Trailing Operating Income Companies with high returns on capital employed, trading at high trailing EBIT-to-enterprise value yield

▼ ▼

Move To Trailing EBIT/ Price/ Insiders Price 52-Week MV EV EV/ EBIT/ Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales EV Employed Rate Book Own. Sells

1 Daily Journal DJCO 73.00 -14% 5% 101 23 .6x 49% infinite 37% 1.5x 4% - / 1

2 Argan AGX 9.52 -22% 21% 130 46 .3x 37% infinite 41% 1.7x 2% - / -

3 Bridgepoint Edu. BPI 16.78 -24% 62% 884 605 .8x 36% infinite 41% 3.8x 1% 7 / 7

4 SuperGen SUPG 2.64 -35% 32% 159 44 .8x 36% infinite n/m 1.3x 0% - / -

5 ITT Educational ESI 73.99 -32% 65% 2,098 1,935 1.2x 32% infinite 39% >9.9x 0% 12 / 2

6 Metropolitan Health MDF 3.88 -23% 37% 158 110 .3x 38% 2665% 38% 2.5x 3% 4 / 5

7 Unisys UIS 32.50 -48% 27% 1,397 1,392 .3x 27% infinite 26% n/m 1% 19 / 12

8 PDL BioPharma PDLI 6.28 -26% 7% 877 1,197 3.5x 25% infinite 39% n/m 0% 1 / -

9 ePlus PLUS 26.96 -39% 13% 228 204 .2x 21% infinite 39% 1.2x 9% 5 / 8

10 Career Education CECO 21.19 -23% 69% 1,646 1,198 .6x 27% 789% 33% 3.8x 1% 17 / 11

11 Apollo Group APOL 39.80 -15% 68% 5,636 4,794 1.0x 29% 518% 60% 5.3x 3% 12 / 12

12 * ACADIA Pharma ACAD 2.24 -71% 6% 116 79 1.9x 19% infinite n/m 3.9x 0% - / -

13 Oshkosh OSK 34.95 -30% 28% 3,171 3,960 .4x 31% 341% 33% n/m 0% 12 / 7

14 Tessera Technologies TSRA 18.40 -19% 26% 940 465 1.5x 27% 382% 45% 1.8x 1% 6 / 5

15 Power-One PWER 7.69 -33% 70% 824 652 .6x 46% 243% 41% 3.1x 2% 2 / 3

16 Amerigroup AGP 64.94 -53% 2% 3,216 2,468 .4x 18% infinite 37% 3.6x 2% 13 / 16

17 USA Mobility USMO 14.80 -18% 30% 327 198 .8x 30% 271% n/m 1.8x 2% 10 / 5

18 Cardiome Pharma CRME 4.46 -9% 110% 273 222 3.4x 17% infinite n/m 5.5x 0% - / -

19 Dell DELL 15.27 -26% 15% 29,116 20,748 .3x 17% infinite 21% >9.9x 13% 13 / 12

20 United Online UNTD 6.21 -24% 40% 547 705 .8x 17% infinite 40% n/m 5% 11 / 11

21 Impax Labs IPXL 26.46 -73% 6% 1,722 1,373 1.6x 29% 241% 36% 3.6x 1% 5 / 6

22 AutoChina AUTC 26.43 -26% 51% 520 367 .6x 16% infinite 22% 2.3x 0% - / -

23 * GameStop GME 26.54 -33% 2% 3,734 3,272 .3x 20% 288% 35% 5.8x 1% 16 / 11

24 * Forest Labs FRX 32.55 -26% 6% 9,312 5,578 1.3x 24% 198% 22% 2.0x 1% 8 / 9

25 Global Cash Access GCA 3.10 -27% 194% 201 349 .6x 15% infinite 52% n/m 1% - / 4

26 * InterDigital IDCC 45.90 -51% 28% 2,082 1,540 3.9x 15% infinite 36% 9.3x 1% 17 / 13

27 Rigel Pharmaceuticals RIGL 7.82 -23% 13% 409 232 1.9x 15% infinite n/m 2.5x 0% - / 1

28 ViroPharma VPHM 19.72 -48% 12% 1,497 1,138 2.6x 19% 277% 37% 5.6x 0% 6 / 6

29 Veeco Instruments VECO 48.90 -40% 11% 1,989 1,454 1.6x 19% 248% 4% 2.9x 1% 4 / 5

30 Lihua International LIWA 7.92 -19% 65% 237 149 .4x 36% 148% 27% 1.5x 47% 2 / -

31 DeVry DV 49.29 -26% 51% 3,413 2,951 1.4x 16% 334% 33% 6.1x 2% 17 / 6

32 Providence Service PRSC 14.03 -15% 32% 182 303 .3x 19% 195% 43% n/m 2% 6 / 2

33 Aeropostale ARO 25.90 -18% 24% 2,118 1,852 .8x 21% 161% 40% 4.9x 1% 17 / 9

34 Lincoln Educational LINC 15.67 -38% 80% 351 342 .5x 38% 122% 41% 3.1x 5% 9 / 8

35 Microsoft MSFT 25.52 -11% 24% 214,429 182,848 2.7x 14% 2353% 24% 6.1x 11% 10 / 11

36 * Almost Family AFAM 36.14 -35% 22% 338 293 .9x 18% 183% 40% 5.1x 10% 10 / 4

37 EarthLink ELNK 8.17 -5% 14% 885 929 1.5x 20% 147% 41% 2.6x 1% 12 / 6

38 AmSurg AMSG 25.84 -37% 8% 807 1,050 1.5x 22% 131% 16% n/m 3% 6 / 7

39 Amedisys AMED 33.66 -32% 81% 993 1,054 .6x 18% 173% 39% >9.9x 1% 7 / 7

40 * Rimage RIMG 15.01 -7% 22% 143 26 .3x 45% 111% 37% 1.1x 0% 5 / 1

41 Deluxe DLX 26.82 -38% 9% 1,381 2,118 1.5x 14% 479% 35% n/m 1% 9 / 6

42 * IDT Corp. IDT 29.03 -73% 5% 520 302 .2x 13% infinite 6% 2.8x 18% 11 / 3

43 H&R Block HRB 17.65 -43% 8% 5,388 5,683 1.5x 13% infinite 36% n/m 0% 9 / -

44 Medicis Pharma MRX 35.08 -40% 2% 2,165 1,630 2.3x 13% infinite 40% 4.0x 1% 1 / 2

45 * SanDisk SNDK 48.99 -33% 9% 11,596 10,358 2.1x 14% 369% 12% 2.0x 0% 7 / 9

Company website SEC Y! Price Charts Proxy Y!

* New additions are highlighted. Screening criteria: ► Market value > $100 million ► ADRs and banks excluded



“Magic Formula,” based on This Year’s EPS Estimates Companies with high returns on capital employed, trading at high earnings yields (based on this FY EPS estimates)

▼ ▼ Move To This FY EBIT/ Price to Insiders Price 52-Week MV EV EV/ EPS Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales Yield Employed Rate Book Own. Sells




4 GT Solar SOLR 9.65 -49% 24% 1,206 1,024 1.2x 12% infinite 36% >9.9x 0% 10 / 14

5 * DepoMed DEPO 8.54 -70% 22% 458 390 4.8x 12% infinite n/m >9.9x 1% 2 / -




9 Apollo Group APOL 39.80 -15% 68% 5,636 4,794 1.0x 12% 518% 60% 5.3x 3% 12 / 12

10 Power-One PWER 7.69 -33% 70% 824 652 .6x 13% 243% 41% 3.1x 2% 2 / 3


12 GameStop GME 26.54 -33% 2% 3,734 3,272 .3x 11% 288% 35% 5.8x 1% 16 / 11

13 Forest Labs FRX 32.55 -26% 6% 9,312 5,578 1.3x 11% 198% 22% 2.0x 1% 8 / 9


15 Lam Research LRCX 48.98 -28% 21% 6,052 4,812 1.5x 12% 127% 10% 2.9x 1% 14 / 11

16 Veeco Instruments VECO 48.90 -40% 11% 1,989 1,454 1.6x 11% 248% 4% 2.9x 1% 4 / 5

17 Kulicke and Soffa KLIC 8.76 -40% 21% 626 522 .7x 16% 104% 2% 2.2x 2% 14 / 13


19 Cisco Systems CSCO 16.94 -2% 64% 93,644 68,656 1.6x 9% 3441% 16% 3.6x 0% 17 / 12

20 America’s Car-Mart CRMT 24.36 -16% 24% 258 316 .9x 10% 192% 37% 1.4x 1% - / 1

21 Gilead Sciences GILD 39.06 -19% 10% 30,973 32,360 4.2x 10% 173% 26% 7.0x 0% 8 / 8

22 Nephros NEP 4.20 -33% 117% 124 66 .7x 26% 82% 20% 1.1x 23% - / 2

23 * LTX-Credence LTXC 8.89 -44% 27% 440 315 1.2x 12% 101% n/m 2.9x 0% 1 / 2

24 Actuate BIRT 5.13 -23% 18% 236 197 1.5x 9% infinite 26% 7.9x 4% 6 / 7

25 * PMC-Sierra PMCS 7.23 -5% 31% 1,687 1,590 2.5x 9% infinite 27% 5.7x 0% 5 / 8

26 DeVry DV 49.29 -26% 51% 3,413 2,951 1.4x 9% 334% 33% 6.1x 2% 17 / 6


28 Teradyne TER 17.81 -50% 8% 3,302 2,648 1.6x 10% 165% 4% 3.3x 0% 5 / 5

29 Marvell Technology MRVL 15.70 -12% 43% 9,944 7,015 1.9x 9% 188% 1% 3.0x 0% 2 / 3

30 * SanDisk SNDK 48.99 -33% 9% 11,596 10,358 2.1x 9% 369% 12% 2.0x 0% 7 / 9

31 Cephalon CEPH 75.91 -29% 2% 5,750 5,634 2.0x 11% 93% 32% 9.6x 1% 10 / 10

32 * Chinacast Education CAST 5.69 -8% 40% 284 179 2.3x 11% 101% 35% 2.1x 0% 2 / -

33 Exceed Company EDS 6.96 -16% 34% 177 64 .2x 23% 70% 14% .8x 0% - / -

34 Amedisys AMED 33.66 -32% 81% 993 1,054 .6x 9% 173% 39% >9.9x 1% 7 / 7

35 China Valves CVVT 4.22 -9% 200% 151 130 .7x 31% 66% 25% 1.1x 0% - / -

36 Gulf Resources GFRE 4.19 -4% 185% 146 77 .5x 43% 65% 26% .8x 12% 6 / 1

37 * Intel INTC 21.46 -18% 12% 115,566 105,725 2.3x 11% 94% 28% 3.7x 0% 2 / 3

38 * KLA-Tencor KLAC 42.60 -37% 22% 7,124 6,233 2.5x 11% 91% 28% 3.5x 1% 10 / 6

39 * AsiaInfo Holdings ASIA 19.08 -17% 71% 1,432 1,152 3.4x 8% 795% 15% 5.0x 6% 9 / 6


41 SciClone Pharma SCLN 4.80 -57% 1% 231 177 2.1x 11% 83% 9% 2.8x 0% - / -

42 * DST Systems DST 48.78 -27% 13% 2,266 2,929 1.3x 9% 162% 33% 4.2x 4% 12 / 10

43 * Eli Lilly LLY 36.26 -12% 5% 41,977 42,176 1.8x 12% 73% 20% 5.5x 0% 24 / 8

44 * Amtech Systems ASYS 22.46 -64% 37% 211 158 1.0x 10% 99% 39% 2.5x 2% 8 / 7

45 * Lexmark LXK 36.92 -14% 30% 2,918 2,350 .6x 13% 66% 19% 2.8x 1% 10 / 8


* New additions are highlighted. Screening criteria: ► MV > $100 million ► ADRs and banks excluded ► Enterprise value to MV < 1.5



“Magic Formula,” based on Next Year’s EPS Estimates Companies with high returns on capital employed, trading at high earnings yields (based on next FY EPS estimates)

▼ ▼ Move To Next FY EBIT/ Price to Insiders Price 52-Week MV EV EV/ EPS Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales Yield Employed Rate Book Own. Sells


2 GT Solar SOLR 9.65 -49% 24% 1,206 1,024 1.2x 15% infinite 36% >9.9x 0% 10 / 14



5 Power-One PWER 7.69 -33% 70% 824 652 .6x 16% 243% 41% 3.1x 2% 2 / 3



8 GameStop GME 26.54 -33% 2% 3,734 3,272 .3x 12% 288% 35% 5.8x 1% 16 / 11



11 America’s Car-Mart CRMT 24.36 -16% 24% 258 316 .9x 12% 192% 37% 1.4x 1% - / 1


13 Kulicke and Soffa KLIC 8.76 -40% 21% 626 522 .7x 17% 104% 2% 2.2x 2% 14 / 13

14 Actuate BIRT 5.13 -23% 18% 236 197 1.5x 11% infinite 26% 7.9x 4% 6 / 7

15 PMC-Sierra PMCS 7.23 -5% 31% 1,687 1,590 2.5x 11% infinite 27% 5.7x 0% 5 / 8

16 Gilead Sciences GILD 39.06 -19% 10% 30,973 32,360 4.2x 12% 173% 26% 7.0x 0% 8 / 8

17 LTX-Credence LTXC 8.89 -44% 27% 440 315 1.2x 15% 101% n/m 2.9x 0% 1 / 2

18 Cisco Systems CSCO 16.94 -2% 64% 93,644 68,656 1.6x 10% 3441% 16% 3.6x 0% 17 / 12


20 Nephros NEP 4.20 -33% 117% 124 66 .7x 27% 82% 20% 1.1x 23% - / 2

21 Teradyne TER 17.81 -50% 8% 3,302 2,648 1.6x 11% 165% 4% 3.3x 0% 5 / 5

22 Marvell Technology MRVL 15.70 -12% 43% 9,944 7,015 1.9x 11% 188% 1% 3.0x 0% 2 / 3

23 * Chinacast Education CAST 5.69 -8% 40% 284 179 2.3x 12% 101% 35% 2.1x 0% 2 / -

24 Lam Research LRCX 48.98 -28% 21% 6,052 4,812 1.5x 11% 127% 10% 2.9x 1% 14 / 11

25 Exceed Company EDS 6.96 -16% 34% 177 64 .2x 27% 70% 14% .8x 0% - / -

26 Amtech Systems ASYS 22.46 -64% 37% 211 158 1.0x 11% 99% 39% 2.5x 2% 8 / 7

27 China Valves CVVT 4.22 -9% 200% 151 130 .7x 36% 66% 25% 1.1x 0% - / -

28 DeVry DV 49.29 -26% 51% 3,413 2,951 1.4x 10% 334% 33% 6.1x 2% 17 / 6

29 * SciClone Pharma SCLN 4.80 -57% 1% 231 177 2.1x 12% 83% 9% 2.8x 0% - / -

30 Gulf Resources GFRE 4.19 -4% 185% 146 77 .5x 47% 65% 26% .8x 12% 6 / 1


32 Intel INTC 21.46 -18% 12% 115,566 105,725 2.3x 11% 94% 28% 3.7x 0% 2 / 3


34 SinoCoking Coal SCOK 6.98 -25% 240% 146 176 2.6x 25% 61% 13% 2.1x 0% - / -

35 * AsiaInfo Holdings ASIA 19.08 -17% 71% 1,432 1,152 3.4x 9% 795% 15% 5.0x 6% 9 / 6

36 Lexmark LXK 36.92 -14% 30% 2,918 2,350 .6x 13% 66% 19% 2.8x 1% 10 / 8

37 * Amedisys AMED 33.66 -32% 81% 993 1,054 .6x 9% 173% 39% >9.9x 1% 7 / 7

38 * Grand Canyon LOPE 13.71 -6% 96% 617 612 1.6x 10% 111% 39% 4.6x 11% - / 6

39 * Hackett Group HCKT 4.04 -34% 12% 167 142 .7x 9% 175% n/m 4.4x 9% 9 / 3

40 USANA Health USNA 34.26 -7% 33% 543 516 1.0x 10% 126% 34% 6.2x 51% 11 / 14

41 * Walter Energy WLT 136.38 -58% 5% 8,486 8,555 5.1x 11% 78% 32% >9.9x 1% 15 / 10

42 * SanDisk SNDK 48.99 -33% 9% 11,596 10,358 2.1x 9% 369% 12% 2.0x 0% 7 / 9

43 * KLA-Tencor KLAC 42.60 -37% 22% 7,124 6,233 2.5x 10% 91% 28% 3.5x 1% 10 / 6

44 SkyPeople Juice SPU 4.00 -15% 65% 103 64 .7x 32% 53% 27% .9x 0% 1 / -

45 * Integrated Silicon ISSI 9.51 -31% 46% 253 178 .7x 15% 57% 1% 1.4x 0% 1 / 1


* New additions are highlighted. Screening criteria: ► MV > $100 million ► ADRs and banks excluded ► Enterprise value to MV < 1.5



Contrarian: Biggest YTD Losers (deleveraged & profitable) Non-financial companies with no net debt, positive analyst estimates for next year’s EPS, and large YTD price drop

▼ Price Change Since Price to Next Insiders Price MV EV December 31, Tangible FY % Buys/ Company Ticker ($) ($mn) ($mn) 2004 2009 2010 Book P/E Own. Sells

1 SemiLEDs LEDS 10.87 296 204 n/m n/m -63% 1.7x 27x 7% 7 / -

2 * Gulf Resources GFRE 4.19 146 77 20850% -64% -61% .8x 2x 12% 6 / 1

3 China Valves CVVT 4.22 151 130 -75% -54% -60% 1.1x 3x 0% - / -

4 * Am. Superconductor AMSC 11.74 595 352 -21% -71% -59% 1.3x 31x 5% 1 / 1

5 China Xiniya Fashion XNY 3.98 232 100 n/m n/m -57% 1.5x 4x 0% - / -

6 Smith Micro Software SMSI 7.87 275 203 -12% -14% -50% 2.6x 11x 6% 12 / 12

7 Ambow Education AMBO 7.32 523 417 n/m n/m -47% 3.8x 9x 0% - / -

8 Trident Microsystems TRID 0.98 175 81 -88% -47% -45% 1.2x 12x 0% 6 / -

9 * QuickLogic QUIK 3.68 141 119 30% 74% -43% 4.8x 37x 0% 4 / 4

10 * China-Biotics CHBT 8.52 189 56 n/m -45% -42% 1.0x 4x 23% - / -

11 * SmartHeat HEAT 3.09 119 74 n/m -79% -41% .9x 3x 0% 1 / -

12 Cree CREE 39.04 4,274 3,201 -3% -31% -41% 2.4x 24x 0% 6 / 5

13 Novatel Wireless NVTL 5.67 182 105 -71% -29% -41% 1.5x 20x 2% 10 / 6

14 * Anadigics ANAD 4.17 281 184 11% -1% -40% 1.4x 13x 4% 11 / 5

15 * Medifast MED 17.78 274 246 405% -42% -38% 3.9x 9x 9% - / 7

16 TEKELEC TKLC 7.55 521 300 -63% -51% -37% 1.4x 18x 1% 8 / 8

17 * AXT AXTI 6.63 212 187 320% 104% -36% 1.9x 9x 1% 1 / 2

18 * Uranium Energy UEC 3.85 275 241 n/m 2% -36% 4.6x 15x 2% 1 / 1

19 Rosetta Stone RST 13.69 283 161 n/m -24% -35% 2.1x 27x 1% - / 1

20 * Daktronics DAKT 10.49 436 362 -16% 14% -34% 2.3x 23x 6% 6 / 8

21 * Quepasa QPSA 7.72 125 118 106% 268% -34% 13.6x 35x 10% 6 / 1

22 * Global Edu. & Tech. GEDU 6.30 164 39 n/m n/m -34% 1.4x 13x 0% - / -

23 * KIT digital KITD 10.76 408 273 -90% -2% -33% 2.8x 10x 0% - / -

24 * HiSoft Technology HSFT 20.43 590 420 n/m n/m -32% 3.9x 19x 0% - / -

25 * NutriSystem NTRI 14.36 403 392 404% -54% -32% 5.4x 15x 3% - / 5

26 * Marchex MCHX 6.54 233 196 -69% 29% -31% 2.3x 23x 7% 5 / 4

27 * MIPS Technologies MIPS 10.45 546 445 6% 139% -31% 6.0x 18x 0% 13 / 7

28 Entropic Comms ENTR 8.35 715 569 n/m 172% -31% 2.9x 9x 0% 8 / 8

29 * THQ THQI 4.19 285 276 -73% -17% -31% 2.4x 14x 0% 6 / 3

30 * Protalix BioTherap. PLX 6.93 571 535 247% 5% -31% n/m 87x 0% - / -

31 * Grand Canyon LOPE 13.71 617 612 n/m -28% -30% 4.6x 10x 11% - / 6

32 * Lihua International LIWA 7.92 237 149 n/m -24% -30% 1.5x 4x 47% 2 / -

33 * Origin Agritech SEED 7.51 179 154 13% -36% -29% 6.5x 14x 0% - / -

34 * Mattson Technology MTSN 2.12 107 88 -81% -41% -29% 1.7x 8x 0% 2 / 2

35 EnerNOC ENOC 17.00 446 293 n/m -44% -29% 2.3x 38x 11% 10 / 6

36 * AirMedia AMCN 4.90 321 215 n/m -35% -29% 1.4x 13x 0% - / -

37 * Hawaiian Holdings HA 5.58 281 185 -18% -20% -29% 2.7x 9x 2% 1 / 1

38 Axcelis Technologies ACLS 2.47 262 216 -70% 75% -29% 1.3x 7x 2% 7 / 5

39 Dolby Laboratories DLB 47.79 5,355 4,651 n/m 0% -28% 4.4x 16x 0% 15 / 11

40 * Longtop Fin. Tech LFT 26.00 1,484 1,071 n/m -30% -28% 3.5x 12x 0% - / -

41 * CDI CDI 13.37 256 244 -37% 3% -28% 1.4x 18x 1% 5 / 4

42 * ShengdaTech SDTH 3.55 193 156 n/m -42% -28% 1.2x 6x 0% - / -

43 * eLong LONG 14.40 342 195 -23% 30% -27% 2.2x 24x 0% - / -

44 * Nephros NEP 4.20 124 66 950% -55% -27% 1.1x 4x 23% - / 2

45 * MGP Ingredients MGPI 8.06 144 144 -7% 5% -27% 1.8x 12x 2% 3 / 4

Company website SEC Y! Stock Price Charts Proxy Y!

* New additions are highlighted. Screening criteria: ► Positive net cash ► Positive next FY EPS estimate ► Market value > $100 million



Value with Catalyst: Cheap Repurchasers of Stock Companies that may be creating value by reducing their shares outstanding at relatively cheap prices

▼ Q-Q Next Price to Net Cash Insiders Price MV EV Change FY Tangible as % of % Buys/ Company Ticker ($) ($mn) ($mn) in Shares P/E Book MV Own. Sells

1 Allied World AWH 63.42 2,412 n/m -11.5% - .9x n/m 0% - / -

2 * RadioShack RSH 15.83 1,685 1,755 -9.5% 8x 2.1x -4% 1% 8 / 7

3 * Canandaigua National CNND 354.00 167 n/m -8.5% - 1.5x n/m 8% 8 / 2

4 * Pernix Therapeutics PTX 11.59 263 260 -7.2% 12x 33.3x 1% 0% - / -

5 Vishay Intertech VSH 18.43 3,049 2,583 -6.6% 9x 2.2x 15% 1% 11 / 3

6 ITT Educational ESI 73.99 2,098 1,935 -6.0% 9x 16.4x 8% 0% 12 / 2

7 * A.M. Castle CAS 17.60 404 437 -5.9% 12x 1.8x -8% 1% 3 / 2

8 Telenor TELNY 49.06 26,773 30,447 -5.8% 9x 4.0x -14% 0% - / -

9 * Enstar Group ESGR 100.65 1,316 n/m -5.6% 8x 1.4x n/m 1% 1 / 1

10 * Journal Comms JRN 5.58 357 427 -5.6% 11x 3.7x -20% 0% 2 / 2

11 Tyson Foods TSN 19.49 7,358 8,784 -5.6% 10x 2.2x -19% 1% 16 / 9

12 * Manulife Financial MFC 17.65 31,376 n/m -5.5% - 1.7x n/m 0% - / -

13 * Aeropostale ARO 25.90 2,118 1,852 -4.9% 10x 4.9x 13% 1% 17 / 9

14 XL Group XL 24.19 7,478 n/m -4.8% - .8x n/m 0% - / -

15 * Travelers TRV 61.32 25,685 n/m -4.4% 10x 1.2x n/m 0% 23 / 17

16 * A. H. Belo AHC 8.18 176 90 -4.4% 28x 1.1x 49% 2% 5 / 6

17 * Validus VR 32.07 3,248 n/m -4.3% 7x 1.0x n/m 2% 9 / 2

18 Lukoil LUKOY 69.90 59,385 68,043 -4.2% 5x 1.0x -15% 0% - / -

19 * Argo Group AGII 31.34 860 n/m -4.1% 11x .6x n/m 0% 1 / -

20 Corinthian Colleges COCO 4.23 358 549 -4.0% 10x 2.2x -53% 1% 19 / 8

21 Aetna AET 39.06 14,873 n/m -4.0% 9x 3.5x n/m 0% 5 / 4

22 * DIRECTV DTV 47.00 37,204 46,212 -3.9% 12x n/m -24% 0% 12 / 5

23 * Kohl’s KSS 52.03 15,110 14,929 -3.9% 10x 1.9x 1% 1% 15 / 5

24 O2Micro OIIM 7.23 262 159 -3.8% 11x 1.5x 39% 0% - / -

25 Platinum Underwriter PTP 37.41 1,394 n/m -3.8% 8x .8x n/m 2% 13 / 4

26 * REX American REX 16.46 158 189 -3.7% - .6x -20% 5% 3 / 3

27 * Celestica CLS 11.04 2,181 1,548 -3.6% - 1.6x 29% 0% - / -

28 Endurance Specialty ENH 45.17 1,791 n/m -3.5% 9x .7x n/m 0% - / -

29 * Meritor MTOR 16.66 1,570 2,325 -3.3% 8x n/m -48% 3% 17 / 13

30 * Comtech Telecomm. CMTL 28.05 749 355 -3.2% 26x 1.5x 53% 2% 3 / 1

31 * Tower Group TWGP 22.00 924 n/m -3.2% 7x 1.3x n/m 9% 15 / 10

32 * Devon Energy DVN 89.11 38,050 40,669 -3.1% 11x 2.9x -7% 1% 12 / 12

33 * Lubrizol LZ 134.48 8,617 9,073 -3.1% 11x 7.6x -5% 1% 18 / 17

34 * People’s United PBCT 13.20 4,747 n/m -3.1% 17x 1.5x n/m 1% 12 / 14

35 Hewlett-Packard HPQ 40.99 88,700 99,169 -3.0% 7x n/m -12% 0% 16 / 13

36 ProAssurance Corp. PRA 63.45 2,190 n/m -2.9% 12x 1.3x n/m 1% 8 / 7

37 Employers Holdings EIG 19.59 754 n/m -2.9% 15x 1.7x n/m 1% 12 / 10

38 Alterra Capital ALTE 21.68 2,280 n/m -2.8% 9x .8x n/m 0% - / -

39 PartnerRe PRE 78.45 5,291 n/m -2.8% 9x .8x n/m 0% - / -

40 * Diversified Global DGHG 1.40 122 138 -2.7% - .6x -13% 0% - / -

41 * PowerSecure POWR 0.00 139 140 -2.7% 13x 1.8x -1% 5% 4 / 4

42 * Gap GPS 0.00 12,813 11,152 -2.6% 11x 3.3x 13% 6% 12 / 11

43 * West Coast Bancorp WCBO 0.00 339 n/m -2.6% 15x 1.3x n/m 0% - / -

44 W.R. Berkley WRB 0.00 4,497 n/m -2.5% 13x 1.2x n/m 4% 3 / 3

45 Axis Capital AXS 0.00 4,154 n/m -2.5% 9x .8x n/m 0% - / -

Company website SEC Y! Proxy Y!

* New additions are highlighted. Criteria: ► MV < 2 * BV ► Next FY P/E < 12 ► Debt/equity < 0.4 ► MV > $100mn ► Q-Q shares < 0



Profitable Dividend Payors with Decent Balance Sheets Dividend-paying companies with no net debt and EPS estimates in excess of 75% of the indicated annual dividend

▼ Move To Dividend Yield Est. P/E Price to Insiders Price 52-Week MV EV Last 12 Annual This Next Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Months Indicated FY FY Book Own. Sells

1 * Invesco Mortgage IVR 21.73 -31% 11% 1,568 1,504 16% 17% 5x 5x 1.5x 0% 7 / 4

2 Two Harbors Invest. TWO 10.35 -23% 11% 717 n/m 14% 15% 7x 7x 1.9x 1% 9 / 1

3 Life Partners LPHI 7.40 -10% 165% 138 n/m 14% 11% 5x 5x 2.0x 0% 1 / -

4 Himax Tech HIMX 2.38 -16% 36% 426 378 21% 11% 12x 9x 1.1x 0% - / -

5 BBVA Banco Frances BFR 11.14 -52% 24% 2,043 n/m 10% 10% 10x 8x 2.3x 0% - / -

6 PennyMac Mortgage PMT 18.06 -14% 7% 501 n/m 7% 9% 8x 7x 1.6x 3% 16 / 1

7 TICC Capital TICC 11.02 -37% 19% 351 n/m 7% 9% 11x 10x 1.1x 0% - / -

8 Crexus Investment CXS 11.28 -4% 22% 825 n/m 5% 8% 11x 9x 3.1x 0% - / -

9 NGP Capital NGPC 9.27 -27% 17% 201 n/m 7% 8% 12x 10x .9x 0% 1 / -

10 Telecom Argentina TEO 22.63 -35% 20% 2,072 1,847 9% 7% 9x 8x 1.7x 0% - / -

11 Gladstone Investment GAIN 7.60 -33% 13% 168 n/m 6% 7% 10x 14x .8x 1% 4 / -

12 Colony Financial CLNY 18.49 -11% 16% 609 n/m 5% 7% 12x 9x 1.8x 0% 4 / -

13 Mesabi Trust MSB 35.15 -56% 65% 461 n/m 7% 7% 14x 12x >9.9x 0% - / -

14 THL Credit TCRD 13.80 -35% 8% 277 n/m 2% 7% 12x 9x 1.1x 0% 4 / -

15 Nokia NOK 8.63 -10% 52% 32,413 22,416 7% 6% 13x 11x 3.1x 0% - / -

16 BGC Partners BGCP 9.00 -48% 12% 891 n/m 5% 6% 11x 10x 3.8x 14% 7 / 4

17 NY Community Banc. NYB 16.19 -11% 19% 7,081 n/m 6% 6% 14x 12x 2.3x 1% 12 / 6

18 AstraZeneca AZN 49.93 -19% 7% 68,711 65,383 5% 6% 7x 8x >9.9x 0% - / -

19 CTC Media CTCM 22.10 -42% 14% 3,473 3,296 2% 6% 18x 14x >9.9x 0% 7 / 7

20 * Telular WRLS 6.95 -66% 28% 104 93 3% 6% 25x 21x 1.9x 3% 9 / 2

21 Lorillard LO 99.21 -29% 2% 14,258 13,964 4% 5% 13x 12x n/m 0% 15 / 3

22 Tower Bancorp TOBC 21.73 -18% 27% 260 n/m 5% 5% 13x 11x 1.1x 4% 22 / 2

23 * Co. Bebidas Americas ABV 31.77 -44% 1% 86,627 86,496 3% 5% 19x 18x >9.9x 0% - / -

24 * NutriSystem NTRI 14.36 -9% 73% 403 392 5% 5% 31x 15x 5.4x 3% - / 5

25 Nat’l Australia Bank NABZY 28.98 -36% 0% 62,165 n/m 6% 5% 12x 11x 1.9x 0% - / -

26 * CNB Financial CCNE 13.72 -23% 20% 168 n/m 5% 5% 11x 9x 1.6x 4% 14 / 1

27 People’s United PBCT 13.20 -8% 24% 4,747 n/m 5% 5% 23x 17x 1.5x 1% 12 / 14

28 Bristol Myers Squibb BMY 27.82 -20% 1% 47,424 45,568 5% 5% 13x 13x 6.7x 0% 13 / 13

29 United Bankshares UBSI 25.32 -13% 26% 1,105 n/m 5% 5% 15x 14x 2.3x 3% 4 / 8

30 American Software AMSWA 7.61 -41% 5% 197 155 5% 5% 30x 22x 3.9x 0% 3 / -

31 Westpac Banking WBK 137.08 -37% 0% 82,340 n/m 5% 5% 13x 13x 2.9x 0% - / -

32 Banco Argentaria BBVA 12.12 -29% 19% 54,691 n/m 3% 5% 8x 9x 1.4x 0% - / -

33 Santander Brasil BSBR 11.61 -15% 35% 87,026 n/m 5% 5% 10x 9x 3.4x 0% - / -

34 Australia and NZ ANZBY 25.75 -37% 1% 66,951 n/m 5% 5% 11x 11x 2.4x 0% - / -

35 * AXA AXAHY 21.88 -36% 5% 50,893 n/m 5% 4% 14x 7x 1.3x 0% - / -

36 * HSBC HBC 54.36 -20% 9% 191,568 n/m 3% 4% 11x 7x 1.6x 0% - / -

37 Safety Insurance SAFT 46.75 -27% 7% 710 n/m 4% 4% 15x 15x 1.1x 6% 12 / 8

38 Baldwin & Lyons BWINB 23.52 -15% 12% 345 n/m 10% 4% 24x 26x .9x 5% 6 / 3

39 Female Health FHCO 4.79 -11% 41% 133 129 4% 4% 20x 16x 8.6x 17% 8 / 3

40 * Arrow Financial AROW 23.96 -11% 19% 281 n/m 4% 4% 13x 13x 2.1x 3% 10 / 6

41 China Mobile CHL 46.76 -5% 17% 186,306 143,140 4% 4% 11x 13x 2.3x 0% - / -

42 Renasant RNST 16.40 -22% 10% 411 n/m 4% 4% 17x 13x 1.5x 1% 12 / 10

43 * DDi Corp. DDIC 9.77 -40% 26% 198 181 2% 4% 8x 7x 2.4x 2% 7 / 9

44 American Ecology ECOL 17.77 -27% 4% 324 317 4% 4% 22x 16x >9.9x 1% 6 / 1

45 * Turkcell TKC 15.18 -20% 31% 13,290 11,823 5% 4% 10x 10x 2.9x 0% - / -


* New additions are highlighted. Criteria: ► Positive net cash ► Positive EPS estimates for this FY and next FY ► MV > $100 million



Deep Value: Lots of Revenue, Low Enterprise Value Companies that trade at low multiples of net revenue

▼ Move To Est. P/E Price to Insiders Price 52-Week MV EV EV/ This Next Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales FY FY Book Own. Sells

1 Eastman Kodak EK 3.22 -10% 182% 866 487 .07x n/m n/m n/m 0% 9 / 2

2 Ingram Micro IM 20.91 -30% 3% 3,367 2,848 .08x 10x 8x 1.1x 1% 12 / 9

3 Tech Data TECD 52.51 -34% 2% 2,445 2,100 .09x 10x 9x 1.2x 1% 14 / 15

4 World Fuel Services INT 37.84 -38% 11% 2,674 2,442 .13x 15x 13x 3.7x 3% 5 / 6

5 Barnes & Noble BKS 10.24 -17% 139% 617 895 .13x n/m n/m n/m 2% - / 10

6 Office Depot ODP 4.24 -21% 117% 1,177 1,638 .14x n/m 27x 1.8x 0% - / 4

7 Kelly Services KELYA 19.11 -47% 20% 701 700 .14x 17x 11x 1.3x 13% 11 / 5

8 AmerisourceBergen ABC 40.55 -33% 1% 11,115 11,116 .14x 17x 15x >9.9x 1% 13 / 8

9 Sunoco SUN 42.17 -36% 11% 5,102 6,046 .16x 23x 16x 1.7x 0% 9 / 3

10 Insight Enterprises NSIT 17.37 -30% 13% 811 780 .16x 10x 9x 1.8x 1% 12 / 10

11 Cardinal Health CAH 42.96 -31% 0% 15,025 16,347 .17x 17x 14x >9.9x 0% 12 / 5

12 SYNNEX SNX 32.47 -30% 13% 1,180 1,586 .17x 9x 8x 1.4x 1% 10 / 6

13 McKesson MCK 82.48 -30% 1% 20,971 21,820 .20x 17x 15x >9.9x 0% 10 / 11

14 IDT Corp. IDT 29.03 -73% 5% 520 302 .21x 11x 11x 2.8x 18% 11 / 3

15 Brightpoint CELL 10.37 -44% 27% 707 756 .21x 10x 9x >9.9x 2% 17 / 15

16 Flextronics FLEX 7.29 -33% 17% 5,541 6,173 .22x - - 2.9x 0% - / -

17 BJ’s Wholesale Club BJ 48.64 -26% 4% 2,612 2,557 .24x 17x 16x 2.3x 0% 3 / -

18 Celestica CLS 11.04 -33% 13% 2,181 1,548 .24x - - 1.6x 0% - / -

19 Supervalu SVU 10.97 -36% 48% 2,327 8,906 .24x 9x 9x n/m 0% - / -

20 * Grupo Casa Saba SAB 19.37 -50% 22% 512 653 .25x - - .8x 0% - / -

21 Best Buy BBY 30.12 -7% 62% 11,873 12,457 .25x 9x 8x 2.6x 1% 19 / 3

22 Sanmina-SCI SANM 11.25 -21% 80% 902 1,647 .25x 7x 6x 1.3x 2% 15 / 8

23 Sears Holdings SHLD 82.30 -28% 52% 8,924 11,081 .26x 83x 64x 2.2x 0% 1 / 4

24 Tesoro TSO 27.55 -62% 4% 3,947 5,294 .26x 11x 10x 1.3x 0% 5 / 8

25 Valero Energy VLO 29.03 -47% 7% 16,538 21,541 .26x 10x 8x 1.1x 0% 9 / 10

26 Fred’s FRED 13.66 -26% 5% 537 492 .27x 16x 13x 1.3x 5% 2 / 5

27 Delek US Holdings DK 13.91 -56% 3% 757 1,004 .27x 19x 20x 2.1x 0% - / -

28 * Sony SNE 30.50 -15% 21% 30,410 24,089 .27x 29x 19x 1.4x 0% - / -

29 * Charming Shoppes CHRS 4.61 -38% 37% 534 556 .27x 31x 14x 2.6x 0% 2 / 6

30 Owens & Minor OMI 33.59 -24% 1% 2,141 2,191 .27x 16x 15x 3.7x 2% 16 / 13

31 Kroger KR 24.51 -22% 2% 15,212 22,279 .27x 13x 11x 3.7x 1% 19 / 7

32 EMCOR Group EME 30.18 -26% 9% 2,017 1,458 .28x 17x 13x 4.0x 1% 12 / 9

33 Rite Aid RAD 1.03 -17% 45% 917 7,207 .29x n/m n/m n/m 0% - / -

34 Kindred Healthcare KND 24.68 -53% 6% 975 1,246 .29x 15x 14x 1.4x 3% 21 / 12

35 Manpower MAN 68.14 -41% 2% 5,580 5,677 .29x 23x 17x 4.8x 1% 17 / 10

36 Avnet AVT 34.85 -36% 7% 5,296 6,564 .29x 9x 8x 2.1x 0% 17 / 15

37 * Insperity NSP 29.70 -32% 6% 786 508 .30x 28x 19x 3.6x 3% 11 / 8

38 Tyson Foods TSN 19.49 -25% 5% 7,358 8,784 .30x 10x 10x 2.2x 1% 16 / 9

39 Coca-Cola FEMSA KOF 80.29 -24% 6% 2,198 2,707 .30x 16x 15x .4x 0% - / -

40 * Benchmark Electron. BHE 17.32 -20% 32% 1,059 724 .30x 13x 11x 1.0x 1% 5 / 5

41 * Jabil Circuit JBL 19.91 -49% 16% 4,351 4,686 .31x 9x 8x 2.6x 4% 4 / 9

42 Sonic Automotive SAH 13.49 -39% 15% 712 2,108 .31x 11x 9x n/m 12% 7 / 6

43 * Brown Shoe BWS 12.45 -18% 60% 552 774 .31x 10x 8x 1.6x 4% 16 / 8

44 * NACCO Industries NC 104.68 -35% 27% 711 841 .31x 9x 8x 1.8x 2% 36 / 8

45 Arrow Electronics ARW 43.21 -50% 2% 5,015 5,911 .32x 9x 8x 2.6x 1% 11 / 11


* New additions are highlighted. Criteria: ► EV to trailing revenue less than 0.5x ► MV does not exceed revenue ► MV > $500 million



Deep Value: Neglected Gross Profiteers Companies that trade at low multiples of gross profit

▼ Move To Enterprise Value / Est. P/E Price/ Insiders Price 52-Week MV EV Gross This Next Tang. % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales Profit EBIT FY FY Book Own. Sells

1 Stewart Information STC 10.75 -28% 36% 205 123 .1x .1x .1x 25x 8x .9x 2% 7 / 6

2 * FXCM FXCM 13.28 -16% 16% 230 37 .1x .1x .4x 14x 10x 6.1x 0% - / -

3 Winn-Dixie Stores WINN 6.78 -12% 99% 378 313 .0x .2x n/m n/m n/m .6x 2% 19 / 13

4 Eastman Kodak EK 3.22 -10% 182% 866 487 .1x .2x n/m n/m n/m n/m 0% 9 / 2

5 Five Star Quality FVE 8.47 -68% 6% 305 316 .3x .3x 12.0x 12x 10x 2.0x 2% 5 / -

6 Kindred Healthcare KND 24.68 -53% 6% 975 1,246 .3x .3x 13.0x 15x 14x 1.4x 3% 21 / 12

7 WellCare WCG 41.93 -47% 6% 1,784 425 .1x .5x 55.2x 15x 13x 2.5x 1% 7 / 11

8 Office Depot ODP 4.24 -21% 117% 1,177 1,638 .1x .5x n/m n/m 27x 1.8x 0% - / 4

9 Barnes & Noble BKS 10.24 -17% 139% 617 895 .1x .5x n/m n/m n/m n/m 2% - / 10

10 Blyth BTH 46.61 -35% 29% 384 280 .3x .5x 6.0x 16x - 1.6x 28% 1 / 4

11 Charming Shoppes CHRS 4.61 -38% 37% 534 556 .3x .5x n/m 31x 14x 2.6x 0% 2 / 6

12 MedCath MDTH 13.26 -47% 11% 269 178 .4x .6x n/m >99x >99x .9x 2% - / 5

13 * RealNetworks RNWK 3.57 -27% 27% 487 161 .4x .6x n/m n/m n/m 1.2x 0% 5 / 4

14 Imation IMN 11.53 -27% 9% 448 143 .1x .6x n/m n/m 41x 1.0x 1% 4 / 3

15 Natuzzi NTZ 4.43 -40% 14% 244 188 .2x .6x 53.6x 5x - .5x 0% - / -

16 * Tuesday Morning TUES 5.05 -30% 71% 218 200 .2x .6x 9.2x 16x 11x .8x 2% 5 / 5

17 American Equity AEL 12.48 -32% 12% 740 742 .6x .6x .6x 7x 6x .8x 5% 10 / 7

18 Coca-Cola FEMSA KOF 80.29 -24% 6% 2,198 2,707 .3x .7x 2.0x 16x 15x .4x 0% - / -

19 Corinthian Colleges COCO 4.23 -8% 356% 358 549 .3x .7x 112.0x 5x 10x 2.2x 1% 19 / 8

20 Coldwater Creek CWTR 2.72 -16% 222% 252 212 .2x .7x n/m n/m n/m 1.3x 0% 1 / -

21 Haverty Furniture HVT 12.40 -23% 45% 271 222 .4x .7x 30.9x 30x 18x 1.1x 2% 1 / 3

22 * Hawaiian Holdings HA 5.58 -16% 56% 281 185 .1x .7x 2.0x 12x 9x 2.7x 2% 1 / 1

23 * Xyratex XRTX 9.97 -5% 105% 302 204 .1x .7x 2.0x 11x 6x .8x 0% - / -

24 * Rosetta Stone RST 13.69 -8% 101% 283 161 .6x .7x 12.5x n/m 27x 2.1x 1% - / 1

25 Gleacher & Co. GLCH 1.90 -21% 143% 251 212 .8x .8x n/m 9x 6x 1.1x 11% 2 / 3

26 Brown Shoe BWS 12.45 -18% 60% 552 774 .3x .8x 10.6x 10x 8x 1.6x 4% 16 / 8

27 * Systemax SYX 12.82 -11% 90% 472 390 .1x .8x 5.7x 9x 7x 1.3x 2% 2 / 1

28 Kenneth Cole KCP 13.14 -19% 67% 240 157 .3x .8x 173.9x 60x 15x 1.7x 0% 2 / 2

29 * Career Education CECO 21.19 -23% 69% 1,646 1,198 .6x .8x 4.9x 8x 9x 3.8x 1% 17 / 11

30 * Investment Tech ITG 17.08 -23% 16% 710 393 .7x .8x 7.9x 17x 13x 2.3x 2% 15 / 9

31 * GAIN Capital GCAP 6.51 -7% 57% 225 157 .8x .8x 3.0x 8x 6x n/m 5% 21 / 12

32 * hhgregg HGG 12.12 -2% 157% 481 497 .3x .8x 6.5x 11x 9x 1.6x 3% 5 / 5

33 Humana HUM 72.34 -40% 3% 12,198 5,730 .2x .8x 3.1x 11x 11x 3.1x 1% 9 / 10

34 Celadon Group CGI 15.12 -29% 11% 340 348 .6x .9x 16.2x 25x 16x 2.4x 8% 9 / 6

35 Lincoln Educational LINC 15.67 -38% 80% 351 342 .5x .9x 2.8x 8x 8x 3.1x 5% 9 / 8

36 RadioShack RSH 15.83 -14% 51% 1,685 1,755 .4x .9x 4.7x 9x 8x 2.1x 1% 8 / 7

37 * Talbots TLB 5.50 -23% 223% 385 400 .3x .9x 12.7x 25x 11x 5.3x 3% 12 / 7

38 * Kelly Services KELYA 19.11 -47% 20% 701 700 .1x .9x 18.4x 17x 11x 1.3x 13% 11 / 5

39 PC Connection PCCC 8.85 -35% 12% 238 206 .1x .9x 5.3x 10x 9x 1.1x 2% 2 / 3

40 * Bob Evans Farms BOBE 31.12 -26% 12% 943 1,063 .6x .9x 12.0x 14x 13x 1.5x 2% 6 / 7

41 Spartan Stores SPTN 15.43 -17% 15% 349 499 .2x .9x 8.2x 12x 11x 7.1x 0% - / 1

42 Christopher & Banks CBK 6.11 -17% 82% 218 141 .3x .9x n/m n/m n/m 1.3x 1% 4 / 8

43 * eHealth EHTH 12.62 -26% 27% 269 141 .9x .9x 4.3x 36x 33x 2.0x 1% - / 6

44 Hot Topic HOTT 6.50 -30% 27% 290 214 .3x .9x n/m 72x 34x 1.3x 0% 4 / 1

45 Liz Claiborne LIZ 6.16 -37% 58% 583 1,138 .5x .9x n/m n/m 26x n/m 1% 10 / 1


* New additions are highlighted. Criteria: ► EV not more than trailing gross profit ► MV not more than 2x gross profit ► MV > $200 million



Activist Targets: Potential Sales, Liquidations or Recaps Companies that may unlock value through a corporate event

▼ Move To Price to Next Insiders Price 52-Week MV EV Tangible Net Cash NCAV EV/ FY % Buys/ Company Ticker ($) Low High ($mn) ($mn) Book (% of MV) (% of MV) Sales P/E Own. Sells

1 Qiao Xing Mobile QXM 2.88 -27% 107% 138 (171) .3x 225% 286% n/m - 0% - / -

2 Qiao Xing Universal XING 2.05 -34% 91% 188 (228) .4x 221% 174% n/m - 0% - / -

3 Audiovox VOXX 7.27 -15% 34% 168 121 .6x 28% 133% .2x - 8% 10 / 10

4 Alvarion ALVR 1.76 -6% 127% 105 15 .8x 86% 109% .1x - 0% - / -

5 * SmartHeat HEAT 3.09 -18% 214% 119 74 .9x 38% 108% .6x 3x 0% 1 / -

6 Exceed Company EDS 6.96 -16% 34% 177 64 .8x 64% 105% .2x 4x 0% - / -

7 Myriad Pharma MYRX 4.35 -18% 19% 111 (3) .8x 103% 100% n/m n/m 0% 1 / -

8 Xyratex XRTX 9.97 -5% 105% 302 204 .8x 32% 98% .1x 6x 0% - / -

9 China Agritech CAGC 6.88 -3% 199% 143 97 1.0x 32% 95% 1.0x - 2% - / 2

10 ModusLink MLNK 5.25 -3% 76% 230 76 .8x 67% 90% .1x - 2% 9 / -

11 Tuesday Morning TUES 5.05 -30% 71% 218 200 .8x 8% 84% .2x 11x 2% 5 / 5

12 Imation IMN 11.53 -27% 9% 448 143 1.0x 68% 83% .1x 41x 1% 4 / 3

13 Flexsteel Industries FLXS 15.57 -35% 26% 105 97 .9x 7% 82% .3x - 16% 7 / 5

14 Nam Tai Electronics NTE 6.02 -33% 34% 270 42 .8x 85% 82% .1x - 0% - / -

15 Rimage RIMG 15.01 -7% 22% 143 26 1.1x 82% 82% .3x 14x 0% 5 / 1

16 Ingram Micro IM 20.91 -30% 3% 3,367 2,848 1.1x 15% 82% .1x 8x 1% 12 / 9

17 PC Connection PCCC 8.85 -35% 12% 238 206 1.1x 14% 81% .1x 9x 2% 2 / 3

18 Benchmark Electron. BHE 17.32 -20% 32% 1,059 724 1.0x 32% 81% .3x 11x 1% 5 / 5

19 Force Protection FRPT 4.65 -17% 30% 328 178 1.0x 46% 81% .3x 11x 2% 10 / 4

20 * A-Power Energy APWR 4.12 -3% 171% 163 60 .6x 63% 80% .2x 6x 0% - / -

21 Callaway Golf ELY 6.98 -17% 46% 450 395 .8x 12% 78% .4x 19x 0% 6 / 6

22 Maxygen MAXY 5.12 -39% 6% 155 21 1.2x 86% 78% .6x - 1% 1 / -

23 Kimball KBALB 7.57 -36% 14% 206 176 .6x 15% 77% .1x - 2% 8 / 3

24 Cogo Group COGO 7.98 -27% 20% 287 257 1.3x 10% 75% .6x 7x 1% 2 / 1

25 Cutera CUTR 8.48 -18% 42% 116 26 1.2x 78% 75% .5x n/m 0% - / -

26 * Advanced Battery ABAT 2.04 -26% 113% 156 45 .8x 71% 75% .5x - 0% - / 1

27 InfoSpace INSP 8.51 -22% 28% 310 56 1.3x 82% 74% .2x 22x 2% 5 / 9

28 * SkyPeople Juice SPU 4.00 -15% 65% 103 64 .9x 38% 72% .7x 3x 0% 1 / -

29 Tech Data TECD 52.51 -34% 2% 2,445 2,100 1.2x 14% 72% .1x 9x 1% 14 / 15

30 Exar EXAR 5.96 -9% 30% 265 79 1.1x 70% 71% .5x 75x 1% 4 / 5

31 FormFactor FORM 10.09 -32% 101% 511 164 1.2x 68% 71% .9x n/m 0% 1 / 1

32 * China-Biotics CHBT 8.52 -15% 120% 189 56 1.0x 70% 71% .5x 4x 23% - / -

33 Sprott Physical Gold PHYS 13.38 -20% 1% 1,659 487 1.4x 71% 71% n/m - 0% - / -

34 G. Willi-Food WILC 7.44 -30% 9% 101 51 1.2x 50% 69% .5x - 0% - / -

35 * SuperGen SUPG 2.64 -35% 32% 159 44 1.3x 72% 68% .8x 13x 0% - / -

36 * Enstar Group ESGR 100.65 -46% 1% 1,316 (1,942) 1.4x 248% 67% n/m 8x 1% 1 / 1

37 Movado MOV 16.96 -44% 4% 421 318 1.2x 24% 67% .8x 28x 6% 14 / 8

38 BigBand Networks BBND 2.49 -6% 46% 174 31 1.3x 82% 67% .3x n/m 1% 13 / 9

39 West Marine WMAR 10.80 -23% 26% 245 223 1.1x 9% 66% .4x 11x 0% 3 / 1

40 * Vital Images VTAL 13.82 -12% 21% 194 60 1.4x 69% 65% 1.0x >99x 0% 2 / -

41 QLT QLTI 7.72 -31% 12% 392 183 1.1x 53% 65% 4.1x - 1% 3 / -

42 * Tecumseh Products TECUA 10.23 -17% 52% 188 187 .4x 0% 64% .2x - 0% 2 / 1

43 * Core-Mark CORE 33.26 -23% 12% 378 369 1.1x 2% 64% .1x 13x 2% 14 / 8

44 PennyMac Mortgage PMT 18.06 -14% 7% 501 (32) 1.6x 106% 64% n/m 7x 3% 16 / 1

45 * Opnext OPXT 2.48 -48% 79% 223 186 1.1x 17% 64% .5x n/m 0% - / 2


* New additions are highlighted. Criteria: ► Tang. book > 50% of MV ► ST assets - liabilities > 50% of MV ► Net cash ► MV > $100mn



This Month’s Top 10 Web Links A Selection of Our Favorite Freely Accessible Internet Resources Click on the link next to each title, or type the Web address into your Web browser:

Jeremy Grantham’s Q1 Letter: “Time to Wake Up” http://bit.ly/hfAqWq

Leucadia National Annual Letter and Report http://bit.ly/g0QE10

Larry Robbins’ Glenview Capital Annual Letter http://scr.bi/gwCbtp

Michael Burry on The Financial Crisis (video) http://bit.ly/i2mHYi

WealthTrack Interview with Jim Grant (video) http://blip.tv/file/5026106

World Economic Forum on Long-Term Investing http://bit.ly/eK3CAD

East Coast Asset Management Q1 Letter http://bit.ly/ezdExU

Chanticleer Holdings Q1 Letter http://bit.ly/emAGj8

Article on Portfolio Concentration http://bit.ly/gfP6iw

Salman Khan on Revolutionizing Education http://youtu.be/PhO2gshIVuE?hd=1



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