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KEY CONCLUSIONS
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
Equity Research Global Entertainment
25 June 2014
Global Music GLOBAL VIEW
The Ideas Engine
series showcases
Credit Suisse’s unique
insights and investment ideas.
Please contact your
Sales person to
access the
supplemental
analysis behind this
report.
Dancing to a new tune
Paid streaming will transform the music industry: In this report, we analyse how
the rapid shift in music consumption towards paid streaming will drive a period of
structural growth in the industry and refocus investors on the value of owning music
content. Our key call is to buy Vivendi (OP, €24 price target, added to EUROPE
FOCUS LIST), which owns the largest global label group, Universal Music. In a
separate report (see Vivendi – Music: the forgotten content growth story) we raise our
valuation of Universal to €10bn, materially ahead of consensus at around €6.5bn.
Music majors set for a period of strong growth: Our analysis suggests paid
streaming will drive a return to industry revenue growth by 2016, and 3% CAGR
2013-2020. More importantly, because streaming revenues generate higher margins
than both physical and digital download revenues, EBITDA growth will be much
higher, at 13% CAGR 2013-2020, pushing aggregate EBITDA margins up to 27%
from 15%. Our assumptions are based on streaming penetration rising to 20% of the
adult population in the top 10 music markets, not aggressive given Sweden and
Norway are already at 19%-24%.
Buy exposure to record labels: Growth in paid streaming services is a major
emerging theme in Global Media, which will have positive implications for the valuation
of recorded music labels, including Universal Music and Sony Music (owned by Sony,
OP, ASIA FOCUS LIST). It also has important implications for Apple (N, $96 price
target) – in a separate report (see Apple – iTunes to "i-Services" to the i-Annuity), our
Global Tech team conclude that while the digital download market may have peaked,
Apple has already responded with the acquisition of Beats Music, and will likely look
to scale the service rapidly. With an installed base of >800m connected devices, and
fiercely loyal customers, this could significantly accelerate the take-up of paid
streaming services globally.
Figure 1: We expect global paid streaming customers to grow from 14m in 2013
to 148m by 2025
Source: Spotify, Deezer, Credit Suisse assumptions
Figure 2: We forecast paid streaming/subscription services will increase
penetration from 5% in 2014 to 20% in 2025 in the top 10 global music markets
Source: Credit Suisse research
RESEARCH ANALYSTS
Omar Sheikh 44 20 7883 8507 [email protected]
Kulbinder Garcha 212 325 4795 [email protected]
Shunsuke Tsuchiya 81 3 4550 9740 [email protected]
Sophie Bell 44 20 7883 1488 [email protected]
Luk Janssens 44 20 7888 4796 [email protected]
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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Spotify (m) Deezer (m) Other platforms (m)
2014 2025
IDEAS ENGINE SERIES
IDEAS ENGINE 2
Global Music
Key Charts
Figure 3: Global recorded music revenues ($m) 1973-2040E, monthly subscriptions are likely to
dominate
Figure 4: Competition between paid streaming services could create competition for music content
Note: Credit Suisse definition of "digital download revenues" and "subscription revenues" may differ from those of
IFPI
Source: Credit Suisse research, IFPI
Source: Credit Suisse research
Figure 5: Major label group EBITDA ($m) 2012-2020E
Figure 6: Subscription revenues have been grown strongly but in 2013 download revenues declined
* includes licensing; ** includes artist services & licensing
Source: Company data, Credit Suisse estimates
Note: Credit Suisse definition of "digital download revenues" and "subscription revenues" may differ from those of IFPI
Source: Credit Suisse research, IFPI
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Physical revenues Digital download revenues Subscription revenues
We expect an inflection point in global recorded musicrevenues in 2016
Physical Digital downloads Digital subscriptions
Universal Music Warner Music Sony Music Independent labels
Walmart Amazon Other retail iTunes Spotify Deezer Beats Music
Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer
Amazon Other
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2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Universal Music* Warner Music** Sony Music
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-116
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263223
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-200
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2009 2010 2011 2012 2013
∆ Digital download revenues ∆ Subscription revenues
IDEAS ENGINE 3
Global Music
Investment Summary
■ Music is the forgotten content growth story in Global Media. While it is now conventional
wisdom that ownership of content IP is the only 'undisruptable' part of the media value
chain, investors' focus has thus far been primarily on video, ie. TV and movies. This is
partly because it appears the owners of music content IP (record labels and music
publishers) have many years of migration from physical to digital formats in front of them,
and look weakly positioned to control the economics of digital distribution because they
currently rely on a single digital aggregator, ie. Apple. We think a major change in music
consumption is under way – the emergence of paid music streaming services – which will
substantially enhance the competitive position and profitability of the three remaining music
majors.
■ Paid streaming platforms, including Spotify, Deezer and Beats Music, are already
transforming the music industry. The latest industry data show these services have grown
from zero in 2008 to $1.1bn of revenues in 2013. We estimate the two largest platforms,
Spotify and Deezer, had 12m paid subscribers globally in 2013, which we think should rise
to 20m by the end of 2014. By providing on-demand 'access' to music rather than the
traditional pay-as-you-go 'à la carte' model for physical CDs or digital downloads, paid
streaming services are well-placed to generate substantial incremental value for the
industry, in our view.
■ We see three ways in which this might happen:
1) A subscriber to Spotify, Deezer or Beats Music generates 2.4x the annual revenue
($120 pa) for the industry than that generated by the average purchaser of physical or
digital music ($50) (source: BPI);
2) Because margins earned by the music industry on paid streaming revenues are
substantially higher than both physical and digital download revenues, a migration of
music consumption towards these platforms should be significantly accretive to music
industry margins;
3) The 'access' model offers more utility to the consumer, including music discovery at
zero marginal cost and access to shared playlists – we think this model stands a good
chance of encouraging some of the 50% of consumers in developed markets who
pay nothing for music today to do so for the first time.
Figure 7: Spotify has grown to 7m paid subscribers in 2013, which we believe will grow to 13m in 2014….
Figure 8:…while Deezer has grown to 5m paid subscribers in 2013, which is likely to grow to 7m in 2014
Source: Company data for 2013, Credit Suisse assumptions 2009-2012, 2014 Source: Company data for 2013, Credit Suisse assumptions 2009-2012, 2014
4 59
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Spotify free users (m) Spotify paid users (m)
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2009 2010 2011 2012 2013 2014E
Deezer free users (m) Deezer premium/Premium+ users (m)
IDEAS ENGINE 4
Global Music
■ We think Apple is likely to further accelerate the music subscription market's development,
via its recent purchase of Beats Music. Apple has an installed base of >800m connected
hardware devices and >500m registered users of its iTunes platform – these provide a
global distribution platform and, crucially, a virtually frictionless payment system. For us, it
seems logical to expect Apple to include Beats Music in a software upgrade to its entire
global installed base, and/or bundle a free/discounted subscription for a fixed period with
new hardware at the point of sale. We would regard both these developments positively for
the whole industry.
■ With a compelling consumer value proposition; a successful partnership strategy in place;
significant penetration in certain 'leading edge' markets; and now with the potential for
Apple to expand the market through a global roll-out of Beats Music, we believe paid
streaming services look well-placed to grow strongly. Based on detailed bottom-up
analysis, we forecast paid music streaming platforms can grow from 14m paying
subscribers in 2013 to 148m by 2025, with penetration of adult populations (15-64 years)
rising from 5% to 20% in the 10 major music markets.
Figure 9: We expect global paid streaming customers to grow from 14m in 2013 to 148m by 2025E…
Figure 10: …based on 20% of the adult population using paid streaming services
Source: Spotify, Deezer, Credit Suisse assumptions Source: Credit Suisse estimates
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2014 2025
IDEAS ENGINE 5
Global Music
■ If we are right that paid music streaming will become a mainstream consumer media
product, this has profound implications for the profitability of the owners of music IP, ie. the
record labels and publishers. We estimate recorded music labels make just 10% EBITDA
margins on physical sales; 34% on digital download revenues; and 40% on revenues
generated by paid streaming platforms. As we highlighted above, given the 'average' buyer
of physical and digital downloads spends $50 pa, but annual subscription revenue is $120
pa, when the 'average' buyer of music on physical formats switches to digital downloads,
we estimate annual EBITDA generated for the recorded music labels grows by 3.7x. If the
same buyer of physical music switches to paid streaming, annual EBITDA generated grows
by 10.3x. Importantly, this means the EBITDA contribution from a paid streaming customer
is 2.8x that of the 'average' digital download customer – we would put any concerns
investors might have that the migration to paid streaming may cannibalise the digital
download market in this context.
■ We publish new forecasts on global recorded music, based on our assumptions on
subscriptions, physical purchases and digital downloads. We believe a step change in the
revenue mix is likely, with subscriptions rising from 8% to 65% of the total. In aggregate,
we see global recorded music returning to year-on-year growth in dollar terms from 2016,
for the first time since 1999. This assumes the digital download market peaked in 2013,
and declines from 2014 onwards; and that the physical market will trend to below 100m
annual units within 10 years, down 97% from the peak in 1996.
Figure 11: Credit Suisse global music forecasts ($m)
Source: Credit Suisse estimate, IFPI
Figure 12: Global recorded music revenues ($m) 1973-2040E – we expect the market to be dominated by
monthly subscriptions
Figure 13: Global recorded music unit volumes (m) by format 1973-2040E – the end of the era of one-off
purchases?
Note: Credit Suisse definition of "digital download revenues" and "subscription revenues" may differ from those of
IFPI
Source: Credit Suisse research, IFPI
Source: Credit Suisse research, IFPI
2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Global recorded music market ($)
Physical 14,510 12,422 10,719 9,845 8,515 7,848 6,825 5,794 4,743 3,795 2,953 2,214 1,685
Digital dow nloads 2,345 2,751 3,013 3,583 4,006 3,890 3,726 3,625 3,595 3,566 3,537 3,533 3,529
Paid streaming 0 276 336 486 731 1,100 1,766 2,740 4,149 7,286 10,194 11,214 11,582
Free streaming & other 1,900 1,104 912 918 901 822 774 763 785 807 831 856 883
Total 18,755 16,552 14,980 14,833 14,153 13,660 13,091 12,923 13,271 15,455 17,514 17,817 17,679
y/y % change -12% -10% -1% -5% -3% -4% -1% 3% 16% 13% 2% -1%
0
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Physical revenues Digital download revenues Subscription revenues
We expect an inflection point in global recorded musicrevenues in 2016
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Vinyl albums Cassette albums CD albums Digital albums
We expect no recovery in digital download unit sales
IDEAS ENGINE 6
Global Music
Figure 14:Paid streaming subscribers generate 2.4x the annual revenue of "average" physical and digital download customers; and 3.7x-10.3x the EBITDA contribution
*Retailer gross margin; **Platform share of after-tax spend
Source: Credit Suisse estimates
Annual spend
$50.00
Retailer revenue
35%* $14.58
Sales tax
20% $8.33
G&A
18% $4.13
Label revenue
100% $22.92
A&R
33% $7.56
Manufacturing
23% $5.27
Sales & marketing
15% $3.44
Distribution
1% $0.23
Label EBITDA
10% $2.29
Publisher revenue
100% $4.17
Writer royalty
70% $2.92
Publisher G&A
2% $0.08
Publisher EBITDA
28% $1.17
Annual spend
$50.00
Platform revenue
30%** $12.50
Sales tax
20% $8.33
Label revenue
100% $25.00
A&R costs
33% $8.25
Sales & marketing
15% $3.75
G&A
18% $4.50
Label EBITDA
34% $8.50
Publisher revenue
100% $4.17
Writer royalty
70% $2.92
Publisher G&A
2% $0.08
Publisher EBITDA
28% $1.17
Annual spend
$120.00
Platform revenue
30%** $30.00
Sales tax
20% $20.00
Label revenue
100% $60.00
A&R costs
30% $18.00
Sales & marketing
12% $7.20
G&A
18% $10.80
Label EBITDA
40% $24.00
Publisher revenue
100% $10.00
Writer royalty
70% $7.00
Publisher G&A
2% $0.20
Publisher EBITDA
28% $2.80
3.7x
10.5x
PHYSICAL DIGITAL DOWNLOADS PAID STREAMING
IDEAS ENGINE 7
Global Music
■ We believe the change in industry revenue mix will have a profound impact on the
profitability of the labels. We see the aggregate EBITDA of the three major label groups
(Universal Music, Sony Music and Warner Music), which control 78% of the global market,
rising from $1.7bn in 2013 to just under $4bn in 2020. We see aggregate label EBITDA
margins rising from 15% to 27%, as higher margin subscription revenue streams grow and
lower (maybe close to zero) margin physical sales decline in importance.
Growth in music subscription services is a major emerging theme in Global Media, which
will have positive implications for the valuation of both recorded music labels and
subscription platforms.
Figure 15: Major label EBITDA margin (%) 2012-2020E
Figure 16: Major label group EBITDA ($m) 2012-2020E
Source: Company data (Universal Music, Warner Music, Sony Music), Credit Suisse estimates * includes licensing; ** includes artist services & licensing
Source: Company data, Credit Suisse estimates
14%15%
17%
19%
21%
24%26% 26% 27%
0%
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15%
20%
25%
30%
2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Major label EBITDA margin (%)
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IDEAS ENGINE 8
Global Music
Vivendi (VIV.PA)
Price (23-Jun-14,€) 19.1
Market Cap (€mn) 25715.2
Previous Value Current Value
Rating OUTPERFORM
Target Price (€) 24.00
EPS FY1E (€) 1.04 0.59
EPS FY2E (€) 1.15 0.75
EPS FY3E (€) 1.18 0.87
Source: Credit Suisse Estimates, IBES
Income Statement 2013FYA 2014FYE 2015FYE 2016FYE
Sales Revenue 22,135 11,653 12,012 12,350 EBITDA 4,926 2,047 2,267 2,433
Depr. & Amort. -2,353 -625 -584 -595 EBIT 2,574 1,422 1,683 1,838
Net interest income (exp) -528 -56 -33 -152
Other adj. 67 -126 -76 136 Profit before tax 2,113 1,241 1,574 1,821
Income tax -328 -327 -443 -528 Profit after tax 1,785 914 1,131 1,293
Minorities -117 -80 -87 -90 Associates & Other -33 -34 -35 -36
Net profit (CS) 1,635 799 1,009 1,167
Other NPAT adjustments 332 -462 -462 -462 Net profit (Reported) 1,967 337 547 705
Cash Flow 2013FYA 2014FYE 2015FYE 2016FYE EBIT 2,574 1,422 1,683 1,838
Net Interest -528 -181 -109 -16
Cash taxes paid -687 -447 -567 -656 Change in Working capital -308 -9 -9 -9
Other cash and non-cash items 2,416 625 584 595 Cash flow from Operations 3,467 1,410 1,583 1,752
CAPEX -2,674 -916 -919 -956 Free cashflow to the firm 793 494 664 796
Cash flow from Investments 993 18,184 -7,919 -956
Cashflow from financing activities -2,138 -1,324 -403 -403 Changes in Net Cash/Debt 2,322 18,270 -6,740 393
Net debt at start 13,419 11,097 -7,173 -433 Change in Net debt -2,322 -18,270 6,740 -393
Net debt at end 11,097 -7,173 -433 -826
Balance Sheet 2013FYA 2014FYE 2015FYE 2016FYE Total Current Assets 15,730 11,083 11,204 11,317
Total Fixed Assets 7,541 8,074 8,636 9,227 Total liabilities 30,150 33,978 34,203 34,285
Shareholder equity 17,457 17,391 17,535 17,837 Minority interests 1,573 1,653 1,740 1,830
Total liabilities and equity 49,180 53,022 53,478 53,952
Net debt 11,097 -7,173 -433 -826
Per Share 2013FYA 2014FYE 2015FYE 2016FYE
No. of shares (wtd avg.) (mn) 1,327 1,348 1,348 1,348 EPS (CS Adj.) (€) 1.23 0.59 0.75 0.87
Prev. EPS (€) 1.23 1.04 1.15 1.18 DPS (€) 1.00 0.30 0.30 0.30
Dividend yield (%) 5.23 1.57 1.57 1.57
Dividend Payout (%) 81.18 50.59 40.08 34.64 Earnings 2013FYA 2014FYE 2015FYE 2016FYE
Sales Growth (%) -23.66 -47.36 3.08 2.81 EBIT Growth (%) -51.28 -44.76 18.37 9.18
Net Income Growth (%) -35.88 -51.11 26.24 15.68 EPS growth (%) -37.08 -51.86 26.24 15.68
EBITDA Margin (%) 22.26 17.56 18.87 19.70
EBIT Margin (%) 11.63 12.20 14.01 14.88 Pretax Profit Margin (%) 9.55 10.65 13.11 14.75
Net Income Margin (%) 7.39 6.86 8.40 9.45 Valuation 2013FYA 2014FYE 2015FYE 2016FYE
EV/Sales (x) 1.5 1.3 1.8 1.7
EV/EBITDA (x) 6.7 7.2 9.5 8.7 EV/EBIT (x) 12.9 10.4 12.8 11.5
P/E (x) 15.5 32.2 25.5 22.1 Price to book (x) 1.4 1.5 1.5 1.4
Asset Turnover 0.5 0.2 0.2 0.2 Returns 2013FYA 2014FYE 2015FYE 2016FYE
Return on equity stated (%) 11.0 1.9 3.1 4.0
ROIC (%) 7.2 8.8 6.4 6.9 Interest burden (X) 0.8 0.9 0.9 1.0
Tax rate (%) 20.3 43.9 41.1 39.9 Financial leverage 0.7 0.0 0.4 0.4
Gearing 2013FYA 2014FYE 2015FYE 2016FYE
Net debt/equity (%) 58.3 -37.7 -2.2 -4.2 Net Debt to EBITDA (x) 2.3 -3.5 -0.2 -0.3
Interest coverage ratio (X) 4.9 25.5 50.9 12.1 Source: Company data, Credit Suisse Estimates
IDEAS ENGINE 9
Global Music
Apple Inc (AAPL.OQ)
Price (23-Jun-14,US$) 90.8
Market Cap (US$mn) 547675.2
Previous Value
Current value
Rating
NEUTRAL
Target Price (US$)
96.00
Year 9/13A 9/14E 9/15E 9/16E
EPS (CS Adj.) (US$) 5.66 6.39 6.69
EPS Prev (US$)
EPS (Qtr 1) (US$) 1.97 2.07 2.24
EPS (Qtr 2) (US$) 1.44 1.66 1.67
EPS (Qtr 3) (US$) 1.07 1.23 1.34
EPS (Qtr 4) (US$) 1.18 1.42 1.44
Source: Credit Suisse Estimates, IBES
Income Statement 2012FYA 2013FYA 2014FYE 2015FYE Sales revenue 156,508 170,910 182,430 187,180
EBITDA 58,518 55,756 59,927 59,181 Depr. & amort. -3,277 -6,757 -7,988 -8,039
EBIT (US$) 55,241 48,999 51,939 51,142
Net interest exp -0 -0 -0 -0 Other adj. 522 1,156 1,200 1,500
PBT (US$) 55,763 50,155 53,139 52,642 Income taxes -14,030 -13,118 -13,816 -13,687
Profit after tax 41,733 37,037 39,323 38,955
Associates & other 1,303 1,662 1,662 1,662 Net profit (US$) 43,036 38,699 40,985 40,618
Other NPAT adjustments 0 0 0 0 Reported net income 43,036 38,699 40,985 40,618
EBIT 55,241 48,999 51,939 51,142 Net interest -0 -0 -0 -0
Change in working capital -299 6,478 886 -2,410
Other cash & non-cash items -4,086 -1,811 1,008 251 Cash flow from operations 50,856 53,666 53,833 48,984
CAPEX -8,295 -8,165 -7,327 -9,359 Free cashflow to the firm 42,561 45,501 46,506 39,625
Cash flow from investments -48,227 -33,774 -7,327 -9,359
Cashflow from financing -1,698 -16,379 -47,107 -37,267 Changes in Net Cash/Debt 3,177 -5,543 -1,627 2,358
Net debt at start -25,952 -29,129 -23,586 -21,959 Change in net debt -3,177 5,543 1,627 -2,358
Net debt at end -29,129 -23,586 -21,959 -24,317 Balance Sheet 2012FYA 2013FYA 2014FYE 2015FYE
Total current assets 57,653 73,286 70,210 74,813
Total fixed assets 15,452 16,597 15,123 16,443 Total liabilities 57,854 83,451 86,727 86,741
Shareholder equity 118,210 123,549 119,730 125,818 Total liabilities and equity 176,064 207,000 206,457 212,560
Net debt -29,129 -23,586 -21,959 -24,317
Per Share 2012FYA 2013FYA 2014FYE 2015FYE Equiv. FPO (period Avg.) (mn) 6,615 6,542 6,156 5,826
EPS (CS Adj.) (US$) 6.3 5.7 6.4 6.7 Prev. EPS (US$) 6.3 5.7 6.4 6.7
DPS (US$) 0.0 0.0 0.0 0.0
Dividend yield (%) 0.0 0.0 0.0 0.0 Dividend Payout (%) 0.0 0.0 0.0 0.0
Earnings 2012FYA 2013FYA 2014FYE 2015FYE Sales growth (%) 44.6 9.2 6.7 2.6
EBIT growth (%) 63.5 -11.3 6.0 -1.5
Net income growth (%) 60.5 -10.1 5.9 -0.9 EPS growth (%) 59.6 -10.3 12.8 4.7
EBITDA margin (%) 37.4 32.6 32.8 31.6 EBIT margin (%) 35.3 28.7 28.5 27.3
Pretax profit margin (%) 35.6 29.3 29.1 28.1 Net income margin (%) 27.5 22.6 22.5 21.7
Valuation 2012FYA 2013FYA 2014FYE 2015FYE
EV/Sales (x) 3.3 3.1 2.9 2.8 EV/EBITDA (x) 8.9 9.4 8.8 8.8
EV/EBIT (x) 9.4 10.7 10.1 10.2 P/E (x) 14.4 16.0 14.2 13.6
Price to book (x) 5.0 4.8 4.6 4.2
Asset turnover 0.9 0.8 0.9 0.9 Returns 2012FYA 2013FYA 2014FYE 2015FYE
ROE 44.2 32.0 33.7 33.1 ROGIC (%) 0.6 0.4 0.4 0.4
Interest burden 1.0 1.0 1.0 1.0 Tax burden 0.3 0.3 0.3 0.3
Financial leverage 1.5 1.7 1.7 1.7
Gearing 2012FYA 2013FYA 2014FYE 2015FYE Net debt/equity (%) -24.6 -19.1 -18.3 -19.3
Net Debt to EBITDA (x) Net Cash Net Cash Net Cash Net Cash Source: Company data, Credit Suisse Estimates
IDEAS ENGINE 10
Global Music
Sony (6758.T)
Price (24-Jun-14,¥) 1,708
Market Cap (¥ bn) 1,782,612
Current Value
Rating OUTPERFORM
Target Price (¥) (Upside %) 2,600 (52%)
Source: Credit Suisse Estimates, IBES
Income Statement 2013FYA 2014FYA 2015FYE 2016FYE
All Values in (¥ bn) Revenue 6795.5 7767.3 7915.0 8081.0
Cost of goods sales 4485.4 5140.1 4975.0 5018.0 SG&A 1457.6 1728.5 1686.0 1721.0
Other op income(expense) 295.4 495.5 662.0 662.0
EBITDA 557.1 403.2 592.0 680.0 Depr. & Amort. 330.6 376.7 340.0 340.0
Goodwill impairment 0.0 0.0 0.0 0.0 EBIT 226.5 26.5 252.0 340.0
Net interest expense 4.7 6.8 7.0 7.0 Net other non-op income(exp.) 10.9 -7.6 -10.5 -10.5
Profit before tax 242.1 25.7 248.5 336.5
Taxes 141.5 94.6 122.0 148.0 Profit after tax 101 -69 126 188
Minority interest -61.1 -59.5 -56.0 -51.0 Net Income 41.5 -128.4 70.5 137.5
Cash Flow 2013FYA 2014FYA 2015FYE 2016FYE
Operating cashflow 476 664 431 482 Investing cashflow -705 -711 -300 -300
Financing cashflow 89 208 -221 -6 Free cash flow -229 -46 131 182
Balance Sheet 2013FYA 2014FYA 2015FYE 2016FYE Cash and cash equivalents 826 1,046 775 874
Accounts Receivables 776 871 944 960
Inventory 710 734 811 811 Other Current Assets 1,604 1,829 1,974 1,974
Current Assets 3,917 4,481 4,503 4,619 Plant, property, Equipment 862 750 852 852
Intangibles 0 0 0 0
Other Non-current assets 9,433 10,103 9,997 10,033 Total Fixed Assets 10,294 10,853 10,849 10,885
Total Assets 14,211 15,334 15,352 15,504 Accounts Payables 572 713 820 840
Short term debt 88 112 108 108 Other short term Liabilities 3,655 3,959 3,877 3,897
Total current liabilities 4,315 4,784 4,805 4,845
Long term debt 938 917 936 936 Other liabilities 6,283 6,846 6,716 6,716
Total liabilities 11,536 12,546 12,457 12,497 Shareholders' equity 2,190 2,258 2,375 2,487
Minority interests 480 525 520 520
Total equity & liabilities 14,206 15,330 15,352 15,504
Per Share 2013FYA 2014FYA 2015FYE 2016FYE
No. of shares (mn) 1,011 1,044 1,038 1,038 EPS (CS Adj.) (¥) 41.1 -123.0 67.9 132.5
BPS (¥) n.m n.m n.m n.m DPS (¥) 25.0 25.0 25.0 25.0
Dividend Payout (%) 60.8 -20.3 36.8 18.9
Operating cash flow per share (¥) 471.0 636.3 415.4 464.5 Earnings 2013FYA 2014FYA 2015FYE 2016FYE
Sales Growth (%) 4.7 14.3 1.9 2.1 EBIT Growth (%) 436.7 -88.3 851.1 34.9
Net Income Growth (%) 109.1 -409.0 154.9 95.0 EBIT Margin (%) 3.3 0.3 3.2 4.2
EBITDA Margin (%) 8.2 5.2 7.5 8.4
Net Income Margin (%) 0.6 -1.7 0.9 1.7 Valuation 2013FYA 2014FYA 2015FYE 2016FYE
EV/SALES (x) 0.3 0.3 0.3 0.3 EV/EBITDA (x) 3.6 5.7 3.6 3.0
EV/EBIT (x) 8.9 87.0 8.4 6.0
P/E (x) 40.0 -16.0 25.1 12.9 P/B (x) 0.8 0.9 0.7 0.7
Dividend Yield (%) 1.5 1.3 1.5 1.5 FCF yield (%) -13.8 -2.3 7.4 10.3
Returns 2013FYA 2014FYA 2015FYE 2016FYE Return on Equity (%) 2.0 -5.8 3.0 5.7
Return on Invested Cap. (%) 3.2 -2.3 4.1 5.8
Asset turnover (%) 47.8 50.7 51.6 52.1 Gearing 2013FYA 2014FYA 2015FYE 2016FYE
ND/ND+E (%) 11.8 8.2 10.7 8.1 Net Debt to EBITDA (x) 0.6 0.6 0.6 0.4
Int Cover (EBIT/Net Int.) (X) 48.5 3.9 36.0 48.6
Financial leverage(x) 6.5 6.8 6.5 6.2 Net debt/equity (%) 16.3 11.0 14.6 10.7
Source: Company data, Credit Suisse Estimates
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Companies Mentioned (Price as of 23-Jun-2014)
AT&T (T.N, $35.39) Amazon com Inc. (AMZN.OQ, $327.24) Apple Inc (AAPL.OQ, $90.83, NEUTRAL, TP $96.00) Deutsche Telekom (DTEGn.F, €12.64) Google, Inc. (GOOGL.OQ, $574.29) KPN (KPN.AS, €2.683) News Corporation (NWS.AX, A$18.17) Orange (ORAN.PA, €11.74) Pandora Media (P.N, $28.2) Sony (6758.T, ¥1,715, OUTPERFORM, TP ¥2,600) Sprint Corp (S.N, $8.36) TeliaSonera (TLSN.ST, Skr49.55) Vivendi (VIV.PA, €19.1, OUTPERFORM, TP €24.0) Vodafone Group (VOD.L, 191.5p)
Disclosure Appendix
Important Global Disclosures
Omar Sheikh, Kulbinder Garcha, Shunsuke Tsuchiya, Sophie Bell, Joseph Barnet-Lamb and Luk Janssens each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Apple Inc (AAPL.OQ)
AAPL.OQ Closing Price Target Price
Date (US$) (US$) Rating
12-Oct-11 57.46 71.43 O
25-Jan-12 63.81 78.57
22-Feb-12 73.29 85.71
19-Mar-12 85.87 100.00
12-Apr-12 88.94 107.14
24-Jan-13 64.35 85.71
24-Apr-13 57.95 75.00
11-Sep-13 66.83 75.00 N
28-Jan-14 72.42 71.43
24-Apr-14 81.11 80.00
03-Jun-14 91.08 85.71
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
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3-Year Price and Rating History for Sony (6758.T)
6758.T Closing Price Target Price
Date (¥) (¥) Rating
25-Aug-11 1,581 2,400 O
09-Sep-11 1,557 R
13-Oct-11 1,562 2,400 O
13-Jan-12 1,327 1,500 N
20-Feb-12 1,681 1,750
10-Oct-12 897 900
14-Mar-13 1,503 1,600
25-Oct-13 1,851 2,600 O
* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM
REST RICT ED
N EU T RA L
3-Year Price and Rating History for Vivendi (VIV.PA)
VIV.PA Closing Price Target Price
Date (€) (€) Rating
18-Aug-11 14.79 20.70 O
29-Mar-12 13.19 17.90
07-Sep-12 15.65 17.60
05-Dec-12 16.70 19.10
16-Sep-13 17.57 20.80
25-Feb-14 21.02 24.00
07-Apr-14 20.62 R
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all com panies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attrac tive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2n d October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshol d replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japa nese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional be nchmark.
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Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sec tors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 44% (54% banking clients)
Neutral/Hold* 40% (49% banking clients)
Underperform/Sell* 13% (46% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, resp ectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definit ions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Sony (6758.T)
Method: We think the PS4 could drive top-line growth from 4Q, and see the relative P/B rising as it did during the last phase of top-line growth. We base our ¥2,600 target price for Sony on a fair-value P/B of 1.1x
(sector averages are 1.3–1.5x), applied to FY3/15E BPS.
Risk: Risks that may cause the share price to diverge from our ¥2,600 target price for Sony include: Downside risks: (1) Poor sales of PS4/smartphones; (2) yen strength.
Price Target: (12 months) for Apple Inc (AAPL.OQ)
Method: Our target price for Apple is $96. We calculate this by applying a 12x multiple to our FY2015 EPS and adding back $14/share of net cash to be returned by the end of FY15.
Risk: Risks to achievement of our $96 target price for Apple Inc. include competitive pressures from global consumer electronics companies, failure to launch innovative products, loss of key executive managers, failure
to maintain key media distribution for iTunes, and regulatory risk
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Price Target: (12 months) for Vivendi (VIV.PA)
Method: We value Vivendi at €24 per share, which assumes a €22.30 "base" SOTP valuation plus €1.80 per share accretion from a €5.5bn share buyback. We also highlight that if the company were to sell GVT
for €8bn in cash and spin-off UMG (or Canal Plus) into a separate listed entity, this would yield a "Blue Sky" valuation of €28. Moreover, if we were to strip out Vivendi's cash, liabilities and listed assets, the media
assets are trading at a 2014E EV/EBITDA multiple of 6.9x, which looks very low when compared with other content assets in Global Media, which trade at 12.6x.
Risk: Risks to our €24 target price for Vivendi are: (1) forecast or multiple changes for wholly owned business units; (2) changes in the market prices of listed assets; (3) impact of potential acquisitions/disposals on our
holding discount; and (4) foreign exchange fluctuations.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (6758.T, AAPL.OQ, VIV.PA, AMZN.OQ, DTEGn.F, GOOGL.OQ, NWS.AX, ORAN.PA, S.N, T.N, TLSN.ST) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (6758.T, VIV.PA, AMZN.OQ, DTEGn.F, GOOGL.OQ, ORAN.PA, S.N, T.N) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (6758.T, AAPL.OQ, VIV.PA, DTEGn.F, NWS.AX, S.N, T.N) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (VIV.PA, DTEGn.F, GOOGL.OQ, S.N, T.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (6758.T, VIV.PA, AMZN.OQ, DTEGn.F, GOOGL.OQ, ORAN.PA, S.N, T.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (6758.T, AAPL.OQ, VIV.PA, AMZN.OQ, DTEGn.F, GOOGL.OQ, NWS.AX, ORAN.PA, P.N, S.N, T.N) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (6758.T, AAPL.OQ, VIV.PA, DTEGn.F, NWS.AX, S.N, T.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (6758.T, AAPL.OQ, AMZN.OQ, GOOGL.OQ, P.N, S.N, T.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (AAPL.OQ, VIV.PA, VOD.L, P.N).
Credit Suisse has a material conflict of interest with the subject company (VIV.PA) . Credit Suisse Securities (Europe) Ltd is acting as financial advisor to Numericable Group and as Joint Bookrunner and Mandated Lead Arranger for the debt financings by Altice SA and Numericable Group to support the proposed acquisition of SFR.
Credit Suisse has a material conflict of interest with the subject company (S.N) . Credit Suisse acted as financial advisor to a shareholder of Clearwire in connection with the announced proposed acquisition of Clearwire by Sprint.
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (6758.T, AAPL.OQ, VIV.PA, VOD.L, AMZN.OQ, DTEGn.F, GOOGL.OQ, NWS.AX, ORAN.PA, P.N, S.N, T.N, TLSN.ST) within the past 12 months
An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL.OQ) within the past 12 months
The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses.
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
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Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
The following disclosed European company/ies have estimates that comply with IFRS: (VIV.PA, VOD.L, DTEGn.F, ORAN.PA, TLSN.ST).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (VIV.PA, DTEGn.F, GOOGL.OQ, ORAN.PA, S.N, T.N) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating.
The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same security). The CS Model Portfolio and important disclosures about it are available at www.credit-suisse.com/ti.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse Securities (Japan) Limited .................................................................................................................................. Shunsuke Tsuchiya
Credit Suisse Securities (Europe) Limited ........................................................ Omar Sheikh ; Sophie Bell ; Joseph Barnet-Lamb ; Luk Janssens
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Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
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