Don Quijote Holdings Co., Ltd.

(TSE:7532)

Breaking through the

Saturated Retail market

KIM, Jeongwoo
PARK, Keunmin
LIM, Heetaek
SOHN, Jungho
JANG, Hun
OKAWA, Alisa
1 No.1 Discount Store (By Annual Sales, Discount Store Sector)

13 Ranking 13th among Retail Companies (By Net Sales, 2014)

25 Years of Consecutive Growth in Sales and Net Income

Don Quijote Holdings Co., Ltd.(TSE:7532)

Investment Highlights
Key Factors

BUY 1. Inbound Tourists & Expansion of Duty-

Free Products

Current Price(2014/10/31) : JPY 6,590 2. Yen Depreciation Forecast

Target Price : JPY 7,143 3. Increasing PB(Private Brand)Products

Upside Potential : 7.7% 4. Solid Financials

JPY 7,143
Target

Current
JPY 6,590

Don Quijote Holdings Co., Ltd.(TSE:7532)

Market Profile
Number of Stocks 78,526,880
Market cap(JPY BN) 630.37
52weeks High 8,460
52weeks Low 4,895
(%) Foreign Shareholders(%) 62.5% (2014.6)

Don Quijote Holdings Co., Ltd

Retail Industry

TOPIX

NIKKEI225
Industry Analysis
Stagnant and Saturated Retail Market
Large Retail Stores Sales (YoY)
Convenience
Store
Total

Dep. Store & Supermarket

General Goods Sales(YoY) in Total

General Apparel
Food&Bev Accessories
Merchandise
.

Source : Ministry of Economy, Trade and Industry

Don Quijote Holdings Co., Ltd.(TSE:7532)

Market Environment
Decreasing number of Retailers in Competitive Market

Retail Industry 5YR Trend MM JPY

# of Companies
OP Margin

NI Margin

Source : Ministry of Finance, Retail Industry

Don Quijote Holdings Co., Ltd.(TSE:7532)

 Market Position
Discount Sale/
Price Competitiveness(Strong)

Don Quijote

Electronic Retail
Supermarket Stores

Daily/ Non-daily/
Convenience Purpose

Convenience Store Department Store

Fixed Price Sale/

Price Competitiveness(Weak)
Don Quijote Holdings Co., Ltd.(TSE:7532)
Investment Highlight – 1. Inbound Tourist(1/4)
Increasing Inbound Tourists (2011.4 - 2014.11,Monthly)

Year 2011 2012 2013 2014 (expected)

Total Number of Tourists 6,218,752 8,358,105 10,363,904 12,177,500

Annual Growth Rate(YoY) 29.2%

2014

2013

2012

2011

Source : Japan National Tourism Organization

Investment Highlight – 1. Inbound Tourist(2/4)
Expanding Duty-Free to all products & Lower standard amount for tax exemption

Japan’s Expansion on Duty-Free Products

Present From 2014 Oct, 1st

All Products
Food
Home Home Beverage
Duty-Free Appliance Appliance Cigarette
Products Apparel Apparel Medicine
Shoes etc. Shoes etc. Cosmetics
Etc.

Tax Total amount Total amount from

Exemption over 10,000 JPY 5,000 to 500,000 JPY

Source : Japan Tourism Agency

Don Quijote Holdings Co., Ltd.(TSE:7532)

Investment Highlight – 1. Inbound Tourist(3/4)
Overall Expense Breakdown(2013) Purchasing rate by products (2013)

Product Ranking Purchased by Tourists(2013)

Rank Korea Taiwan China US Hong Kong
Food/Beverage/
1 Confectionary Confectionary Confectionary
Alcohol
Confectionary
Food/Beverage/ Cosmetics/ Cosmetics/
2 Alcohol Medicine Medicine
Confectionary Apparel/Bag
Cosmetics/ Food/Beverage/ Food/Beverage/ Food/Beverage/
3 Medicine Alcohol Alcohol
Traditional Cloth
Alcohol
Cosmetics/
4 Apparel/Bag Apparel/Bag Apparel/Bag Apparel/Bag
Medicine
Comic/ Cosmetics/
5 Animation
Traditional Cloth Camera/Watch
Medicine
Traditional Cloth

Source : Japan Tourism Agency

Don Quijote Holdings Co., Ltd.(TSE:7532)
Investment Highlight – 1. Inbound Tourist(4/4)
Opportunities and Catalyst for DQ’s Revenue Boost
DQ’s Duty-Free Business Segment Sales by Total Sales(YoY)
MM JPY
1 out of 2 tourist visits DQ

283 Stores in Total

267 Duty-Free Stores(95%) (5%) Food

4,600 Duty Free Stores in Japan Watches and

Fashion
(5.5% Market Share) Merchandise

Japan’s Largest Duty-Free Store Network

Daily Commodities
Increasing
Overseas Credit Card Sales
&
Overall Duty-Free Sales

Don Quijote Holdings Co., Ltd.(TSE:7532)

 Investment Highlight – 2. Depreciating Yen
LDP is renominated as the ruling party boost the Yen Depreciation Policy

On Dec. 2012 Mr. Abe is nominated as

USD/JPY 5YR Trend
Japanese Prime Minister
Number of tourists Abe nomination Yen

Yen Depreciation Policy

  Increasing
The number of Foreign Tourists
USD/JPY
has increased drastically
 

Inbound Tourist LDP = ruling party again on Dec. 2014

Expecting 1)
Intensification of Yen Depreciation Policy

Expecting 2)
Overall sales of DQ is expected to

Source : Bank Of Japan / Japan National Tourism Organization

increase more
Investment Highlight – 3. PB products(1/2)
Outstanding profit trend with NO ADVERTISING COST

Increasing Share of PB Sales Improving Gross Margin

PB
Sales/Sales

# of PB Products

Aiming 30% of PB Sales by 2017, extending its product line up to 5,000

– Lowering cost, expecting constant improvement of Gross Margin
Consumption Tax rising up to 10%
– Demand for highly price-competitive foods and daily sundries is likely
Diversifying product line through joint-production
– Covering weakness of technology and knowhow
– Offering differentiated merchandise (TV, Helmets etc.) that other competitors do not cover

Don Quijote Holdings Co., Ltd.(TSE:7532)

Investment Highlight – 3. PB products(2/2)
Price Competitiveness eliminating Second-Mover Disadvantage

Jounetsu KaKaku vs Seven Premium

Jounetsu Kakaku Seven Premium

135g×3pack 150g×3pack
Yakisoba
97JPY 128JPY
180g×3pack 200g×3pack
Noodle
97JPY 138JPY

Green Tea 2L 95JPY 2L 148JPY

Oloong Tea 2L 95JPY 2L 148JPY

36bags 458JPY 3bags 88JPY

Miso Soup
1bag 13JPY 1bag 29JPY

Fermented 3packs 58JPY 3Pack 78JPY

Soybeans 1pack 19JPY 1Pack 26JPY

Don Quijote Holdings Co., Ltd.(TSE:7532)

Investment Highlight – 4. Solid financials(1/2)
Gradual increase in Profitability De-leveraging
BN JPY (%) D/E ICR

EBITDA Sales
Margin D/E Ratio

OP Margin
Interest
Coverage
Ratio

Effective Investment Recurring Stream of Operating CF

(%) BN JPY

ROE

ROI

Don Quijote Holdings Co., Ltd.(TSE:7532)

Investment Highlight – 4. Solid financials(2/2)
MM Shares JPY

OCF per Share

# of Shares
Positive and Good quality of EPS

EPS

JPY

Dividend Per Share

Increasing Dividend per Share yet,
diminishing Dividend Payout Ratio
Dividend Payout Ratio
Possibility of reinvesting surplus cash
in operations, CAPEX and
expectations for further strategic
acquisitions.

Don Quijote Holdings Co., Ltd.(TSE:7532)

Valuation – DCF Method
Assumptions
Corporate Tax Rate 38%
WACC 3.80%
Terminal growth rate 1.25%

Sensitivity Analysis

Terminal Growth Rate

　
0.75% 1.00% 1.25% 1.50% 1.75%

3.4% 6,809.55 7,614.83 8,607.38 9,861.13 11,494.80

3.6% 6,280.95 6,973.45 7,813.30 8,853.12 10,173.96

WACC
(Discount 3.8% 5,821.67 6,423.71 7,143.79 8,020.41 9,110.84
Rate)
4.0% 5,418.92 5,947.26 6,571.66 7,320.94 8,236.72

4.2% 5,062.87 5,530.37 6,077.11 6,725.09 7,505.32

Don Quijote Holdings Co., Ltd.(TSE:7532)
Investment Risks
MARKET
IT Retail Sales increasing with competitive price and convenience – Amazon, Rakuten.

ECONOMIC

Consumption tax of 10% in 2017 - Weakening consumer confidence

Currency Risk - Lifting price of imported goods

Pressure of Inflation - Possibility of rise in wage (90% of Employees are part time)

OPERATIONAL
Weather and Seasonal factors - Greatly affecting customers use of DQ

POLITICAL
Regulations on Retail Business - The Japanese Large Scale Retail Store Law

Don Quijote Holdings Co., Ltd.(TSE:7532)

Conclusion

Inbound Tourists
(With Depreciating Yen)

BUY
Current Price(2014/10/31) : JPY 6,590
PB Products
One-Year Target Price : JPY 7,143
Upside Potential : 7.7%

Solid
Financials3
Title

Don Quijote Holdings Co., Ltd.(TSE:7532)

 Q&A

Don Quijote Holdings Co., Ltd.(TSE:7532)