IDOM / 7599 COVERAGE INITIATED ON: LAST UPDATE:

Transcription

1 COVERAGE INITIATED ON: Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg. Research Report by Shared Research Inc.

2 Research Report by Shared Research Inc. INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Executive summary Key financial data Recent updates Highlights Trends and outlook Monthly trends Quarterly trends and results Full-year company forecasts (initial forecasts) Medium-term plan Business Overview Business structure Other businesses Strengths and weaknesses Financial statements Income statement Balance sheet Cash flow statement Dividends and shareholder benefits Other information Major shareholders Top management Employees Investor relations Historical results and news Historical results News and topics Profile /65

3 Research Report by Shared Research Inc. Executive summary One of the largest buyers of used cars in Japan. Leverages extensive store network and cultivated sales team IDOM s core business is buying and selling used vehicles. Used vehicle prices vary widely, and the market value for used vehicles had been difficult to assess. IDOM was the first to introduce a system of transparent purchasing prices based on auction prices, which has underpinned its growth. This straightforward pricing and the use of a franchise model during its founding has made the company into one of Japan s largest buyer of used vehicles. Leveraging existing businesses, the company is now bolstering retail sales of used cars, which has led to steady growth in the volume of retail vehicle sales. The company has the largest store network in Japan and a solid sales team of permanent employees it has trained. It looks to grow by combining its existing vehicle sales infrastructure (Japan s largest store network built around a high-quality sales organization) with new services. Toward a new growth stage During the initial stage following the company s foundation when the focus was solely on purchasing and wholesaling (wholesale of used vehicles within two weeks of purchase), IDOM became an industry leader holding the largest number of purchased vehicles in inventory. In the second stage, it began leveraging the inventory holding period (two weeks) to develop showroom-based retail sales and in turn obtained an industry-leading retail capability. Retail capability here refers to a couple of factors according to the company. 1) Sales infrastructure: Retailing using roughly 5 brick and mortar stores nationwide, a sales team, and sales via showrooms using a fully shared inventory system (sales infrastructure allows access to Japan s largest pool of sound in-house inventory). 2) Specialist head office department functions: Total end-to-end inventory control from procurement through retail sales (centralized pricing at headquarters and risk control) and ability to determine which items will sell. From FY2/19, IDOM intends to enter a new stage using its retail capability to diversify sourcing, products, and services. Formerly, IDOM maintained a rough balance between purchase numbers and retail and wholesale sales (slightly lower purchase numbers). In the future, the two will not necessarily be in balance as the company exploits a variety of procurement channels (in FY2/18, unit sales already significantly outstripped purchases). In the previous stages, growth in units purchased was a key element in strengthening retail sales. The key in the current stage will be what is added onto the sales infrastructure. The company said it aims to develop convenience store style formats which stock anything related to cars as it leverages alliances with other companies. Toward a new growth stage Management resources to acquire Number of transactions Management resources utilized Industry-leading purchased vehicles in inventory Purchase and wholesale Management resources utilized Industry-leading retail capability Purchased vehicles in inventory Retail The largest number of vehicles and customer transactions in Japan Diversify sourcing as well as products and services Foundation Present 3/65

4 Research Report by Shared Research Inc. FY2/19 In FY2/19, the company plans on an operating profit of JPY7.6bn (+12.1% YoY). This is a significant drop from the medium-term plan target of JPY17.5bn, but the core of the medium-term business plan the expansion of retail sales showrooms (and retail vehicle sales volume) remains unchanged. The company has a precise two-pronged strategy based on gross profit per vehicle and SG&A expenses to grow profit by increasing retail sales volume. The elements are as follows. 1) Retail sales volume growth: Continued new store openings combined with improved retail sales customer appeal and higher contract rates. 2) Profit per vehicle: Optimizing price setting, working to expand ancillary earnings (e.g. automobile inspections, insurance), and sourcing high GPM products. 3) Controlling SG&A expenses: Reducing/streamlining operating costs per store and head office costs, and controlling advertising costs through a more efficient approach in attracting customers who seek to sell their vehicles. 4/65

5 Research Report by Shared Research Inc. Key financial data Income statement FY2/9 FY2/1 FY2/11 FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 FY2/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Total sales 163, , ,38 132, , , ,681 21,85 251, ,157 29, YoY -14.1% -9.1% -4.6% -6.4% 7.9% 18.1% -8.1% 34.9% 19.7% 9.8% 5.% Gross profit 39,596 38,918 36,473 32,989 33,889 36,554 39,75 51,61 61,133 65,859 YoY -9.1% -1.7% -6.3% -9.6% 2.7% 7.9% 6.9% 32.1% 18.5% 7.7% GPM 24.2% 26.1% 25.7% 24.8% 23.6% 21.6% 25.1% 24.6% 24.3% 23.8% Operating profit 3,95 5,281 8,1 6,249 5,77 7,94 5,325 7,542 4,498 6,779 3, YoY -55.1% 35.2% 51.5% -21.9% -18.8% 39.7% -24.9% 41.6% -4.4% 5.7% -55.7% OPM 2.4% 3.5% 5.6% 4.7% 3.5% 4.2% 3.4% 3.6% 1.8% 2.5% 1.% Recurring profit 2,635 5,8 7,824 6,318 5,252 7,21 5,345 6,835 4,16 5,797 2, YoY -69.7% 9.1% 56.2% -19.2% -16.9% 37.1% -25.8% 27.9% -39.1% 39.4% -65.5% RPM 1.6% 3.4% 5.5% 4.8% 3.7% 4.3% 3.4% 3.3% 1.7% 2.1%.7% Net income -2, ,14 3,785 2,98 4,36 3,286 4,111 2,247 3,578 7 YoY - - 1,377.% -26.4% -21.3% 46.3% -24.6% 25.1% -45.3% 59.2% -8.4% Net margin -1.7%.2% 3.6% 2.8% 2.1% 2.6% 2.1% 2.%.9% 1.3%.2% Per share data (JPY) Shares issued (year end; ') 16,888 16,888 16,888 16,888 16,888 16,888 16,888 16,888 16,888 16,888 - EPS EPS (fully diluted) Dividend per share Book value per share 1,74. 1, , Balance sheet (JPYmn) Cash and cash equivalents 4,215 3,613 8,896 8,472 6,863 14,688 4,897 9,149 14,337 22,763 Total current assets 4,22 5,179 36,338 3,925 29,555 33,463 29,42 49,74 63,765 76,955 Tangible fixed assets 9,522 8,717 7,434 8,43 9,69 1,989 16,126 19,743 22,33 23,88 Intangible fixed assets 1,695 1, ,11 3,349 15,513 16,914 15,597 Investments and other assets 7,352 7,452 15,128 14,353 13,146 7,315 8,274 9,879 11,334 14,539 Total assets 58,773 67,948 59,856 54,643 53,253 52,779 57,153 94, ,47 13,181 Accounts payable 2,993 4,23 3,86 2,912 3,439 2,852 5,1 14,12 12,317 14,327 Short-term debt 28,643 26,159 8,517 2, 5, - 5,292 2,124 3,48 1,21 Total current liabilities 4,862 41,587 22,698 16,6 17,357 13,525 19,847 28,6 29,483 31,91 Long-term debt 624 8,516 11, 9, 4, 4, 43 22,851 4,774 52,68 Total fixed liabilities 2,74 9,967 12,265 11,29 6,445 6,47 2,676 27,365 44,983 56,784 Total liabilities 42,937 51,555 34,964 27,351 23,82 19,933 22,523 55,965 74,466 88,686 Net assets 15,836 16,393 24,891 27,292 29,451 32,846 34,629 38,245 39,581 41,494 Cash flow statement (JPYmn) Cash flows from operating activities -6,539-3,586 14,253 1,665 3,64 1, ,121-4,632 6,989 Cash flows from investing activities -2,97-1,336 2,79-1,58-1,348 3,734-8,54-17,686-8,262-5,315 Cash flows from financing activities 1,51 5,56-11,749-9,919-2,83-5,981-1,721 17,858 18,92 8,731 Financial ratios Total interest-bearing debt 29,267 34,675 19,517 11, 9, 4, 5,335 24,975 44,182 53,881 ROA (RP-based) 4.8% 7.9% 12.2% 11.% 9.7% 13.6% 9.7% 9.% 4.% 4.7% ROE -15.7% 2.2% 24.9% 14.5% 1.5% 14.% 9.7% 11.5% 5.9% 9.% Equity ratio 26.9% 24.1% 41.6% 49.9% 55.3% 62.2% 6.6% 39.4% 33.9% 31.4% Note: The company initiated a 1-for-1 stock split on May 1, 213. Per share data calculated as though the split occurred at the beginning of FY2/14. 5/65

6 Research Report by Shared Research Inc. Recent updates Highlights On October 12, 218, IDOM Inc. announced earnings results for 1H FY2/19; see the results section for details. On October 9, 218, the company announced revisions to its 1H and full-year earnings forecasts. Forecast revisions Consolidated FY2/18 FY2/19 Revised Est. FY2/19 Initial Est. Difference (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 135,468 14, , ,9 146,1 29, 142,8 147,2 29, +1,1-1,1 - YoY 9.% 1.5% 9.8% 6.2% 3.8% 5.% 5.4% 4.6% 5.% Cost of sales 13,654 16,644 21, ,4 11,6 22, Gross profit 31,813 34,46 65,859 33,4 36,6 7, YoY 7.1% 8.3% 7.7% 5.% 7.5% 6.3% GPM 23.5% 24.2% 23.8% 23.4% 24.9% 24.1% SG&A expenses 29,285 29,795 59,8 3,7 31,7 62,4 SG&A ratio 21.6% 21.2% 21.4% 21.5% 21.5% 21.5% Operating profit 2,528 4,251 6, ,55 3, 2,7 4,9 7,6-2,25-2,35-4,6 YoY 16.4% 82.8% 5.7% -82.2% -4.% -55.7% 6.8% 15.3% 12.1% OPM 1.9% 3.% 2.5%.3% 1.7% 1.% 1.9% 3.3% 2.6% -1.6ppt -1.6ppt -1.6ppt Non-op. income (expenses) , Recurring profit 2,32 3,765 5, ,1 2, 2,3 4,5 6,8-2,4-2,4-4,8 YoY.6% 75.9% 39.4% -14.9% -44.2% -65.5% 13.2% 19.5% 17.3% RPM 1.5% 2.7% 2.1% -.1% 1.4%.7% 1.6% 3.1% 2.3% -1.7ppt -1.6ppt -1.7ppt Net income 1,121 2,457 3, ,3 7 1,15 2,75 3,9-1,75-1,45-3,2 YoY 1.7% 114.6% 59.2% % -47.1% -8.4% 2.6% 11.9% 9.% Depreciation 3, Capital expenditures 4,39-4, Parent FY2/18 FY2/19 Revised Est. FY2/19 Initial Est. Difference (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 17,66 18, ,777 11,6 114,4 225, 111,1 113,9 225, YoY 11.9% 5.8% 8.7% 2.8% 5.8% 4.3% 3.2% 5.3% 4.3% Cost of sales 8,763 79,294 16,57 83,3 83,3 166,6 Gross profit 26,84 28,88 55,72 27,8 3,6 58,4 YoY 8.9% 8.9% 8.9% 3.6% 6.% 4.8% GPM 24.9% 26.7% 25.8% 25.% 26.9% 26.% SG&A expenses 24,131 24,666 48,797 25, 26,2 51,2 SG&A ratio 22.4% 22.8% 22.6% 22.5% 23.% 22.8% Operating profit 2,79 4,213 6,922 2,8 4,4 7,2 YoY 25.% 78.% 52.7% 3.4% 4.4% 4.% OPM 2.5% 3.9% 3.2% 2.5% 3.9% 3.2% Non-op. income (expenses) Recurring profit 2,489 4,362 6, ,3 2,4 2,7 4,3 7, -2,6-2, -4,6 Cons.-Par. difference FY2/18 FY2/19 Revised Est. FY2/19 Initial Est. Difference (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 27,862 32,518 6,38 33,3 31,7 65, 31,7 33,3 65, +1,6-1,6 - YoY -.6% 29.9% 13.7% 19.5% -2.5% 7.7% 13.8% 2.4% 7.7% Cost of sales 22,891 27,35 5,241 26,1 27,3 53,4 Gross profit 4,973 5,166 1,139 5,6 6, 11,6 YoY -1.5% 5.% 1.7% 12.6% 16.1% 14.4% GPM 17.8% 15.9% 16.8% 17.7% 18.% 17.8% SG&A expenses 5,154 5,129 1,283 5,7 5,5 11,2 SG&A ratio 18.5% 15.8% 17.% 18.% 16.5% 17.2% Operating profit YoY % -44.8% 1,215.8% % OPM -.6%.1% -.2% -.3% 1.5%.6% Non-op. income (expenses) Recurring profit , Reasons for revision Consolidated sales in 1H FY2/19 are expected to be in line with initial forecast. However, consolidated operating profit, recurring profit, and net income are anticipated to fall short of initial forecasts. This is due to non-consolidated gross profit being approximately 11% lower than expected, because retail profit per unit was below target following a change in used car pricing and store operation strategies at directly managed stores in Japan in the second half of April 218. IDOM has taken steps to address the above factors that eroded earnings in 1H, and the YoY decline in profit per unit and retail sales volume has slowed in the second half of Q2 and the first half of (September). However, the company revised down its 6/65

7 Research Report by Shared Research Inc. full-year earnings forecast because recovery in 2H may only offset the shortfall in 1H. An approximately JPY2mn extraordinary loss arising from damage to part of product inventory and stores caused by the typhoon and earthquake in September is reflected in full-year net income forecast. Dividend forecast for FY2/19 is unchanged as the company s dividend per share is calculated using confirmed results of FY2/18. On the same day, the company announced monthly sales volume data for September 218; see the monthly trends section for details. On October 1, 218, the company announced it had acquired the Andrews & Wallis Motor Group (a new car dealer group that comprises five companies) of Melbourne, Victoria, Australia. Reason for the acquisition The company provided three reasons for the acquisition: First, the Andrews & Wallis Motor Group (AWM Group) operates multi-brand dealerships in Melbourne, which is located in a densely populated area of eastern Australia, and possesses a strong presence in the regional new car market. Second, the economic situation and new car market in Melbourne are strong, and the AWM Group s financial results are displaying continuous growth. Third, the AWM Group can leverage the managerial expertise and business foundation of Buick Holdings (DVG), which operates in western Australia and has been a group subsidiary since October 215, and help improve consolidated earnings and raise medium- to long-term corporate value for the IDOM group. The IDOM group s acknowledgement of DVG s positive results appears to have led to this acquisition, which the company anticipates will establish a groundwork for future operational expansion in Australia. Summary The company s subsidiary, IDOM Automotive Group Pty Ltd (formerly Gulliver Australia Holdings Pty Ltd), completed acquisition of the AWM Group s five companies under its newly established subsidiary, IDOM Automotive Essendon Pty Ltd, through stock acquisition and transfer of assets. The simple, unaudited sum of FY6/18 sales for the AWM Group s five companies was AUD273.1mn, while operating profit was AUD1.6mn (estimated JPY equivalents are sales of about JPY22.bn and operating profit of about JPY87mn at a rate of AUD1=JPY82). Based on interviews with the company, Shared Research speculates that the transaction value of the acquisition was about JPY5.bn, or an EV/EBITDA just short of 6x. The company views the terms of the acquisition and valuation as favorable. About 6% of funds for the acquisition will likely be procured through local financing with favorable terms, while the remaining approximately 4% will likely come from cash on hand. This acquisition s impact on FY2/19 consolidated financial results is expected to be minimal. On the same day, the company announced that it added new BMW and MINI cars to NOREL, an unlimited car transfer service with a fixed monthly rate. On September 12, 218, the company announced monthly sales volume data for August 218. On August 1, 218, the company announced monthly sales volume data for July /65

8 Research Report by Shared Research Inc. On July 25, 218, Shared Research updated the report following interviews with the company. For previous releases and developments, please refer to the News and topics section. 8/65

9 Research Report by Shared Research Inc. Trends and outlook Monthly trends Total car sales at directly managed stores (units) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY2/14 23,223 15,921 12,456 12,884 13,123 12,198 13,416 17,181 15,462 1,716 13,258 18, ,769 YoY 12.3% 3.2% 14.3% 1.4% 13.2% 6.6% 9.8% 24.6% 13.2% 29.3% 11.2% 1.3% 12.6% FY2/15 21,58 11,64 9,725 1,374 12,232 13,44 14,136 18,552 15,181 11,7 13,215 18, ,968 YoY -7.1% -26.9% -21.9% -19.5% -6.8% 6.9% 5.4% 8.% -1.8% 3.3% -.3% -3.8% -5.5% FY2/16 23,716 18,747 13,711 14,26 14,443 13,319 13,676 18,338 14,295 11,111 14,78 2,35 189,675 YoY 9.9% 61.1% 41.% 36.9% 18.1% 2.1% -3.3% -1.2% -5.8%.4% 6.5% 1.% 12.3% FY2/17 24,396 17,994 12,825 13,986 15,82 13,15 16,782 18,628 16,47 14,42 15,86 21, ,362 YoY 2.9% -4.% -6.5% -1.5% 4.4% -2.3% 22.7% 1.6% 14.8% 26.4% 7.2% 5.4% 5.1% FY2/18 29,461 19,23 15,649 16,994 17,356 15,551 17,25 18,351 16,4 14,57 16,932 23,658 22,889 YoY 2.8% 6.9% 22.% 21.5% 15.1% 19.5% 2.8% -1.5% -.%.1% 12.2% 12.% 1.8% FY2/19 29,738 18,753 14,627 15,455 16,127 15,85 16, ,119 YoY.9% -2.5% -6.5% -9.1% -7.1% 1.6% -3.7% % Retail sales at directly managed stores (units) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY2/14 6,593 4,327 3,441 3,84 4,19 3,27 3,937 4,962 4,66 3,661 2,785 5,8 5,386 YoY 14.5% 18.8% 11.7% 1.1% -.3% -7.4% 3.9% 12.2% 3.1% 32.1% 2.5% 16.7% 11.3% FY2/15 7,6 3,28 2,86 3,695 4,87 4,448 4,249 5,3 4,937 3,873 3,176 5,882 52,217 YoY 6.3% -3.% -18.5% -2.9% -.5% 46.9% 7.9% 1.4% 5.9% 5.8% 14.% 15.8% 3.6% FY2/16 7,944 5,338 5,134 5,28 5,372 5,24 5,566 7,165 5,675 4,955 4,961 8,367 7,79 YoY 13.4% 76.3% 83.% 36.1% 31.4% 17.% 31.% 42.4% 14.9% 27.9% 56.2% 42.2% 35.4% FY2/17 9,868 7,14 6,514 6,976 8,131 6,918 8,259 8,856 7,719 7,68 7,473 1,537 95,333 YoY 24.2% 31.4% 26.9% 38.7% 51.4% 32.9% 48.4% 23.6% 36.% 42.6% 5.6% 25.9% 34.8% FY2/18 14,55 8,914 9,978 9,952 1,777 9,33 9,99 1,59 9,636 9,29 9,555 13, ,161 YoY 42.4% 27.1% 53.2% 42.7% 32.5% 34.5% 21.% 18.7% 24.8% 3.3% 27.9% 26.1% 31.3% FY2/19 13,612 9,361 8,952 9,336 1,515 9,347 1,172 71,295 YoY -3.2% 5.% -1.3% -6.2% -2.4%.5% 1.8% % Wholesale sales at directly managed stores (units) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY2/14 16,63 11,594 9,15 9,8 9,14 9,171 9,479 12,219 1,82 7,55 1,473 13, ,383 YoY 11.4% -1.6% 15.3% 14.8% 2.7% 12.2% 12.4% 3.4% 7.2% 27.9% 13.7% 8.2% 13.1% FY2/15 14,574 8,612 6,919 6,679 8,145 8,596 9,887 13,522 1,244 7,197 1,39 12, ,751 YoY -12.4% -25.7% -23.3% -26.4% -9.6% -6.3% 4.3% 1.7% -5.2% 2.% -4.1% -1.9% -9.1% FY2/16 15,772 13,49 8,577 9,178 9,71 8,115 8,11 11,173 8,62 6,156 9,117 11, ,966 YoY 8.2% 55.7% 24.% 37.4% 11.4% -5.6% -18.% -17.4% -15.9% -14.5% -9.2% -5.4% 1.9% FY2/17 14,528 1,98 6,311 7,1 6,951 6,97 8,523 9,772 8,688 6,974 7,613 1,582 14,29 YoY -7.9% -18.1% -26.4% -23.6% -23.4% -24.9% 5.1% -12.5%.8% 13.3% -16.5% -9.3% -12.6% FY2/18 15,46 1,316 5,671 7,42 6,579 6,248 7,26 7,842 6,764 4,848 7,377 1,375 95,728 YoY 6.% -6.% -1.1%.5% -.9% 2.5% -14.8% -19.8% -22.1% -3.5% -3.1% -2.% -8.% FY2/19 16,126 9,392 5,675 6,119 5,612 6,458 6, ,824 YoY 4.7% -9.%.1% -13.1% -14.7% 3.4% -11.3% % Store count Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Year end FY2/ Directly managed Franchisee Directly managed YoY change FY2/ Directly managed Franchisee Directly managed YoY change FY2/ Directly managed Franchisee Directly managed YoY change FY2/ Directly managed Franchisee Directly managed YoY change FY2/ Directly managed Franchisee Directly managed YoY change FY2/ Directly managed Franchisee Directly managed YoY change Note: Total vehicle sales at directly managed stores = the sum of direct retail sales to customers and wholesale sales at auctions Note: Retail sales at directly managed stores = direct retail sales to customers, only 9/65

10 V/! 219 R Research Report by Shared Research Inc. Quarterly trends and results #DI Quarterly performance FY2/18 FY2/19 FY2/17 FY2/18 FY2/19 FY2/17 FY2/18 FY2/19 YoY change (JPYmn) Q2 Q4 Q2 1H 1H 1H 1H Rev. Est. 1H Init. Est. Act. Act. Rev. Est. Change Init. Est. Diff. Q2 1H Sales 71,13 64,338 68,87 71,819 71,411 72, , , , ,9 142,8 251, ,157 29, +13,843 29, +13, ,188 +8,469 Domestic business 6,562 52,425 56,884 59,614 58,567 57,975 11,92 112, ,542 29, ,485-1,995 +5,55 +3,555 Australian business 1,184 11,385 11,445 11,838 12,46 13,958 22,281 21,569 26,418 4,596 44,852 +2,276 +2,573 +4,849 Other (US) ,63 1, YoY 7.5% 1.8% 3.1% 18.7%.4% 12.7% 3.8% 9.% 6.3% 6.2% 5.4% 19.7% 9.8% 5.% 5.% Domestic business 11.4% 12.2%.3% 15.7% -3.3% 1.6% 7.4% 11.8% 3.1% 1.4% 9.6% Australian business -1.8% 4.8% 18.4% 36.8% 22.3% 22.6% % 22.5% 117.3% 1.5% Gross profit 16,88 15,725 17,39 17,7 15,36 14,859 29,74 31,813 3,165 33,4 61,133 65,859-7, +4, ,648 YoY 7.2% 7.% 5.8% 11.% -4.9% -5.5% 26.7% 7.1% -5.2% 5.% 18.5% 7.7% GPM 22.6% 24.4% 24.7% 23.7% 21.4% 2.5% 23.9% 23.5% 21.% 23.4% 24.3% 23.8% 24.1% +.3pp -1.2pp -4.pp -2.5pp SG&A expenses 14,845 14,44 14,363 15,432 14,927 14,792 27,532 29,285 29,719 3,7 56,634 59,8-62,4 +3, YoY 7.9% 4.9%.8% 3.9%.6% 2.4% 42.1% 6.4% 1.5% 4.8% 28.5% 4.3% SG&A ratio 2.9% 22.4% 2.9% 21.5% 2.9% 2.4% 22.2% 21.6% 2.6% 21.5% 22.5% 21.4% 21.5% +.1pp +.pp -2.pp -1.pp Operating profit 1,243 1,285 2,676 1, ,172 2, ,7 4,498 6,779 3, -3,779 7, ,218-2,83 Domestic business 1,569 1,414 2,952 1, ,297 2, ,36 7,921-1,135-1,31-2,445 Australian business Other (US) Adjustments Elimination Goodwill amortization YoY -.2% 38.6% 44.6% 23.9% -69.6% -94.8% -46.8% 16.4% -82.4% -82.2% 6.8% -4.4% 5.7% -55.7% 12.1% Domestic business 16.5% 48.8% 44.4% 95.1% -72.3% -92.6% -43.6% 29.9% -82.% -27.7% 47.8% OPM 1.7% 2.% 3.9% 2.2%.5%.1% 1.7% 1.9%.3%.3% 1.9% 1.8% 2.5% 1.% -1.4pp 2.6% +.2pp -1.2pp -1.9pp -1.6pp Domestic business 2.6% 2.7% 5.2% 3.3%.7%.2% 2.3% 2.6%.5% - 2.6% 3.5% Recurring profit 93 1,129 2,449 1, ,2 2, ,3 4,16 5,797 2, -3,797 6,8 +1,3-8 -1,338-2,138 YoY -23.% 33.3% 29.4% 432.8% -88.6% - -5.%.6% -15.2% -14.9% 13.2% -39.1% 39.4% -65.5% 17.3% RPM 1.3% 1.8% 3.6% 1.8%.1% -.3% 1.6% 1.5% -.1% -.1% 1.6% 1.7% 2.1%.7% -1.4pp 2.3% +.2pp -1.1pp -2.pp -1.6pp Net income , ,12 1, ,1 2,247 3, ,878 3, ,116-1,719 YoY -37.6% 79.5% 49.6% 1,354.4% % 1.7% % % -45.3% 59.2% -8.4% 9.% Net margin.6% 1.% 2.4% 1.2% -.2% -.6%.9%.8% -.4% - 1.5%.9% 1.3%.2% -1.1pp 1.3% +.pp -.8pp -1.7pp -1.2pp Parent FY2/18 FY2/19 FY2/17 FY2/18 FY2/ FY2/17 FY2/18 FY2/19 YoY change (JPYmn) Q2 Q4 Q2 1H 1H 1H 1H Rev. Est. 1H Init. Est. Act. Act. Rev. Est. Change Init. Est. Diff. Q2 1H Sales 57,444 5,162 52,975 55,196 55,588 55,1 96,2 17,66 11,589 11,6 111,1 198, , , +9, , +9,223-1,856 +4,839 +2,983 YoY 11.7% -.7% 12.9% -3.2% 9.6% 36.2% 3.1% 2.8% 2.8% 3.2% 1.6% 8.7% 4.3% 4.3% Gross profit 13,673 13,167 14,393 14,487 12,234 12,396 24,655 26,84 24,63 27,8 51,166 55,72-58,4 +2,68-1, ,21 YoY 1.2% 7.5% 5.5% 12.6% -1.5% -5.9% 11.8% 8.9% -8.2% 3.6% 13.% 8.9% 4.8% GPM 23.8% 26.2% 27.2% 26.2% 22.% 22.5% 25.6% 24.9% 22.3% 25.% 25.8% 25.8% 26.% +.1pp -1.8pp -3.7pp -2.7pp SG&A expenses 12,269 11,862 11,884 12,782 12,38 12,298 22,487 24,131 24,336 25, 46,632 48,797-51,2 +2, Personnel 4,487 4,27 4,316 4,357 4,462 4,42 8,264 8,757 8,864 16,614 17, Outsourcing ,76 1,236 1,814 2, Commission fee ,722 1, Depreciation ,178 1,289 1,28 2,514 2, Advertising 1,992 1,813 2,17 2,624 1,829 1,784 3,923 3,85 3,613 9,64 8, Rents 2,153 2,29 2,175 2,241 2,328 2,384 3,677 4,362 4,712 7,532 8, Others 1,989 1,848 1,771 1,852 1,86 2,17 3,699 3,837 3,877 7,372 7, YoY 9.5% 5.1%.7% 3.6% -1.9% 3.7% 23.1% 7.3%.8% 3.6% 21.3% 4.6% Personnel 8.% 3.9% 3.1% 4.6% -.6% 3.1% 17.7% 6.% 1.2% % 4.9% Outsourcing 28.3% 19.9% -7.1% 5.5% 7.2% 23.1% 14.1% 24.1% 14.9% % 21.8% Commission fee 18.4% 1.6% -24.5% 1.7% -28.5% -22.3% 59.6% 14.% -25.1% %.6% Depreciation 1.3% 8.6% 3.2%.4%.3% -1.7% 24.7% 9.4% -.7% % 5.4% Advertising -.1% -6.% -9.3% -6.9% -8.2% -1.6% 47.1% -3.% -5.% % -5.8% Rents 18.6% 18.7% 15.% 14.1% 8.1% 7.9% 18.5% 18.6% 8.% % 16.5% Others 7.7% -.3%.5% -3.% -6.5% 9.1% 14.6% 3.7% 1.% - 15.% 1.2% SG&A ratio 21.4% 23.6% 22.4% 23.2% 21.7% 22.4% 23.4% 22.4% 22.% 22.5% 23.5% 22.6% 22.8% +.1pp +.3pp -1.3pp -.4pp Personnel 7.8% 8.5% 8.1% 7.9% 8.% 8.% 8.6% 8.1% 8.% - 8.4% 8.1% - +.2pp -.5pp -.1pp Outsourcing 1.% 1.%.9% 1.2% 1.1% 1.2%.9% 1.% 1.1% -.9% 1.% - +.1pp +.1pp +.1pp Commission fee.8% 1.1%.7%.7%.6%.8%.9%.9%.7% -.9%.8% - -.2pp -.3pp -.3pp Depreciation 1.1% 1.3% 1.3% 1.2% 1.1% 1.2% 1.2% 1.2% 1.2% - 1.3% 1.2% - +.pp -.1pp -.pp Advertising 3.5% 3.6% 4.% 4.8% 3.3% 3.2% 4.1% 3.5% 3.3% - 4.6% 4.% - -.2pp -.4pp -.3pp Rents 3.7% 4.4% 4.1% 4.1% 4.2% 4.3% 3.8% 4.1% 4.3% - 3.8% 4.1% - +.4pp -.1pp +.2pp Others 3.5% 3.7% 3.3% 3.4% 3.3% 3.7% 3.8% 3.6% 3.5% - 3.7% 3.5% - -.1pp -.pp -.1pp Operating profit 1,44 1,35 2,59 1, ,167 2, ,8 4,534 6,922-7, YoY 16.8% 35.2% 36.3% 224.% -86.1% -92.5% -42.6% 25.% -89.2% 3.4% -33.7% 52.7% 4.% OPM 2.4% 2.6% 4.7% 3.1%.4%.2% 2.3% 2.5%.3% 2.5% 2.3% 3.2% 3.2% -.pp Cons.-Par. Sales 13,686 14,176 15,895 16,623 15,823 17,525 28,44 27,862 33,348 53,82 6,38-65, +4,62 +2,137 +3,349 +5,486 Diff. Gross profit 2,415 2,558 2,646 2,52 3,72 2,463 5,49 4,973 5,535 9,967 1,139-11,6 +1, SG&A 2,576 2,578 2,479 2,65 2,889 2,494 5,45 5,154 5,383 1,2 1,283-11, Operating profit Buick HD Operating profit (DVG) Goodwill amortization OP after goodwill amortization , Indicators FY2/18 FY2/19 FY2/17 FY2/18 FY2/19 FY2/17 FY2/18 YoY change (Stores, units) Q2 Q4 Q2 1H 1H 1H Act. Act. Change Init. Est. Diff. Q2 1H Store Directly managed count YoY 11.8% 1.6% 7.6% 6.3% 5.5% 5.6% 14.2% 1.6% 5.6% 1.9% 6.3% 6.6% Franchisees Vehicles Directly managed sales 64,34 49,91 52,1 54,647 63,118 47,387 97, ,241 47, ,362 22, ,222-2,514-66,854 sold Retail 32,947 3,32 3,135 32,37 31,925 29,198 45,421 62,979 29,198 95, ,151-14, +14,849-1, ,781 W holesale 31,393 19,869 21,866 22,61 31,193 18,189 51,877 51,262 18,189 14,29 95, ,68-33,73 Retail ratio 51.2% 6.2% 58.% 58.6% 5.6% 61.6% 46.7% 55.1% 61.6% 47.8% 56.7% -.6pp +1.4pp +6.5pp YoY Directly managed sales 16.5% 18.6%.4% 8.8% -1.9% -5.% -.9% 17.4% -58.5% 5.1% 1.8% - Retail 4.8% 36.4% 21.3% 27.7% -3.1% -2.8% 33.5% 38.7% -53.6% 34.8% 31.3% 11.9% W holesale -1.3% -.9% -19.% -1.2% -.6% -8.5% -19.1% -1.2% -64.5% -12.6% -8.% - Retail units / Directly managed stores (avg.) YoY 26.5% 22.6% 11.2% 19.5% -8.5% -7.9% 16.9% 25.3% -56.1% 17.8% 19.9% 2.6% Sales (parent) / Vehicles sold 893 1,5 1,19 1, , , ,392 YoY -3.9% -5.8% -1.1% 3.8% -1.4% 15.5% 8.6% -4.7% 147.8% 5.3% -1.9% - Gross profit (parent) / Vehicles sold YoY -5.4% -9.3% 5.1% 3.5% -8.8% -.9% 12.8% -7.3% 121.2% 7.5% -1.7% - No. of employees (parent) 3,464 3,339 3,265 3,39 3,437 3,41 3,249 3,339 3,41 3,169 3, No. of employees per store YoY -4.3% -7.1% -6.5% -9.8% -5.9% -3.6% 6.5% -7.1% -3.6% 5.7% -9.8% Capital expenditures 1,625 2,419 3,82 4,39 1,28 2,187 2,644 2,419 2,187 5,33 4,39-4, IDOM s quarterly gross profit margin (GPM) fluctuates due to seasonal factors. The peak period for auctions is the end of the fiscal year in February and March, and April is a quiet period. Consequently, the GPM tends to be high in Q4 and low in. Wholesale prices fall when the auctions are quiet, but the company s gross profit/unit is steady, and GPM tends to rise. 1/65

11 Research Report by Shared Research Inc. 1H FY2/19 results (out October 12, 218) Overview: The company announced downward revisions to1h and full-year FY2/19 forecasts on October 9. 1H earnings were down sharply despite start of the nine earnings growth initiatives. In the latter half of Q2, the confusion that accompanied retail revenue structure changes (leading to decreases in retail sales volume per store and gross profit per vehicle) began to clear. That said, the revisions factor in the possibility that 2H performance will stay at the same level as 1H. 1H FY2/19: Operating profit down JPY2.1bn (82%) YoY as retail sales volume declined for first time since FY2/15 as company moved to optimize retail advertising and made changes in retail revenue structure. Gross profit per vehicle on retail sales declined in tandem. While the volume declined that continued into Q2 recovered in the latter half of the quarter, this was not enough. Optimized retail advertising: Tightening of internal review system and ad content standards led to decline in number of ads placed and customers until April, though this had been factored into the plan Retail revenue structure changed: Despite pricing strategy aimed at attracting more customers, issues arose and retail sales volume and gross profit per vehicle both declined (in contrast to forecast, which assumed the switch would have no impact) Issue 1: Store employees understanding and awareness of new revenue structure failed to penetrate as expected, leading to lower contract rate Issue 2: Gross profit structure (gross profit from vehicles + revenue from accessories) under new revenue structure resulted in lower gross profit as products with low unit price failed to generate revenue from accessories Australia: With an operating profit of JPY52mn (+JPY326mn YoY), Australian business finished in the black before goodwill amortization. New car market in Australia has not recovered yet, but various sales initiatives have kept top-line revenues growing at the Australian business since Q2 FY2/18 New store openings: 14 new openings and two closures for net increase of 12 stores in FY2/19 versus full-year target of net increase of 32 stores. Q2 had a net increase of eight stores (2 thus far in FY2/19). Topic: Purchased a new vehicle dealer located in Melbourne (Australia). The company hopes to use this entity as a stepping stone to expand the Australian business. 11/65

12 Research Report by Shared Research Inc. Quarterly earnings 8 7.8% Sales Operating profit OPM (right axis) % 5.1% 5.2% % % 4.4% 4.4% 5 3.8% % 4.% % % 2.9% 2.8% 3 2.2% 3.2% 1.8%1.8% 1.8% 1.6% 1.9% 1.6% 1.7% 2.% %.5% %.1 FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 FY2/19 (JPYbn) 8% 7% 6% 5% 4% 3% 2% 1% % (') 8 Retail Wholesale Vehicles purchased (directly managed stores) Retail ratio (right axis) (JPYbn) FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 FY2/19 6% 55% 5% 45% 4% 35% 3% 25% 2% Earnings overview 1H earnings down sharply despite start of the nine earnings growth initiatives; acquired an Australian new vehicle dealer Sales: JPY143.9bn (+6.3% YoY) Operating profit: JPY445mn (-82.4% YoY) On the domestic front, sales rose 3.1% YoY to JPY116.5bn and operating profit fell 82.% YoY to JPY5mn. In Australia, sales rose 22.5% to JPY26.4bn and operating profit was JPY52mn versus a loss of JPY274mn in the same period the previous year. The company missed 1H forecasts (sales of JPY142.8bn and operating profit of JPY2.7bn). It already announced downward revisions to 1H and full-year FY2/19 forecasts on October 9. The following text describes the content. Reasons for the revisions: Consolidated sales in 1H FY2/19 are expected to be in line with initial forecast. However, consolidated operating profit, recurring profit, and net income are anticipated to fall short of initial forecasts. This is due to non-consolidated gross profit being approximately 11% lower than expected, because retail profit per unit was below target following a change in used car pricing and store operation strategies at directly managed stores in Japan in the second half of April 218. IDOM has taken steps to address the above factors that eroded earnings in 1H, and the YoY decline in profit per unit and retail sales volume has slowed in the second half of Q2 and the first half of (September). However, the company revised down its full-year earnings forecast because recovery in 2H may only offset the shortfall in 1H. An approximately JPY2mn extraordinary loss arising from damage to part of product inventory and stores caused by the typhoon and earthquake in September is reflected in full-year net income forecast. Dividend forecast for FY2/19 is unchanged as the company s dividend per share is calculated using confirmed results of FY2/18. 12/65

13 Research Report by Shared Research Inc. Topics On October 1, 218, the company announced it had acquired the Andrews & Wallis Motor Group (a new car dealer group that comprises five companies) of Melbourne, Victoria, Australia. Reason for the acquisition The company provided three reasons for the acquisition: First, the Andrews & Wallis Motor Group (AWM Group) operates multi-brand dealerships in Melbourne, which is located in a densely populated area of eastern Australia, and possesses a strong presence in the regional new car market. Second, the economic situation and new car market in Melbourne are strong, and the AWM Group s financial results are displaying continuous growth. Third, the AWM Group can leverage the managerial expertise and business foundation of Buick Holdings (DVG), which operates in western Australia and has been a group subsidiary since October 215, and help improve consolidated earnings and raise medium- to long-term corporate value for the IDOM group. The IDOM group s acknowledgement of DVG s positive results appears to have led to this acquisition, which the company anticipates will establish a groundwork for future operational expansion in Australia. Summary The company s subsidiary, IDOM Automotive Group Pty Ltd (formerly Gulliver Australia Holdings Pty Ltd), completed acquisition of the AWM Group s five companies under its newly established subsidiary, IDOM Automotive Essendon Pty Ltd, through stock acquisition and transfer of assets. The simple, unaudited sum of FY6/18 sales for the AWM Group s five companies was AUD273.1mn, while operating profit was AUD1.6mn (estimated JPY equivalents are sales of about JPY22.bn and operating profit of about JPY87mn at a rate of AUD1=JPY82). Based on interviews with the company, Shared Research speculates that the transaction value of the acquisition was about JPY5.bn, or an EV/EBITDA just short of 6x. The company views the terms of the acquisition and valuation as favorable. About 6% of funds for the acquisition will likely be procured through local financing with favorable terms, while the remaining approximately 4% will likely come from cash on hand. This acquisition s impact on FY2/19 consolidated financial results is expected to be minimal. Reference: Outlook as of Decreases in contract rate and gross profit per vehicle caused by changes in revenue structure During FY2/19 the company will continue working on the nine earnings growth initiatives that are designed to help it meet the sales and earnings targets under its medium-term business plan. Its efforts aimed at increasing retail sales volume and gross profit per vehicle did not yield the results expected, though, as the increase in retail customer traffic failed to bring about the expected increase in either proportion of retail customers purchasing a vehicle (i.e., the contract rate) or the proportion purchasing additional services. With both retail sales volume and gross profit per vehicle coming down, gross profit at the parent fell JPY1.4bn YoY and the gross profit margin declined 1.8pp. Nevertheless, the company believes the general direction of the nine earnings growth initiatives is appropriate as they did result in the anticipated increase in customer count. It also believes the issues that appeared in can be resolved by tweaking revenue structure. Nine earnings growth initiatives Retail units 1. New store openings 2. Customer attraction 3. Contract ratio Gross profit per unit 4. Optimize pricing 5. Additional revenues 6. Sourcing high-margin products SG&A expenses (excluding increases in line with new openings) 7. Operational expenses per store 8. Advertising expenses 9. Head office expenses Changes in retail revenue structure brought planned increase in customer count, but additional earnings were below plan and contract rate fell 13/65

14 Research Report by Shared Research Inc. Initiatives undertaken during included 1) optimizing retail advertising by tightening its internal review system and standards for ad content, which led to a decline in the volume of ads placed until April; 2) changes in retail revenue structure from latter half of April with a switch to pricing aimed at attracting more customers and increasing customer satisfaction (offering cars and services that match customer needs, and increasing price transparency). The change did not yield the benefits expected, though, as the increase in customer traffic was less than the company had expected and the added traffic did not lead to an increase in either the proportion of retail customers purchasing a vehicle or the proportion purchasing additional services (which would have increased both retail sales and the gross profit on sales). Trends in retail sales volume and gross profit per vehicle sold (YoY, per store) Indicators Advertisement Customer traffic Conversion rate Additional revenue Customer traffic decreased during the ad review period Retail units Results Gross profit per unit March April May Change in the retail revenue structure IDOM has been optimizing its retail advertising by conducting strict internal checks to ensure representations are accurate so that it can prevent any recurrence of the sorts of issues that caused an administrative order* by the Consumer Affairs Agency in December 217. To allow checks of all advertising material, the company reduced total advertising volume, which led to decreased ability to attract customers. However, its initial FY2/19 forecasts already took this into account for the optimization period slated to end in April, so the company says results so far have been as expected. Sales were impacted in April and May because of the average time required from sale to vehicle delivery. *Administrative order: In December 217, IDOM was subject to an administrative order based on the Act against Unjustifiable Premiums and Misleading Representations. This was because of the use of the phrase warranty included in newspaper inserts for Gulliver Minikuru in May 216 and January and March 217. The phrase was deemed to be a misleading representation in violation of the Act against Unjustifiable Premiums and Misleading Representations, since it could have led customers to believe the warranty was free. The company took this administrative order very seriously and is working to prevent any recurrence by enhancing its management structure, including improvements to its regulatory compliance systems. IDOM made changes in revenue structure, targeting an increase in customers. It appears to be pushing forward the Gulliver store sales model that proved successful in FY2/18. Changes include revision of the retail revenue structure in terms of gross profit per vehicle for retail sales, making certain accessories optional, allowing the company to realize lower selling prices for vehicles. By offering lower prices than the competition, IDOM receives preference in online comparisons, which has led to an increase in customer traffic. At the same time, the company aims to maintain current levels of gross profit (gross profit from vehicle + revenue from accessories) by capturing revenue from accessories. However, although its ability to attract customers has improved, the contract rate declined, as did the ratio of transactions that included accessories, leading to a decline in retail vehicle sales volume and gross profit per vehicle (lower gross profit from vehicle + reduced revenue from accessories). Purpose of changes in revenue structure Revenue from accessories Target 1: Change in pricing to attract customer traffic Revenue from accessories Target 2: Improved price transparency and customer satisfaction by providing products and services to meet customer needs Revenue from accessories (included in vehicle margin) Vehicle margin Revenue from accessories (made optional) Vehicle margin Accessory products and services - Auto loans - Insurance - Warranties - Glass coating - Parts - Car navigation systems and drive recorders Improvement measures already in place against identified issues; expecting to be back in line with initial forecasts from September As a result of improvement measures, the monthly number of vehicles sold maintained double-digit growth for the 38 months through February (+26.1%), but has declined for the most part since then (March -3.2%, April +5.%, May -1.3%, June -6.2%), even with the effect of new stores (5 7% increase in store count per month). 14/65

15 Research Report by Shared Research Inc. IDOM sees the following reasons for this recent trend: Ability to make proposals (reason for decline in contract rate): Store employees do not have adequate awareness regarding proposals of accessory products and services and their proficiency in business negotiations varies. Revenue structure (reason for decline in ratio of revenue from accessories): Capturing revenue from accessories for low-price vehicles has not met expectations (for high-price vehicles it is in line with plan) and region-specific response has been inadequate. To address these issues, the company initiated additional reform measures aimed at meeting its initial target for higher retail volume and bringing the proportion of retail customers purchasing a vehicle and the proportion purchasing additional services back to previous levels. These measures include the following: Ability to make proposals: development of standardized tools Revenue structure: retail revenue structure suited to price bands and regions Additional: lineup of accessories suited to customer needs and expansion of lineup of high-margin accessories Although it will take time to improve employees ability to make proposals, IDOM believes it can improve gross profit per vehicle by controlling the variation among employees. The changes in revenue structure have already been completed, and sales activities have been using post-revision product pricing since July. The company has also nearly completed the enhanced lineup of accessory products. Considering the time required until vehicle delivery, the effects will likely begin to appear in the July results and become more pronounced from August. IDOM is continuing to strengthen its systems in preparation for the next high-demand months, September and October. It plans to get back on track toward its initial forecasts in and expects it can make up for the 1H shortfall in 2H. We will be watching how the September results turn out. Number of vehicles sold (retail; left) and number of vehicles sold (retail + wholesale; right) at directly managed stores (' units) 16 FY2/16 FY2/17 FY2/18 FY2/19 (' units) 35 FY2/16 FY2/17 FY2/18 FY2/ Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Supplementing domestic business (Outlook as of, reference) The decline in GPM (-1.8pp at parent) is the result of a drop in gross profit per vehicle, even as SG&A expenses remained in line with plan. Initial forecasts called for advertising expenses to be flat YoY, but IDOM actually succeeded in reducing them by JPY163mn. It also achieved an increase in customer count. One of the issues identified in regarded translating that increase into an improved contract rate, so the company has no plans to increase advertising expenses from Q2. At end, the number of directly operated stores stood at 5 (14 new stores, 2 closures), a net increase of 12 from end FY2/18. This was favorable progress toward the full-year plan (52 stores, net increase of 32). IDOM says there is even a possibility it will exceed the initial target. In addition, in April 218 the company opened Brat Utsunomiya, a remodeled store with a new format it is testing. The conventional Brat, of which there were six as of July 218, specialized in four-wheel drive SUVs, but the Utsunomya store (in Tochigi) is the first to specialize in sedans and coupes. IDOM has also strengthened its online purchasing with the launch of Gulliver Online on June 29, 218. This is a complete and economical online service that covers used car purchasing, valuation, and sales (personnel expenses for vehicle appraisers, operating costs, and travel expenses are added to the valuation price). Australian business (Outlook as of, reference) IDOM's performance improvement measures helped the Australian business finish in the black with an operating profit of JPY62mn (before goodwill amortization) for first time since Q2 FY2/17. Restructuring and the appointment of a new COO (in January 218) both seem to have had a positive effect. The company is also enhancing the used car business, opening Gulliver Outlets on a trial basis and increasing the number of new car dealers also handling used cars. In Australia, many companies financial years end in June, making June a busy period, so the company has high hopes for Q2 performance. 15/65

16 Research Report by Shared Research Inc. Overseas business (JPYmn) (JPYmn) FY2/16 Overseas operating profit FY2/ Overseas OP before goodwill amortization FY2/18 Number of vehicles sold at Australian business FY2/19 (JPYmn) FY2/ FY2/17 Australia Other (US) FY2/ FY2/19 (' units) 14 CY215 CY216 CY217 CY218 (JPYmn) +15% Units sold YoY (' units) % % 1 11 % % 6 8 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Shared Research based on Federal Chamber of Automotive Industries data -1% Jan 213 Jan 214 Jan 215 Jan 216 Jan 217 Jan For reference Parent GPM and SG&A-to-sales ratio +5pp +4pp +3pp +2pp +1pp pp -1pp -2pp -3pp -4pp -5pp FY2/13 FY2/14 FY2/15 YoY FY2/16 Parent GPM FY2/17 FY2/18 FY2/19 28% -4pp 27% -3pp 26% -2pp 25% -1pp 24% pp 23% +1pp 22% +2pp 21% 2% +3pp 19% +4pp 18% +5pp FY2/13 FY2/14 FY2/15 YoY FY2/16 Parent SG&A ratio FY2/17 FY2/18 FY2/19 15% 16% 17% 18% 19% 2% 21% 22% 23% 24% Parent SG&A expenses (JPYbn) FY2/11 Other SG&A (parent) Personnel (parent) Advertising (parent) No. of directly managed stores (right axis) FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 FY2/ /65

17 Research Report by Shared Research Inc. 3, 2,5 2,322 2, 2,17 1,994 1,929 1,992 1,759 1,3831,5781,739 1,813 1,829 1,5 1,784 1,686 1,515 1, % 1, % 1, 1,1571,181 1,241 1,89 4.5% 1, , % 1,4 4.% 2.3%2.5% 2.7% 3.1% 3.4% 3.9% 3.5% 3.7% 2.3% 2.6%2.6% 2.7% 4.6%3.%3.% 3.7% 3.9% 4.3%4.4% 3.5%3.6% 4.8%3.3%3.2% 4.% 5 FY2/12 FY2/13 Advertising expenses (parent) FY2/14 (JPYmn) FY2/15 % of sales (right axis) FY2/16 2,715 FY2/17 2,819 FY2/18 2,624 FY2/19 12% 1% 8% 6% 4% 2% % Overall domestic sales volume of new vehicles; IDOM s sales volume 4% 3% 2% 1% % -1% -2% -3% Mar FY2/14 Sep Mar FY2/15 Market: new cars sold in Japan IDOM: sales units (retail + wholesale) Market: pre-owned car sales units Sep Mar FY2/16 Sep Mar FY2/17 Sep Mar FY2/18 Sep Mar FY2/19, Japan Automobile Dealers Association data, and Japan Light Motor Vehicle and Motorcycle Association data Note: Domestic sales of new vehicles are sales of passenger cars, small vehicles, and light motor vehicles. Sep For details on previous results, please refer to the Historical performance section. 17/65

18 Research Report by Shared Research Inc. Full-year company forecasts (initial forecasts) Consolidated FY2/16 FY2/17 FY2/18 FY2/19 Initial Est. (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 95,24 115,61 21,85 124, , , ,468 14, , ,8 147,2 29, YoY 27.3% 42.% 34.9% 3.8% 1.6% 19.7% 9.% 1.5% 9.8% 5.4% 4.6% 5.% Cost of sales 71,573 86,92 158,475 94,539 95,844 19,383 13,654 16,644 21,298 19,4 11,6 22, Gross profit 23,45 28,16 51,61 29,74 31,429 61,133 31,813 34,46 65,859 33,4 36,6 7, YoY 24.7% 38.9% 32.1% 26.7% 11.6% 18.5% 7.1% 8.3% 7.7% 5.% 7.5% 6.3% GPM 24.7% 24.5% 24.6% 23.9% 24.7% 24.3% 23.5% 24.2% 23.8% 23.4% 24.9% 24.1% SG&A expenses 19,371 24,696 44,67 27,532 29,12 56,634 29,285 29,795 59,8 3,7 31,7 62,4 SG&A ratio 2.4% 21.5% 21.% 22.2% 22.9% 22.5% 21.6% 21.2% 21.4% 21.5% 21.5% 21.5% Operating profit 4,79 3,463 7,542 2,172 2,326 4,498 2,528 4,251 6,779 2,7 4,9 7,6 YoY 49.6% 33.3% 41.6% -46.8% -32.8% -4.4% 16.4% 82.8% 5.7% 6.8% 15.3% 12.1% OPM 4.3% 3.% 3.6% 1.7% 1.8% 1.8% 1.9% 3.% 2.5% 1.9% 3.3% 2.6% Non-op. income (expenses) Recurring profit 4,43 2,792 6,835 2,2 2,14 4,16 2,32 3,765 5,797 2,3 4,5 6,8 YoY 46.6% 7.9% 27.9% -5.% -23.4% -39.1%.6% 75.9% 39.4% 13.2% 19.5% 17.3% RPM 4.3% 2.4% 3.3% 1.6% 1.7% 1.7% 1.5% 2.7% 2.1% 1.6% 3.1% 2.3% Net income 2,563 1,548 4,111 1,12 1,145 2,247 1,121 2,457 3,578 1,15 2,75 3,9 YoY 55.8% -5.7% 25.1% -57.% -26.% -45.3% 1.7% 114.6% 59.2% 2.6% 11.9% 9.% Depreciation 2,449 2,964 3,44 - Capital expenditures 5,45 5,33 4,39 4, Parent FY2/16 FY2/17 FY2/18 FY2/19 Initial Est. (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 89,317 9,5 179,367 96,2 12, ,434 17,66 18, , ,1 113,9 225, YoY 21.9% 12.7% 17.1% 7.7% 13.5% 1.6% 11.9% 5.8% 8.7% 3.2% 5.3% 4.3% Cost of sales 67,268 66,89 134,77 71,544 75, ,268 8,763 79,294 16,57 83,3 83,3 166,6 Gross profit 22,48 23,241 45,289 24,655 26,511 51,166 26,84 28,88 55,72 27,8 3,6 58,4 YoY 2.1% 17.2% 18.6% 11.8% 14.1% 13.% 8.9% 8.9% 8.9% 3.6% 6.% 4.8% GPM 24.7% 25.8% 25.2% 25.6% 25.9% 25.8% 24.9% 26.7% 25.8% 25.% 26.9% 26.% SG&A expenses 18,272 2,175 38,447 22,487 24,145 46,632 24,131 24,666 48,797 25, 26,2 51,2 SG&A ratio 2.5% 22.4% 21.4% 23.4% 23.6% 23.5% 22.4% 22.8% 22.6% 22.5% 23.% 22.8% Operating profit 3,776 3,65 6,841 2,167 2,367 4,534 2,79 4,213 6,922 2,8 4,4 7,2 YoY 47.4% 23.6% 35.7% -42.6% -22.8% -33.7% 25.% 78.% 52.7% 3.4% 4.4% 4.% OPM 4.2% 3.4% 3.8% 2.3% 2.3% 2.3% 2.5% 3.9% 3.2% 2.5% 3.9% 3.2% Non-op. income (expenses) Recurring profit 3,74 2,644 6,384 2,12 2,547 4,649 2,489 4,362 6,851 2,7 4,3 7, Cons.-Par. difference FY2/16 FY2/17 FY2/18 FY2/19 Initial Est. (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 5,77 25,11 3,718 28,44 25,38 53,82 27,862 32,518 6,38 31,7 33,3 65, YoY 322.4% 2,58.% 1,123.8% 391.4%.1% 72.8% -.6% 29.9% 13.7% 13.8% 2.4% 7.7% Cost of sales 4,35 2,93 24,398 22,995 2,12 43,115 22,891 27,35 5,241 26,1 27,3 53,4 Gross profit 1,42 4,919 6,321 5,49 4,918 9,967 4,973 5,166 1,139 5,6 6, 11,6 YoY 213.6% 993.1% 64.7% 26.1% -.% 57.7% -1.5% 5.% 1.7% 12.6% 16.1% 14.4% GPM 24.6% 19.7% 2.6% 18.% 19.6% 18.8% 17.8% 15.9% 16.8% 17.7% 18.% 17.8% SG&A expenses 1,99 4,521 5,62 5,45 4,957 1,2 5,154 5,129 1,283 5,7 5,5 11,2 SG&A ratio 19.3% 18.1% 18.3% 18.% 19.8% 18.8% 18.5% 15.8% 17.% 18.% 16.5% 17.2% Operating profit YoY 82.5% 237.3% 146.8% -98.3% -11.3% -15.1% -3,72.% % 297.2% -44.8% 1,215.8% % OPM 5.3% 1.6% 2.3%.% -.2% -.1% -.6%.1% -.2% -.3% 1.5%.6% Non-op. income (expenses) Recurring profit , Number of vehicles FY2/16 FY2/17 FY2/18 FY2/19 Initial Est. (Units) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Vehicles bought 88,128 92,838 18,966 87,998 98, ,175 83,27 YoY 24.2% 6.2% 14.3% -.1% 5.8% 2.9% -5.6% Vehicles sold 41, ,77 189,675 42,83 157, ,362 49,91 17,978 22,879 YoY 17.7% 1.8% 12.3%.3% 6.5% 5.1% 18.6% 8.7% 1.8% Retail 15,64 55,15 7,79 22,25 73,38 95,333 3,32 95, ,151 14, YoY 27.6% 37.8% 35.4% 41.1% 33.% 34.8% 36.4% 29.8% 31.3% 11.9% W holesale 26,364 92,62 118,966 2,58 83,971 14,29 19,869 75,859 95,728 YoY 12.6% -.8% 1.9% -23.9% -9.3% -12.6% -.9% -9.7% -8.% 18/65

19 Research Report by Shared Research Inc. FY2/19 outlook (initial forecasts out April 12, 218) Core strategies In FY2/19, the company plans on an operating profit of JPY7.6bn (+12.1% YoY). This is a significant drop from the medium-term plan target of JPY17.5bn, but the core of the medium-term business plan the expansion of retail sales showrooms (and retail vehicle sales volume) remains unchanged. The company has a precise two-pronged strategy based on gross profit per vehicle and SG&A expenses to grow profit by increasing retail sales volume. The elements are as follows. 1) Retail sales volume growth: Continued new store openings combined with improved retail sales customer appeal and higher contract rates. 2) Profit per vehicle: Optimizing price setting, working to expand ancillary earnings (e.g. automobile inspections, insurance), and sourcing high GPM products. 3) Controlling SG&A expenses: Reducing/streamlining operating costs per store and head office costs, and controlling advertising costs through a more efficient approach in attracting customers who seek to sell their vehicles. Numerical targets Note that the initial forecasts factor in the 32 net additions to the store network in FY2/18, but not the nine initiatives discussed later. Parent company assumptions are as follows. Store openings: 32, no change from FY2/18. Retail sales volume per store: No change. Retail gross profit per vehicle: No change. SG&A expenses: Operating cost per store, advertising expenses, and head office expenses in line with FY2/18. Assumptions for consolidated subsidiaries. Australia: Operating profit of JPY2mn before goodwill amortization (up JPY965mnn YoY, up JPY751mn excluding JPY214mn in inventory valuation losses in Q4 FY2/18) on higher sales volume. Domestic subsidiaries: IDOM said it has conservative assumptions for revenues from BMW dealership, which performed well in FY2/18. Business strategy: toward meeting medium-term plan targets Nine earnings growth initiatives As previously mentioned, FY2/19 company forecasts only include the impact on sales, costs, and profits from the 32 net store additions in FY2/18. Still, the company has kept its medium-term plan targets (operating profit of JPY17.5bn in FY2/19 and JPY21.bn in FY2/2). IDOM plans to implement the nine initiatives in the following table to grow profit. Note that these are not new policies from FY2/19 but were previously in place. Shared Research understands that they have been stated in more concrete and precise detail. While specific measures have not been disclosed for competitive reasons, the gist is as follows. Nine earnings growth initiatives Retail units 1. New store openings 2. Customer attraction 3. Contract ratio Gross profit per unit 4. Optimize pricing 5. Additional revenues 6. Sourcing high-margin products SG&A expenses (excluding increases in line with new openings) 7. Operational expenses per store 8. Advertising expenses 9. Head office expenses Increasing retail volume Company forecasts incorporate 32 store openings in FY2/19, but it aims at more. It is in fact considering more than 45 store developments. The shift to larger stores has made finding locations more difficult and negotiations mean that opening stores in all the proposed sites would be unlikely, but IDOM aims to open stores yearly from FY2/19 onward. The company is closing stores that have been open for 1 to 15 years during which storefront traffic had withered, but said net openings should not fall below 32. Most of the new store openings will be in the Outlet and Gulliver store with showroom formats. In areas with sufficient room, it will also add LIBERALA stores. Since December 217, new stores have employed the new design, which the company hopes will 19/65

20 Research Report by Shared Research Inc. boost customer appeal and contract numbers. IDOM says the design does not merely entail changes to the decor, but leverages the expertise gained from opening nearly 2 stores with showrooms and is designed to boost store profits. Interior and exterior design, vehicle display methods, and entry areas have been revamped, while operating costs and equipment investment per square meter are unchanged. At the April 218 results briefing, the company said new format stores that already opened posted significant gains in customer appeal, contract rates, and store profitability. Gulliver stores with showrooms also have enhanced ability to attract customers and contract rates. After a gradual rollout from the start of FY2/18, all of the target stores were converted to have showrooms by end Q2 (roughly 8% of the 289 Gulliver stores as of end Q2). These should contribute over full-year FY2/19. Increased retail unit sales in FY2/18 could be largely attributed to this store format, in which the company leverages the high-profile Gulliver brand to attract customers seeking to sell their vehicles, then aggressively markets the used vehicles on display and on the Dolphinet system, encouraging them to purchase another. Sales volume is not as large as in Outlet showrooms, but since Gulliver stores are large in number and had not been aggressively marketing showroom sales, retail customer appeal and contract rates increased with the newly refurbished stores. Average sales volume in some existing showroom stores appear to have declined somewhat as the company sent management level employees to oversee Gulliver stores with showrooms to focus on retail sales, and cannibalization occurred among some stores. Still, the impact on new stores is negligible and the company is targeting sales of 3 33 vehicles per month per store as set out in the medium-term plan. Gulliver stores with showrooms: Conditions for opening such stores are the same as for Outlet store openings, and the company opens Gulliver stores with showrooms in commercial areas where there are no existing Gulliver stores. These are hybrid stores that leverage the positives of both Outlet and Gulliver stores. They generate similar retail sales to Outlet stores and can expect to purchase a fair volume of used vehicles from the name recognition of Gulliver stores. Number of stores and net increase No. of directly managed stores YoY change (net) No. of directly managed stores No. of franchisees FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 Retail and wholesale volume (left), retail volume average number of stores (right) 6% 5% 4% 3% 2% 1% % % FY2/ FY2/14 Retail units FY2/ FY2/16 Retail gross profit per vehicle Retail units YoY (left axis) FY2/ FY2/18 (') % 5% 4% 3% 2% 1% % -1% % FY2/ FY2/14 Retail units per store FY2/ FY2/16 YoY (left axis) FY2/17 71 FY2/18 The company is aiming to maximize retail gross profit per vehicle. By optimizing prices, growing ancillary profits, and increasing high gross margin products, it hopes to boost gross profit per vehicle sold by JPY1, 5, (not factored into company forecasts). The company s FY2/19 sales target is 14, units. Assuming an average profit increase of JPY1, per unit, this would boost profits by JPY1.4bn. This is a critical factor in meeting medium-term targets (units) /65

21 Research Report by Shared Research Inc. In FY2/18 IDOM aimed to maximize gross profits by lowering prices in the Gulliver stores with showrooms to be in line with the Outlet stores while significantly growing sales volume. The company views its efforts as a success as they led to increased retail sales volume and gross profit and improved profitability at Gulliver stores. In addition to full-year benefits from these initiatives in FY2/19, it aims to optimize pricing, which had been reduced (by around JPY1, in some cases). From 2H FY2/18 the company started gradually adjusting prices in light of store location and competitive conditions at some stores, and plans to do so more widely in FY2/19. Still, optimization is pointless if price rises push down sales volume and gross profit declines. IDOM aims to maximize gross profit gross profit per vehicle times retail volume. It said it is analyzing characteristics of each store location and taking care and time to implement the initiative. Maximize total gross profit due to an increase in retail sales volume Margin per unit Gulliver stores Margin per unit Showrooms Margin per unit From FY2/19 FY2/17 FY2/18 +JPY1, 5,/unit Retail units Retail units Gross profit increase in line with increase in units Retail units The contribution of ancillary earnings is increasing in line with retail sales volume. This includes for example automobile inspections, insurance, maintenance contracts, and coating. It characteristically trends not just with annual sales volume but the cumulative number of vehicles sold that are on the road. In parent company sales, these are included with franchise royalties and other commissions posted under other operating revenue. The company says that it is the second-largest agent in the industry for automobile damage insurance (as of FY2/18). YoY change in parent company merchandise sales, other sales, and retail volume 5% Merchandise sales Other sales Retail units 4% 3% 2% 1% % -1% -2% FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 High gross-margin products involve the sale of high-priced products and expanding procurement from new car dealers (including imports) and leasing companies. Relationships with leasing companies could help constrain advertising spend aimed at growing volume in the buying business. While volume and sales/profit composition are not disclosed, the company cites this as one of its initiatives, and Shared Research thinks that it is significant. 21/65

22 Research Report by Shared Research Inc. Retail sales volume and parent company gross profit and GPM (JPYbn) 18 Gross profit Retail units (right axis) (') 35 28% GPM Retail units (right axis) (') % 24% 22% % 18% 16% FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 14% FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 Controlling SG&A expenses Controlling SG&A expenses entails working to control operating costs per store, advertising spend, and head office costs. As the store network has grown to around 5, the impact of store operating costs has increased. IDOM aims to cut costs by negotiating rent reductions and building on initiatives to streamline processes. In the medium term, the company plans to cut costs on advertising aimed at customer acquisition in the purchasing business to save billions of yen. In FY2/18, it expanded procurement via auctions (although the wholesale gross profit portion declined) and focused on online advertising to streamline operations. Still, online advertising expenses are in an uptrend, while TV commercials and other mass advertising expenses are low in the regional areas, so the company is thinking about how to optimize its channel mix. In FY2/19, IDOM aims to reap the benefits of the full-scale rollout of the Gulliver FleMa (name derived from flea market; a C2C platform for used car sales), now that the test runs are complete. The company s analysis shows that stores which have installed Gulliver FleMa are procuring larger volumes. This suggests that a nationwide rollout could facilitate a decline in advertising spending. Some 3 4% of customers who come to the Gulliver stores actually sell a vehicle. The rest balk when shown the purchase price after two or three hours is spent examining and valuing the vehicle. At this point they are invited to list the vehicle on Gulliver FleMa, and once agreement is reached, the listing can be immediately made public because inspection is over and there are photographs. The company receives a commission if a sale is made, but even if the customer is not able to sell, the Gulliver store may ultimately make the purchase. In FY2/18, the company worked to streamline activities with an increase in auction procurement (although the wholesale gross profit margin portion declines) and investing mainly in online ads. Parent company SG&A expenses (JPYbn) Other SG&A (parent) Personnel (parent) Advertising (parent) No. of directly managed stores (right axis) FY2/11 FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/ /65

23 Research Report by Shared Research Inc. New growth stage Focus on NOREL and Gulliver FleMa among new services As for new businesses addressing changes in the car industry, IDOM intends to maximize sales and profits by combining new services with the company s key strength, which is its vehicle sales infrastructure (Japan s largest store network centered around a high-quality sales organization). Looking back, during the initial stage following the company s foundation when the focus was solely on purchasing and wholesaling (wholesale of used vehicles within two weeks of purchase), IDOM became an industry leader holding the largest number of purchased vehicles in inventory. In the second stage, it began leveraging the inventory holding period (two weeks) to develop showroom-based retail sales and in turn obtained an industry-leading retail capability. Retail capability here refers to a couple of factors according to the company. 1) Sales infrastructure: Retailing using roughly 5 brick and mortar stores nationwide, a sales team, and sales via showrooms using a fully shared inventory system (sales infrastructure allows access to Japan s largest pool of sound in-house inventory). 2) Specialist head office department functions: Total end-to-end inventory control from procurement through retail sales (centralized pricing at headquarters and risk control) and ability to determine which items will sell. From FY2/19, IDOM intends to enter a new stage using its retail capability to diversify sourcing, products, and services. Domestic sales volume (calendar years) (' units) CY212 CY213 CY214 CY215 CY216 CY217 (' units) CY212 CY213 CY214 CY215 CY216 CY217 1 Toyota 1,646 1,536 1,59 1,449 1,528 1,587 1 Mercedes-Benz Honda Hino Suzuki BMW Daihatsu VW Nissan Lexus Mazda Mitsubishi Fuso Subaru Audi IDOM BMW MINI Mitsubishi Others Isuzu Total (excl. IDOM) 5,37 5,376 5,563 5,47 4,97 5,234 Formerly, IDOM maintained a rough balance between purchase numbers and retail and wholesale sales (slightly lower purchase numbers). In the future, the two will not necessarily be in balance as the company exploits a variety of procurement channels (in FY2/18, unit sales already significantly outstripped purchases). In the previous stages, growth in units purchased was a key element in strengthening retail sales. The key in the current stage will be what is added onto the sales infrastructure. The company said it aims to develop convenience store style formats which stock anything related to cars as it leverages alliances with other companies. Toward a new growth stage Management resources to acquire Number of transactions Management resources utilized Industry-leading purchased vehicles in inventory Purchase and wholesale Management resources utilized Industry-leading retail capability Purchased vehicles in inventory Retail The largest number of vehicles and customer transactions in Japan Diversify sourcing as well as products and services Foundation Present In FY2/18 when purchase volume was continuously declining, the company said it received many similar inquiries from investors (see below) to which it answered as follows. Q. Wouldn t IDOM s strengths disappear if the company sourced vehicles through means other than via conventional purchasing? A. There is no question that having the largest volume of purchased vehicles in inventory is one of IDOM s major management resources, but it is no longer an absolute requirement for growth now that the stage of bolstering retail capability is complete. IDOM plans to add procurement diversity as a new strength. 23/65

24 Research Report by Shared Research Inc. Q. Wasn t the utilization of purchased vehicles in inventory the core element of the company s business model? A. The important thing is inventory risk control. There is no change to the policy of comprehensive inventory risk hedging and not holding unnecessary inventory. IDOM would prefer investors to be reassured by its ability to procure through diverse procurement channels on better terms than via conventional purchasing. Q (Asked during results briefing). How would diversified sourcing impact IDOM s working capital and free cash flow? A. IDOM will continue to apply the ironclad rule (holding inventory for two weeks maximum) on conventionally purchased vehicles excluding those allotted for retail inventory. Meanwhile all vehicles held in retail inventories will be sold 1% via the retail channel, and those sourced externally (through dealers and others) will be handled appropriately depending on the situation. In the case of a brand new car, for instance, the chances of a price drop after procurement are not very high provided there are no model changes (no inventory risk in the sense of falling prices). Also, while IDOM had typically purchased from individuals, when its counterparties are companies, there is more room for negotiation (e.g. have its counterparty take on the burden of working capital [sourcing cost], negotiate to pay on delivery). Thus while maintaining the ironclad rule for inventory management, it would add the concept of retail inventory and deal with this flexibly. Still, IDOM said it would consider it with a view of not taking inventory risk and not increasing working capital. Development leveraging retail sales capabilities Products and services Sales Consumers Companies Auctions Car-rental companies, manufacturers, others Inventories purchased via conventional channel Directly managed stores (5 and growing) Inventory sharing system Wholesale (auction) Retail inventories In-house and other companies' services, C2C platform, car-sharing, other Diversify sourcing - Conventional purchasing - Direct purchase from companies - Participate in auctions Diversify products and services - Expand product line-up - Provide services such as C2C and car-sharing Sell all retail inventories through retail channels New businesses In FY2/19, the company will expand NOREL (monthly car exchange service using the inventory of purchased vehicles) and also steadily grow Gulliver FleMa (C2C platform designed to capture customers who made inquiries but did not sell their vehicles to Gulliver stores). 24/65

25 Research Report by Shared Research Inc. Assumptions Overall domestic sales volume of new vehicles; IDOM s sales volume 8% Market: new cars sold in Japan IDOM: sales units (retail + wholesale) IDOM: retail sales units 6% 4% 2% % -2% -4% Mar FY2/14 Sep Mar FY2/15 Sep Mar FY2/16 Sep Mar FY2/17 Sep Mar FY2/18 Sep Sales volume of used cars; IDOM s sales volume 4% 3% 2% 1% % -1% -2% -3% Mar FY2/14 Sep Mar FY2/15 Market: new cars sold in Japan IDOM: sales units (retail + wholesale) Market: pre-owned car sales units Sep Mar FY2/16 Sep Mar FY2/17 Sep Mar FY2/18, Japan Automobile Dealers Association data, and Japan Light Motor Vehicle and Motorcycle Association data Note: Domestic sales of new vehicles are sales of passenger cars, small vehicles, and light motor vehicles. Customer acquisition cost in the purchasing business (roughly unchanged YoY) In FY2/18 IDOM succeeded in boosting the efficiency of customer acquisition costs in the purchasing business (calculated as number of appraisals amount spent by the company), and it expects this to be roughly unchanged YoY in FY2/19. The company said it may possibly decline. Sep Retail vehicle sales (+ 14,849 units YoY) FY2/17 retail sales volume rose by 24,624 units YoY. Reasons for the higher sales were: the opening of new showrooms (+58 showrooms in FY2/16 and +44 in FY2/17); new stores (+28 stores in FY2/16 and +29 in FY2/17) that are mainly Outlet stores with higher monthly sales; and increase in monthly sales at comparable stores from 34.8 units in FY2/16 to 36.1 units in FY2/17. For FY2/18, the company expects a sales increase of 2,667 units YoY. Effectiveness of new stores will likely decline in time (stores opened during FY2/17 will likely produce less, while those opened in FY2/18 will perform at par YoY). New stores will be mainly composed of Outlet stores as was the case in FY2/17 and sales at comparable stores are expected to remain roughly at the same level YoY. The forecasts did not reflect sales increase at Gulliver stores. Factors that could contribute to even higher sales versus forecasts were: a) opening of new showrooms, mainly Outlet stores with an established store format that allows quicker investment recovery; b) upturn in monthly sales at comparable stores; and c) successful showrooms at Gulliver stores (trial sales in March at 5 Gulliver stores marked, on the average, 3x retail sales YoY and +2% YoY vehicle purchase including trade-ins). FY2/18 retail sales volume rose by 29,818 units YoY to 125,151. Higher sales volumes at Gulliver stores drove the growth. The number of new showrooms opened fell short of targets (net increase of 29 versus planned 45). The company had management personnel in charge of showroom sales concentrate on retail sales at Gulliver stores with showrooms, so there was a slight decline in sales volume at existing stores (new stores in line with existing stores). Still, sales grew significantly thanks to the success of Gulliver stores with showrooms. 25/65

26 Research Report by Shared Research Inc. For FY2/19, the company conservatively expects sales to grow by 14,849 units YoY. The impact of Gulliver stores with showrooms that was the driving force in FY2/18 should run its course, and the aforementioned initiatives to boost retail sales are not factored in. SG&A expenses The key variables in SG&A expenses are operating costs per store, advertising spending, and head office costs. The company expects these to all be flat YoY. In FY2/18, the company cut costs at some stores, reduced customer acquisition costs (advertising spending) for the purchasing business slightly via streamlining, and unrolled outsourcing and other efficiency measures gradually to keep overall costs flat YoY. Just as with retail volume, IDOM has not factored in the impact of its initiatives. Shared Research will be watching to see what sort of inroads the company makes into costs. Number of vehicles purchased, the new car market, and advertising expenses 2, 1, , , ,179 1, , ,65 1,99 1,12 1, ,29 1,19 1,77 1, ,152 1,759 1,4 1,383 1,578 1,739 1,426 1,241 1,686 2,715 1,994 1,929 2,322 2,819 1,992 1,813 2,17 2,624 FY2/14 IDOM: advertising expenses (JPYmn) Market: new cars sold in Japan (' units) IDOM: vehicles purchased (right axis, ' units) Q2 Q4 FY2/15 Source: Shared Research based on data from JAMA Q2 Q4 FY2/ Q2 Q4 FY2/ ,53 1, ,193 Q2 Q4 FY2/ ,6 1,66 1,45 Q2 Q Expenses to develop new markets Feeling the need to invest in future markets even at the expense of revising down forecasts, the company included in the revised plan it announced in July 216 an additional investment of JPY1.5bn on new market development. To maintain steady earnings growth in the medium and long term, it would not be enough to seek reform in the existing market for pre-owned vehicles. The company has decided that it must quickly enter emerging fields related to automotive services. IDOM s efforts in the existing market (automobile distribution) and new markets New markets AI/self-driving vehicles, connected cars Sharing economy, etc. New service C New service B New service A Car sharing, rental cars, etc. Developments of new services Automobile distribution market Declining 7.7mn 2.5mn (est.) New vehicles 4.8mn (est.) Previously-owned vehicle retail 2.5mn (est.) Measures to increase Gulliver store visitors (optimize advertising) Growth of retail sales for showrooms 199 Flat growth 216 The company made studies encompassing a wide range of business domains and decided to focus on the two projects of NOREL and Gulliver FleMa that it thought would produce high synergies with existing businesses. Related expenses in FY2/18 came in as expected at about JPY5mn, down YoY by about JPY1.bn. The company expects them to be flat YoY in FY2/19. Expenses to develop future markets: Expenses are mainly used for establishing a system for launching new services, consulting fees and other initial spending, and advertising costs to expand the new services. IDOM believes that the auto industry faced a major turning point in 216, and that the use of vehicles is going through a transformation. Therefore the company decided to invest toward the future. As of July 216, the investments were expected to start contributing to earnings during the medium-term plan through FY2/2, and will not call for a plan revision. IDOM aims to push forward initiatives to boost the numerical target for the final year of the plan. 26/65

27 Research Report by Shared Research Inc. Gulliver FleMa The company refers customers who received an estimate for their vehicle at a Gulliver store but did not sell their car to sign up for Gulliver FleMa. It encourages customers who did not sell their car to return to a Gulliver store at a later date to make the sale, with a goal of an increase in the number of contracts at stores. The company launched this service in 3 stores by May 216, 6 stores by August 216, and all stores by November 216. This service is also intended to minimize advertisement costs since it could increase both customer traffic to Gulliver stores and the number of cars purchased by Gulliver. With a trial run over, the company plans a full-scale rollout in FY2/19. NOREL IDOM began a test run of NOREL in August 216, limiting it to 1 customers in the Tokyo metropolitan area. However, because of its popularity, the company accepted more applicants for the service since October 216. As of April 217, the membership was about 2. The company changed the system in April and began offering price plans with three options (a JPY39,8 plan, JPY59,8 plan, and JPY79,8 plan) and resumed accepting applicants. The company expanded the service to the Kansai and Tokai areas in November 217, and increased the lineup with plans of JPY19,8, JPY39,8, JPY59,8, JPY79,8, JPY99,8, JPY2,, and JPY3, per month. In IDOM s business, the company purchases preowned vehicles, then sells them (within two weeks) for retail or at an auction. The company expects to generate gross profits from NOREL itself with revenue of approximately JPY48, to JPY96, per vehicle per year and with a gross profit margin of approximately 3% (Shared Research estimate). This is because the service utilizes vehicles after the company buys them and before it sells them. If the service s visibility improves and consumers understand how it works, we expect the business to expand. NOREL: Providing a new way of driving in line with different lifestyles When it comes to car rentals and car sharing, there is always some difficulty in choosing a vehicle, but with NOREL, there is none since customers can choose from over 1 car models, including minivans, SUVs, luxury sedans, and mobile homes to fit their environment or needs. This service allows customers to choose a vehicle based on their lifestyle without car loans tying them down, even as that lifestyle changes from marriage, children, or other life events. Characteristics 1) the ability to exchange vehicles after at least 9 days 2) regardless of the number of exchanges, no initial costs such as the cost of mandatory vehicle liability insurance, vehicle registration, and automobile acquisition tax, as well as no running costs such as the cost of vehicle inspections, automobile tax, or car insurance (excludes the monthly fee, cost of gasoline, and parking fees) 3) ability to exchange vehicles based on the season or as needed. Effectively leverage existing management resources NOREL also effectively leverages existing management resources. Excluding investments and the cost of creating the NOREL system, there does not seem to be any significant initial expenses, as NOREL uses the company s inventory, which already has a solid lineup of over 1, vehicles. Additionally, after the company purchases a used vehicle, it typically sells it through its wholesale or retail business. NOREL provides another method for marketing used cars. In the NOREL system, customers reserve a vehicle of their choice online and pick it up at the nearest IDOM group store. The company is also careful in selecting the type of vehicle it handles because prices of preowned vehicles can easily decline depending on the timings of vehicle inspections. 27/65

28 Research Report by Shared Research Inc. Service flow Purchase of pre-owned vehicles New services Sales of pre-owned vehicles Wholesale Showrooms pre-owned vehicles Purchase contract signed Sales contract signed Not signed Gulliver FleMa Not signed Auction locations: approx. 12 Not signed Signed NOREL earnings structure Initial costs Running costs Decline in auction prices NOREL gross profit Retail gross profit 6 NOREL gross profit after 12 months 9-day usage required NOREL sales 1m 2m 3m 4m 5m 6m 7m 8m 9m 1m 11m 12m Store opening policy The company assumes a net increase of 32 directly-managed stores, of which most are showrooms and Gulliver retail stores. It is in fact considering more than 45 store locations. The shift to larger stores has made finding locations more difficult and negotiations mean that opening stores in all the proposed sites would be unlikely, but IDOM aims to open at least 32 stores, and from 32 to 45 stores yearly from FY2/19 onward. As for sales channels, the company intends to continue opening Outlet and Gulliver retail stores while increasing LIBERALA stores at cruising speed. LIBERALA store network is currently expanding and its customer segment is different from that of Outlet stores. The company plans to continue opening LIBERALA stores, mainly in large urban areas. Conditions for opening Gulliver stores are the same as for Outlet store openings, and the company plans to open stores in areas where there are no existing Gulliver stores. The company hired about 473 new graduates in April 218 (around 54 in 217), which will be more than enough manpower for it to open 45 stores. The company intends to control overstaffing and minimize impact on labor costs by making adjustments on the number of mid-career recruits. Parent company employees 4, 3,5 No. of employees (parent) Employees per store (right axis) , 7. 2, , 6. 1, , FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/ /65

29 Research Report by Shared Research Inc. Consolidated subsidiary In FY2/17, Buick Holdings (DVG), a consolidated subsidiary in Australia, posted an operating loss of JPY462mn before goodwill amortization (JPY862mn after amortization). Results were affected by stagnant new car market in Western Australia stemming from a downturn in the local energy industry. Operating profit declined by JPY777mn YoY and JPY91mn versus the full-year target. Drastic organizational restructuring implemented by the company, including changes in the management structure, appear to have had a large impact on the results. In FY2/18, amid an ongoing slump in the new car market, the company started growing sales from Q2 due to various initiatives. Still, it posted an operating loss before goodwill amortization of JPY765mn (operating loss of JPY1.2bn after amortization), a widening of JPY33mn (special factor of JPY214mn in inventory valuation losses in Q4 FY2/18). The company had planned for an operating profit before amortization in Q4, but improvement was delayed and it posted an operating loss of JPY8mn before the special factor. In November 217 the company recruited a former group company COO of Australia s largest new car dealer who joined the company from January 218. For FY2/19, IDOM expects operating profit before goodwill amortization of JPY2mn (operating loss of JPY2mn after amortization), an improvement of JPY965mn (JPY751mn excluding special factor). IDOM expects it will take another year for the subsidiary to make a significant profit contribution. The forecast appears to incorporate volume growth and little impact from the new COO s turnaround strategy. Any such impacts would probably add to profit growth. The difference between parent and consolidated operating profit is expected to improve by JPY543mn from a loss of JPY143mn in FY2/18 to JPY4mn in FY2/19. Considering an improvement of JPY965mn in the Australian subsidiary, Japanese subsidiaries are estimated to deteriorate by the difference, JPY422mn. The company said that it has conservative FY2/19 forecasts for a subsidiary that operates a BMW dealership following a strong FY2/18. Overseas earnings (JPYmn) (JPYmn) FY2/16 Overseas operating profit FY2/ Overseas OP before goodwill amortization FY2/ (JPYmn) FY2/ Australia FY2/17 Other (US) FY2/ /65

30 Research Report by Shared Research Inc. Medium-term plan Aiming for profit growth by increasing retail vehicle sales and showrooms In April 216, the company revised its medium-term business plan (announced April 214) since it had to modify its store opening policy the core of the business plan due to resource shortage. In the revised medium-term plan, the basic principle behind IDOM s initial plan achieve operating profit growth by increasing gross profit through expansion of retail sales remained unchanged, but the company took into account changes in its store opening policy and the slow recovery of the new car market. The thinking behind gross profit derived from retail sales and store opening-related costs (investment amounts and recurring expenses) also remained generally in line with the initial plan. Breaking into untapped markets However, in FY2/17 the company announced a downward revision of the full-year FY2/17 earnings forecasts and a plan to enter untapped markets by accelerating investments. Expansion of sales showrooms the core element of the medium-term plan remained unchanged. Still, the company stated that the numbers of customers selling vehicles to buy new cars were lower than expected given a stagnant new car market, and that it saw the need to quickly establish a fresh business model targeting the new markets that were emerging from the rapid structural changes of the automotive industry. As a result, FY2/18 forecasts were also revised downward versus the medium-term plan. That said, the company maintained the medium- to long-term targets: FY2/18 operating profit of JPY13.6bn and FY2/21 operating profit of JPY25.bn (both on the condition of a 1% exercise of stock options). The core strategy to achieve profit growth by increasing retail vehicle sales and number of showrooms outlined in the medium-term plan also remained unchanged. We will, however, keep note of the fact that revised down figures were announced. See below for a summary on IDOM s medium- to long-term strategy concerning future markets (announced July 216) and a summary on the medium-term plan announced in April 216. Medium- to long-term strategy (out July 216) Goal is to create an IDOM area The company s medium- to long-term goal is to become a top player in the field and create its own operating territory in all areas of automotive distribution and related services. IDOM wants to imitate the Amazon Prime membership program and offer similar services for the auto industry. Shared Research believes that IDOM wants to establish an area where the company can provide services such as vehicle purchase and sales, maintenance, and driving instruction for a fixed monthly fee to customers both with and without their own vehicles. The company wants to go beyond just selling various automobile products to provide services to customers who do not own cars. Existing platform to add services in new markets, as it seeks to maximize profits The medium-term management plan (released in April 214 and revised in April 216) is one driver toward this goal. Under the plan, the company has been transforming itself from a B2B service focusing on purchase and wholesale operations in the pre-owned vehicle distribution sector into a B2C provider catering to consumers primarily through showrooms. The company has also begun to enter related markets: it launched HUNT, a shopping mall that promotes an automobile lifestyle, in October 214; opened Shake!, a store specializing in automobile inspection services, in January 215; and created a smartphone app called KURU-MAJIRO (renamed Gulliver FleMa) in September 215 to help individuals buy and sell vehicles (C2C). These moves are part of an effort to maximize profits by adding various services to its existing platforms. While the initiatives mentioned above could be considered extensions of the existing pre-owned vehicle distribution business, the company has been making small investments to enter new markets. The company must make management decisions more swiftly in response to recent industry developments, including 1) the emergence of new markets and services, such as self-driving vehicles and a 3/65

31 Research Report by Shared Research Inc. sharing economy (car and ride sharing among individuals), 2) aggressive investments by large new entrants, and 3) negative impact from a decline in new vehicle demand unless the company can expand beyond providing services related to the buying and selling physical vehicles. Brick-and-mortar stores and client base make IDOM an attractive partner IDOM s strengths are its business infrastructure and customer base. The company operates physical stores nationwide (about 5 stores as of end February 216) and receives more than 2mn requests for purchases from vehicle owners each year. Newly established companies do not usually have such advantages, making IDOM an attractive alliance partner for companies eager to launch new services quickly. IDOM is already in talks with several major startups, and recognizes the importance of brick-and-mortar stores even as distribution services increasingly go online. The number of customer IDs is a key performance indicator for the company as it expands and forms alliances for new and existing services. Striving to beat medium-term profit targets For future alliances, it is not yet clear whether IDOM s role will be limited to customer referrals, vehicle sales, and maintenance, or whether IDOM will also engage in value-added services. Another question is whether such partnerships will include capital tie-ups. For now, the company will aim to achieve its revised operating profit forecast of JPY7.6bn for FY2/17, and exceed the FY2/2 operating profit target of JPY21bn. According to the company, roughly JPY1.5bn in investments allocated for FY2/17 will likely start contributing to profits during FY2/18. IDOM expects that the arrival of vehicles that are truly self-driving may take another 1 years or so. However, the company s efforts to create an automobile service platform may progress more swiftly, with a sharing economy spreading in the nation s three major economic hubs Tokyo, Nagoya, and Osaka. Consumers may place more emphasis on using rather than owning cars. The company wants to turn the new service into a viable business before the end of the medium-term plan. Auto industry: Transformation in vehicle use Automate Self-driving cars Combine services and automation Central control system to become a social infrastructure Conventional cars From "owning" to "using" Car designed as a platform for services Services Medium-term management plan (revised in April 216) Revises previous medium-term plan (in April 214), changing core store opening policy to 6 annually from 11 The company revised its medium-term business plan in April 214 as it modified its store opening policy, the core of the business plan, due to a shortage of staff. In the revised medium-term plan, the basic principle behind IDOM s initial plan (increase gross profit through expansion of retail sales, thereby growing operating profit) remains unchanged, but the company takes the following into account when making revisions: changes to its store opening policy and slow recovery of the new car market. IDOM also generally followed the initial plan in taking gross profit from retail sales and store opening-related costs (investment amounts and recurring expenses) into consideration. Due to the downward revision to the planned net increase in sales showrooms ( display stores) from 11 a year to 6, the initial numerical target of JPY2.bn in annual operating profit was delayed by around two years. The revised business plan also assumes that the Australian subsidiary and the domestic vehicle importing subsidiary will continue to generate profits similar to those expected for FY2/17. The revised plan does not include effects of the company s new initiatives and a possible change in accounting standards. The following is the outline of the new medium-term plan. 31/65

32 Research Report by Shared Research Inc. Outline of new medium-term plan FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 FY2/19 FY2/2 April 214 Operating profit (JPYmn) 5,77 7,94 8,5 11,4 15, 2, YoY -18.8% 39.7% 19.8% 34.1% 31.6% 33.3% Retail sales (vehicles) 45,269 5,386 6, 87, 12, 15, YoY 36.8% 11.3% 19.1% 45.% 37.9% 25.% New store openings Net increase of stores (stores) April 215 Operating profit (JPYmn) 5,77 7,94 5,325 8,2 15, 2, YoY -18.8% 39.7% -24.9% 54.% 82.9% 33.3% Retail sales (vehicles) 45,269 5,386 52,217 79, 12, 15, YoY 36.8% 11.3% 3.6% 51.3% 51.9% 25.% New store openings Net increase of stores (stores) April 216 Operating profit (JPYmn) 5,77 7,94 5,325 7,542 1,8 13,6 17,5 21, YoY -18.8% 39.7% -24.9% 41.6% 43.2% 25.9% 28.7% 2.% Retail sales (vehicles) 45,269 5,386 52,217 7,79 95, 117, 137, 16, YoY 36.8% 11.3% 3.6% 35.4% 34.4% 23.2% 17.1% 16.8% New store openings Net increase of stores (stores) Store opening policy The key to achieving targets in the new medium-term plan is whether IDOM will be able to keep the net increase of 6 sales showrooms annually. The downward revision to the number of net increase in sales showrooms came as the company took its personnel hiring situation into account. The company had already changed the store opening policy during 2H FY2/16 as it took into consideration the possibility that it may not hire as many new graduates as initially planned. No issues with store development, land acquisition, and manager training; additional store openings if more new graduates hired There were no delays or issues of store development, acquisition of land, and store manager training, as the company focused on the skills of employees working at new stores. It tasks employees with teaching new graduates the necessary skills such as corporate, customer service, and business skills through systems that place an emphasis on one-on-one instruction and individual learning. New employees work closely with the store manager and other employees, and receive more in-depth training than a mid-career employee, placing new employees in a position of importance. IDOM hired 42 new graduates in FY2/16 and 55 in FY2/17. However, as this revised plan is based on a tight labor market for new graduates, the company appears to be considering the possibility of not reaching its target number of employees. In its revised medium-term plan, IDOM incorporated hiring numbers into its new store opening projections, and so it revised its forecast of 11 new stores in FY2/17 in the previous plan to 6 new stores. However, as IDOM sets a higher in-house target, it may revise up the new plan depending on its activities to hire new graduates. The company assumes that each new store requires five employees at least. If the number of new graduates exceeds the company s plan by 1, opening an additional 2 new stores may be possible. According to the company, it may open 1 new stores if it manages to hire 7 graduates, depending on the turnover rate. Operating profit target of JPY21.bn The basic idea behind the operating profit target remains unchanged: gross profit of JPY28.5bn due to a rise in retail vehicle sales; minus an increase in SG&A expenses worth JPY15.bn due to a rise in sales showroom stores; plus operating profit of JPY7.5bn in FY2/16, resulting in JPY21.bn in operating profit in FY2/2. Increase in retail vehicle sales Of existing sales showrooms (totaling 131 as of end FY2/16), the company expects newer ones (operating for less than one year) to sell 3 units each a month, other existing stores, 34 units a month, and Gulliver stores, nine vehicles each a month. This will increase the company s retail vehicle sales by 9, units from 7, in FY2/16 to 16, in FY2/2. The company expects wholesale sales to fall by 4, units from 12, to 8,. Excluding the transfer of 4, units from wholesale sales, the company expects the net increase in retail sales to be 5, units. The company expects that retail gross profit will worsen by JPY1.4bn due to the transfer from wholesale sales and that gross profit from the net increase in retail sales (retail gross 32/65

33 Research Report by Shared Research Inc. profit and wholesale gross profit) will increase by JPY18.6bn. Based on these plans, retail gross profit should come to JPY372, per vehicle and wholesale gross profit to JPY112, per vehicle. The company also estimated SG&A expenses for 24 stores for four years at JPY5mn per month for each. As a result, gross profit will increase by JPY28.5bn and SG&A expenses by JPY15.bn in FY2/2 from FY2/16, thereby increasing operating profit by JPY13.5bn. Together with the operating profit of JPY7.5bn in FY2/16, the company expects to see annual operating profit of JPY21.bn for FY2/2. Store-related expenses Store-related SG&A expenses of JPY5mn per month for each store include personnel costs (five employees per store), rents, and other items. The company estimates the initial investment in a sales showroom at JPY8mn on average, and plans to recover the investment in three years (36 months). According to the company, it may recover investments in some Gulliver Outlet stores, which require relatively low costs, in a year, depending on cases. The revised plan includes JPY2mn in spending on area marketing per new store. This is for the company s initiative to enhance the degree of recognition of new stores by intensifying area marketing using TV commercials, flyers, and others within relevant areas, thereby expanding business areas and increasing retail sales volume at an early stage. The company estimates monthly vehicle sales at a new retail store at 3 units for the first year and 34 units for the second year. By acquiring customers awareness at an early stage, IDOM plans to shorten the period until a new store attains the target sales of 34 vehicles a month. Fund raising Based on the plan to open 6 new stores, annual investments will total JPY4.8bn, resulting in overall investments of JPY19.2bn for four years. As it disclosed in March 216, it has completed fund procurement with low interest rates, ahead of actual needs, comprised of long-term borrowings (for seven to 1 years with fixed interest rates at.433% to.54%) and concluded a commitment line contract (for seven years with variable interest rates). ROE target The company sets an ROE target of 2% or more for FY2/2, up from 11.5% in FY2/16. The basic idea is to increase net income by attaining the operating profit target. IDOM decides on dividends with a target payout ratio of 3%, based on consolidated net income. This applies to the revised medium-term plan, as well. Overseas expansion Business performance of domestic and overseas subsidiaries not included in medium-term plan The revised medium-term plan did not mention overseas expansion and assumed that the Australian subsidiary s operating profit will hold level. However, the importance of the overseas business has not decreased. The company recognizes the significance of establishing the business base for the Australian unit in acquiring confidence from investors for future business development, including M&A. Possibility of collaboration with emerging automakers advantage of IDOM s sales channels Another strategy not included in the new medium-term plan is possible collaboration with emerging automakers. IDOM foresees the likelihood that newly established automakers may grow on development of vehicles equipped with automatic driving systems as well as electric vehicles. IDOM should be attractive for emerging automakers as possible business partners due to its independent standing and nationwide sales network of actual stores. Some of those automakers have noticed the strength of IDOM s sales channels and have apparently started talks on cooperation. 33/65

34 Research Report by Shared Research Inc. Business Earnings trends (JPYmn) 4% 3% 2% 1% % Sales YoY (left axis) (JPYbn) (JPYbn) Operating profit OPM (right axis) % 6% 5% 4% 3% 2% -1% 5 2 1% -2% FY2/2 FY2/6 FY2/1 FY2/14 FY2/18 % FY2/2 FY2/6 FY2/1 FY2/14 FY2/18 (' units) 3 Retail units Wholesale units Retail units ratio (right axis) 56.7% 6% 47.8% % % % 28.2% % 22.6% FY2/11 FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 Source: Shared Research based on company materials 5% 4% 3% 2% 1% % Overview One of the largest buyers of used vehicles in Japan. Strengths in store network and vehicle sales infrastructure underpinned by well-trained sales team Core business is buying and selling used vehicles. The introduction of fair purchasing prices premised on auction prices was the key to the company s growth. Used vehicle prices vary widely, and the market value for used vehicles was difficult to assess. IDOM was the first to move to a system of fair purchasing prices. This fair and straightforward rule and the use of a franchise model during its founding worked. The company is Japan s largest buyer of used vehicles. Leveraging the existing business platform, the company is now bolstering retail sales of used cars and the volume of retail vehicle sales has been showing steady growth. The company s strengths are the nation s largest store network and a sales organization of well-trained regular employees. The company aims to increase the number of stores to 1,. It pursues further growth in profits by combining Japan s largest vehicle sales infrastructure with new services. Shift in business model Phase 1: concentrate on purchasing of used cars; capture upstream (purchasing) segment The market for used vehicles in 1994 (the year in which IDOM was established) was distinguished by the absence of nationwide chains. Multi-store operators ran four to five stores at most, which nearly all lacked dedicated sales staff. IDOM decided to first capture the upstream segment of the market, and accordingly concentrated on the purchasing of used vehicles to build up inventory. The company apparently resolved not to stray from this objective (into areas unrelated to the purchasing of used cars) for a period of 1 years. Its initial objective was to secure 1% of the vehicles put up for sale by car owners, and subsequently develop the downstream segment of the market backed by the largest car inventory in the nation. One point of reference for the company at the time was the central kitchens operated by food-service companies. IDOM intensively researched food-service companies, and reached the conclusion to make its stores specialize in just car inspections and negotiations, and have the head office handle all the complex aspects of the business such as sales channels, sales periods, 34/65

35 Research Report by Shared Research Inc. and purchasing prices. This strategy allowed the company to secure 5 stores (1999) over four years and nine months, earn the distinction of fastest-listed company at the time (2), and become Japan s first hyper-growth company with sales of USD1.bn in its first ten years of operation. IDOM has positioned this period of building purchasing infrastructure and securing inventory as Phase 1 of its strategic roadmap. Coping with inventory risk: the ironclad rule Inventory risk is a critical factor for any company that accumulates inventory. In Japan, the asset value of a new car generally declines to virtually zero over a period of seven years. The age of a vehicle is a key determinant of its resale value, and each month a car is left sitting idle in inventory reduces it sales price. This in turn means the company will not be able to secure its initially envisioned sales price (even through auctions) and incur maintenance costs as a result. Attempts to recover such costs via either purchasing prices or retail prices will reduce customer satisfaction, giving rise to a negative spiral. To resolve this predicament, the company decided to hold inventory for a maximum of two weeks. This practice is referred to within the company as the ironclad rule and considered of paramount importance. Phase 2: expand earnings through effective use of inventory and aggressive expansion of retail store numbers. Obtain industry No. 1 retailing capability During Phase 1, the company stored its inventory in what it calls a pool center. From Phase 2, however, it will channel inventory toward retail sales. The plan is to move pool center inventory to showrooms for retail sales, which means no additional inventory burden will incur. The effective use of inventory hinges on the massive inventory accumulated in Phase 1 and the brand power acquired through previous spending on advertising. Accordingly, we see little risk of the business model being copied by others. It is important to note that retail sales will increase gross profit. IDOM believes showroom opening and operating costs will be offset by higher gross profit even after factoring in working capital until the products reach the customers. For this reason, it signaled a major shift toward aggressive showroom openings in its medium-term plan unveiled in April 214. In FY2/18, the company aimed at improving profitability at the Gulliver stores while also accelerating retail sales. It launched showroom sales at roughly 8% of its Gulliver stores that had traditionally focused on purchases, and in FY2/18 sales volume was up 31.3% YoY to 125, units, the third consecutive year of over 3% growth. The company climbed in the ranks of domestic retail unit sales to be alongside Japanese automobile manufacturers. It improved its market position with the No. 1 retail sales capability and retail sales infrastructure. Domestic sales volume (calendar years) (' units) CY212 CY213 CY214 CY215 CY216 CY217 (' units) CY212 CY213 CY214 CY215 CY216 CY217 1 Toyota 1,646 1,536 1,59 1,449 1,528 1,587 1 Mercedes-Benz Honda Hino Suzuki BMW Daihatsu VW Nissan Lexus Mazda Mitsubishi Fuso Subaru Audi IDOM BMW MINI Mitsubishi Others Isuzu Total (excl. IDOM) 5,37 5,376 5,563 5,47 4,97 5,234 Source: Shared Research based on company materials Toward a new growth phase Retail capability here refers to a couple of factors according to the company. 1) Sales infrastructure: Retailing using roughly 5 brick and mortar stores nationwide, a sales team, and sales via showrooms using a fully shared inventory system (sales infrastructure allows access to Japan s largest pool of sound in-house inventory). 2) Specialist head office department functions: Total end-to-end inventory control from procurement through retail sales (centralized pricing at headquarters and risk control) and ability to determine which items will sell. From FY2/19, IDOM intends to enter a new stage using its retail capability to diversify sourcing, products, and services. 35/65

36 Research Report by Shared Research Inc. Toward a new growth stage Management resources to acquire Number of transactions Management resources utilized Industry-leading purchased vehicles in inventory Purchase and wholesale Management resources utilized Industry-leading retail capability Purchased vehicles in inventory Retail The largest number of vehicles and customer transactions in Japan Diversify sourcing as well as products and services Foundation Source: Shared Research based on company materials Present Formerly, IDOM maintained a rough balance between purchase numbers and retail and wholesale sales (slightly lower purchase numbers). In the future, the two will not necessarily be in balance as the company exploits a variety of procurement channels (in FY2/18, unit sales already significantly outstripped purchases). In the previous stages, growth in units purchased was a key element in strengthening retail sales. The key in the current stage will be what is added onto the sales infrastructure. The company said it aims to develop convenience store style formats which stock anything related to cars as it leverages alliances with other companies. In FY2/18 when purchase volume was continuously declining, the company said it received many similar inquiries from investors (see below) to which it answered as follows. Q. Wouldn t IDOM s strengths disappear if the company sourced vehicles through means other than via conventional purchasing? A. There is no question that having the largest volume of purchased vehicles in inventory is one of IDOM s major management resources, but it is no longer an absolute requirement for growth now that the stage of bolstering retail capability is complete. IDOM plans to add procurement diversity as a new strength. Q. Wasn t the utilization of purchased vehicles in inventory the core element of the company s business model? A. The important thing is inventory risk control. There is no change to the policy of comprehensive inventory risk hedging and not holding unnecessary inventory. IDOM would prefer investors to be reassured by its ability to procure through diverse procurement channels on better terms than via conventional purchasing. Q (Asked during results briefing). How would diversified sourcing impact IDOM s working capital and free cash flow? A. IDOM will continue to apply the ironclad rule (holding inventory for two weeks maximum) on conventionally purchased vehicles excluding those allotted for retail inventory. Meanwhile all vehicles held in retail inventories will be sold 1% via the retail channel, and those sourced externally (through dealers and others) will be handled appropriately depending on the situation. In the case of a brand new car, for instance, the chances of a price drop after procurement are not very high provided there are no model changes (no inventory risk in the sense of falling prices). Also, while IDOM had typically purchased from individuals, when its counterparties are companies, there is more room for negotiation (e.g. have its counterparty take on the burden of working capital [sourcing cost], negotiate to pay on delivery). Thus while maintaining the ironclad rule for inventory management, it would add the concept of retail inventory and deal with this flexibly. Still, IDOM said it would consider it with a view of not taking inventory risk and not increasing working capital. 36/65

37 Research Report by Shared Research Inc. Development leveraging retail sales capabilities Products and services Sales Consumers Companies Auctions Car-rental companies, manufacturers, others Inventories purchased via conventional channel Directly managed stores (5 and growing) Inventory sharing system Wholesale (auction) Source: Shared Research based on company materials Retail inventories In-house and other companies' services, C2C platform, car-sharing, other Diversify sourcing - Conventional purchasing - Direct purchase from companies - Participate in auctions Diversify products and services - Expand product line-up - Provide services such as C2C and car-sharing Sell all retail inventories through retail channels Business structure IDOM has a simple business structure consisting of 1) purchasing vehicles from customers, and 2) selling those vehicles either via auctions (wholesale) or showrooms (retail). Refer to section entitled (Toward a new growth phase) for details on developments leveraging retail capability from FY2/19 onward. Business flow: past (left) and present (right) Past Consumers Expensive foreign cars Imported cars Minivans Eco-friendly cars K-cars Old cars Inspection & appraisal Present Consumers Expensive foreign cars Imported cars Minivans Eco-friendly cars K-cars Old cars Inspection & appraisal Inventory period limited to two weeks (iron law) Pool center Approx. 12 auction halls Used car dealers bid USS, JU, JAA, LAA Purchase Wholesale B2B Inventory period limited to two weeks (iron law) Showrooms Approx. 12 auction halls Used car dealers bid USS, JU, JAA, LAA Purchase Retail B2C Wholesale B2B Source: Shared Research based on company materials Purchasing Before purchasing a vehicle, IDOM goes through a process that involves a store visit by the customer (or a visit by a company representative to the customer's home), an inspection of the vehicle to be purchased, an appraisal, a final decision on the purchase price by the head office, negotiations, and finally a contract. This process can be completed in as little as 3 minutes. A key point that sets IDOM apart is its use of fair prices premised on auction prices, a practice that has been the driving force behind the company s rapid growth. Fair prices refer to prices that will 1) satisfy customers, 2) support sales through auctions (high contract rate), and 3) allow the company to secure its targeted gross profit levels. The authority to set fair prices is centralized in the head office, which determines such prices based on the company's track record in auctions and its accumulated expertise. In addition, customers who visit stores with the aim of selling their car fall into three categories with a roughly equal distribution: 1) customers who plan to purchase a new vehicle, 2) customers who plan to purchase a used vehicle, and 3) customers who only want to sell their vehicle (and plan to stop driving for a while). IDOM s purchasing process: IDOM s used-vehicle purchasing process has been optimized for easy inspection, assessment and decision-making. The only aspect it leaves up to individual stores is vehicle inspection, which is based on companywide standards set by corporate headquarters. HQ determines valuations based on the results of inspections, and decides on when and where to send vehicles for auction. At each store the vehicle s condition is first assessed. This takes about 2 minutes. The results are noted on an assessment sheet, with data sent to HQ. HQ then takes about 1-15 minutes to price the vehicle based on its condition and corresponding auction value, and sends the data back to the store. In about 4% of all cases, this results in a transaction. The Gulliver FleMa service, which was launched from September 215, targets an increase in contract rate. 37/65

38 Research Report by Shared Research Inc. Gulliver FleMa (former KURU-MAJIRO): The former KURU-MAJIRO is a C2C automobile sales service (launched September 215). In February 216, the company launched this service as a trial at four Gulliver stores in preparation for a potential expansion of the C2C market. The name of the service was changed in June 217. Purchasing process Purchase operation at stores Customer attraction Customer's visit to store Inspection Pricing Negotiation Contract Inventory management Vehicle registration Sale Customer attraction Pricing Inventory management Vehicle registration Sale Centralize operations at the headquarters Source: Shared Research based on company materials Retail Retail sales volume (left), GPM (right), and share of retail sales Retail units Retail units ratio (right axis) 47.8% 37.3% 3.9% 28.5% 28.2% 23.8% 22.6% % 125 6% 5% 4% 3% 2% 1% 27% 26% 25% 24% 23% 22% 23.8% GPM (parent) Retail units ratio (right axis) 56.7% 25.8% 25.8% 25.2% 24.9% 47.8% 24.3% 37.3% 28.5% 23.4% 3.9% 28.2% 22.6% 6% 5% 4% 3% 2% 1% (' units) FY2/11 FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 Source: Shared Research based on company materials % 21% 21.4% FY2/11 FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18 % Ironclad rule Information on all vehicles purchased by directly managed stores and franchises is uploaded to IDOM s used-vehicle information system, Dolphinet. A key point here is the company s ironclad rule. As previously noted, this refers to the practice of selling all inventory of used vehicles within two weeks of purchase. The rule applies equally to sales through Dolphinet or showrooms, and all vehicles that exceed two weeks of inventory storage are immediately auctioned off. This approach minimizes inventory risk and concurrently eliminates any burden on working capital, thus facilitating business expansion (increase in vehicles purchased). However, we note that the ironclad rule can only be observed by first purchasing vehicles based on the practice of fair price setting. Dolphinet: IDOM s proprietary car sales system that relies heavily on image-based data. It provides transparent access to data that may otherwise be difficult to understand at first glance, thus removing customer concerns when purchasing a vehicle. The system is utilized in several ways. Some customers selling their vehicle at a Gulliver store will buy a different vehicle on the spot, using the in-store Dolphinet terminal to search the available inventory. Other customers will access Dolphinet online, and visit a store or request a follow-up visit from a sales representative. Dolphinet displays an array of detailed information, including images, specifications and repair history. Selling vehicles on-screen without the customer being able to see the actual vehicle was thought impossible, but the company managed to build a system for setting used car prices based on market prices. Showrooms In its medium-term business plan unveiled in April 214, the company signaled plans to aggressively roll out showrooms, and although subsequent changes in the environment have prompted revisions to such plans, management s basic policy of achieving earnings growth through new store rollouts remains unchanged. The rationale behind this earnings growth strategy is to maximize gross profit for each purchased used vehicle. Key objectives are to a) eliminate procurement costs by utilizing purchased inventory, b) prevent fluctuations in inventory risk by adhering to the 38/65

39 Research Report by Shared Research Inc. ironclad rule, c) secure gross profit from retail sales that is at least double the level for wholesale operations, and d) build car sales infrastructure across the nation. Earnings model IDOM s earnings model encompasses the following elements: 1) operating profit: generate gross profit from retail sales in excess of store opening and operating costs; 2) OPM: improve OPM in tandem with an increase in retail sales volume (higher share of retail sales); 3) required funding: when investing in expansion of the store network, minimize risk by not owning land and holding as little inventory as possible, and utilize financial leverage taking advantage of own funds or bank loans; 4) time required to open new store: roughly six months starting from the decision to open the applicable store; 5) recovery of funds: recover costs associated with store rollouts (average of JPY8mn) in 36 months. Based on the above, the company aims to expand profits, profitability (margins and ROE), and asset efficiency. IDOM looks for annual store operating costs to average roughly JPY6mn (assuming about five staff members), so there is no major change in this regard. With the aim of accelerating profitability for new stores, the company is working to achieve early brand recognition in individual service areas and thus bolstering its ability to attract customers. To this end, it has strengthened marketing activities such as intensive advertising campaigns (using TV commercials and other media) timed to coincide with new store openings since early 216. Advertising costs for new store openings are roughly JPY2mn. The higher share of retail sales has been accompanied by an increase in inventory listed on the company s financial statements, and this appears to have a negative effect on related indicators. However, we note that this inventory is essentially risk-free because it is protected by the company s ironclad rule. As outlined in the figure below, the vehicle delivery period for retail sales (including all steps from contract conclusion to payment and vehicle delivery) takes four to six weeks, but tends to become longer at end Q4, which coincides with the peak period. Inventory turnover period and share of retail sales Wholesale Retail Purchase Sign contract Payment Purchase Sign contract Payment Car delivery 2 weeks 2 weeks Source: Shared Research based on company materials 1. to 1.5 months after signing contract before car delivery Showrooms at Gulliver stores During 1H FY2/18, IDOM shifted its retail sales strategy from growth by strengthening existing showroom stores and opening more new showrooms to maximizing retail sales, including at Gulliver stores. Shared Research believes that after accelerating construction of the largest vehicle sales infrastructure in Japan by expanding retail sales volume, IDOM intends to step it up with new value added to improve earnings. IDOM lowered prices in the Gulliver stores with showrooms to be in line with the Outlet stores while working to expand gross profit, and the initiative contributed to higher profits in FY2/18. The company plans to focus on gradually optimizing pricing from FY2/19 onward. 39/65

40 Research Report by Shared Research Inc. Accelerate retail sales at Gulliver stores Previous Showroom model 1% Completion of conversion of targeted stores Purchase Retail Dolphinet Purchase Retail Dolphinet 5% Conversion Acceleration in conversion Showroom Retail unit prices lower than in the previous model % Planning End- FY2/17 End-Q4 End- FY2/18 End-Q2 End- Source: Shared Research based on company materials Maximize total gross profit due to an increase in retail sales volume Margin per unit Gulliver stores Margin per unit Showrooms Margin per unit From FY2/19 FY2/17 FY2/18 +JPY1, 5,/unit Retail units Retail units Gross profit increase in line with increase in units Retail units Source: Shared Research based on company materials Personnel training IDOM aims to build a high-quality sales organization centered on full-time employees, and it therefore requires a sizable number of employees to staff its stores. Two important factors for the company are the hiring of new graduates and personnel training. In FY2/16, the company changed its plan for annual net store increases from hundred stores to roughly 6, after taking into consideration the skills of employees working at new stores. It tasks employees with teaching new graduates the necessary skills such as corporate, customer service, and business skills through systems that place an emphasis on one-on-one instruction and individual learning. New employees work closely with the store manager and other employees, and receive more in-depth training. Since the company prioritizes training and fostering new graduates over hiring mid-career employees, the successful recruitment of new employees becomes key to store operations. IDOM hired 42 new graduates in FY2/16 and 55 in FY2/17. Under the revised plan, however, the company appears to be considering the possibility of not reaching its target number of employees in light of a tight labor market for new graduates and employee turnover risk. We note that the company is aiming to avoid hasty store development while personnel resources remain scarce. In addition, the training process to obtain store manager qualifications takes roughly two years, but a reduced pace of store openings from 21 and other factors resulted in a situation where 1-plus employees (at the time) who passed the store manager examination have remained stuck in deputy store manager positions. This pool of human resources allowed the company to shift to a policy of aggressive store rollouts from FY2/15. Emphasis on one-on-one instruction and individual learning: Newly hired graduates are assigned to stores that specialize in training young recruits, where they are trained and assisted by employees with two to three years of experience at the company, and thus given a chance to become familiar with the work. 4/65