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Japan Value Report
 

Japan Value Report

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A sample of our monthly research. When the Great Earthquake struck in Japan, we opportunistically looked at potential investment opportunities arising from this tragedy.

A sample of our monthly research. When the Great Earthquake struck in Japan, we opportunistically looked at potential investment opportunities arising from this tragedy.

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    Japan Value Report Japan Value Report Document Transcript

    • Value-oriented Equity Investment Ideas for Sophisticated Investors A Monthly Publication of BeyondProxy LLC  Subscribe at manualofideas.com “If our efforts can further the goals of our members by giving them a discernible edge over other market participants, we have succeeded.”Investing In The Tradition ofGraham, Buffett, Klarman Year IV, Volume IV May 2, 2011 THE JAPAN ISSUE When asked how he became so successful, Buffett answered: “We read hundreds and hundreds ► Context: Japan, the country and the economy of annual reports every year.” ► 20 Japanese companies profiled and analyzedTop Ideas In This Report ► Proprietary selection of top investment candidatesKonami(Tokyo: 9766, NYSE: KNM) ……. 50 ► Plus: Exclusive interview with Scott CallonRicoh(Tokyo: 7752, OTC: RICOY) …… 90 ► Plus: Exclusive interview with Mark O’FrielToyota Motor(Tokyo: 7203, NYSE: TM) …….. 106 ► Plus: Superinvestor holdings updateAlso Inside ► Plus: Favorite screens for value investorsEditorial Commentary ………………. 4Superinvestor Update ………………. 7 Companies mentioned in this issue includeInterview with Scott Callon ………… 8 Advantest, Aeon, Aisin Seiki, Asahi Breweries, Asahi Glass, Asahi Kasei,Interview with Mark O’Friel ………. 12 Astellas Pharma, Bridgestone, Canon, Central Jap. Railway, Chubu Electric, Chugai Pharma, Chuo Mitsui, Dai Nippon Printing, Dai-ichi Life,Japan, the Country and Economy … 17 Daiichi Sankyo, Daikin Industries, Daiwa Securities, Denso,Screening for Japanese Ideas …….. 24 East Japan Railway, Eisai, Fanuc, Fast Retailing, FUJIFILM, Fujitsu,Profiles of 20 Japanese Companies 30 Hitachi, Honda Motor, Hoya, ITOCHU, Japan Tobacco, JFE Holdings,Selected Statistics on Japan ………110 JS Group, JX Holdings, Kansai Electric, Kao, KDDI, Keyence, Kirin,Screens for Value Investors ……… 115 Kobe Steel, Komatsu, Konami, Kubota, Kyocera, Kyushu Electric, Marubeni, Mitsubishi, Mitsubishi Chemical, Mitsubishi Electric,This Month’s Top Web Links …….. 124 Mitsubishi Estate, Mitsubishi Heavy, Mitsubishi UFJ Financial, Mitsui + Co., Mitsui Fudosan, Mizuho Financial, MS + AD Insurance,About The Manual of Ideas Nikon, Nippon Steel, Nissan Motor, Nitto Denko, NKSJ, Nomura, NTT,Our goal is to bring you investment NTT Data, NTT DoCoMo, ORIX, Osaka Gas, Otsuka, Panasonic, Resona,ideas that are compelling on the Ricoh, SANYO Electric, Secom, Seven + i Holdings, Sharp,basis of value versus price. In ourquest for value, we analyze the top Shin-Etsu Chemical, SMC, Softbank, Sony, Sony Financial, Sumitomo,holdings of top fund managers. We Sumitomo Chemical, Sumitomo Electric, Sumitomo Metal,also use a proprietary methodologyto identify stocks that are not widely Sumitomo Mining, Sumitomo Mitsui, Sumitomo Realty, Suzuki Motor,followed by institutional investors. T+D Holdings, Takeda Pharma, TDK, Terumo, Tohoku Electric,Our research team has extensive Tokio Marine, Tokyo Electric, Tokyo Electron, Tokyo Gas,experience in industry and security Toray Industries, Toshiba, Toyota Industries, Toyota Motor,analysis, equity valuation, andinvestment management. We bring a West Japan Railway, Yahoo Japan, and more.“buy side” mindset to the ideageneration process, cutting acrossindustries and market capitalization (analyzed companies are underlined)ranges in our search for compellingequity investment opportunities.Copyright Warning: It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent ofBeyondProxy LLC. Email support@manualofideas.com if you wish to have multiple copies sent to you. © 2008-2011 by BeyondProxy LLC. All rights reserved.
    • Value-oriented Equity Investment Ideas for Sophisticated Investors Table of Contents EDITORIAL COMMENTARY ......................................................................... 4  SUPERINVESTOR HOLDINGS UPDATE ..................................................... 7  EXCLUSIVE INTERVIEW WITH SCOTT CALLON ....................................... 8  EXCLUSIVE INTERVIEW WITH MARK O’FRIEL ....................................... 12  SOME CONTEXT: JAPAN, THE COUNTRY AND THE ECONOMY .......... 17  SCREENING FOR JAPANESE INVESTMENT OPPORTUNITIES............. 24  TOP 100 TOKYO STOCK EXCHANGE COMPANIES, BY MARKET VALUE ......................................... 24  PROFITABLE COMPANIES WITH 5-YEAR ROE > 5%, TRADING AT < 1X BOOK ............................... 26  PROFITABLE COMPANIES WITH 5-YEAR ROA > 5% .................................................................... 28  CHEAPEST BASED ON TANGIBLE BOOK TO MARKET VALUE ......................................................... 29  PROFILES OF 20 JAPANESE INVESTMENT CANDIDATES ................... 30  ADVANTEST (TOKYO: 6857, NYSE: ATE) .................................................................................. 30  CANON (TOKYO: 7751, NYSE: CAJ) ......................................................................................... 34  FUJIFILM (TOKYO: 4901, OTC: FUJIY) ...................................................................................... 38  FUJITSU (TOKYO: 6702, OTC: FJTSY) ...................................................................................... 42  HITACHI (TOKYO: 6501, NYSE: HIT) ......................................................................................... 46  KONAMI (TOKYO: 9766, NYSE: KNM) ....................................................................................... 50  KUBOTA (TOKYO: 6326, NYSE: KUB) ....................................................................................... 54  KYOCERA (TOKYO: 6971, NYSE: KYO) ..................................................................................... 58  MITSUBISHI UFJ FINANCIAL (TOKYO: 8306, NYSE: MTU) .......................................................... 62  MITSUI (TOKYO: 8031, OTC: MITSY) ........................................................................................ 66  NOMURA HOLDINGS (TOKYO: 8604, NYSE: NMR) ..................................................................... 70  NIPPON TELEPHONE AND TELEGRAPH (TOKYO: 9432, NYSE: NTT)............................................ 74  NTT DOCOMO (TOKYO: 9437, NYSE: DCM) ............................................................................ 78  ORIX (TOKYO: 8591, NYSE: IX) ............................................................................................... 82  PANASONIC (TOKYO: 6752, NYSE: PC) .................................................................................... 86  RICOH (TOKYO: 7752, OTC: RICOY) ........................................................................................ 90  SHARP (TOKYO: 6753, OTC: SHCAY) ...................................................................................... 94  SONY (TOKYO: 6758, NYSE: SNE) ........................................................................................... 98  TDK (TOKYO: 6762, OTC: TTDKY) ........................................................................................ 102  TOYOTA MOTOR (TOKYO: 7203, NYSE: TM) ........................................................................... 106  APPENDIX: SELECTED STATISTICS ON JAPAN .................................. 110  FAVORITE STOCK SCREENS FOR VALUE INVESTORS ...................... 115  “MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME ................................................... 115  “MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ................................................... 116  “MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES .................................................. 117  CONTRARIAN: BIGGEST YTD LOSERS (DELEVERAGED & PROFITABLE)....................................... 118  VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK ..................................................... 119  PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS ............................................. 120  DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE ..................................................... 121  DEEP VALUE: NEGLECTED GROSS PROFITEERS ....................................................................... 122  ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ........................................... 123  THIS MONTH’S TOP 10 WEB LINKS ....................................................... 124 © 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 3 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors Editorial Commentary Japan has been on our radar screen for quite some time. The aftermath of this year’s Great East Japan Earthquake has given us the impetus to look at this market in more detail — and to try to identify some bargains among Japanese mid- and large- cap stocks. These companies are quite accessible to non Japan-based investors, as they trade on one or more stock exchanges in addition to the Tokyo Stock Exchange. When an already cheap market becomes even cheaper due to an exogenous shock, value investors are bound to take notice. While the human toll of the Great East Japan Earthquake has been devastating, we have confidence in the ability of the Japanese people to rebound from disaster. Japan has gone through many trying periods in history, repeatedly emerging with a newfound zeal to grow and prosper. Most of the issues that have kept investors away from Japan over the years remain today. Japanese companies still have not embraced a goal of achieving strong returns on equity. Corporate boards remain entrenched, and value-unlocking strategic actions remain an exception. On the positive side, many Japanese companies are highly competitive on a global scale and have built truly global brands — Canon (CAJ), Sony (SNE) and Toyota Motor (TM) are just a few. Executive compensation at Japanese companies remains reasonable, contrasting sharply with the experience of major U.S. corporations. Finally, Japanese companies’ balance sheets tend to be among the strongest in the world, with many large companies owning substantial excess assets. The latter can be seen as a positive or a negative, but the fact is that much improvement is possible at Japan Inc. Excess assets could be rationalized over time, while returns on equity have ample room for improvement. Contrast this with Corporate America, where profit margins have almost nowhere to go but down.  Here are a few lessons from our research into Japanese companies: Lesson #1: There is not a “Japanese” company. However, there is Canon that derives ~80% of revenue from outside Japan; there is Advantest that is set to become the largest global producer of semiconductor test equipment pending the acquisition of Verigy; and there is Toyota that created the world’s first mass-produced hybrid car. These firms are leaders in their industries and defy being labeled “Japanese.” Lesson #2: Company-specific factors remain paramount for valuation. Companies like Kubota and Mitsui are benefiting from the same trends that Caterpillar and Glencore are taking advantage of. They also face similar risks, which likely outweigh the risk associated with a Japan-based headquarters. Lesson #3: Governance is not all bad. In our research, we’ve mostly come across committed and experienced managers who are not overpaid or incentivized to bet the house every day they walk through the doors. Another often overlooked fact about Japan’s corporate governance is that it is a shareholder-meeting system, not a board-level governance regime. Shareholders have strong legal rights and can call a shareholder meeting at will. If shareholders want to dismiss the board or double the dividend, with enough votes it can be done, even against the board’s wishes. Lesson #4: The “Mitsubishi UFJ” factor. The Japanese mega bank, with customer deposits representing two thirds of total assets, has avoided the fate of some of its Western peers during the 2008/09 financial crisis. Indeed, it has taken© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 4 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors advantage of weaker rivals to buy up assets, including community banks in the U.S. as well as a stake in Morgan Stanley. Supported by strong balance sheets, many Japan-based companies are similarly expanding their business. On the other hand, quite a few Western firms have taken on debt to buy back shares at the top of the market, ruining investors in the process. So much for “efficient” capital structures. Lesson #5: Key issue is long-term competitiveness, not how “Western” the management culture is. It is underappreciated how well-invested Japan-based companies are and how much they spend on R&D to advance their competitive moat. This, however, is one of the key determinants of long-term shareholder value. On this account, it is interesting to observe how former household consumer electronics companies such as Fujifilm and TDK have stumbled and are attempting to reinvent themselves. Similarly, Sony investors would probably prefer if Howard Stringer could win some product battles against the likes of Apple than if he were to split the role of CEO and chairman or sell the financial services business.  We are pleased to bring you two exclusive interviews this month, each of which sheds light on the peculiarities of the Japanese equity market as well as the way to identifying compelling investments in Japan. Scott Callon and Mark O’Friel have decades-long experience and impressive track records in Japan. We think you’ll enjoy the conversations a great deal.  We highlight three intriguing Japanese investment opportunities: Konami (Tokyo: 9766, NYSE: KNM, $19.50 per share; MV $2.6 billion) $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Under the direction of CEO and founder Kagemasa Kozuki, Konami has expanded from an arcade games producer in the 1970s to one of the world’s major gaming companies, with a strong franchise in video game software publishing. Despite conglomerate tendencies, including a loss-making foray into fitness clubs, Kozuki remains incentivized to create long-term value as the largest shareholder with 28%. Recent valuation is attractive relative to the earning power inherent in Konami’s businesses.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 5 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors Ricoh (Tokyo: 7752, OTC: RICOY, $58 per share; MV $8.4 billion) $140 $120 $100 $80 $60 $40 $20 $0 Mar 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Office printer and copier manufacturer Ricoh derives high-margin, annuity-like income from equipment maintenance, rentals and consumables, which represent nearly half of revenue. This offsets the more volatile product sales and leads to relatively stable free cash flow generation. Ricoh’s modest valuation fails to reflect this, as shares trade at 1.1x tangible book and a 10+% FCF yield based on average free cash flow during FY06-10. The balance sheet is stronger than it may appear as cash and finance receivables offset the gross debt balance. Despite product commoditization risks, the risk-reward is attractive. Toyota Motor (Tokyo: 7203, NYSE: TM, $80 per share; MV $125 billion) $160 $140 $120 $100 $80 $60 $40 $20 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Car industry pioneer Toyota is struggling following multiple “shocks” including the financial crisis of 2008/09, the massive U.S. vehicle recall in 2010, and most recently, due to production issues related to the Japanese earthquake. While it may take time, an eventual reversion to average profitability should reward long-term shareholders. Trading at tangible book, the shares offer an attractive risk-reward as Toyota is likely to deliver normalized ROEs of 10+%, in-line with historical experience. Sincerely, John Mihaljevic, CFA and The Manual of Ideas research team© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 6 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsSuperinvestor Holdings UpdateWe recently profiled the holdings of 50+ top investment managers, based on their Schedule 13F-HR filings with theSecurities and Exchange Commission. On this page, we provide an update on the latest disclosed purchase and sale activityby the same group of investors. This information is based primarily on Schedule 13G or 13D filings and Form 3 or 4 filings.Increases in Superinvestor Holdings  Latest Market Stock Price ($) Shares Owned Holdings Trade/ Filing Value Latest Filing ∆ since Latest ∆ since as % of Filing Type Investor Company / Ticker ($mn) Date Date Filing (mn) 12/31/10 Company 4/8/11 4 Second Curve Primus Guaranty / PRS 186 4.89 5.01 -2% 6.5 0% 17% 3/21/11 13D Pershing Sq. Alexander & Baldwin / ALEX 2,190 52.65 41.57 27% 3.6 new 9% 3/18/11 13G Glenview Meritor / MTOR 1,600 17.00 17.85 -5% 5.4 33% 6% 3/15/11 4 Icahn Hain Celestial / HAIN 1,310 30.43 28.67 6% 7.1 n/a 17% 2/23/11 13G Scout Domino’s Pizza / DPZ 1,080 17.97 16.49 9% 3.0 21% 5% 2/16/11 4 Ancient Art ZipRealty / ZIPR 56 2.75 2.71 1% 2.2 0% 11% 2/14/11 13G Lone Pine Ctrip.com / CTRP 5,290 36.86 40.65 -9% 7.9 83% 5%Source: SEC filings, The Manual of Ideas compilation and analysis.Decreases in Superinvestor Holdings  Latest Market Stock Price ($) Shares Owned Holdings Trade/ Filing Value Latest Filing ∆ since Latest ∆ since as % of Filing Type Investor Company / Ticker ($mn) Date Date Filing (mn) 12/31/10 Company 4/19/11 4 Second Curve Mercantile Bank / MBWM 78 9.06 9.50 -5% 0.9 n/a 10% 4/8/11 4 Breeden Zale / ZLC 116 3.61 3.99 -10% 7.5 -17% 23% 4/5/11 4 Second Curve CompuCredit / CCRT 151 4.22 6.83 -38% 3.5 -19% 10% 4/4/11 13D Third Point Nabi Pharma / NABI 242 5.76 5.78 0% 3.5 -8% 8% 4/1/11 13D Southeastern Pioneer Natural / PXD 11,660 100.10 103.81 -4% 5.0 -61% 4% 3/29/11 13D Southeastern Telephone & Data / TDS 3,510 33.72 32.81 3% 9.6 -17% 9% 3/28/11 13G Bares Hallmark Financial / HALL 170 8.46 8.08 5% 1.9 -20% 10% 3/1/11 13D Breeden Hillenbrand / HI 1,330 21.50 21.47 0% 3.1 -25% 5%Source: SEC filings, The Manual of Ideas compilation and analysis.The Manual of Ideas follows portfolio moves by Bill Ackman, Pershing Square; Lee Ainsle, Maverick; Chuck Akre, Akre Capital; Zeke Ashton, Centaur Capital;Brian Bares, Bares Capital; Bruce Berkowitz, Fairholme; Richard Breeden, Breeden Capital; Tom Brown, Second Curve; Warren Buffett, Berkshire Hathaway;Francis Chou, Chou Associates; Chase Coleman, Tiger Global; James Crichton, Scout; Ian Cumming and Joe Steinberg, Leucadia; Boykin Curry, Eagle; DavidEinhorn, Greenlight; Phil Falcone, Harbinger; Alan Fournier, Pennant; Glenn Fuhrman and John Phelan, MSD Capital; Jeffrey Gates, Gates Capital; Tom Gayner,Markel Gayner; Kian Ghazi, Hawkshaw; Ed Gilhuly and Scott Stuart, Sageview; Glenn Greenberg, Brave Warrior; John Griffin, Blue Ridge; Howard Guberman,Gruss; Andreas Halvorsen, Viking Global; Mason Hawkins, Southeastern; Lance Helfert and Paul Orfalea, West Coast; Chris Hohn, Children’s Investment Fund;Carl Icahn, Icahn; Rehan Jaffer, H Partners; Seth Klarman, Baupost; John Kleinheinz, Kleinheinz Capital; Eddie Lampert, ESL Investments; Quincy Lee, Teton;Dan Loeb, Third Point; Steve Mandel, Lone Pine; Sandy Nairn, Edinburgh Partners; Mohnish Pabrai, Pabrai Funds; John Paulson, Paulson & Co.; Boone Pickens,BP Capital; Mark Rachesky, MHR; Lisa Rapuano, Lane Five; Larry Robbins, Glenview; Bob Rodriguez and Steven Romick, First Pacific; Wilbur Ross, WL Ross;Ken Shubin Stein, Spencer; Chris Shumway, Shumway Capital; David Tepper, Appaloosa; Peter Thiel, Clarium; Prem Watsa, Fairfax; Wally Weitz, Weitz Funds;and David Winters, Wintergreen.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 7 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors Exclusive Interview with Scott Callon We are pleased to bring you the following interview with Scott Callon, Partner and CEO of Ichigo Asset Management, Ltd. A brief biography follows: On behalf of Ichigo, currently serving as Chairman and Representative Statutory Executive Officer of Ichigo Group Holdings Co., Ltd. (2337), a Japanese real estate asset manager listed on JASDAQ (ichigo-holdings.co.jp). Previously, Managing Director, Head of Equities, and member of the Executive Committee of Morgan Stanley Japan; Chairman of the Foreign Securities Council of the Japan Securities Dealers Association (JSDA); and Chief Executive Officer of PCA Asset Management of the UK Prudential Group. A.B., Woodrow Wilson School, Princeton University, 1986 (Phi Beta Kappa and summa cum laude (highest honors)), and Ph.D. in Political Science from Stanford University. Author of Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Policy, 1975-1993, winner of the Arisawa Prize. (“Callon’s findings are extraordinary... It is essential for anyone trying to get a little closer to the core of what makes Japan tick.” Japan Times). Has lived in Japan for twenty-two years; fluent in spoken and written Japanese. Chartered Financial Analyst (CFA). The Manual of Ideas: Tell us about the genesis of your firm. What goals did you have at the outset, and what operating principles have guided you since then? Scott Callon: We started the firm in early 2006, so it has been five years now. Our goal was and continues to be to serve our investors by investing wisely and judiciously on behalf of their enduring missions (we invest primarily for endowments and foundations), to partner with great companies and management “Japanese valuations are teams, and to support positive change in Japan. We are high-commitment value truly unique: it is the only investors. We believe that valuation ultimately is the single most important market in the world where determinant of investment merit and ultimately returns. We seek to be you can buy consistently shareholders of outstanding companies that have demonstrated their excellence profitable companies at a over many years and yet trade at substantial discounts to their fundamental discount to their tangible value. asset value.” We are Japan specialists and invest only in Japan. Japanese valuations are truly unique: it is the only market in the world where you can buy consistently profitable companies at a discount to their tangible asset value. We strive to invest with respect and humility – it is an enormous challenge to run a public company and the management teams of our portfolio companies have our deepest respect. We seek to focus our portfolio on the best return opportunities available and have only about ten major positions. We are not in the diversification business – we expect to be only a small part of our clients’ highly diversified portfolios and thus we concentrate only on what [we] consider to be our very best investment ideas.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 8 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors MOI: You have received much publicity for successfully standing up for shareholder democracy in Japan in the case of Osaka Steel’s proposed merger with Tokyo Kohtetsu in 2006. How has this event shaped your investment approach since then? What lessons have you learned? Callon: We think Tokyo Kohtetsu is Japan’s best small steel company. We thought that back in 2006 and still think that today. We have never sold a share. With all due respect to the proposed buyer, which was a larger, also extraordinarily successful steel maker, we and a large number of other shareholders had a strong desire to remain as shareholders of Tokyo Kohtetsu. Unfortunately, we could not reach agreement on what the Tokyo Kohtetsu shareholders hoped for as an acquisition price, so we and nearly three-quarters of the individual shareholders chose not to vote for the acquisition, which proved to be the first successful shareholder-led proxy in Japanese history. For us, the first key lesson was that Japanese shareholders are willing to stand up for their rights. The second was that we as a firm needed to work harder at building deeper relationships with our portfolio company management teams to reach agreement on the way forward. In 2006, we had just started out as a firm, had not yet built the depth of relationship with Tokyo Kohtetsu that we typically aim to achieve, and quite frankly were taken by surprise at the merger announcement. The outcome may have been in its own way history- making, but it also strengthened Ichigo’s commitment to building and maintaining close relationships and alignment with our portfolio companies. MOI: Help us understand your investment approach more broadly. What are the key criteria you employ when making an investment decision? Callon: Again, we’re value guys. We do not try to guess what the market is thinking or will be thinking, we do not track flows of funds, etc. That is not to say that we think those particular approaches to investment are wrong – it is just not what we do. There is lots of room in the capital markets for a variety of approaches and the markets are stronger for having diversification in investment approaches. However, in our case, we are valuation fundamentalists. We seek to buy companies that are trading around or below tangible book value, who typically have dominant market positions in specialized markets (smaller market “We think Tokyo Kohtetsu is size and specialization invites less new entry), conservative balance sheets, and Japan’s best small steel high returns on net operating assets – in short, companies with great operating company. We thought that and financial performance over time and through multiple economic cycles. Our back in 2006 and still think basic framework is to think of corporate value as made up of two fundamental that today. We have never components: asset value and operating value. Asset value tends to be simpler to sold a share.” understand (although usually requires a translation from book value to market value), and we generate a view on operating value using conservative views of the future and relatively high assumptions about cost of capital. MOI: What role, if any, do macroeconomic factors play in your investment strategy? Are you worried about how Japan’s high debt, aging population or other macro variables may affect real equity returns in the long-run? Callon: We are entirely company-focused. Operating cashflows, assets required to generate those cashflows, etc. are what is fundamental to us. Having said that, macro factors clearly feed into company operating performance. If the population is shrinking, then retail sales are also likely to shrink. We own a couple of great retailers, and we have forecast very little in the way of future© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 9 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors growth from them. However, if you have a market cap that is 60-70% made up of cash holdings, a dominant market position which translates into significant positive cash flow, and a price-to-book ratio well below one, you can build in a large amount of macro deterioration and still be confident of generating a reasonable return. In fact, what we tend to find is that the negative demographic headwinds have been overly-priced in, that the negative scenarios baked into certain companies’ stock prices are wildly more extreme than what is actually happening. MOI: For investors that may be new to Japanese equities, are there any Japan- specific “checklists” that you would recommend going through before investing? Callon: Not really. We think the fundamental principles of sound investing apply the same in Japan as they do anywhere else in the world. MOI: Many investors, most notably Warren Buffett and Jim Rogers, have expressed a view that the Japanese stock market may present buying opportunities following the sell-off related to the March earthquake? Do you share this view, and, if so, do you think the opportunity may extend beyond retracing recent share price declines? In other words, could this catastrophe accelerate changes at the corporate or government level that could lead to more sustained value creation for shareholders of Japanese companies? Callon: We do share the view that there have been some significant buying opportunities post-quake. Alongside the deeply saddening human loss, the disaster has impacted Japanese companies on three levels: 1) Direct physical damage (destruction of corporate assets such as factories, loss of employees, etc.); 2) Secondary sectoral spillover effects, either negative or positive (supply chain disruptions, electricity shortages, substitution effects as production shifts “Japan’s ROE challenge is away from suppliers in Tohoku to other regions, heightened demand for goodsreally about the E, not the R. such as construction materials, alternative fuels, bottled drinks, etc.); and 3)Japanese companies’ returns Macro effects, again both negative and positive, including a dampening in are very similar to those of discretionary consumption as the Japanese people mourn, loosened monetarypeers in the US and Europe, policy to lessen the initial supply and demand shocks to the economy, massiveso the R part of the equation infrastructure spending to rebuild Tohoku, etc. What is striking is that for a is fine. The driver of low number companies the sum of these three impacts has been quite moderate ROEs is thus the relative to how much their shares have been sold off. denominator, E: Japanese Although this is not something that we have attempted to price into our firms frequently have very company-level valuations, we do think it possible that the aftermath could prove large amounts of retained to be a catalyst for positive and accelerated change.earnings, often in the form of cash, so the returns are MOI: While Warren Buffett has recently sounded optimistic on Japan, it remains telling that he has not made any significant investments in Japan. As far diluted across a massive back as in 1998, Buffett commented in a speech to University of Florida equity base.” students that one reason for his lack of interest in Japanese companies are their low returns on equity. Despite low ROEs remaining a characteristic of the Japanese equity market in general, can you point to any exceptions to this “rule”? Are there any developments that may lead to improving ROEs in the future? Callon: Japan’s ROE challenge is really about the E, not the R. Japanese companies’ returns are very similar to those of peers in the US and Europe, so the R part of the equation is fine. The driver of low ROEs is thus the© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 10 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors denominator, E: Japanese firms frequently have very large amounts of retained earnings, often in the form of cash, so the returns are diluted across a massive equity base. On the one hand, this is enormously comforting: Japanese balance sheets are about as bullet-proof as they come and cash has real value. However, the large equity bases do dramatically reduce ROEs, so from a shareholder’s perspective, this is a negative. The good news is that more Japanese companies are working towards higher capital efficiency and increasing shareholder distributions via both higher dividends and share repurchase, but this is clearly going to happen over time. We actually prefer to discuss this issue with management teams in terms of EPS, rather than ROE. Growing EPS is clearly in everybody’s interest, and EPS can “The sell-side is a business, be grown both via increasing total earnings and reducing share count, so we and Japanese equities have think a balanced approach of both managing for earnings growth and buying underperformed for so long back shares when they are inexpensive is appropriate. that the sell-side has MOI: How do you generate investment ideas?retreated (along with a good Callon: We invest only in Japanese small caps, so we need to build ourchunk of the buy-side), so our understanding of our portfolio companies directly. The sell-side is a business, investment universe has no and Japanese equities have underperformed for so long that the sell-side has research coverage to speak retreated (along with a good chunk of the buy-side), so our investment universe of. If one is investing in has no research coverage to speak of. If one is investing in Toyota, there are Toyota, there are plenty of plenty of folks out there expressing a view, but our universe is under-researched, folks out there expressing a under-known, and under-owned. view, but our universe is under-researched, under- MOI: What is the single biggest mistake that keeps investors from reaching their goals? known, and under-owned.” Callon: Hmm. Not sure. I do think it is important to be extraordinarily prudent about downside risk, to test worst-case scenarios and make sure one is protected under those scenarios. In our case, we don’t use leverage and prefer to have cash on hand. Both of these decisions potentially constitute a drag on returns, but they also radically diminish risk during extreme negative market environments. MOI: Are there any books you would recommend to non-Japanese investors looking to learn about Japan? Callon: Gillian Tett, Saving the Sun: How Wall Street Mavericks Shook Up Japan’s Financial World and Made Billions. John Dower, Embracing Defeat: Japan in the Wake of World War II. Junichiro Tanizaki, The Makioka Sisters.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 11 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors Exclusive Interview with Mark O’Friel We are pleased to share with you our recent conversation with Mark O’Friel, the managing partner of MOF Capital, an alternative investment fund focused on investments in Japan and China. Prior to starting MOF Capital, Mark was with Steel Partners Japan as managing director and head of the Tokyo office in 2008 and 2009. Previously, he jointly led Morgan Stanley’s U.S. proprietary trading business in North America from 2002-05. Mark formerly directed Morgan Stanley’s Equity Division in Japan, acting as senior equity risk manager and a member of the firm’s Global Equity Operating Committee from 1996-2002. Under his leadership, Morgan Stanley achieved leading market share in the Japanese equity market and received Institutional Investor’s top ranking for equity research in Japan. Mark served on the committees of the Tokyo Stock Exchange that wrote the regulations and guidelines for program trading, options trading and new technologies. He also represented Morgan Stanley on the board of the Osaka Stock Exchange. He began his Morgan Stanley career as an equity derivatives and program trader, introducing some of the first quantitative trading strategies in the Japanese market. Mark began his career in Japan as a market strategist for Sanyo Securities. He serves on the board of the Kennedy Child Study Center in New York City. He is a member of the Leadership Council of the Harvard School of Public Health. He is active with the Harvard School of Public Health China Initiative, which partners with the Chinese Ministry of Health to advance health and social development in China, Room to Read, Math for America and Harvard College. He is a graduate of Harvard College. The Manual of Ideas: Mark, thank you for taking the time to discuss Japan at this pivotal moment in the country’s recent history. Mark O’Friel: Thank you for the opportunity to speak with you about Japan. The country has just experienced a tragedy that goes beyond words, with 25,000 “Despite high levels of people dead or missing. The pictures of the earthquake and ensuing tsunami government debt, the damage are heart rendering. The resilience that the Japanese of Tohoku have government actually has shown in the face of this event is a profound statement to the strength of the quite a bit of leeway. Ten- national character. The best of Japan is on display throughout the country. year JGBs have remained What is overlooked in the reports and pictures of the disaster is in fact how quite strong.” well prepared Japan was and how the damage was minimized. The earthquake itself, despite its unprecedented size, caused relatively little damage. Even near the epicenter, collapsed buildings and deaths were few. This is after the main earthquake of 9.0 and over 800 aftershocks greater than 4.5. The before and after satellite pictures now available on the web are testimony to the power of nature. The pictures now and the pictures one, five and ten years from now will be testimony to the speed and efficiency of how Japan can rebuild physical infrastructure. Japan has a long history of rebuilding, from the aftermath of World War II to the Kobe earthquake. Despite high levels of government debt, the government actually has quite a bit of leeway. Ten-year JGBs have remained quite strong.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 12 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors The earthquake and its aftermath will not be a catalyst for change in Japan. The government, corporate Japan and its population will seek to draw on the traditional strengths of discipline, perseverance, hard work and self sacrifice. MOI: You have spent the major part of your career in Japan. Tell us a little about your background and what motivated you to work in Japan. O’Friel: Japan had already become an economic power when I began my career, but it was just beginning on the path of deregulation of its financial service sector. The early eighties was also the first phase of the globalization of U.S. financial firms. Investment banks were just opening or expanding what had been small outposts overseas. Given my interest in Japan, it seemed interesting for me to take the opportunity to spend one or two years just out of college overseas and then come back to the U.S. Two years ended up being twenty. I first worked at a Japanese investment bank. At that time I lived in a company dorm and experienced firsthand the Japanese style of management. This was at the beginning of the equity and real estate stock bubble. I moved to Morgan Stanley where I was “present at the creation” of international derivatives markets. We were among the first traders of the Hang Seng, the SIMEX and the Osaka 50 futures contracts. Morgan Stanley facilitated the first program trades and the first electronic trades on the Tokyo stock exchange. As markets grew and became more sophisticated we helped introduce options, over the counter options and algorithmic trading to Japan. Morgan Stanley also had one of the leading prime brokerage businesses in Asia. We were able to deal with many of the leading hedge funds as they increased their exposure to Japanese shares. After running the Morgan Stanley Equity department in Tokyo, I moved to the buy side. First running an internal hedge fund for Morgan, then with Steel Partners Japan and now on my own. MOI: How has your view of corporate Japan evolved over the years? O’Friel: As I mentioned above, my first exposure to corporate Japan was working at a Japanese company. Those were the heady years just after the“Japanese managers are less publishing of Japan as Number One, a book by Ezra Vogel, my mentor atlikely to own a large amount Harvard. At that company, I learned the difference between management theoryof shares in their companies. and execution. They were an affiliate of Nomura Securities and tried to use the same business plan. However they did not have the human resources, capital or Thus, the interests of scale to execute the plan.managers are less likely to be directly aligned with It was obvious to me, a naïve observer fresh out of school, that there really shareholders, especially was no “corporate Japan,” just as there is no “corporate America.” There are short-term shareholders.” good companies and there are bad companies. That being said, there are some management philosophies that are more prominent in Japanese companies. In general the Japanese have a broader view of who the stakeholders are in corporations. There is a sense of responsibility to workers, vendors, clients and regions that is stronger than at most U.S. firms. Japanese managers are also less likely to own a large amount of shares in their companies. Thus, the interests of managers are less likely to be directly aligned with shareholders, especially short-term shareholders. This was true when I first came to Japan and is true now. The result is, although management is much more focused on the interests© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 13 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors of shareholders, there is still little interest in financial engineering for the short term benefit of stock prices. MOI: Given the mixed track record of activist funds in Japan, is it justified investing in Japan using an activist approach? O’Friel: I would highlight the distinction that you made in your question. There is a difference between the success of activism used as part of the investment process and the success of particular activist funds, especially given the small sample size of such funds. Activist funds can act as a bridge between what the majority of shareholders want. Often large shareholders remain silent and prefer to “vote with their feet” by selling shares. However, there are fund managers who have complemented their success in Japan by behaving in an activist fashion, that is, working with management to implement change. These shareholders might not be noisy, but they have frequent and meaningful meetings with managers and directors of corporates. Japanese companies have always been innovative and willing to learn from the outside. Corporate finance departments and CEOs are willing to listen to shareholders. Gaiastu is a well recognized term in Japanese vocabulary that describes using the threat of foreign pressure to implement change. The improvements in balance sheets of corporate Japan over the last decade can be attributed to some degree to shareholder pressure. MOI: How would you assess the state of corporate governance in Japan? For investors looking to invest in Japanese equities, are there any governance related checklists that you would recommend? O’Friel: Corporate governance can be defined as monitoring the behavior of corporations so that efficient operations can be maintained, and assuring that the benefits accrue fairly among shareholders, management and other stakeholders. Legal shareholder rights in Japan are comparatively strong. Majority votes of shareholders can enforce change. The issue is that there are often more than a majority of shareholders that have no interest in the level of corporate governance and little interest in monitoring management. The first checklist point is the makeup of shareholders. Some items to check are the level of the institutional ownership, the number and relationship of “In [terms of executive cross shareholdings and the amount of insider or management ownership. compensation], Japanese The second item to check is the board membership. There has been somecorporations are far superior movement to improve the governance of corporate boards. The TSE has to companies in the West.” introduced some guidelines. Corporate boards in Japan are often large and have few independent directors. An analysis of the number and relationship of board members will give you an idea of the level of independence. A third item is executive compensation. In this area, Japanese corporations are far superior to companies in the West. There are few cases of management enriching themselves to the disadvantage of shareholders or employees. MOI: Many investors, most notably Warren Buffett and Jim Rogers, have expressed the view that the Japanese stock market may present buying opportunities following the selloff related to the March earthquake. Do you share this view?© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 14 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors O’Friel: One of the reasons that the stock market rebounded so sharply after the immediate selloff was the vote of confidence by Buffett and other foreign investors. They realized that the damage of the earthquake and tsunami, while devastating in its human toll, was not huge in its infrastructure and economic ramifications. The three prefectures most directly affected by the quake (Miyagi, Iwate and Fukushima) account for only 4% of the population and GDP of Japan. However, damage to facilities did effect national supply chains and distribution. Then came the news of the damage and leaks at the Fukushima nuclear facilities. This has created more uncertainty in the medium term. 3% of the electrical capacity of Japan is now offline. This has begun to affect production outside of the areas directly impacted by the quake. In addition, both private consumption and consumer confidence in Japan will be eroded as the impact of blackouts continues. The loss of consumption on the private side will have to be measured against the rise in reconstruction demand. There will be gains in government consumption and public investment. While it is undeniable that the rebuilding process in Japan will be fast and efficient, it is vital that the repairs to the nuclear facility proceed without interruption and that the government is transparent about the damage and the impact of any dispersion of radiation. MOI: Will the recent catastrophe accelerate changes at the corporate or government level that could lead to more sustained value creation for shareholders in Japan? O’Friel: The general public has increased its demand for transparency from the government and from TEPCO. This might inspire the creation of an independent nuclear regulatory agency. The crisis has also highlighted the cozy relationship between regulators and the regulated in the power industry. We must keep in mind that tragedy often inspires countries to search for their core strengths. I think the Japanese nation, its people and its corporations will look to their core to help the rebuilding. They will look to the values of solidarity, patience and discipline. There is no indication that these noble traits, however useful they are to surviving and overcoming this disaster, will lead to fewer or better regulations or different views of corporate governance. “The three prefectures most MOI: While Buffett has recently sounded optimistic about Japan, he has notdirectly affected by the quake made any significant investments there. Are there any developments that may (Miyagi, Iwate and lead to improving returns on equity in the future?Fukushima) account for only O’Friel: The particular way of valuing Japanese companies has been the subject 4% of the population and of debate throughout the course of my career. Many of the valuation metrics GDP of Japan. However, have come into line with global norms. Once, brokers and companies struggleddamage to facilities did effect to justify P/E ratios of 60x to 100x as something that was unique to Japan. P/E national supply chains and ratios are now at levels in the low teens, which compare favorably to other distribution.” international markets. Price to book, especially for mid-cap and small-cap stocks, is low. There are many with price-to-book ratios below one. MOI: What are some of your key investment criteria? O’Friel: I have three simple criteria. First, the investment business is all about trust and values. If the management of an investment target is trustworthy and© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 15 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors shares common values with the investor, then the opportunity is worth closer inspection. Otherwise, it is best to stay away, short or, if given the capacity, replace management. Second, valuation is the primary determinant of long-term returns. Being right on the concept and right on the price are two very different things. Finally, patience is important. If one is patient, it is easier to be a contrarian and to wait for the fat pitch. MOI: What is the single biggest mistake that keeps investors from reaching their goals? O’Friel: Research has shown that the single biggest error is overconfidence.“…valuation is the primary Investing is hard, with elements of skill, hard work and luck. An investor who determinant of long-term attributes every success to skill is susceptible to overreaching. Despite thereturns. Being right on the outward veneer of successful managers, most are rather modest in reference to concept and right on the their own skills. They know what they do not know. They respect the market.price are two very different things.” MOI: What books would you recommend to non-Japanese investors looking to learn about Japan? O’Friel: Any of the John Dower books, from War Without Mercy to Embracing Defeat, tell the story of how Japan rebuilds from disaster and will give readers a clue as to how Japan will respond to the recent earthquake. Ronald Dore’s Stock Market Capitalism: Welfare Capitalism challenges the preconception that there is one way of global capitalism. It highlights similarities between traits seen in Germany and Japan. It is especially relevant given the 2008 shocks to the “Anglo-American” system.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 16 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsSome Context: Japan, The Country and The EconomyPOPULATION SIZE – JAPAN IS DWARFED BY THE U.S. AND SEVERAL EMERGING COUNTRIES th Japan is ranked 9 in terms of population size, but its rank may slip in the coming decades.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.POPULATION GROWTH HAS TURNED NEGATIVE The decline in youth is worrisome for Japan’s long-term economic and social outlook.Source: Japan Statistical Yearbook 2011, Chapter 2: Population and Households, The Manual of Ideas.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 17 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsJAPAN’S POPULATION PYRAMID HAS BECOME TOP-HEAVY…Source: “Statistical Handbook of Japan 2010” by Statistics Bureau, Japan; The Manual of Ideas.…AND WILL LIKELY BECOME EVEN MORE TOP-HEAVY OVER TIME Increased immigration or a higher birth rate are likely necessary for Japan’s long-term viability as an economic power.Source: Japan Statistical Yearbook 2011, Chapter 2: Population and Households, The Manual of Ideas.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 18 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsDISTRIBUTION OF ESTABLISHMENTS AND EMPLOYEES IN JAPAN Corporations, both large and small, dominate the employment picture.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.GDP BY COUNTRY – JAPAN REMAINS AN ECONOMIC POWERHOUSE * Japan’s economic significance dwarfs what might be expected when considering the country’s population size ranking. That said, China recently surpassed Japan in terms of GDP.* Based on 2008 data. Source: Japan Statistical Yearbook 2011, The Manual of Ideas.JAPANESE GDP HAS STAGNATED FOR MORE THAN A DECADE The Japanese economy has made little progress against a backdrop of multi-year deflationary pressures.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 19 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNOT SURPRISINGLY, SALES AND PROFITS HAVE ALSO STAGNATED The financial crisis has affected the profits of “Japan Inc.” in an unprecedented way.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.TRADE INCREASED THROUGH 2008, BUT EXPERIENCED A SHARP SETBACK AS A RESULT OF THE FINANCIAL CRISIS Japan has consistently maintained its status as a leading exporter and generator of trade surpluses. The latter have shrunk in recent years, as imports have become more important to the country.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 20 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNEARLY ONE-HALF OF REVENUE FROM BOND ISSUANCE, WHILE NEARLY A QUARTER OF BUDGET GOES TO DEBT SERVICE Japan relies heavily on debt issuance to fund the annual budget. Social security and debt service represent large burdens on Japan’s budget. Offsetting these needs is a relatively low allocation to defense.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.“NON-PRODUCTIVE” SPENDING (RETIREES AND DEBT SERVICE) HAS BEEN INCREASING OVER TIME Japan’s has radically reduced land preservation and development expenditures in order to fund other priorities.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 21 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsJAPAN’S GOVERNMENT DEBT-TO-GDP RATIO STANDS OUT AMONG DEVELOPED COUNTRIES Japan’s debt-to-GDP ratio may have passed the “point of no return”.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.UNEMPLOYMENT HAS INCREASED BUT REMAINS QUITE LOW Japan’s unemployment rate fell to remarkable lows prior to the crisis.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 22 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsRETAIL SALES HAVE BEEN ON THE DECLINE FOR NEARLY TWO DECADES The fate of Japan’s retail industry was sealed with the bursting of the late-80s bubble.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.NUCLEAR PLAYS A SMALL BUT NON-NEGLIGIBLE ROLE IN JAPAN’S OVERALL ENERGY MIX Natural gas may gain share in the wake of the recent Fukushima nuclear plant disaster.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.JAPANESE STOCK MARKET VALUES REMAIN SIGNIFICANTLY BELOW THE 1989 HIGH Two “lost decades”: The aftermath of the 1980s bubble has been exacerbated by persistent deflationary pressures.Source: Japan Statistical Yearbook 2011, The Manual of Ideas.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 23 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsScreening for Japanese Investment OpportunitiesTop 100 Tokyo Stock Exchange Companies, by Market Value Market Enter. Trailing EBIT LTM Earnings Yield Net Debt/ Tang. Value Value Revenue Margin FCF Last This Tangible Book Tokyo Company Industry ($bn) ($bn) to EV (5-Yr) Yield Year Year Book to MV Symbol Toyota Motor Auto & Truck Manufacturers 140 242 94% 5% 1% 2% 5% 83% 88% 7203 NTT DoCoMo Communications Services 77 75 69% 17% 7% 8% 8% -3% 62% 9437 Honda Motor Auto & Truck Manufacturers 67 102 102% 6% -1% 5% 10% 66% 79% 7267 Mitsubishi UFJ Regional Banks 67 550 n/m 22% n/m 8% 10% n/m 145% 8306 NTT Communications Services 65 108 114% 11% 17% 10% 10% 61% 106% 9432 Canon Computer Peripherals 59 48 94% 13% 8% 5% 7% -37% 51% 7751 Mitsubishi Iron & Steel 48 89 62% 7% 2% 7% 11% 108% 80% 8058 Sumitomo Mitsui Regional Banks 44 261 n/m 21% n/m 10% 15% n/m 123% 8316 Softbank Communications Services 43 63 53% 10% 15% 5% 6% -307% -15% 9984 Nissan Motor Auto & Truck Manufacturers 40 77 118% 5% -5% 3% 10% 112% 83% 7201 Takeda Pharma Major Drugs 37 28 64% 29% 1% 10% 8% -50% 50% 4502 Mizuho Financial Regional Banks 36 623 n/m 18% n/m 9% 17% n/m 134% 8411 Fanuc Misc. Capital Goods 36 29 10% 35% 2% 2% 5% -64% 28% 6954 Japan Tobacco Tobacco 36 43 174% 5% 6% 8% 5% 1846% 1% 2914 Komatsu Constr. & Agric. Machinery 34 39 44% 10% 3% 1% 5% 59% 27% 6301 Mitsui + Co. Misc. Capital Goods 33 58 86% 4% 7% 7% 14% 92% 80% 8031 Sony Audio & Video Equipment 32 26 336% 1% 18% 1% 3% -25% 81% 6758 Panasonic Audio & Video Equipment 31 39 230% 4% 8% n/m 4% 55% 44% 6752 Denso Auto & Truck Parts 28 25 146% 6% 12% 4% 7% -16% 81% 6902 KDDI Communications Services 28 38 109% 9% 10% 12% 11% 49% 77% 9433 Mitsubishi Electric Electronic Instr. & Controls 25 26 155% 5% 13% 2% 7% 11% 50% 6503 Mitsubishi Estate Real Estate Operations 24 39 31% 12% 10% 4% 3% 117% 55% 8802 Hitachi Electronic Instr. & Controls 23 45 241% 2% 12% n/m 12% 191% 49% 6501 Seven + i Holdings Retail (Grocery) 22 23 267% n/a -1% 7% 6% 4% 73% 3382 East Japan Railway Misc. Transportation 22 63 49% 15% 1% 7% 8% 191% 97% 9020 Nippon Steel Iron & Steel 22 37 112% 9% 3% 0% 6% 73% 100% 5401 Tokio Marine Insurance (Prop. & Casualty) 21 19 n/m 4% n/m 8% 7% n/m 96% 8766 Shin-Etsu Chemical Chemical Manufacturing 21 18 63% 18% 3% 5% 6% -22% 80% 4063 Toshiba Computer Hardware 21 32 240% 2% 4% n/m 6% 421% 13% 6502 Yahoo Japan Computer Services 21 19 18% 48% 2% 5% 5% -43% 20% 4689 Kansai Electric Electric Utilities 20 61 52% 8% 4% 8% 7% 187% 107% 9503 Kyocera Electronic Instr. & Controls 19 14 93% 8% 3% 3% 7% -35% 79% 6971 Nomura Investment Services 19 111 15% 0% n/m 12% 2% n/m 130% 8604 Sumitomo Oil & Gas Operations 18 59 59% 6% 0% 11% 14% 282% 80% 8053 JFE Holdings Iron & Steel 18 35 97% 7% 11% 5% 6% 108% 94% 5411 Astellas Pharma Biotechnology & Drugs 18 16 76% 21% 1% 9% 6% -25% 44% 4503 JX Holdings Oil & Gas - Integrated 17 41 0% n/a n/a n/m 25% 136% 104% 5020 Bridgestone Tires 17 21 162% 5% 4% 8% 7% 33% 79% 5108 Central Jap. Railway Railroads 17 53 34% 25% 16% 7% 10% 254% 85% 9022 ITOCHU Misc. Fabricated Products 17 42 97% 8% 14% 10% 13% 237% 64% 8001 Chubu Electric Electric Utilities 16 45 60% 8% 13% 8% 5% 141% 124% 9502 FUJIFILM Office Equipment 16 14 182% 3% 9% 4% 5% -9% 102% 4901 Mitsubishi Heavy Misc. Capital Goods 15 30 117% 2% 8% 1% 2% 100% 96% 7011 Mitsui Fudosan Real Estate Operations 15 35 47% 10% -2% 6% 4% 170% 80% 8801 Asahi Glass Constr. - Supplies & Fixtures 15 19 81% 6% 12% 11% 11% 45% 62% 5201 Chuo Mitsui Regional Banks 15 32 n/m 24% n/m 11% 12% n/m 50% 8309 Dai-ichi Life Insurance (Life) 15 12 n/m n/a n/m 12% 4% n/m 59% 8750 MS + AD Insurance Insurance (Prop. & Casualty) 14 9 n/m 3% n/m 8% 4% n/m 135% 8725 Keyence Electronic Instr. & Controls 14 11 16% 47% 4% 3% 5% -51% 49% 6861 Otsuka Biotechnology & Drugs 14 9 142% n/a n/m 7% 8% -35% 93% 4578© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 24 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors Market Enter. Trailing EBIT LTM Earnings Yield Net Debt/ Tang. Value Value Revenue Margin FCF Last This Tangible Book Tokyo Company Industry ($bn) ($bn) to EV (5-Yr) Yield Year Year Book to MV Symbol Fast Retailing Apparel/Accessories 14 11 87% 15% 2% 7% 5% -76% 22% 9983 Daiichi Sankyo Biotechnology & Drugs 14 13 91% n/a 6% 4% 6% -12% 61% 4568 Kao Personal & Household Prods. 13 14 104% 9% 8% 4% 5% 12% 25% 4452 Marubeni Oil & Gas Operations 13 38 105% 4% 12% 10% 13% 345% 56% 8002 Kirin Beverages (Alcoholic) 13 21 122% 5% 8% 9% 7% 239% 29% 2503 Suzuki Motor Auto & Truck Manufacturers 12 10 305% 3% 9% 3% 5% -22% 93% 7269 Tokyo Gas Natural Gas Utilities 12 18 94% 7% -1% 5% 7% 65% 76% 9531 Kubota Constr. & Agric. Machinery 12 15 73% 10% 7% 4% 6% 43% 64% 6326 Resona Regional Banks 12 26 n/m 31% n/m 12% 14% n/m 178% 8308 Toray Industries Textiles - Non Apparel 12 17 96% 4% 12% n/m 6% 77% 59% 3402 Fujitsu Computer Services 12 15 371% 2% 2% 15% 7% 55% 56% 6702 SMC Scientific & Technical Instr. 12 9 29% 21% 6% 2% 6% -35% 54% 6273 Sharp Audio & Video Equipment 11 19 177% 2% -7% 3% 3% 69% 102% 6753 Terumo Medical Equipment & Supplies 11 10 37% 20% 2% 5% 4% -20% 33% 4543 Sumitomo Electric Auto & Truck Parts 11 13 168% 4% 5% 5% 8% 20% 102% 5802 NKSJ Insurance (Prop. & Casualty) 11 10 n/m n/a n/m n/m 3% n/m 124% 8630 Secom Security Systems & Services 11 9 89% 13% 3% 6% 7% -28% 63% 9735 Sumitomo Metal Constr. - Supplies & Fixtures 11 23 67% 13% 12% n/m 3% 128% 91% 5405 Eisai Biotechnology & Drugs 11 13 74% 10% 10% 6% 8% 162% 15% 4523 ORIX Consumer Financial Services 10 64 18% 15% -39% 5% 8% 344% 153% 8591 Sumitomo Mining Metal Mining 10 11 79% 10% 8% 7% 10% 13% 71% 5713 Tokyo Electron Semiconductors 10 7 68% 11% -1% n/m 8% -41% 66% 8035 Hoya Electronic Instr. & Controls 10 9 57% 18% 3% 5% 7% -26% 40% 7741 Chugai Pharma Major Drugs 10 8 56% 18% -2% 5% 6% -30% 55% 4519 Aisin Seiki Auto & Truck Parts 10 10 248% 4% 24% 6% 9% 3% 83% 7259 Sumitomo Realty Real Estate Operations 10 31 28% 15% -5% 6% 7% 382% 58% 8830 Toyota Industries Auto & Truck Parts 10 14 123% 2% 12% 0% 6% 35% 115% 6201 Mitsubishi Chemical Chemicals - Plastics & Rubber 10 22 137% 3% 18% 4% 10% 195% 67% 4188 Asahi Kasei Chemical Manufacturing 10 11 152% 5% 10% 4% 8% 24% 79% 3407 Nitto Denko Semiconductors 9 8 93% 9% 8% 5% 8% -31% 52% 6988 Daikin Industries Misc. Capital Goods 9 12 104% 7% 6% 5% 3% 78% 38% 6367 Mitsubishi Tanabe Biotechnology & Drugs 9 8 61% 13% 4% 6% 5% -17% 75% 4508 Aeon Retail (Grocery) 9 21 267% 2% 29% 5% 8% 125% 100% 8267 Kyushu Electric Electric Utilities 9 33 53% 8% 2% 6% 4% 183% 143% 9508 Tokyo Electric Electric Utilities 9 91 67% 5% 38% 20% 12% 231% 407% 9501 NTT Data Computer Networks 9 12 117% 6% 10% 5% 5% 208% 17% 9613 Ricoh Office Equipment 9 15 166% 6% 9% 4% 5% 88% 79% 7752 SANYO Electric Electronic Instr. & Controls 9 12 168% 0% 1% n/m -3% 332% 12% 6764 Sony Financial Insurance (Life) 8 7 n/m 6% n/m 7% 127% n/m 40% 8729 Sumitomo Chemical Chemical Manufacturing 8 19 103% 4% 7% 2% 3% 272% 47% 4005 Dai Nippon Printing Printing & Publishing 8 9 222% 4% 6% 7% 6% 3% 127% 7912 Kobe Steel Iron & Steel 8 16 122% 8% 28% 0% 7% 131% 76% 5406 Nikon Photography 8 7 127% 7% 12% n/m 4% -19% 50% 7731 T+D Holdings Insurance (Life) 8 6 n/m 1% n/m 21% 5% n/m 91% 8795 Tohoku Electric Electric Utilities 8 31 65% 5% 13% 3% 4% 207% 134% 9506 Osaka Gas Natural Gas Utilities 8 13 98% 7% 3% 7% 7% 73% 91% 9532 JS Group Constr. - Supplies & Fixtures 8 10 123% 2% 2% 2% 4% 26% 76% 5938 Asahi Breweries Beverages (Alcoholic) 8 12 152% 5% 13% 10% 9% 64% 74% 2502 Daiwa Securities Investment Services 8 87 7% 12% n/m 8% 0% n/m 108% 8601 West Japan Railway Misc. Transportation 8 20 71% 8% -13% 4% 6% 151% 105% 9021Note: The above table includes companies incorporated in Japan only.Favorable data points, i.e., those that exceed certain thresholds set by The Manual of Ideas, are highlighted.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 25 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsProfitable Companies with 5-Year ROE > 5%, Trading at < 1x Book Company Industry Tokyo 52-Wk Market Enter. Sales 5-Yr Average Sales/ Price to Trailing ROE Ticker Price Value Value ($mn) Profit Margins Empl. EPS Cash Book (5-Yr  ($mn) ($mn) Gross Net ($’000) Flow Avg) Toyota Motor Auto & Truck 7203 -12% 136,960 249,340 242,550 16% 4% 763 20x 7x 1.0x 8% NTT Communications 9432 -2% 65,770 134,840 126,000 57% 7% 545 9x 2x .6x 7% Sumitomo Oil & Gas 8053 12% 18,320 61,640 37,850 27% 6% 584 7x 4x .9x 14% Orix Consumer Financial 8591 6% 11,200 n/m 11,770 42% 10% 673 19x 4x .7x 9% Ricoh Office Equipment 7752 -34% 8,560 15,340 24,470 41% 3% 226 21x 5x .7x 7% Japan Retail Fund Real Estate 8953 22% 2,730 6,400 536 41% 35% n/m 12x 8x .8x 5% Nomura RE Office Real Estate 8959 12% 2,160 4,350 334 49% 37% n/m 18x 13x .9x 5% Japan Prime Realty Real Estate 8955 9% 1,930 3,790 299 51% 36% n/m 17x 12x .9x 5% Kewpie Food Processing 2809 -3% 1,860 2,010 5,820 24% 2% 496 14x 6x .9x 6% Tokyo Tatemono Construction 8804 -3% 1,680 7,020 2,450 25% 5% 1,133 21x 9x .5x 5% Sapporo Beverages 2501 -35% 1,530 3,620 4,810 31% 1% 1,235 12x 4x 1.0x 5% Orix Jreit Real Estate 8954 12% 1,400 3,020 266 50% 39% n/m 15x 10x .8x 6% Toagosei Chemical Manuf. 4045 11% 1,330 1,400 1,900 28% 5% 739 8x 5x .9x 6% Tokyu Reit Real Estate 8957 14% 1,110 2,120 162 50% 42% n/m 22x 12x .9x 8% Tokai Carbon Chemical Manuf. 5301 -24% 1,110 1,220 1,330 28% 7% 741 15x 6x .8x 8% Shimachu Retail (Specialty) 8184 -10% 1,080 777 1,800 32% 6% 1,405 12x 8x .5x 5% China Boqi Waste Mgmt 1412 -6% 1,000 249 2,350 14% 3% 4,786 8x 6x .5x 5% Gurobaru Wan Real Estate 8958 3% 837 1,450 112 55% 45% n/m 20x 14x .9x 7% His Personal Services 9603 -7% 718 (44) 4,470 15% 1% 719 8x 7x 1.0x 8% Bic Camera Retail (Tech) 3048 5% 695 1,240 7,670 24% 1% 1,285 7x 5x .9x 10% Alpen Retail (Specialty) 3028 -5% 691 432 2,350 44% 3% 793 16x 7x .6x 6% Premier Investment Real Estate 8956 30% 652 1,530 128 54% 41% n/m 14x 10x .7x 7% PGM Holdings Recreational 2466 -28% 646 1,930 982 54% 14% 209 4x 3x .7x 19% Thasegawa Chemical Manuf. 4958 -12% 644 510 563 33% 6% 447 15x 8x .9x 5% Kato Sangyo Food Processing 9869 -10% 621 167 8,340 7% 1% 4,183 10x 6x .7x 6% Nippon Denko Metal Mining 5563 -32% 619 602 889 21% 7% 1,370 8x 6x 1.0x 13% SAN-A Retail (Grocery) 2659 -8% 597 447 1,670 30% 4% 1,492 8x 5x .8x 10% Tkc Business Services 9746 -3% 534 367 671 60% 7% 276 14x 8x .9x 7% Mitsubishi Pencil Office Supplies 7976 -6% 496 298 644 44% 6% 232 10x 7x .8x 7% Shizuokagas Nat. Gas Utilities 9543 1% 458 1,010 1,460 -- 4% 1,313 9x 2x .8x 7% Heiwa Real Estate Real Estate 8966 59% 431 1,240 77 49% 68% n/m 3x 3x .5x 8% Mitsubishi Research Computer Services 3636 -13% 333 260 903 22% 4% 285 12x 6x 1.0x 10% Pack Containers & Pack. 3950 -7% 317 212 1,020 23% 4% 911 8x 6x .8x 12% Nihon Nohyaku Chemical Manuf. 4997 -31% 311 245 490 40% 4% 686 13x 8x .8x 5% Sri Sports Recreational 7825 -2% 308 322 786 50% 4% 488 9x 4x .7x 8% Nippon Carbon Electronic Instr. 5302 -29% 298 445 433 31% 10% 738 14x 4x .8x 12% Ohara Personal Products 5218 -38% 294 275 341 36% 10% 116 15x 6x .6x 7% Daiwa Industries Capital Goods 6459 -9% 256 (123) 348 57% 16% 189 6x 5x .5x 17% Keiyo Gas Nat. Gas Utilities 9539 -5% 254 421 982 -- 4% 881 9x 2x .4x 6% Torigoe Food Processing 2009 -4% 219 109 262 25% 6% 761 16x 11x .8x 6% Chiyoda Integre Electronic Instr. 6915 -2% 196 141 476 23% 4% 93 36x 9x .7x 7% Tomoe Engineering Plastics & Rubber 6309 22% 194 138 517 19% 3% 703 9x 8x .8x 8% Hosokawa Micron Capital Goods 6277 2% 187 183 399 35% 4% 285 14x 7x .8x 8% CAC Computer Services 4725 -1% 177 90 452 18% 3% 217 13x 8x .7x 7% Teikoku Sen Textiles 3302 18% 171 75 323 24% 6% 1,299 6x 5x .9x 12% Tosei Real Estate 8923 15% 165 501 327 23% 6% 1,586 27x 17x .6x 12% Space Co Business Services 9622 -8% 163 63 361 12% 4% 533 14x 12x .6x 7%© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 26 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors Company Industry Tokyo 52-Wk Market Enter. Sales 5-Yr Average Sales/ Price to Trailing ROE Ticker Price Value Value ($mn) Profit Margins Empl. EPS Cash Book (5-Yr  ($mn) ($mn) Gross Net ($’000) Flow Avg) Shinwa Co Machinery 7607 -14% 156 96 282 16% 4% 609 23x 15x .9x 11% Sanyo Housing Real Estate 8904 -1% 124 116 418 18% 4% 919 7x 6x .6x 12% Toukei Computer Computer Services 4746 -7% 121 104 140 31% 9% 182 11x 7x .8x 9% Nitto Seiko Fabric. Products 5957 -12% 117 85 312 24% 6% 221 11x 5x .5x 11% Satori Electric Semiconductors 7420 -13% 113 247 2,190 7% 1% 2,561 7x 6x .3x 5% Takara Printing Printing Services 7921 -16% 99 36 143 44% 6% 206 16x 8x .6x 7% Otaki Gas Nat. Gas Utilities 9541 6% 99 31 589 -- 2% 2,082 7x 3x .4x 5% Kanro Food Processing 2216 -1% 96 103 246 49% 3% 526 12x 5x .7x 7% Create Medic Medical Equipment 5187 -7% 95 59 112 52% 8% 167 11x 9x .7x 7% Maeda Kosen Construction 7821 105% 88 52 157 38% 4% 415 9x 6x .7x 6% Altech Business Services 4641 -3% 87 47 202 24% 3% 72 12x 9x .9x 8% Invincible Invest. Real Estate 8963 -21% 84 571 66 9% 48% n/m 2x 1x .2x 9% Gameon Computer Services 3812 -22% 81 17 75 73% 12% 311 157x 16x .8x 12% Himaraya Retail (Specialty) 7514 54% 81 122 579 36% 1% 821 12x 6x .7x 6% Hagihara Industries Plastics & Rubber 7856 11% 80 94 238 25% 4% 219 5x 3x .6x 10% Nippon Seiro Oil & Gas 5010 50% 75 204 403 12% 2% 1,709 4x 3x .6x 7% Kyowa Electronic Electronic Instr. 6853 -10% 73 70 163 35% 3% 212 23x 8x .7x 6% Maruka Machinery Capital Goods 7594 3% 69 2 303 14% 2% 798 28x 11x .5x 8% Niitaka Personal Products 4465 -3% 65 81 145 38% 3% 634 27x 6x .9x 7% Kuraudia Personal Services 3607 -13% 64 107 169 66% 6% 179 5x 4x .7x 14% Densan Software 3640 -- 61 47 166 26% 4% 232 6x 4x .7x 11% Toa Valve Fabricated Prod. 6466 -26% 58 16 138 29% 5% 361 5x 4x .5x 9% Genky Stores Retail (Drugs) 2772 -- 58 110 571 21% 2% 1,459 7x 3x .7x 14% Top Culture Retail (Specialty) 7640 -2% 53 154 415 31% 2% 1,112 9x 3x .6x 7% Gakujo Business Services 2301 -13% 52 30 32 55% 9% 220 22x 17x .7x 6% Land Business Real Estate 8944 -11% 51 296 119 32% 10% 7,428 29x 6x .3x 9% Intellex Real Estate 8940 -39% 47 223 336 12% 1% 1,740 3x 3x .6x 7% Medical System Retail (Drugs) 4350 -19% 46 137 521 34% 1% 459 7x 2x .9x 12% Densan System Computer Services 3630 1% 38 (120) 237 15% 2% 342 7x 4x .6x 9% Mitachi Semiconductors 3321 -17% 38 42 427 9% 1% 730 7x 5x .6x 9% Paraca Business Services 4809 -12% 38 153 85 30% 7% 1,538 5x 4x .5x 9% Trust Co Retail (Specialty) 3347 -3% 32 111 90 29% 5% 787 9x 2x .7x 6% Golf Digest Online Recreational 3319 -35% 30 44 163 39% 2% 623 14x 5x .9x 9% Higashinihon Gas Nat. Gas Utilities 9544 -5% 28 69 80 -- 4% 765 15x 1x .4x 6% Information Planning Computer Services 3712 -20% 26 5 23 54% 14% 210 21x 18x .9x 14% Chip One Stop Electronic Instr. 3343 1% 25 4 45 37% 5% 635 7x 6x .7x 7% Japan Corp. Housing Real Estate 8945 -4% 23 13 74 20% 4% 151 4x 4x .9x 17% Riken Corundum Supplies & Fixtures 5395 -2% 19 24 75 23% 4% 490 7x 4x .4x 6% Ifis Japan Computer Services 7833 -11% 17 3 33 35% 4% 383 17x 6x .9x 9% Early Age Real Estate 3248 -17% 16 41 47 27% 6% 1,813 6x 5x .8x 21% Mandarake Retail (Specialty) 2652 13% 15 72 101 49% 2% 295 4x 3x .4x 6% Kojima Iron Works Capital Goods 6112 -20% 14 11 28 18% 6% 291 62x 10x 1.0x 19% Dear Life Real Estate 3245 56% 13 13 16 26% 5% 850 12x 10x .8x 10%© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 27 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsProfitable Companies with 5-Year ROA > 5% Market Enter. EV/ MV/ LTM P/E EBIT Tokyo Value Value LTM Tang. FCF LTM For- Margin Symbol Company Sector ($mn) ($mn) Sales Book Yield Adj. ward (5-Yr) 1819 Taihei Kogyo Capital Goods 384 484 .2x .7x 10% 4x 5x 7% 7599 Gulliver International Services 413 547 .3x 1.4x 28% 13x 6x 4% 7294 Yorozu Consumer Cyclical 427 265 .3x 1.0x 32% 14x 6x 4% 8876 Relo Holdings Services 258 299 .3x 1.5x 7% 7x 7x 4% 9729 Tokai Healthcare 326 289 .3x .9x 22% 6x 7x 6% 9430 NEC Mobiling Technology 441 302 .2x 1.1x 9% 8x 7x 4% 9831 Yamada Denki Services 6,472 7,310 .3x 1.3x 11% 9x 7x 4% 1722 Misawa Homes Capital Goods 238 393 .1x 1.5x 110% 17x 8x 8% 5214 Nippon Electric Glass Technology 6,989 6,729 1.7x 1.3x 7% 10x 8x 20% 7313 TS Tech Consumer Cyclical 1,153 817 .2x 1.0x 20% 15x 8x 4% 7251 Keihin Consumer Cyclical 1,360 874 .3x .9x 14% 13x 8x 6% 4283 Panasonic Works Technology 268 265 .6x 1.1x 2% 9x 9x 12% 4617 Chugoku Marine Basic Materials 573 700 .7x 1.1x 6% 9x 9x 8% 5541 Pacific Metals Basic Materials 1,429 981 1.4x 1.1x 12% 14x 9x 33% 6676 Melco Technology 680 405 .3x 1.6x 16% 11x 9x 4% 7545 Nishimatsu Chain Services 555 242 .2x 1.0x 7% 8x 9x 9% 3738 T-Gaia Services 827 1,106 .2x 2.8x 5% 7x 9x 2% 4711 Tokyu Community Services 404 313 .2x 1.1x 3% 10x 9x 5% 2726 PAL Co. Services 349 155 .2x 1.4x 16% 11x 9x 7% 9422 ITC Networks Services 249 200 .1x 1.4x 15% 6x 9x 3% 7278 EXEDY Consumer Cyclical 1,399 1,157 .6x 1.1x 8% 19x 9x 9% 2659 SAN-A Services 614 448 .3x .9x 11% 10x 9x 7% 9433 KDDI Services 27,597 37,987 .9x 1.3x 10% 8x 9x 9% 9682 DTS Technology 249 138 .2x .9x 9% 15x 10x 7% 2695 KURA Services 305 299 .3x 1.6x 9% 9x 10x 5% 9787 Aeon Delight Services 895 756 .4x 1.9x 5% 9x 10x 6% 4095 Nihon Parkerizing Basic Materials 894 702 .8x 1.1x 13% 15x 10x 12% 7739 Canon Electronics Technology 1,145 818 .6x 1.6x 13% 10x 10x 11% 5713 Sumitomo Metal Basic Materials 10,120 11,046 1.3x 1.4x 8% 15x 10x 10% 7222 Nissan Shatai Consumer Cyclical 1,127 1,105 .2x .6x 20% 7x 10x 4% 2685 Point Services 1,025 803 .7x 2.5x 3% 8x 10x 17% 3636 Mitsubishi Research Technology 334 206 .2x 1.1x 13% 11x 10x 7% 7606 United Arrows Services 587 764 .8x 3.6x 7% 19x 11x 7% 4021 Nissan Chemical Basic Materials 1,727 1,902 1.1x 1.4x 8% 11x 11x 12% 8096 Kanematsu Technology 286 13 .0x .8x 5% 11x 11x 7% 5186 Nitta Capital Goods 554 499 1.1x .9x 2% 39x 11x 3% 5563 Nippon Denko Basic Materials 657 637 .7x 1.1x 12% 9x 11x 11% 3593 Hogy Medical Healthcare 688 500 1.3x 1.0x 5% 11x 11x 23% 1379 Hokuto Consumer/Non-Cyclical 741 838 1.4x 1.4x 5% 12x 11x 16% 4708 Moshi Moshi Services 654 526 .6x 1.7x 4% 11x 11x 12% 3433 Tocalo Basic Materials 277 216 1.0x 1.2x 16% 16x 11x 19% 6459 Daiwa Industries Capital Goods 268 n/m n/m .6x 27% 6x 12x 22% 8227 Shimamura Services 3,482 2,875 .5x 1.4x 5% 11x 12x 8% 6737 Eizo Nanao Technology 532 233 .2x .8x 1% 8x 12x 10% 4521 Kaken Pharma Healthcare 1,219 1,159 1.1x 1.7x 5% 14x 12x 12% 2875 Toyo Suisan Consumer/Non-Cyclical 2,372 1,826 .5x 1.2x 6% 9x 12x 7% 6923 Stanley Electric Consumer Cyclical 2,899 2,305 .8x 1.2x 6% 18x 12x 11% 6379 Shinko Plantech Energy 534 358 .3x 1.7x 13% 10x 12x 8% 7296 F.C.C. Consumer Cyclical 1,265 1,040 .9x 1.5x 11% 39x 12x 10% 9728 Nippon Kanzai Services 350 243 .3x 1.3x 9% 13x 12x 5%Detailed screening criteria: Market value > $235 million, 0x < Forward P/E < 12x, 5-year average return on assets > 5%, Trailing free cash flow > 0© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 28 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsCheapest Based on Tangible Book to Market Value Market Enter. Debt/ Trailing Tang. EPS Yield LTM EBIT Value Value Tang. Sales Book/ Last This FCF Margin Company Industry ($mn) ($mn) Book to EV MV Year Year Yield (5-Yr) 8037 Kamei Oil & Gas Operations 151 619 80% 848% 389% 16% 2% 63% 1% 8515 Aiful Consumer Financial 294 n/m 438% n/m 368% n/m n/m n/m n/m 7972 Itoki Furniture & Fixtures 121 113 -2% 892% 343% 3% 2% -7% 0% 4464 SOFT99 Auto & Truck Parts 131 26 -24% 932% 341% 10% 7% -1% 3% 1820 Nishimatsu Construction Services 436 604 12% 793% 327% n/m n/m 65% -2% 7913 Tosho Printing Printing & Publishing 132 34 -23% 2124% 326% n/m 2% 2% 2% 7744 Noritsu Koki Photography 214 -92 -44% n/m 325% n/m n/m -32% -8% 5658 Nichia Steel Constr. Supplies 146 179 7% 190% 319% 5% 2% 10% 3% 3443 Kawada Tech. Constr. Supplies 113 395 80% 334% 313% 47% 54% 68% n/a 9537 Hokuriku Gas Natural Gas Utilities 127 210 21% 245% 304% 11% 6% 27% 3% 8983 Japan Office Real Estate Operations 264 834 71% 12% 303% 5% n/m 13% n/a 2116 Nissin Sugar Food Processing 113 68 -13% 765% 302% 14% 13% 8% 1% 7885 Takano Electronic Instruments 103 -15 -38% n/m 300% n/m 8% 29% 3% 7226 Kyokuto Kaihatsu Misc. Capital Goods 211 169 -7% 387% 296% n/m 1% 14% 1% 7989 Tachikawa Constr. Supplies 106 18 -28% 2448% 292% 6% 4% 4% 2% 7914 Kyodo Printing Printing & Publishing 204 261 10% 483% 290% 5% n/m -13% 0% 3877 Chuetsu Paper Products 208 906 117% 134% 287% 6% 2% 33% 1% 8150 Sanshin Electronics Electronic Instruments 250 217 -5% 993% 284% 7% 8% -37% 2% 7494 Konaka Retail (Apparel) 141 272 33% 303% 280% n/m 20% 40% -4% 8266 Izumiya Retail (Dep’t/Discount) 373 1,351 94% 329% 280% n/m 2% 2% 0% 8574 Promise Consumer Financial 939 n/m 251% n/m 279% 30% n/m n/m n/m 4033 NITTO FC Chemical Manufacturing 162 51 -25% 404% 279% 9% 6% 12% 9% 9070 Tonami Trucking 188 389 38% 353% 279% 6% 4% -4% 0% 8046 Marufuji Sheet Construction Materials 100 119 7% 269% 277% 5% n/m 7% 2% 1939 Yondenko Construction Services 182 139 -9% 616% 274% 10% 10% 27% 3% 7414 Onoken Fabricated Products 195 327 25% 428% 271% 9% 13% -54% 3% 1937 Seibu Electric Construction Services 102 120 6% 542% 266% 5% 7% -22% 2% 5408 Nakayama Steel Iron & Steel 187 1,156 196% 163% 265% n/m n/m -20% 1% 1822 Daiho Construction Services 102 -7 -41% n/m 257% 13% 8% 57% 1% 1941 Chudenko Construction Services 825 456 -17% 308% 256% 1% 2% 3% -3% 7949 Komatsu Wall Constr. Supplies 109 34 -27% 864% 252% n/m 6% -26% 5% 5915 Komai Tekko Construction Services 141 174 9% 321% 251% 6% 19% 16% -5% 7925 Maezawa Kasei Containers & Packaging 157 31 -32% 796% 248% 3% 4% 11% 2% 5410 Godo Steel Iron & Steel 445 861 40% 134% 235% n/m n/m 0% 6% 5445 Tekyo Tekko Iron & Steel 147 199 15% 269% 232% 36% 5% -7% 11% 1896 Obayashi Road Construction Services 129 80 -17% 1387% 222% 16% 3% -23% 2% 7822 Eidai Forestry & Wood 213 32 -40% 2098% 214% 0% 5% 14% 0% 1914 Japan Foundation Construction Services 123 11 -43% 1738% 213% 2% 1% -4% 0% 1934 Yurtec Construction Services 497 286 -21% 690% 204% 4% 3% 4% 2% 1884 Nippon Road Construction Services 320 216 -16% 785% 202% 16% 8% 4% 2% 8519 Pocket Card Consumer Financial 254 n/m 222% n/m 201% n/m 9% n/m n/m 8066 Mitani Construction Materials 374 29 -50% 13707% 186% 18% 14% 6% 3% 5262 Nippon Hume Construction Materials 136 99 -15% 353% 185% 9% 7% 16% 4% 9234 Kokusai Kogyo Business Services 146 314 62% 190% 185% 1% n/m -15% n/a 1899 Fukuda Construction Services 181 427 80% 321% 170% 10% 5% 34% -1% 1865 Asunaro Aoki Construction Services 365 87 -45% 1709% 169% 4% 10% 15% 1% 5602 Kurimoto Iron & Steel 288 736 93% 195% 167% 2% 6% 23% -5% 1882 Toa Road Construction Services 127 234 51% 540% 165% 34% 7% -5% 0% 5269 Nippon Concrete Construction Materials 167 255 32% 158% 161% 1% 3% 4% 1%Detailed screening criteria: Market value > $100 million; traded on Tokyo Stock Exchange; regional banks excluded.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 29 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsProfiles of 20 Japanese Investment CandidatesAdvantest (Tokyo: 6857, NYSE: ATE) Technology: Semiconductors Chiyoda-ku, TK, Japan, 81-3-321-7500 www.advantest.co.jp Trading Data Consensus EPS Estimates Valuation Price: $18.02 (as of 4/21/11) Month # of P/E FYE 3/31/10 n/m 52-week range: $15.36 - $27.13 Latest Ago Ests P/E FYE 3/31/11 n/a Market value: $3.6 billion This quarter n/a n/a n/a P/E FYE 3/30/12 n/a Enterprise value: $2.6 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 200.8 million FYE 3/31/11 n/a n/a n/a EV/ LTM revenue 2.1x Ownership Data FYE 3/30/12 n/a n/a n/a EV/ LTM EBIT 29x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 2.3x Insider buys (last six months): 0 LT growth n/a n/a n/a Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 3% Institutional ownership: 1% n/a n/a n/a LTM pre-tax ROC 15% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 2,045 2,811 2,981 2,759 2,145 900 625 1,211 151 299 Gross profit 1,041 1,449 1,555 1,482 1,103 233 304 587 50 140 Operating income 363 713 757 667 251 (622) (140) 89 (59) 14 Net income 203 447 486 417 194 (879) (134) 54 (67) 8 Diluted EPS 1.03 2.28 2.61 2.22 1.06 (4.92) (0.75) 0.32 (0.37) 0.05 Shares out (avg) 197 196 185 187 182 179 179 177 179 173 Cash from operations 331 1,060 698 575 284 28 (208) (1) (74) 8 Capex 64 108 89 99 153 65 35 34 11 9 Free cash flow 268 952 609 476 131 (38) (244) (35) (85) (1) Cash & investments 1,187 1,420 1,854 2,305 1,730 1,533 1,255 1,023 1,250 1,023 Total current assets 3,002 2,629 3,235 3,460 2,623 1,846 1,687 1,649 1,648 1,649 Intangible assets 44 36 34 36 41 17 17 17 17 17 Total assets 3,883 3,483 4,117 4,300 3,506 2,372 2,215 2,151 2,173 2,151 Short-term debt 53 235 0 0 0 0 0 0 0 0 Total current liabilities 782 869 901 712 372 253 257 318 237 318 Long-term debt 236 1 0 0 0 0 0 0 0 0 Total liabilities 1,280 1,057 1,090 840 522 451 451 539 442 539 Common equity 2,603 2,427 3,028 3,460 2,984 1,921 1,764 1,612 1,731 1,612 EBIT/capital employed 22% 50% 67% 63% 23% -79% -28% 15% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $70 $60 $50 $40 $30 $20 $10 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 30 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA — ADVANTEST1Advantest manufactures semiconductor testing equipment. FYE March 31 2007 2008 2009 2010 2011  revenue -7% -22% -58% -31% 87%In March 2011, Advantest and competitor Verigy (VRGY)  employees (end) 1% 1% -13 -1% n/aannounced a definitive agreement under which Advantest  assets (end) 4% -18% -32% -7% -4%will acquire Verigy for $15 per share in cash (~$1.1 billion).  TBV/share (end) 14% -10% -35% -8% -5% TBV/share (end) (¥) 1,554 1,403 907 833 788INVESTMENT HIGHLIGHTS Revenue (¥bn) 235 183 77 53 100 % of revenue by segment:  #1 producer of semiconductor testing equipment, Semiconductor test products 70% 70% 63% 57% 67% pending the $1.1 billion acquisition of Verigy. Mechatronics products 22% 19% 16% 21% 18% Advantest would overtake incumbent #1 Teradyne Services 8% 11% 21% 22% 14% (TER) in the largely consolidated industry. EBITDA margin by segment: Semiconductor test products 31% 21% -51% -19% 17%  Verigy adds scale and testing expertise in non- Mechatronics products 29% 13% -82% -13% 2% memory semiconductors such as system-on-a-chip Services 36% 34% 10% 35% 27% (SoC). Both company’s testing equipment enables Corporate -3% -3% -9% -8% -5% Total EBITDA margin 28% 17% -53% -14% 10% chip manufacturers to lower costs, get products to % of revenue by geography (based on customers’ location): market quickly, and improve their products’ quality. Asia (excluding Japan) 60% 59% 49% 64% 66%  Pro-forma EV-to-5-year average revenue and Japan 31% 31% 32% 23% 22% EBIT is ~1.0x and ~10x. (pro-forma EV-to-prior Americas/Europe 9% 10% 19% 13% 12% Selected items as % of revenue: peak EBIT is ~3x). While trailing pro-forma revenue Gross profit 52% 54% 51% 26% 49% remains ~30% below the 5-year average, revenue is R&D 11% 13% 17% 31% 21% growing rapidly due to a cyclical demand upturn. EBIT 25% 24% 12% -65% 6%  Strong post-deal balance sheet with an estimated Net income 16% 15% 9% -98% 3% D&A 3% 3% 5% 11% 4% ~¥40 billion of pro-forma net cash. Capex 3% 4% 7% 7% 3% Employees (end) 3,637 3,666 3,187 3,151 n/aINVESTMENT RISKS & CONCERNS Return on tang. equity 13% 6% -36% -7% 2%  Advantest may be overpaying for Verigy in its Tangible equity/assets 77% 82% 83% 80% 78%  shares out (end) 1% -5% 0% 0% -3% quest to catch up to Teradyne, and prevent the 1 Based on U.S. GAAP. TBV=tangible book value. previously announced merger between Verigy and LTX-Credence. Advantest is paying 1.9x tangible SELECTED OPERATING DATA — VERIGY book, 14x trailing EBITDA and 1.1x trailing revenue. YTD  Verigy integration risks due to different corporate FYE October 31 2007 2008 2009 2010 1/31/11 cultures and global operations. Semiconductor  revenue -2% -9% -53% 67% 13% manufacturers may move business to competitors.  employees (end) 3% 6% -9% -2% n/a Revenue ($mn) 761 691 323 539 120  Exposed to price pressure and cyclicality of the % of revenue by geography (based on customers’ location): semiconductor industry. A high proportion of Asia 74% 79% 72% 84% n/a fixed costs increases the risk of operating losses. North America/Europe 26% 21% 28% 16% n/a  Top 5 customers typically account for 30-50+% Selected items as % of revenue: Gross profit 45% 44% 33% 48% 47% of revenue. Intel and Samsung are key customers. R&D 12% 15% 28% 18% 19%  Exposed to yen strength as most products are made EBIT 13% 7% -34% 4% -4% in Japan. The addition of Verigy may mitigate this. D&A 2% 2% 5% 4% 4% Capex 2% 2% 2% 4% -2% Employees (end) 1,550 1,650 1,500 1,470 n/aCOMPARABLE PUBLIC COMPANY ANALYSIS P/ This Next MV EV EV / Tang. FY FY RATINGS ($mn) ($mn) Rev. Book P/E P/E VALUE Intrinsic value materially higher than market value?  TER 3,300 2,650 1.6x 3.3x 10x 9x DOWNSIDE PROTECTION Low risk of permanent loss?  LTXC 440 320 1.2x 2.9x 8x 7x MANAGEMENT Capable and properly incentivized?  ATE 3,620 2,600 2.1x 2.3x n/a n/a FINANCIAL STRENGTH Solid balance sheet?  MOAT Able to sustain high returns on invested capital? MAJOR HOLDERS (notable non-trustees only) EARNINGS MOMENTUM Fundamentals improving? Insiders 1% | Fujitsu 10% | MUFJ 9% | Manning & Napier 4% MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEThe proposed $1.1 billion acquisition of Verigy would make Advantest the largest global producer of semiconductor testingequipment (ahead of Teradyne). As the upturn in the semiconductor industry has led to strong recent revenue growth, andlikely optimistic management outlooks, we are concerned Advantest may be overpaying. Given the notoriously cyclical chipindustry, and integration risks, a commensurate margin of safety is required. Despite the strong post-deal balance sheet, weare therefore not enticed by the pro-forma valuation, which we estimate implies an EV-to-”through the cycle” EBIT of ~10x.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 31 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsADVANTEST – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Selected historic financial information: 2 Advantest five-year average financials: Revenue 160 EBIT 17 Implied EBIT margin 10% 3 Verigy five-year average financials: Revenue 50 Advantest and Verigy ‘s 5-year EBIT 2 average pro-forma revenue is ~45% higher than their pro-forma Implied EBIT margin 5% trailing revenue Advantest/Verigy pro forma five-year average financials: Revenue 210 4 as % of trailing pro-forma revenue 145% EBIT 19 as % of trailing pro-forma EBIT 204% Implied EBIT margin 9% Valuation summary (pro forma Advantest/Verigy): Conservative Base Case Aggressive 10x estimated ¥20 10x estimated ¥25 10x estimated ¥30 billion of normalized billion of normalized billion of normalized Valuation methodology EBIT after merger EBIT after merger EBIT after merger synergies synergies synergies 5 Normalized pro-forma revenue ¥200 ¥200 ¥200 6 Normalized pro-forma EBIT margin 10% 10% 10% Normalized pro-forma EBIT before synergies ¥20 ¥20 ¥20 7 Estimated merger synergies 0 5 10 Normalized pro-forma EBIT after synergies ¥20 ¥25 ¥30 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value ¥200 ¥250 ¥300 Plus: Advantest net cash (as of 3/31/2011) 95 95 95 Plus: Acquired net cash at Verigy (as of 1/31/2011) 37 37 37 Minus: Purchase consideration for Verigy (100% cash) (91) (91) (91) 7 Minus: Estimated present value of cash restructuring costs (10) (10) (10) Minus: Advantest post-retirement liabilities, net (as of 3/31/2011) (14) (14) (14) 8 ¥220 billion ¥270 billion ¥320 billion Estimated fair value of the equity of Advantest (¥ in billions) ¥1,270 per share ¥1,560 per share ¥1,850 per share 8 $2.7 billion $3.3 billion $3.9 billion Estimated fair value of the equity of Advantest (US$ in billions) $15.30 per ADS $18.80 per ADS $22.30 per ADS Implied EV-to-trailing pro-forma revenue 1.4x 1.7x 2.1x Implied EV-to-trailing pro-forma EBIT 22x 27x 32x Implied EV-to-5-year average pro-forma revenue 1.0x 1.2x 1.4x Implied EV-to-5-year average pro-forma EBIT (before synergies) 11x 13x 16x 9 Implied EV per pro-forma employee ($) $520,000 $650,000 $780,0001 In March 2011, Advantest and Verigy (Nasdaq: VRGY) announced a definitive agreement under which Advantest will acquire Verigy for $15.00 per share in cash.The implied total acquisition price is $1.1 billion (approximately ¥91 billion based on the exchange rate of $1=¥83).2 Averages are based on the fiscal years 2006-10 (ended March 2010). This period includes three profitable and two unprofitable years, which we assumerepresents a full industry cycle. For reference, Advantest reported revenue and EBIT of ¥100 billion and ¥6 billion, respectively, for the year ended March 2011.3 Averages are based on calendar years 2006-10 and recent exchange rate of $1=¥83.4 Trailing pro-forma revenue is the sum of Advantest’s revenue for the year ended March 2011 and Verigy’s revenue for the year ended January 2011 (convertedinto yen at the recent exchange rate of $1=¥83).5 Approximates the five-year average pro-forma revenue of Advantest and Verigy.6 Approximates the five-year average pro-forma EBIT margin of Advantest and Verigy.7 These figures are “guesses.”8 Based on 173 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.9 Based on ~4,600 pro-forma employees.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 32 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsADVANTEST & VERIGY – PORTFOLIO OF SEMICONDUCTOR TEST SOLUTIONSADVANTEST & VERIGY – SELECTED PRO FORMA FINANCIAL INFORMATIONADVANTEST & VERIGY – TRANSACTION TERMSSource: Company presentation dated March 28, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 33 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsCanon (Tokyo: 7751, NYSE: CAJ) Technology: Computer Peripherals Ohta-ku, TK, Japan, 81-3-375-2111 www.canon.com Trading Data Consensus EPS Estimates Valuation Price: $43.20 (as of 4/21/11) Month # of P/E FYE 12/31/10 18x 52-week range: $36.80 - $52.30 Latest Ago Ests P/E FYE 12/31/10 18x Market value: $57.2 billion This quarter n/a n/a n/a P/E FYE 12/31/11 18x Enterprise value: $46.5 billion Next quarter n/a n/a n/a P/E FYE 12/30/12 17x Shares out: 1,324.3 million FYE 12/31/10 2.45 2.45 1 EV/ LTM revenue 1.0x Ownership Data FYE 12/31/11 2.44 3.16 1 EV/ LTM EBIT 10x Insider ownership: <1% FYE 12/30/12 2.61 3.46 1 P / tangible book 2.0x Insider buys (last six months): 0 LT growth 4.4% 21.7% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 10% Institutional ownership: 3% 10/27/10 n/a n/a LTM pre-tax ROC 25% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended December 31, LTME FQE FQE per share data) 2004 2005 2006 2007 2008 2009 2010 12/31/10 12/31/09 12/31/10 Revenue 40,705 44,066 48,791 52,601 48,056 37,669 43,511 45,300 11,199 12,534 Gross profit 20,111 21,352 24,185 26,375 22,748 16,754 20,930 21,455 5,092 5,778 Operating income 6,383 6,844 8,299 8,882 5,823 2,548 4,549 4,736 1,081 973 Net income 4,030 4,508 5,345 5,732 3,629 1,545 2,895 2,895 723 633 Diluted EPS 3.03 3.38 4.01 4.43 2.89 1.25 2.34 2.44 0.59 0.52 Shares out (avg) 1,328 1,331 1,332 1,293 1,256 1,234 1,235 1,235 1,234 1,229 Cash from operations 6,591 7,109 8,161 9,851 7,239 7,175 8,738 8,738 2,778 2,641 Capex 3,013 4,637 4,987 5,567 5,026 3,850 2,338 2,338 776 733 Free cash flow 3,578 2,472 3,174 4,284 2,213 3,325 6,400 6,400 2,003 1,908 Cash & investments 10,439 11,798 13,687 11,327 8,062 9,556 11,003 11,003 9,556 11,003 Total current assets 26,201 28,858 32,659 30,621 24,237 23,684 25,007 25,007 23,684 25,007 Intangible assets 0 0 0 1,321 1,398 1,378 1,796 1,796 1,378 1,796 Total assets 42,104 47,462 53,077 52,968 46,598 45,162 46,761 46,761 45,162 46,761 Short-term debt 716 266 367 416 236 147 245 245 147 245 Total current liabilities 11,540 12,661 13,655 14,751 11,081 9,199 10,528 10,528 9,199 10,528 Long-term debt 336 318 185 102 99 58 49 49 58 49 Total liabilities 16,164 16,889 18,021 18,667 15,378 13,609 15,706 15,706 13,609 15,706 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 25,939 30,573 35,056 34,302 31,220 31,552 31,056 31,056 31,552 31,056 EBIT/capital employed 39% 40% 43% 43% 28% 12% 24% 25% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $70 $60 $50 $40 $30 $20 $10 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 34 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Canon manufactures imaging products in three segments: YTD FYE December 31 2006 2007 2008 2009 2010 3/31/11Office (53% of 2010 revenue): multifunction devices (~50%  revenue 11% 8% -9% -22% 16% 11%of segment sales), color copiers (17%), b&w copiers (15%).  EBIT 21% 7% -34% -56% 79% -5%Consumer (37% of revenue): includes mainly cameras  employees (end 3% 11% 27% 1% 17% 5%  assets (en ) 12% 0% -12% -3% 4% -2%(~70% of segment revenue) and inkjet printers (~25%).  TBV/share (end) 15% -3% -2% 1% -6% -5%Industry and Others (~10% of revenue): includes lithography TBV/share (end) (¥) 2,192 2,118 2,076 2,096 1,974 1,9 3(~25% of segment revenue), medical and other products. Revenue (¥tn) 4.2 4.5 4.1 3.2 3.7 0.8 % of revenue by major product type:2 Computer peripherals 34% 34% 36% 35% 36% n/aINVESTMENT HIGHLIGHTS Office imaging products 29% 29% 27% 26% 26% n/a  One of the world’s largest manufacturers of Cameras 25% 26% 25% 29% 29% n/a cameras, printers and copiers, and related % of revenue by segment: Office 54% 55% 54% 51% 53% 57% imaging products. Canon is both incumbent and Consumer 35% 35% 36% 40% 37% 34% innovator in shifts from traditional copiers to digital Industry and others 11% 9% 10% 9% 9% 8% MFDs, and from monochrome to color products. EBIT margin by segment:  Shares trade at an ~8% FCF yield on average Office 23% 23% 21% 14% 15% 13% Consumer 19% 21% 15% 14% 17% 14% 2006-10 free cash flow despite a strong balance Industry and others 8% 6% -12% -28% -3% 10% sheet, decent free cash flow growth prospects, and a Corporate/eliminations -3% -4% -3% -4% -4% -3% history of capital return to shareholders. Total EBIT margin 17% 17% 12% 7% 10% 10%  ~¥900 billion of net cash (20+% of recent market % of revenue by geography:3 Japan 22% 21% 21% 22% 19% 19% value), as of March 31. Upon becoming CEO in Americas 31% 30% 28% 28% 28% 26% 1995, Fujio Mitarai (75) has cut debt from ~35% of Europe 32% 33% 33% 31% 32% 33% assets to <1% in 2005. Despite an unlevered balance Asia and Oceania 15% 16% 18% 19% 22% 22% sheet, ROEs have been in the midteens historically. Selected items as % of revenue: Gross profit 50% 50% 47% 44% 48% 48%  2015 revenue target of ¥5+ trillion implies an 8% R&D 7% 8% 9% 10% 9% 8% 2010-15 revenue CAGR. Based on a 20+% EBIT Net income 11% 11% 8% 4% 7% 7% margin target, Canon trades at ~4x implied 2015 Net cash from ops 17% 19% 15% 19% 20% 9% EBIT. Canon targets an equity ratio of 75+%. D&A 6% 8% 8% 10% 7% 7% Capex 10% 11% 10% 10% 5% 6%  Returned ~¥1.3 trillion in dividends and share Return on tang. equity 17% 17% 12% 5% 10% 9%4 buybacks during 2006-10 (30% of market value). Tangible equity/assets 64% 64% 64% 67% 66% 65%  shares out (end) 0% 0% -8% 0% 0% 0% 1INVESTMENT RISKS & CONCERNS 2 Based on U.S. GAAP. TBV=tangible book value. 2010 data represents The Manual of Ideas estimates.  Earnings pressure due to production issues 3 Based on the location where the product is shipped to. 4 Annualized. related to the March earthquake and yen strength.* Revised 2011 guidance: revenue of ¥3,730 billion COMPARABLE PUBLIC COMPANY ANALYSIS (up 1% y-y), EBIT of ¥335 billion (down 14% y-y), P/ This Next MV EV EV / Tang. FY FY and attributable net income of ¥220 billion (down ($mn) ($mn) Rev. Book P/E P/E 11% y-y). Guidance assumes a rate of ¥85 per $. HPQ 88,700 99,170 .8x n/m 8x 7x  Dependence on the success of new products, PC 29,770 37,240 .3x 2.2x 22x 45x especially in the fickle consumer segment, as a XRX 14,310 22,920 1.0x 30.1x 9x 8x majority of revenue is from 2-3 year-old products. RICOY 8,480 14,310 .6x 1.3x 16x 15x  Technology risk. For example, interchangeable CAJ 57,210 46,500 1.0x 2.0x 18x 18x lens, or so-called “mirrorless,” cameras are a threat to conventional digital single-lens-reflex cameras. RATINGS  Derives ~20% of revenue from Hewlett-Packard, VALUE Intrinsic value materially higher than market value?  Canon sells laser printers on an OEM basis to HP. DOWNSIDE PROTECTION Low risk of permanent loss?  MANAGEMENT Capable and properly incentivized? MAJOR HOLDERS (notable non-trustees only) FINANCIAL STRENGTH Solid balance sheet? Insiders <1% | Dai-Ichi Mutual Life 6% | Mizuho 6% | MOAT Able to sustain high returns on invested capital? Sompo Japan Insurance 2% | Brandes <1% | Scout <1% EARNINGS MOMENTUM Fundamentals improving? * Despite a global presence, Canon still makes a majority of products in Japan. MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEImaging industry giant Canon differentiates itself from other Japanese companies through superior returns on capital as well asconsistent returns of capital to shareholders. This is despite operating in an industry that is competitive, new feature-driven andeconomically sensitive. While production problems due to earthquake-related supply chain issues, as well as the strong yen,pose headwinds, the shares are undervalued based on “normalized” free cash flow generation and the strong balance sheet.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 35 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsCANON – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 10x estimated ¥500 10x estimated ¥675 10x estimated ¥350 billion of normalized billion of normalized billion of normalized Valuation methodology EBIT (approximates EBIT (approximates EBIT (approximates 2006-10 average prior peak EBIT in 2011 EBIT guidance) EBIT) 2006/07) 1 Normalized revenue ¥3,500 ¥4,000 ¥4,500 2 Normalized EBIT margin 10.0% 12.5% 15.0% 3 Normalized EBIT ¥350 ¥500 ¥675 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value ¥3,500 ¥5,000 ¥6,750 4 Plus: Net cash 904 904 904 4 Minus: Net post-retirement liability (202) (202) (202) 4 Minus: Non-controlling interest (164) (164) (164) 5 ¥4,040 billion ¥5,540 billion ¥7,290 billion Estimated fair value of the equity of Canon (¥ in billions) ¥3,370 per share ¥4,620 per share ¥6,080 per share 5 $48.7 billion $66.7 billion $87.8 billion Estimated fair value of the equity of Canon (US$ in billions) $40.60 per ADS $55.60 per ADS $73.20 per ADS Implied trailing FCF yield 11% 8% 6% Implied FCF yield based on FY06-10 average FCF 8% 6% 5% 6 Implied dividend yield 4% 3% 2% Implied EV-to-trailing revenue 0.9x 1.3x 1.8x Implied EV-to-trailing EBITDA 5.3x 7.6x 10.2x Implied EV-to-trailing EBIT 9.1x 13.0x 17.6x Implied fair value of the equity to tangible book 1.7x 2.3x 3.1x1 Management’s revenue guidance for 2011 is ¥3,730 billion (up 1% y-y). Average revenue during 2006-10 is ~¥3,950 billion with a peak of ~¥4,500 billion in 2007and a trough of ~¥3,200 billion in 2009.2 Average EBIT margin during 2006-10 is 12.5%, with a peak of ~17% in 2006/07 and a trough of 7% in 2009. Management’s EBIT guidance for 2011 is ¥335billion (down 14% y-y), which implies an EBIT margin of 9%.3 Our base case EBIT of ¥500 billion approximates Canon’s “pre-earthquake” 2011 EBIT guidance of ~¥530 billion (~13% EBIT margin). Excluding a negative~¥200 billion impact due to the earthquake, actual EBIT guidance for 2011 is ¥335 billion.4 Based on balance sheet values as of March 31, 2011.5 Based on 1,200 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.6 Based on a per share dividend of ¥120 for the fiscal year ended December 2010.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.CANON – CAPITAL EXPENDITURE AND FREE CASH FLOW, 2008-2011 (¥ in billions)Source: Company presentation dated April 26, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 36 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsCANON – RESULTS OVER PAST 15 YEARS, AND MANAGEMENT TARGETS FOR 2015Source: Company presentation dated March 1, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 37 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsFujifilm (Tokyo: 4901, OTC: FUJIY) Basic Materials: Fabricated Plastic & Rubber Minato-ku, TK, Japan, 81-3-340-2111 www.fujifilm.com Trading Data Consensus EPS Estimates Valuation Price: $30.48 (as of 4/21/11) Month # of P/E FYE 3/31/10 n/m 52-week range: $27.25 - $37.45 Latest Ago Ests P/E FYE 3/31/11 19x Market value: $15.7 billion This quarter n/a n/a n/a P/E FYE 3/30/12 12x Enterprise value: $14.3 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 516.4 million FYE 3/31/11 1.62 1.61 1 EV/ LTM revenue 0.5x Ownership Data FYE 3/30/12 2.56 2.87 1 EV/ LTM EBIT 14x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.0x Insider buys (last six months): 0 LT growth 11.7% 84.0% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 7% Institutional ownership: 0% 7/30/10 n/a n/a LTM pre-tax ROC 8% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 30,128 29,666 31,311 32,661 33,415 28,574 25,608 27,328 6,499 6,413 Gross profit 12,476 11,934 12,603 13,430 13,546 10,835 10,152 11,004 2,622 2,642 Operating income 2,165 1,927 827 1,046 2,424 357 (507) 1,012 72 430 Net income 966 992 435 404 1,226 124 (451) 317 (19) 213 Diluted EPS 1.88 1.93 0.85 0.76 2.27 0.25 (0.92) 0.55 (0.04) 0.40 Shares out (avg) 513 513 510 511 508 499 489 488 489 486 Cash from operations 3,843 2,575 3,199 3,489 3,499 2,459 3,695 2,675 321 168 Capex 2,318 2,159 2,391 2,266 2,193 2,083 1,092 1,142 311 266 Free cash flow 1,525 416 809 1,223 1,306 376 2,603 1,533 10 (98) Cash & investments 5,818 4,154 3,386 5,085 4,060 3,513 5,488 5,142 4,401 5,142 Total current assets 17,497 16,119 16,110 18,607 17,747 15,291 16,557 16,596 15,627 16,596 Intangible assets 2,939 3,247 3,361 3,724 4,912 4,733 4,355 4,365 4,469 4,365 Total assets 35,489 35,019 35,536 38,959 38,340 34,000 33,188 32,641 33,234 32,641 Short-term debt 1,682 1,451 1,163 1,245 1,336 793 1,824 2,356 719 2,356 Total current liabilities 8,828 8,617 8,485 9,172 8,858 6,263 7,758 7,969 6,030 7,969 Long-term debt 1,371 1,127 873 3,145 3,007 2,981 1,646 1,394 2,848 1,394 Total liabilities 14,950 13,315 12,489 15,759 15,776 13,385 12,692 12,415 12,553 12,415 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 20,540 21,704 23,047 23,200 22,564 20,615 20,495 20,226 20,681 20,226 EBIT/capital employed 17% 15% 6% 7% 16% 2% -4% 8% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $60 $50 $40 $30 $20 $10 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 38 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Fujifilm produces imaging-related products in three segments: FYE March 31 2007 2008 2009 2010 2011  revenue 4% 2% -14% -10% 2%Document Solutions (44% of revenue*): operates as Fuji  employees (end) 1% 3% -3% -3% 6%Xerox (75%-owned), the segment manufactures office copiers,  assets (end) 10% -2% -11% -2% -4%printers, and consumables, and provides related services.  TBV/share ( nd) -1% -8% -7% 2% -2% TBV/share (end) (¥) 3,246 2,982 2,769 2,814 2,769Information Solutions (41% of revenue): produces equipment Revenue (¥bn) 2,783 2,847 2,434 2,182 2,217and materials for medical systems, life sciences and graphic % of revenue by segment:arts, as well as flat panel display materials, recording media, Document solutions 41% 42% 44% 43% 44%optical devices, electronic and inkjet materials. Information solutions 37% 39% 39% 41% 41% Imaging solutions 22% 19% 17% 16% 15%Imaging Solutions (15% of revenue): color films, digital Revenue growth by segment:cameras, photofinishing equipment, color paper, chemicals. Document solutions 5% 4% -10% -13% 4% Information solutions 17% 8% -15% -5% 2%INVESTMENT HIGHLIGHTS Imaging solutions -12% -10% -25% -16% -6% Adj. EBIT margin by segment:2  Transforming into office equipment and digital Document solutions 7% 7% 5% 7% 9% imaging company, from a legacy in film production. Information solutions 11% 11% 2% 8% 12%  Last five years’ cumulative FCF is 40+% of Imaging solutions 3% 0% -7% -3% 0% Corporate3 0% 0% 0% -1% -1% market value despite restructuring cash outflow Total adj. EBIT margin 7% 7% 2% 5% 8% related to the downsizing of the imaging solutions % of revenue by geography:4 business and the financial crisis of 2007-08. Japan 47% 44% 47% 49% 47%  Strong balance sheet with ~¥285 billion of net Asia and others 17% 20% 21% 23% 25% Americas 21% 20% 18% 16% 17% cash including investments in securities. Europe 15% 16% 14% 12% 12%  Legacy businesses may no longer be a material Selected items as % of revenue: drag on revenue growth due to their small size. Gross profit 41% 41% 38% 40% 41% R&D 6% 7% 8% 8% 7%  Guiding for an increase “both in sales and EBIT – reported5 4% 7% 2% -2% 6% profit” for the year ended March 2012. EBIT – adjusted 7% 7% 2% 5% 8% Net income 1% 4% 0% -2% 3%INVESTMENT RISKS & CONCERNS Net cash from ops 11% 10% 9% 14% 9% D&A 8% 8% 9% 9% 7%  Product/materials-driven business model leads to Capex6 7% 7% 7% 4% 5% commoditization and technology risk. Unlike Return on tang. equity 2% 7% 1% -3% 5% some rivals, Fujifilm lacks meaningful services Tangible equity/assets 58% 54% 53% 55% 57% capabilities that can be a source of recurring revenue.  shares out (end) 0% -1% -3% 0% -1% 1 Based on U.S. GAAP. TBV=tangible book value.  Low returns on equity likely to persist without 2 Stated before restructuring charges. Also excludes equity in net earnings of more aggressive return of excess capital to affiliates, gains/losses on forex and securities, as well as other items. 3 shareholders through asset sales/rationalizations. FY07-09 is based on old corporate expense allocation policy. 4 Based on sales destination.  “Surge in raw materials prices and movements 5 Includes restructuring charges, but excludes equity in net earnings of in currency exchange rates” are challenges, affiliates, gains/losses on forex and securities, as well as other items. 6 Includes purchases of software. which threaten recent profitability improvements.  Significant minority interest related to the Fuji MAJOR HOLDERS* (notable non-trustees only) Xerox business – a key earnings driver. Xerox, Insiders <1% | Nippon Life 4% | Chuo Mitsui 2% owns 25% of the entity, which manufactures and * The underlying share count excludes ~33 million treasury shares (~6% of distributes document processing products. total issued Fujifilm shares as of March 31, 2011).* Based on the year ended March 2011. RATINGSCOMPARABLE PUBLIC COMPANY ANALYSIS VALUE Intrinsic value materially higher than market value?  P/ This Next DOWNSIDE PROTECTION Low risk of permanent loss?  MV EV EV / Tang. FY FY MANAGEMENT Capable and properly incentivized?  ($mn) ($mn) Rev. Book P/E P/E FINANCIAL STRENGTH Solid balance sheet?  CAJ 57,210 46,500 1.0x 2.0x 18x 18x MOAT Able to sustain high returns on invested capital?  XRX 14,310 22,920 1.0x 30.1x 9x 8x RICOY 8,480 14,310 .6x 1.3x 16x 15x EARNINGS MOMENTUM Fundamentals improving?  MACRO Poised to benefit from economic and secular trends?  FUJIY 15,740 14,350 .5x 1.0x 19x 12xTHE BOTTOM LINEInvestors may dismiss Fujifilm as it evokes memories of a declining film-based imaging business. While this remains true toan extent, the company’s key earnings contributors are the manufacture of office equipment via 75%-owned Fuji Xerox, aswell as imaging applications that target growth areas including in health care and inkjet. The valuation may not properlyreflect this, despite commoditization and technology risks tied to a product and materials-driven business model. Given ahistory of frequent share buybacks, the strong balance sheet is a potential source of increasing returns to shareholders.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 39 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsFUJIFILM – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 8x estimated ~¥90 8x estimated ~¥175 8x estimated ~¥130 billion of normalized billion of normalized billion of normalized EBIT (approximates EBIT (approximates EBIT (approx. trailing Valuation methodology FY07-11 average trailing EBIT EBIT including EBIT including excluding restructuring restructuring restructuring charges) charges) charges) 1 Normalized revenue ¥2,200 ¥2,200 ¥2,200 2 Normalized EBIT margin 4.0% 6.0% 8.0% Normalized EBIT ¥88 ¥132 ¥176 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value ¥880 ¥1,320 ¥1,760 3 Plus: Net cash 147 147 147 3 Plus: Investments 182 182 182 3 Minus: Net post-retirement liability (79) (79) (79) 3 Minus: Non-controlling interest (128) (192) (257) 4 ¥1,000 billion ¥1,380 billion ¥1,750 billion Estimated fair value of the equity of Fujifilm (¥ in billions) ¥2,080 per share ¥2,860 per share ¥3,630 per share 4 $12.0 billion $16.6 billion $21.1 billion Estimated fair value of the equity of Fujifilm (US$ in billions) $25 per ADS $35 per ADS $44 per ADS Implied fair value of the equity to tangible book 0.7x 1.0x 1.3x Implied trailing FCF yield 9% 6% 5% Implied FCF yield based on FY07-11 average FCF 11% 8% 6% 5 Implied dividend yield 1% 1% 1% Implied EV-to-trailing revenue 0.4x 0.6x 0.8x Implied EV-to-trailing EBITDA excluding restructuring charges 2.7x 4.1x 5.4x Implied EV-to-trailing adj. EBITDA minus capex 4.2x 6.3x 8.3x1 Revenue for the year ended March 2011 is ¥2,217 billion (up 2% y-y).2 EBIT margin for FY11 is ~7.5%, excluding restructuring charges (~6% including restructuring charges). Both EBIT measures exclude equity in net earnings ofaffiliates, gains/losses on forex and securities, as well as other items.3 Based on balance sheet values as of March 31, 2011. Non-controlling interest, which is stated at its balance sheet value in the conservative case, is adjusted inthe base and aggressive cases.4 Based on 482 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.5 Based on the dividend of ¥30 per share for the fiscal year ended March 2011.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.FUJIFILM – SELECTED FINANCIAL DATA AND MANAGEMENT GUIDANCE (¥ in billions)Source: Company presentation dated April 28, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 40 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsFUJIFILM – OPERATING INCOME BRIDGE, ex. Restructuring and Other Charges (¥ in billions)FUJIFILM – CALCULATION OF FREE CASH FLOW (¥ in billions)FUJIFILM – STOCK REPURCHASES AND DIVIDENDSSource: Company presentation dated April 28, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 41 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsFujitsu (Tokyo: 6702, OTC: FJTSY) Technology: Computer Services Minato-ku, TK, Japan, 81-3-625-2220 jp.fujitsu.com Trading Data Consensus EPS Estimates Valuation Price: $27.69 (as of 4/21/11) Month # of P/E FYE 3/31/10 11x 52-week range: $26.01 - $37.34 Latest Ago Ests P/E FYE 3/31/11 n/a Market value: $11.6 billion This quarter n/a n/a n/a P/E FYE 3/30/12 n/a Enterprise value: $15.1 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 417.5 million FYE 3/31/11 n/a n/a n/a EV/ LTM revenue 0.2x Ownership Data FYE 3/30/12 n/a n/a n/a EV/ LTM EBIT 9x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.8x Insider buys (last six months): 0 LT growth n/a n/a n/a Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 11% Institutional ownership: 1% n/a n/a n/a LTM pre-tax ROC 17% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 57,034 56,984 57,327 61,021 63,782 56,150 55,989 68,638 39,883 13,118 Gross profit 15,625 14,958 15,171 15,776 16,107 14,375 14,873 18,990 10,510 3,614 Operating income 1,308 1,494 2,135 1,823 1,441 (813) 480 1,722 (310) 245 Net income 588 375 812 1,225 576 (1,345) 1,114 1,023 567 198 Diluted EPS 1.33 0.83 1.77 2.69 1.17 (3.25) 2.52 2.35 1.30 0.46 Shares out (avg) 400 407 414 413 412 414 412 412 411 414 Cash from operations 3,676 3,185 4,853 4,899 3,865 3,073 3,534 2,720 109 (157) Capex 2,405 2,387 3,389 3,094 3,961 2,895 2,074 2,227 443 480 Free cash flow 1,271 798 1,463 1,804 (96) 178 1,460 493 (334) (637) Cash & investments 4,988 5,470 5,064 5,377 6,573 6,432 5,120 4,040 5,338 4,040 Total current assets 24,116 23,708 23,125 25,509 25,962 22,584 22,398 20,647 22,444 20,647 Intangible assets 2,631 2,684 2,823 2,811 2,627 2,528 3,341 3,040 3,465 3,040 Total assets 46,250 43,554 45,551 47,185 45,728 38,550 38,622 35,824 38,425 35,824 Short-term debt 4,579 2,507 2,810 2,707 2,378 5,603 2,994 3,837 4,353 3,837 Total current liabilities 20,556 17,845 19,173 21,627 19,279 18,550 18,665 17,462 19,352 17,462 Long-term debt 10,701 10,448 8,301 6,216 9,449 6,029 4,744 3,718 4,780 3,718 Total liabilities 36,353 33,300 34,579 35,585 34,383 29,589 29,066 26,339 29,480 26,339 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 9,897 10,254 10,972 11,600 11,345 8,961 9,556 9,485 8,945 9,485 EBIT/capital employed 10% 12% 19% 16% 12% -7% 5% 17% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 42 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1 YTDFujitsu provides IT products and services in three segments: FYE March 31 2006 2007 2008 2009 2010 12/31/10Technology Solutions (~65% of revenue): IT systems  revenue 1% 6% 5% -12% 0% -3%integration, outsourcing and maintenance; IT products,  employees (end) 5% 2% 4% -1% 4% -1%including servers, storage, base stations, optical transmission.  assets (end) 5% 4% -3% -16% 0% -7%  TBV/share (end) 8% 8% -1 - 6% -3% 17%Ubiquitous Product Solutions (~23% of revenue): PCs and TBV/share (end) (¥) 329 355 352 260 252 260mobile phones. Since April 2010, also includes car audio and Revenue (¥tn) 4.8 5.1 5.3 4.7 4.7 3.2navigation systems, comms equipment, and auto electronics. % of revenue by segme t: Technology 61% 60% 59% 64% 65% 64%Device Solutions (~13% of revenue): manufactures Ubiquitous products 19% 19% 20% 18% 17% 23%2integrated circuits and other electronic components. Device 14% 14% 14% 12% 11% 13% Other 6% 7% 7% 7% 7% 1%3 Revenue growth by selected segment:INVESTMENT HIGHLIGHTS Technology 2% 6% 3% -6% 2% -3%  World’s third-largest IT services provider, and Ubiquitous products 3% 7% 6% -20% -3% 18%2 the #1 in Japan, based on company data. Fujitsu has EBIT margin by segment:4 parlayed strong product expertise, including in Technology 5% 5% 6% 6% 5% 4% Ubiquitous products 4% 4% 5% 0% 3% 3% servers (a top five global provider) into services Device 5% 3% 2% -13% -2% 5% such as IT systems integration and outsourcing. Other3 3% 3% 4% 1% 3% -21%  Low EV-to-revenue of ~30% — but can margins Corporate -1% -1% -1% -1% -2% -1% be improved? EV-to-EBIT is 9x based on EBIT Total EBIT margin 4% 4% 4% 1% 2% 2% % of revenue by geography (based on customer location): guidance of ¥145 billion for the year ended March Japan 72% 69% 69% 72% 66% 64% 2011. This implies an EBIT margin of 3.2%, which International 28% 31% 31% 28% 34% 36% approximates the 2005-10 average EBIT margin. EBIT margin by geography (before corporate costs):  Turnaround potential of non-Japanese operations Japan 5% 5% 7% 3% 5% n/a International 4% 3% 1% 1% 1% n/a (~35% of revenue), which have a 1% EBIT margin Selected items as % of revenue: versus 5+% at Japanese operations. While Japan Gross profit 26% 26% 26% 26% 27% 28% margins approximate their historical average, non- R&D 5% 5% 5% 5% 5% 5% Japan margins are below the 4% achieved in 2005. Net income 1% 2% 1% -2% 2% 1% Net cash from ops 8% 8% 6% 5% 6% 2%  Customers include nearly half of the Fortune D&A 5% 5% 5% 6% 5% 5% Global 500. This indicates Fujitsu’s products and Capex 6% 6% 6% 5% 4% 4% services are able to compete on a global scale. Employees (end) (k) 158 161 167 166 172 172 Return on tang. equity 10% 14% 7% -18% 18% 10% Tangible equity/assets 19% 19% 20% 19% 18% 18%INVESTMENT RISKS & CONCERNS  shares out (end) 0% 0% 0% 0% 0% 0%  Shares appear fairly valued based on stagnating 1 Based on Japanese GAAP. 2 revenue and average historic margins, which Includes car audio/navigation systems, mobile communications equipment, and automotive electronics, which were reported within “Other” prior to April imply an EV-to-EBIT of ~10x. The margin of safety 2010. Excludes the hard disk drive business since it was sold in October 2009. 3 is only modest with a price-to-tangible book of 1.7x. From April 2010 onward, includes Japan’s “supercomputer project,” facility services, internal IT development, and employee retirement/healthcare benefits.  Vulnerable to technological change and 4 As reported (excludes special items, affiliate earnings and dividend income). competition from the likes of IBM. Low margins may be a sign Fujitsu is losing on the product front. MAJOR HOLDERS (notable non-trustees only)  Threat of commoditization in certain business lines Insiders <1% | Fuji Electric 11% | State Street 5% | Asahi despite Fujitsu’s brand, scale and integrated offering. Mutual Life 2% | Fujitsu Employee Ass’n 2% | Mizuho 2%  ¥87 billion of net debt; large pension liabilities. RATINGSCOMPARABLE PUBLIC COMPANY ANALYSIS VALUE Intrinsic value materially higher than market value?  P/ This Next DOWNSIDE PROTECTION Low risk of permanent loss?  MV EV EV / Tang. FY FY MANAGEMENT Capable and properly incentivized?  ($mn) ($mn) Rev. Book P/E P/E FINANCIAL STRENGTH Solid balance sheet?  IBM 205,220 222,190 2.2x n/m 13x 12x MOAT Able to sustain high returns on invested capital?  ACN 40,610 35,930 1.4x 15.5x n/a n/a EARNINGS MOMENTUM Fundamentals improving?  FJTSY 11,560 15,080 .2x 1.8x n/a n/a MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEFujitsu has a strong heritage in IT product innovation, having developed Japan’s first computer in the 1950s. More recently,the company is using its expertise in servers and storage products to expand into services such as systems integration andoutsourcing. However, stagnating overall revenue and low margins indicate that Fujitsu remains behind competitors such asIBM, who have more aggressively exited commoditizing products to focus on value-added services. While the valuationappears fair on historic margins, shares have material upside potential if margins can be improved (EV-to-revenue is ~30%).© 2008-2011 by BeyondProxy LLC. 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    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsFUJITSU – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 10x estimated 10x estimated normalized EBIT of normalized EBIT of 1.25x tangible Valuation methodology ¥150 billion ¥200 billion common equity (approximates FY06- (approximates FY06- 10 average EBIT) 08 average EBIT) Conservative case metrics: Tangible common equity as of 12/31/2010 ¥539 Fair value multiple 1.25x Estimated equity value ¥673 Base/aggressive case metrics: 1 Normalized revenue ¥5,000 ¥5,000 2 Normalized EBIT margin 3.0% 4.0% Normalized EBIT (EBIT guidance: ¥145 billion for year to 3/2011) ¥150 ¥200 Fair value multiple 10.0x 10.0x Estimated enterprise value ¥1,500 ¥2,000 3 Minus: Net debt (87) (87) 4 Minus: Net post-retirement liability (192) (192) 5 Minus: Non-controlling interest (135) (135) 6 ¥673 billion ¥1,086 billion ¥1,586 billion Estimated fair value of the equity of Fujitsu (¥ in billions) ¥330 per share ¥520 per share ¥770 per share 6 $8.1 billion $13.1 billion $19.1 billion Estimated fair value of the equity of Fujitsu (US$ in billions) $20 per ADS $32 per ADS $46 per ADS Implied fair value of the equity to tangible book 1.3x 2.0x 2.9x Implied trailing FCF yield 6% 4% 3% Implied trailing earnings yield 12% 7% 5% Implied FCF yield based on average FCF during FY06-10 10% 6% 4% 7 Implied dividend yield 3% 2% 1% Implied EV-to-trailing revenue 0.21x 0.33x 0.44x 8 Implied EV-to-trailing Japan revenue 0.30x 0.48x 0.64x Implied EV-to-trailing EBITDA less capex 5.1x 8.1x 10.7x Implied EV per employee ($) $67,000 $105,000 $140,0001 Revenue for the year ended December 2010 was ~¥4,600 billion. Revenue peaked at ~¥5,300 billion in FY08 (ended March 2008) and averaged ~¥4,900 billionduring FY06-10 (not directly comparable due to inclusion of discontinued businesses).2 EBIT margin for the year ended December 2010 was 3.2%. EBIT margin peaked at 3.8% in FY08 (ended March 2008) and averaged ~3.0% during FY06-10 (notdirectly comparable due to inclusion of discontinued businesses).3 Based on balance sheet values of cash and debt as of December 31, 2010. Our cash figure includes marketable and investment securities (at reported values).4 Based on reported retirement benefits as of December 31, 2010. The related gross benefit obligation was ¥1.3 trillion at March 2010 based on a 2.5% discountrate (~$15 billion at recent exchange rates).5 Based on the balance sheet value as of December 31, 2010.6 Based on 2,070 million common shares outstanding (1 ADS = 5 shares). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.7 Based on dividend guidance of ¥10 per share for the fiscal year ended March 2011.8 EBIT margins in Japan have averaged 5% during FY06-10, while EBIT margins outside of Japan have averaged 2% during the same period. This suggestsFujitsu’s non-Japan revenue may be of relatively little value.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 44 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsFUJITSU – SEGMENT CLASSIFICATIONSource: Company data book dated October 2010.FUJITSU – RESEARCH CAPABILITY, AS INDICATED BY PATENT ACTIVITYSource: Fujitsu Annual Report 2010.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 45 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsHitachi (Tokyo: 6501, NYSE: HIT) Technology: Electronic Instruments & Controls Chiyoda-ku, TK, Japan, 81-3-325-1111 www.hitachi.co.jp Trading Data Consensus EPS Estimates Valuation Price: $50.66 (as of 4/21/11) Month # of P/E FYE 3/31/10 n/m 52-week range: $35.53 - $65.29 Latest Ago Ests P/E FYE 3/31/11 8x Market value: $23.4 billion This quarter $1.56 $1.56 1 P/E FYE 3/30/12 10x Enterprise value: $44.9 billion Next quarter 1.08 1.08 1 P/E FYE 3/30/13 n/a Shares out: 461.2 million FYE 3/31/11 6.63 6.63 1 EV/ LTM revenue 0.4x Ownership Data FYE 3/30/12 5.19 5.19 1 EV/ LTM EBIT 8x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 2.1x Insider buys (last six months): 0 LT growth 26.3% 26.3% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 12% Institutional ownership: 1% 11/4/10 $1.77 $1.48 LTM pre-tax ROC 14% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 103,284 108,005 113,242 122,612 134,323 119,650 107,305 115,503 25,818 27,081 Gross profit 23,000 24,716 24,851 25,838 29,302 26,133 25,356 29,081 6,386 7,028 Operating income 1,557 2,620 2,682 2,017 2,870 (289) 1,816 5,587 755 1,413 Net income 190 616 447 (392) (695) (9,420) (1,280) 2,686 262 743 Diluted EPS 0.57 1.81 1.30 (1.18) (2.09) (28.34) (3.49) 5.68 0.72 1.54 Shares out (avg) 330 332 333 333 332 332 366 388 354 452 Cash from operations 7,257 6,764 8,266 7,359 9,474 6,688 9,551 10,083 654 504 Capex 9,693 11,648 11,618 12,722 11,894 10,614 7,690 7,544 1,641 1,842 Free cash flow (2,436) (4,883) (3,352) (5,363) (2,420) (3,927) 1,862 2,540 (988) (1,338) Cash & investments 16,680 16,536 15,228 9,575 9,074 11,808 9,874 6,860 8,854 6,860 Total current assets 62,454 63,877 65,958 65,017 64,630 60,605 57,133 59,611 57,339 59,611 Intangible assets 4,728 5,263 5,157 5,205 4,699 5,445 6,046 6,090 3,561 6,090 Total assets 114,744 116,490 119,899 127,354 125,997 112,512 107,104 111,333 107,424 111,333 Short-term debt 14,968 14,912 12,792 15,349 14,072 18,788 9,343 11,432 13,879 11,432 Total current liabilities 46,794 48,631 49,312 55,845 56,867 55,299 47,035 48,788 47,982 48,788 Long-term debt 15,723 15,782 16,972 17,825 17,009 15,430 19,287 16,913 18,925 16,913 Total liabilities 88,803 88,878 89,895 98,127 100,027 99,949 91,734 93,989 93,491 93,989 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 25,941 27,612 30,005 29,227 25,971 12,562 15,370 17,345 13,933 17,345 EBIT/capital employed 4% 6% 6% 4% 6% -1% 5% 14% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $120 $100 $80 $60 $40 $20 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 46 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Hitachi is a conglomerate that operates in eleven segments: YTD FYE March 31 2008 2009 2010 12/31/10Information and Telecommunication Systems includes IT  revenue 10% -11% -10% 8%services, software, servers, mainframes, telco products, ATMs.  employees (end) -1% 4% -1% -1%High Functional Materials & Components includes wires,  assets (end) -1% -11% -5% 4%  TBV/share (end) -13% -63% -4% 29%cables, copper products, specialty steels, and circuit boards. TBV/share (end) (¥) 487 179 171 208Social Infrastructure & Industrial Systems includes industrial Revenue (¥tn) 11.2 10.0 9.0 6.8machinery, elevators, escalators and railway vehicles. % of revenue by selected segment: Information & telco 16% 17% 17% 15%Digital Media & Consumer Products: includes optical disk High functional materials 15% 15% 13% 15%drives, TVs, projectors, mobiles, and home appliances. Social infrastructure & industrial 10% 11% 12% 9% Digital media & consumer 11% 10% 10% 10%Electronic Systems & Equipment includes semiconductor and Electronic systems & equipment 9% 8% 10% 10%LCDs cap equipment, test and medical equipment, and tools. Power 6% 8% 9% 8% All Other2 33% 31% 30% 33%Power Systems includes thermal, nuclear, hydro and wind Adj. EBIT margin by selected segment:power generation systems. Information & telco 8% 8% 6% 5%Components & Devices includes hard disk drives, LCDs, High functional materials 8% 2% 4% 7% Social infrastructure & industrial 3% 3% 4% 4%information storage media and batteries. Digital media & consumer -10% -11% -1% 3%Construction Machinery includes hydraulic excavators, Electronic systems & equipment 6% 3% -1% 4%wheel loaders and mining dump trucks. Power -2% 0% 3% 4% All Other2 4% 1% 2% 6%Automotive Systems includes engine management systems, Total adj. EBIT margin3 3% 1% 2% 5%powertrains, drive control and car information products. % of revenue by geography:4 Japan 66% 59% 59% 56%Financial Services includes leasing and loan guarantees. Non-Japan 34% 41% 41% 44%Others includes logistics, property, and other activities. Adj. EBIT margin by geography (before corporate costs): Japan 4% 1% 3% n/aINVESTMENT HIGHLIGHTS Non-Japan 2% 2% 3% n/a Selected items as % of revenue:  One of world’s largest providers of electronic Gross profit 22% 22% 24% 26% and electrical products, ranging from IT products R&D 4% 4% 4% 4% to home appliances and electricity generation plants. Special items5 0% -2% -1% 1% Net income (after minorities) -1% -8% -1% 3%  Shares trade at 8-9x trailing P/E — a modest Net cash from ops (after minorities) 7% 5% 9% 6% valuation if record 2010 earnings are sustained. D&A 6% 7% 6% 5% Hitachi is benefiting from the global cyclical upturn. Capex6 5% 5% 4% 4%  Reaffirmed dividend guidance following the Tangible equity / assets (end) 16% 7% 9% 11%  shares out (end) 0% 0% 35%7 1% Japan earthquake in March. This suggests Hitachi 1 Based on U.S. GAAP. TBV=tangible book value. 2 expects no material liability from the related nuclear Includes the following segments: Components & Devices, Construction disaster (Hitachi’s nuclear power joint venture with Machinery, Automotive Systems, Financial Services, and Others. 3 Gross profit less SG&A (excludes special items and affiliates earnings/losses). GE helped build the Fukushima nuclear plant). 4 Based on customer location. Asia represents 52% of YTD non-Japan revenue.  5 To receive $3.5 billion cash (~15% of market Includes impairments, restructuring charges, and various gains/losses. 6 Includes purchase of intangibles; excludes capex of assets to be leased. value) from selling the hard disk drive business. 7 Hitachi issued 1.150 billion shares for ¥254 billion (~¥220/share) in 12/2009.INVESTMENT RISKS & CONCERNS MAJOR HOLDERS (notable non-trustees only)  Unwieldy conglomerate with low historic return Insiders <1% | MUFJ 6% | Hitachi Employees Ass’n 3% | on capital. The strategy of CEO Hiroaki Nakanishi Nippon Life 2% | Dai-Ichi Life 2% | RenTech <1% (65) to create a “social innovation business” appears unlikely to improve shareholder value creation. RATINGS  Trades at 2x tangible book and >13x last 5-years’ VALUE Intrinsic value materially higher than market value?  average FCF of ~¥150 billion (years to March ‘10). DOWNSIDE PROTECTION Low risk of permanent loss?   Dilutive equity raise in 2009 highlights risks to MANAGEMENT Capable and properly incentivized?  shareholders of a levered, cyclical model with little FINANCIAL STRENGTH Solid balance sheet?  recurring revenue; ~90% of revenue is from products. MOAT Able to sustain high returns on invested capital?   ¥1.8 trillion of net debt (1.8x 2010 adj. EBITDA); EARNINGS MOMENTUM Fundamentals improving?  ¥0.9 billion of net pension liabilities at yearend ‘10. MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEConglomerate Hitachi is benefiting from the global economic upturn and significant emerging markets’ exposure (25% ofrevenue is from non-Japan Asia). The levered, cyclically-exposed business model, however, puts shareholders’ capital atsignificant risk and has destroyed value in the past. The valuation is not enticing based on through-the-cycle earning power.© 2008-2011 by BeyondProxy LLC. 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    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsHITACHI – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 10x “normalized” 12.5x “normalized” 15x “normalized” Valuation methodology FCF FCF FCF 1 Average net cash from operations (FY06-10) ¥668 ¥668 ¥668 2 Minus: Average capex (FY06-10) (519) (519) (519) 3 Average FCF (FY06-10) ¥148 ¥148 ¥148 Fair value multiple 10.0x 12.5x 15.0x 4 ¥1,480 billion ¥1,850 billion ¥2,220 billion Estimated fair value of the equity of HItachi (¥ in billions) ¥310 per share ¥380 per share ¥460 per share 4 $17.8 billion $22.3 billion $26.7 billion Estimated fair value of the equity of Hitachi (US$ in billions) $37 per ADS $46 per ADS $55 per ADS Implied trailing earnings yield 15% 12% 10% 5 Implied run-rate dividend yield 2% 2% 1% 6 Implied fair value of the equity to adj. tangible book 1.4x 1.8x 2.1x1 Net cash from operations is stated after cash dividends paid to noncontrolling interests. Fiscal years refer to the twelve months ended in March of the stated year(e.g. FY10 is the year ended in March 2010).2 Capex includes the purchase of intangible assets but excludes purchases of tangible assets and software to be leased. Based on this definition, our capex figureapproximated 85% of reported average D&A during the period.3 In our view, the average free cash flow during fiscal years 2006-10 is representative of Hitachi’s cash generation capability through a full economic cycle. Inaddition, due to the company structure, including significant non-controlling interests in many of Hitachi’s segments, free cash flow is our preferred metric to use forvaluation purposes. Using our definition of FCF, HItachi generated ~¥155 billion of FCF during the nine months to December 2010, which puts the recent annualrun-rate cash generation above the five year average. This appears to be in-line with a 5% adj. EBIT margin for the recent nine-month period versus an averageadj. EBIT margin of ~2% during FY06-10. Adjusted EBIT is based on reported gross profit minus SG&A (excludes various special items). As the recent recordEBIT margins may not be sustainable over a full-economic cycle, we use our average FCF figure rather than to rely on the higher, more recent free cash flow inour valuation. Our “normalized” FCF figure of ~¥150 billion is 25% below management’s target to “consistently generate at least ~¥200 billion” of net incomeattributable to Hitachi, Ltd. shareholders (based on the presentation from May 2010, which outlined the “mid-term management plan”). A 25% discount appearswarranted in our view, based on management’s mixed track record and actual FCF generation to date.4 Based on ~4,830 million common shares outstanding, including estimated dilution from convertible debt (1 ADS = 10 shares). Estimated fair value in US$ isbased on a conversion of the recent exchange rate at 1US$=¥83.5 Based on a per share dividend of ¥6. This is based on an interim dividend of ¥3 yen paid in 2010 (excluding the ¥2 of “commemorative dividends” paid per sharefor Hitachi’s centennial anniversary) and yearend dividend guidance of ¥3 (based on Hitachi’s announcement affirming the previous yearend dividend guidancefollowing the Japan earthquake in March 2011).6 Adjusted tangible book is based on reported shareholders’ equity of ¥1,450 billion at yearend 2010 less goodwill/intangibles of ~¥510 billion plus ¥100 billion ofconvertible bonds due 2014 (accounted for in the diluted share count).Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.HITACHI – MANAGEMENT TARGETS FOR FY2012Source: Company presentation dated May 2010.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 48 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsHITACHI – GLOBAL GROWTH STRATEGYHITACHI – OUTLOOK FOR CAPEX AND OTHER INVESTMENT SPENDINGSource: Company presentation dated May 2010.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 49 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKonami (Tokyo: 9766, NYSE: KNM) Technology: Software & Programming Minato-ku, TK, Japan, 81-3-522-0573 www.konami.com Trading Data Consensus EPS Estimates Valuation Price: $18.90 (as of 4/21/11) Month # of P/E FYE 3/31/10 16x 52-week range: $15.14 - $22.47 Latest Ago Ests P/E FYE 3/31/11 15x Market value: $2.7 billion This quarter n/a n/a n/a P/E FYE 3/30/12 12x Enterprise value: $2.6 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 144.2 million FYE 3/31/11 1.27 1.27 1 EV/ LTM revenue 0.8x Ownership Data FYE 3/30/12 1.53 1.53 1 EV/ LTM EBIT 12x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.8x Insider buys (last six months): 0 LT growth 16.2% 16.2% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 8% Institutional ownership: 0% 8/5/10 n/a n/a LTM pre-tax ROC 19% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 3,286 3,133 3,151 3,369 3,574 3,723 3,151 3,172 926 872 Gross profit 1,133 965 930 1,043 1,108 1,167 918 815 328 246 Operating income 489 338 30 338 407 329 224 221 150 102 Net income 242 126 277 195 221 131 160 148 101 65 Diluted EPS 2.01 1.05 2.11 1.42 1.61 0.95 1.20 1.13 0.76 0.49 Shares out (avg) 120 120 131 137 137 137 133 133 133 133 Cash from operations 413 334 287 383 370 362 172 330 128 138 Capex 106 190 174 112 144 103 76 112 22 36 Free cash flow 307 144 113 271 226 260 96 217 106 102 Cash & investments 1,044 1,077 826 689 627 644 610 625 527 625 Total current assets 1,836 1,946 1,735 1,662 1,684 1,643 1,617 1,754 1,673 1,754 Intangible assets 558 563 729 737 722 695 687 685 693 685 Total assets 3,539 3,658 3,637 3,662 3,837 3,626 3,584 3,689 3,642 3,689 Short-term debt 66 304 306 277 98 44 29 82 32 82 Total current liabilities 875 1,200 976 991 903 750 643 779 723 779 Long-term debt 820 634 428 291 428 454 479 432 481 432 Total liabilities 2,312 2,385 1,668 1,562 1,640 1,479 1,367 1,462 1,459 1,462 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 1,227 1,272 1,969 2,099 2,197 2,147 2,217 2,226 2,183 2,226 EBIT/capital employed 90% 63% 5% 41% 42% 32% 21% 19% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 50 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Gaming company Konami operates in four segments: YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10Digital Entertainment (54% of CY10 revenue; ¥18 billion of  revenue 1% 7% 6% 4% -15% -1%CY10 EBIT): develops and distributes computer and video  employees (end) 13% 1% 6% 3% 1% n/agame software (50+% of segment revenue), video games for  assets (end) -1% 1% 5% -% -1% 1%amusement arcade machines, card games, and online games. Revenue (¥bn) 262 280 297 310 262 188 % of revenue by segment:Health & Fitness (33%; -¥2 billion): entered the fitness club Digital entertainment 62% 59% 60% 60% 54% 52%business in 2001; operates 200+ own clubs (mostly leased) Health & fitness 31% 32% 29% 29% 33% 34%and ~115 clubs on an outsourced basis. ~10% of revenue Gaming & system 4% 6% 6% 6% 8% 8% Other/eliminations 3% 4% 5% 5% 6% 6%derives from the manufacture and supply of fitness equipment. Revenue growth by selected segment:Gaming & System (8%; ¥5 billion): Develops and services Digital entertainment 1% 1% 8% 5% -24% -3%casino machines and systems, mostly for the U.S. market. Health & fitness 3% 9% -2% 4% -5% 1% EBIT margin by selected segment:Other (6%; -¥3 billion): includes corporate/other activities. Digital entertainment 21% 18% 20% 22% 15% 13% Health & fitness -21% 9% 6% -9% -2% 2%INVESTMENT HIGHLIGHTS Gaming & system 1% 13% 15% 19% 23% 26% Total EBIT margin2 1% 10% 11% 9% 7% 9%  One of the largest global publishers of video Japan as % of sales3 74% 74% 74% 72% 76% 75% game software for gaming consoles such as Sony Selected items as % of revenue: PlayStation, Nintendo Wii, and Microsoft Xbox. Gross profit 30% 31% 31% 31% 29% 27% Computer and video game software, which represents EBIT – adjusted4 8% 10% 11% 12% 8% 9% Net income 9% 6% 6% 4% 5% 5% ~30% of total revenue, is a key earnings contributor. Net cash from ops 9% 11% 10% 10% 5% 9%  Valuable content franchise as Konami produces D&A 5% 4% 4% 4% 5% 5% its own games, which can then be monetized across Capex 6% 3% 4% 3% 2% 4% various channels. DanceDanceRevolution, for Employees (end) (k)5 5.1 5.2 5.5 5.6 5.7 n/a Return on tang. equity 28% 15% 16% 9% 11% 10%6 example, was first sold as an arcade game, then as a Tangible equity/assets 32% 45% 47% 48% 51% 51% home title, and, most recently, as an iPhone game.  shares out (end) 12% 0% 0% -7% 0% 0%  Valuation ignores the earning power of the games 1 2 Based on U.S. GAAP. TBV=tangible book value. Includes corporate costs and EBIT of “other/eliminations” segment. business and value of non-core fitness operations, 3 Based on where the company sold products or rendered services. 4 which contribute a third of revenue and little EBIT. 5 Excludes restructuring and impairment charges. EV-to-revenue is <0.8x and EV-to-prior peak EBIT On full-time basis (excl. ~7,400 part-time staff at 3/2010). 6 Annualized. is <6x. The FCF yield is 8% on 5-year average FCF.  Non-core fitness segment is the largest fitness COMPARABLE PUBLIC COMPANY ANALYSIS P/ This Next club operator in Japan with ~20% market share. MV EV EV / Tang. FY FY  Owns gaming licenses in the U.S. and other ($mn) ($mn) Rev. Book P/E P/E jurisdictions tied to the supply of gaming machines. ATVI 13,030 9,520 2.1x 5.4x 16x 13x  Chairman and CEO Kagemasa Kozuki (70) ERTS 6,820 4,850 1.4x 6.3x 30x 24x founded Konami as an arcade games producer in TTWO 1,330 1,140 1.0x 4.6x 18x 14x 1969. Kozuki owns 28% of the company. THQI 290 280 .4x 2.5x n/m 14x  ¥9 billion of net cash at yearend 2010. KNM 2,730 2,620 .8x 1.8x 15x 12xINVESTMENT RISKS & CONCERNS MAJOR HOLDERS (notable non-trustees only)  Emergence of the Internet as a medium for Founder and CEO Kozuki 28% | Other insiders <1% | MUFJ creative collaboration and games distribution 4% | AllianceBernstein <1% | Jane Street <1% | DFA <1% threatens the company’s competitive advantages.  Gaming software business depends on “hit” RATINGS products and is vulnerable to new entrants such VALUE Intrinsic value materially higher than market value?  as online-based gaming providers. Konami’s content DOWNSIDE PROTECTION Low risk of permanent loss?  ownership and online gaming efforts mitigate this. MANAGEMENT Capable and properly incentivized?   Losses in non-core fitness club operations destroy FINANCIAL STRENGTH Solid balance sheet?  value and divert management attention. A MOAT Able to sustain high returns on invested capital?  turnaround and subsequent sale should be pursued. EARNINGS MOMENTUM Fundamentals improving?   Sony devices drive 50+% of video game unit sales. MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEUnder the direction of CEO and founder Kagemasa Kozuki, Konami has expanded from an arcade games producer in the 1970sto one of the world’s major gaming companies, with a strong franchise in video game software publishing. Despite conglomeratetendencies, including a loss-making foray into fitness clubs, Kozuki remains incentivized to create long-term value as thelargest shareholder with 28%. Recent valuation is attractive relative to the earning power inherent in Konami’s businesses.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 51 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKONAMI – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive Sum-of-the-parts Sum-of-the-parts Sum-of-the-parts Valuation methodology (see detailed (see detailed (see detailed assumptions below) assumptions below) assumptions below) Digital Entertainment (video game development): 1 Normalized revenue ¥125 ¥150 ¥175 2 Normalized EBIT margin 10.0% 15.0% 20.0% Estimated normalized EBIT ¥13 ¥23 ¥35 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value of Digital Entertainment (A) ¥125 ¥225 ¥350 implied EV-to-trailing segment revenue 0.9x 1.6x 2.5x implied EV-to-trailing segment EBIT 6.9x 12.5x 19.4x Health & Fitness (operation of fitness clubs): 3 Normalized revenue ¥85 ¥85 ¥85 4 Normalized EBIT margin 5.0% 7.5% 10.0% Estimated normalized EBIT ¥4 ¥6 ¥9 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value of Health & Fitness (B) ¥43 ¥64 ¥85 implied EV-to-trailing segment revenue 0.5x 0.7x 1.0x implied EV-to-prior peak segment EBIT (year ended March ‘07) 5.7x 8.5x 11.3x Gaming & System (manufacture of casino gaming machines): 5 Normalized revenue ¥15 ¥20 ¥25 6 Normalized EBIT margin 15.0% 20.0% 25.0% Estimated normalized EBIT ¥2 ¥4 ¥6 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value of Gaming & System (C) ¥23 ¥40 ¥63 implied EV-to-trailing segment revenue 1.1x 2.0x 3.2x implied EV-to-trailing segment EBIT 4.9x 8.7x 13.6x Other/Corporate (other businesses and corporate activities): Trailing segment EBIT (¥3) (¥3) (¥3) Fair value multiple 10.0x 10.0x 10.0x Estimated value drag of Other/Corporate (D) (¥30) (¥30) (¥30) Estimated total enterprise value = (A) + (B) + (C) + (D) ¥160 ¥299 ¥468 7 Plus: Net cash 9 9 9 7 Minus: Net post-retirement liability (3) (3) (3) 7 Minus: Non-controlling interest (5) (5) (5) 8 ¥161 billion ¥300 billion ¥469 billion Estimated fair value of the equity of Konami (¥ in billions) ¥1,210 per share ¥2,250 per share ¥3,510 per share 8 $1.9 billion $3.6 billion $5.6 billion Estimated fair value of the equity of Konami (US$ in billions) $14.60 per ADS $27.10 per ADS $42.30 per ADS Implied trailing FCF yield 11% 6% 4% Implied FCF yield based on average FCF during FY06-10 10% 5% 3% 9 Implied dividend yield 3% 1% 1% Implied EV-to-trailing revenue 0.6x 1.1x 1.8x Implied EV-to-trailing EBITDA 5.2x 9.8x 15.3x Implied EV-to-trailing EBIT 8.8x 16.5x 25.8x Implied fair value of the equity to tangible book 1.3x 2.3x 3.7x1 Calendar year 2010 revenue is ¥140 billion. Revenue averaged ¥167 billion during fiscal years 2006-10 (ended March 2010).2 Calendar year 2010 EBIT margin is 13%. EBIT margin averaged 19% during fiscal years 2006-10.3 Calendar year 2010 revenue is ¥86 billion. Revenue averaged ¥86 billion during fiscal years 2006-10.4 Calendar year 2010 EBIT margin is -2%. EBIT margin averaged -4% during fiscal years 2006-10, with a peak of 9% in FY07 and a trough of -21% in FY06.5 Calendar year 2010 revenue is ¥20 billion. Revenue averaged ¥17 billion during fiscal years 2006-10.6 Calendar year 2010 EBIT margin is 23%. EBIT margin averaged 14% during fiscal years 2006-10.7 Based on balance sheet values at yearend 2010.8 Based on 133 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.9 Based on dividend guidance of ¥32 per share for the fiscal year ended March 2011.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 52 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKONAMI – A CLOSER LOOK AT THE DIGITAL ENTERTAINMENT BUSINESSOperating income by segment:Recent Digital Entertainment segment performance:Video game unit sales:Source: Company presentation dated February 3, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 53 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKubota (Tokyo: 6326, NYSE: KUB) Capital Goods: Construction & Agricultural Machinery Osaka-shi, OS, Japan, 81-6-664-2622 www.kubota.co.jp Trading Data Consensus EPS Estimates Valuation Price: $46.89 (as of 4/21/11) Month # of P/E FYE 3/31/10 23x 52-week range: $37.35 - $55.50 Latest Ago Ests P/E FYE 3/31/11 18x Market value: $12.1 billion This quarter n/a n/a n/a P/E FYE 3/30/12 16x Enterprise value: $15.4 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 258.1 million FYE 3/31/11 2.60 2.60 1 EV/ LTM revenue 1.3x Ownership Data FYE 3/30/12 2.93 2.93 1 EV/ LTM EBIT 15x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.6x Insider buys (last six months): 0 LT growth 17.1% 17.1% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 7% Institutional ownership: 2% 11/2/10 n/a n/a LTM pre-tax ROC 13% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 11,176 11,817 12,809 13,550 13,876 13,310 11,185 11,458 2,745 2,776 Gross profit 2,742 3,244 3,747 3,999 3,972 3,573 2,996 3,130 730 793 Operating income 259 1,038 1,450 1,560 1,564 1,132 836 1,038 226 290 Net income 141 1,417 974 919 818 578 509 666 140 221 Diluted EPS 0.55 4.73 3.71 3.61 3.16 2.26 2.00 2.66 0.55 0.87 Shares out (avg) 268 265 261 259 258 255 254 254 254 254 Cash from operations 1,317 804 1,056 1,164 1,083 (271) 1,431 1,305 427 165 Capex 318 250 309 412 430 396 320 313 97 76 Free cash flow 999 554 747 752 654 (667) 1,111 992 330 89 Cash & investments 1,012 896 1,104 993 1,067 835 1,339 1,276 1,165 1,276 Total current assets 7,385 8,117 9,113 9,820 9,887 9,811 9,865 9,756 9,810 9,756 Intangible assets 0 0 0 0 0 0 0 0 0 0 Total assets 13,512 14,339 16,891 18,058 17,598 16,656 16,935 16,764 16,749 16,764 Short-term debt 1,889 2,648 2,594 2,768 2,407 2,511 2,092 2,159 2,352 2,159 Total current liabilities 4,984 6,058 6,207 6,931 6,243 5,942 5,291 5,574 5,471 5,574 Long-term debt 1,741 1,412 1,827 1,804 2,211 2,507 2,925 2,388 2,770 2,388 Total liabilities 8,811 8,558 9,602 10,130 9,809 9,705 9,406 9,122 9,509 9,122 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 4,700 5,781 7,289 7,928 7,789 6,950 7,528 7,642 7,240 7,642 EBIT/capital employed 4% 17% 21% 21% 20% 14% 10% 13% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $70 $60 $50 $40 $30 $20 $10 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 54 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Machinery manufacturer Kubota has two key segments: YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10Farm & Industrial Machinery (69% of CY10 revenue):  revenue 7% 6% 2% -4% -16% 1%manufactures agricultural machinery and engines (~90% of  employees (end) 1% 3% 3% 3% -1% n/asegment revenue) as well as construction machinery such as  assets (end) 18% 7% -3% -5% 2% 0%excavators. 60+% of segment revenue is from outside Japan.  TBV/share (end 2% 9% -1% -10% 8% 6% Revenue (¥tn)2 1.1 1.1 1.2 1.1 0.9 0.7Water & Environment Systems (21%): manufactures pipes % of revenue by selected se ment:(~65% of segment revenue) such as ductile iron pipes for Farm & ind. machinery 63% 66% 69% 68% 66% 72%water supply and sewage systems. ~90% of segment revenue Other3 37% 34% 31% 32% 34% 28%is from Japan (mainly from government customers). Revenue growth by selected segment: Farm & ind. machinery 16% 11% 6% -5% -18% 7% Other -5% -3% -5% -2% -11% -12%INVESTMENT HIGHLIGHTS EBIT margin by selected segment:  One of the largest manufacturers of agricultural Farm & ind. machinery 16% 17% 17% 14% 10% 15% Other 7% 6% 5% 4% 8% 5% machinery worldwide. Farm machinery and engines Corporate -1% -2% -1% -1% -2% -2% represent ~80% of EBIT (before corporate costs). Total EBIT margin 11% 12% 12% 9% 7% 10%  Diesel engine know-how provides competitive % of revenue by destination: advantages, and is likely a key driver of 15+% Japan 62% 57% 53% 53% 58% 50% North America 27% 29% 29% 25% 19% 20% segment EBIT margins. Engines are used in own Asia 6% 7% 11% 15% 18% machinery as well as sold to other manufacturers. 11% Other 8% 12% 11% 8% 12%  Investments and finance receivables represent Revenue growth by selected destination: ~50% of market value. Monetizing and returning Japan 0% -3% -5% -3% -7% -4% these non-core assets to shareholders would leave North America 23% 14% 2% -16% -38% 5% Asia n/a n/a 12% 54% 11% 10% net debt/trailing EBITDA at a still reasonable ~2.5x. EBIT margin by selected destination (before corporate costs):  Consistent dividends and some share buybacks, Japan 16% 15% 15% 9% 10% n/a as well as improving governance under Chairman North America 9% 11% 11% 10% 8% n/a Asia n/a 13% 12% 12% 11% n/a and CEO Yasuo Masumoto (64). Selected items as % of revenue:  Expanding profitably into non-Japanese markets Gross profit 29% 30% 29% 27% 27% 28% (~50% of revenue), including the U.S. and Asia. EBIT 11% 12% 12% 9% 7% 10% Net income 8% 7% 6% 4% 5% 6%INVESTMENT RISKS & CONCERNS Net cash from ops 8% 9% 8% -2% 13% 10% D&A 2% 2% 3% 3% 3% 3%  Shares appear fairly valued at 1.5x tangible book Capex4 2% 3% 3% 3% 3% 3% and ~17x calendar year 2010 net income of ~¥55 TBV/share (end) (¥) 467 511 506 455 493 500 billion (~15% below FY06-10 average net income). Return on tang. equity 15% 12% 10% 8% 7% 9%5 Tangible equity/assets 42% 44% 44% 43% 43% 44%  Japanese revenue (~50% of total) has declined  shares out (end) 0% -1% -1% -1% 0% 0% every year since ‘06. If this does not reverse, growth 1 Based on U.S. GAAP. TBV=tangible book value. 2 will depend on a continued boom in China and other Includes finance income from owned finance receivables. Net finance income of ¥11 billion represented ~5% of gross profit and ~15% of EBIT in FY10. Net emerging markets. A stronger yen is a negative. finance receivables of ~¥300 billion represent ~20% of assets as of 12/31/2010.  Financing business ties up capital and is a source 3 4 Includes 1) Water & environment systems; 2) Social infrastructure; and 3) Other. of credit risk. Net finance receivables of ~¥300 Excludes net changes in owned finance receivables. 5 Annualized. billion, which arise due to Kubota’s financing of its equipment sales, represent 30+% of market value. MAJOR HOLDERS (notable non-trustees only) Insiders <1% | MUFJ 8% | Nippon Life 6% | Meiji YasudaCOMPARABLE PUBLIC COMPANY ANALYSIS Life 5% | Sumitomo Mitsui 4% | Mizuho 3% P/ This Next MV EV EV / Tang. FY FY RATINGS ($mn) ($mn) Rev. Book P/E P/E VALUE Intrinsic value materially higher than market value?  CAT 70,540 95,370 2.2x 9.5x 18x 13x DOWNSIDE PROTECTION Low risk of permanent loss?  DE 40,100 60,830 2.2x 7.4x 15x 13x MANAGEMENT Capable and properly incentivized?  KMTUY 33,860 39,210 1.9x 3.8x 18x 14x FINANCIAL STRENGTH Solid balance sheet?  CNH 11,400 22,730 1.4x 2.5x n/a n/a MOAT Able to sustain high returns on invested capital?  KUB 12,100 15,370 1.3x 1.6x 18x 16x EARNINGS MOMENTUM Fundamentals improving?  MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEAgricultural machinery producer Kubota has a track record of decent profitability and return of capital to shareholders. LikeCaterpillar and Deere, the company is benefiting from booming demand in China and the rest of Asia. While the shares are notas expensive as those of its U.S.-based counterparts, they are not a bargain trading at a trailing P/E of 17x and 1.5x tangiblebook. The margin of safety is insufficient to compensate for cyclical end-markets as well as credit risk in the financing business.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 55 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKUBOTA – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 10x estimated ~¥70 10x estimated ~¥100 10x estimated ~¥130 billion of normalized billion of normalized billion of normalized EBIT of the industrial EBIT of the industrial EBIT of the industrial business plus/minus business plus/minus business plus/minus Valuation methodology other assets/liabilities other assets/liabilities other assets/liabilities (including (including (including assets/liabilities of the assets/liabilities of the assets/liabilities of the financing business) financing business) financing business) Industrial business: 2 Normalized revenue ¥900 ¥1,000 ¥1,100 3 Normalized EBIT margin 8.0% 10.0% 12.0% Normalized EBIT ¥72 ¥100 ¥132 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value of industrial business ¥720 ¥1,000 ¥1,320 4 Other assets/liabilities: Plus: Cash 106 106 106 5 Plus: Investments and finance receivables 426 426 426 6 Plus: Excess real estate 0 0 0 Minus: Debt (365) (365) (365) Minus: Net post-retirement liability (34) (34) (34) Minus: Non-controlling interest (48) (48) (48) 7 ¥805 billion ¥1,085 billion ¥1,405 billion Estimated fair value of the equity of Kubota (¥ in billions) ¥630 per share ¥850 per share ¥1,100 per share 7 $9.5 billion $12.8 billion $16.6 billion Estimated fair value of the equity of Kubota (US$ in billions) $37 per ADS $50 per ADS $65 per ADS Implied fair value of the equity to tangible book 1.3x 1.7x 2.2x Implied trailing FCF yield 10% 8% 6% Implied FCF yield based on FY06-10 average FCF 5% 4% 3% 8 Implied dividend yield 2% 2% 1%1 While Kubota’s core business is the manufacture and sale of farm machinery, the company also provides retail finance and finance leases to customers “in orderto facilitate machinery sales.” Our valuation accounts for this by valuing the industrial business separately. We then add owned finance receivables and subtractthe related debt to/from our EV estimate for the industrial business. Although our approach is quite crude, it highlights the different sources of value within Kubota.2 Average revenue during FY06-10 is ¥1,077 billion. Management’s revenue guidance for the year ended March 2011 is ¥960 billion (up 3% y-y). Finance incomefrom owned finance receivables (~¥20 billion in FY10) is included in these revenue figures, but excluded in our normalized revenue estimate.3 Average EBIT margin during FY06-10 is ~10%. Management’s EBIT guidance for the year ended March 2011 is ¥90 billion (up ~30% y-y), which implies an EBITmargin of ~9%. As our valuation excludes the contribution from the financing business, our normalized EBIT margin estimates are not directly comparable. Netfinance income related to owned finance receivables (included in gross profit) was ~¥11 billion in FY10, which represents ~1% of FY10 revenue.4 Based on balance sheet values as of December 31, 2010.5 Includes an estimated ~¥125 billion of investments (primarily in available-for-sale equity securities). The remainder is represented by net finance receivables ofthe company’s financing business.6 While we do not include any value for excess real estate, Kubota may have significant real estate that could be monetized. The company owns ~2.5 millionsquare meters of land (~300,000 square meters of floor space) in Japan, “used for the head office, branches, business offices and research facilities.” This is inaddition to 4+ million square meters of land (~1.2 million square meters of floor space) underlying the company’s manufacturing facilities, primarily in Japan.7 Based on 1,272 million common shares outstanding (1 ADS = 5 shares). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥85.8 Based on a per share dividend of ¥14 as forecast by management for the fiscal year ended March 2011.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 56 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKUBOTA – A LOOK AT RETURN OF CAPITAL TO SHAREHOLDERS (¥ in billions) YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10 Cash dividends 11.8 14.3 16.8 19.2 17.8 15.3 Purchases of treasury stock 14.9 8.5 8.0 5.3 0.2 0.0 Total return of capital 26.7 22.8 24.8 24.5 18.0 15.3 Cumulative return of capital (FY2006-11) 132.1 as a % of recent market value 14% 1 recent dividend yield 2% 2 Cash dividends per share (¥) 9 11 13 15 14 12  cash dividends per share 50% 22% 18% 15% -7% -14%1 Based on management guidance for a dividend of ¥14 per share for the fiscal year ended March 31, 2011.2 Based on dividends paid during the stated fiscal year.Source: Company data, The Manual of Ideas analysis.KUBOTA – A LOOK AT THE FINANCING BUSINESS (¥ in billions) FYE March 31 (at period-end) 2007 2008 2009 2010 Retail receivables 254 274 219 212 Finance leases 18 40 59 107 Total finance receivables - gross 272 313 278 319 Less: Unearned income 3 7 10 16 Less: Allowance for credit losses 1 1 2 2 Total finance receivables - net 268 305 267 301 Y-Y change in gross finance receivables 272 42 -35 40 as a % of revenue 24% 4% -3% 4% Period-end net finance receivables as a % of: ...assets 18% 21% 19% 21% ...shareholders’ equity 41% 47% 46% 48% 1 Related finance income and expenses (for the fiscal year): Finance income (included in revenue) 22 28 23 21 Less: Finance expenses (included in cost of revenue) 12 15 12 10 Net finance income (included in gross profit) 10 12 12 11 as a % of gross profit 3% 4% 4% 5% as a % of EBIT 8% 9% 11% 16%1 Excludes interest income and expenses related to cash, investments and other debt.Source: Company data, The Manual of Ideas analysis.KUBOTA – MANAGEMENT GUIDANCE FOR THE JUST-COMPLETED FISCAL YEARSource: Company press release dated February 4, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 57 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKyocera (Tokyo: 6971, NYSE: KYO) Technology: Electronic Instruments & Controls Fushimi-ku,, KY, Japan, 81-75-604-3500 www.kyocera.co.jp Trading Data Consensus EPS Estimates Valuation Price: $102.94 (as of 4/21/11) Month # of P/E FYE 3/31/10 39x 52-week range: $79.08 - $108.99 Latest Ago Ests P/E FYE 3/31/11 14x Market value: $19.6 billion This quarter n/a n/a n/a P/E FYE 3/30/12 16x Enterprise value: $14.2 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 190.5 million FYE 3/31/11 7.53 7.93 1 EV/ LTM revenue 0.9x Ownership Data FYE 3/30/12 6.44 8.44 1 EV/ LTM EBIT 8x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.3x Insider buys (last six months): 0 LT growth 50.5% 63.7% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 12% Institutional ownership: 1% 10/28/10 n/a n/a LTM pre-tax ROC 28% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 13,711 14,190 14,104 15,431 15,509 13,564 12,906 15,420 3,426 3,840 Gross profit 3,372 3,913 4,068 4,608 4,888 3,509 3,435 4,503 984 1,145 Operating income 1,297 1,212 1,156 1,624 1,829 436 765 1,777 350 457 Net income 818 552 838 1,280 1,289 355 482 1,386 117 382 Diluted EPS 4.38 2.94 4.23 6.46 6.80 1.89 2.63 7.68 0.64 2.08 Shares out (avg) 187 187 188 188 189 188 184 184 184 184 Cash from operations 752 1,749 2,056 1,799 2,367 1,175 1,654 1,707 14 (110) Capex 708 772 1,226 877 941 1,024 485 799 93 225 Free cash flow 45 977 830 922 1,426 151 1,168 908 (78) (335) Cash & investments 4,387 4,153 4,672 5,958 7,152 5,665 6,172 5,817 5,652 5,817 Total current assets 11,222 10,764 11,065 12,577 13,439 11,445 12,433 12,848 11,884 12,848 Intangible assets 504 528 752 692 837 1,482 1,409 1,276 1,440 1,276 Total assets 21,570 20,979 23,214 25,605 23,758 21,319 22,219 22,365 21,531 22,365 Short-term debt 1,554 1,329 1,289 254 129 299 211 160 217 160 Total current liabilities 4,527 4,139 4,551 3,680 3,626 2,860 3,477 3,569 3,101 3,569 Long-term debt 849 403 401 88 100 343 349 282 374 282 Total liabilities 7,704 6,859 7,721 7,402 6,317 5,410 6,051 5,912 5,652 5,912 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 13,866 14,120 15,493 18,203 17,441 15,909 16,168 16,453 15,879 16,453 EBIT/capital employed 19% 18% 17% 25% 29% 7% 12% 28% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $120 $100 $80 $60 $40 $20 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 58 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Kyocera produces components and equipment used mainly FYE March 31 2006 2007 2008 2009 2010 2011for IT and telecommunications. It has three main segments:  revenue 0% 9% 1% -13% -5% 18%  employees (end) 5% 3% 5% -10% 7% 4%Components (~55% of revenue; 17% EBIT margin):*  assets (end) 11% 10% -7% -10% 4% 5%includes the original business of manufacturing electronic  TBV/share (end) 8% 18% -6% -10% 2% 7%device components such as capacitors, ceramic packages and TBV/share (end) (¥) 6,532 7,723 7,293 6,540 6,692 7,157sapphire substrates. Over time, Kyocera has expanded into Revenue (¥bn) 1,174 1,284 1,290 1,129 1,074 1,267 % of revenue by segment:the production of applied ceramic products, including cutting Electronic devices 22% 22% 23% 20% 19% 19%tools, medical applications, jewelry and solar energy products. Applied ceramic 10% 10% 12% 13% 15% 16%Equipment (~35% of revenue; 6% EBIT margin): built Semiconductor parts 12% 12% 12% 12% 13% 14% Fine ceramic parts 6% 6% 6% 5% 5% 6%largely through M&A, this segment provides mobile phones Total components 50% 51% 53% 51% 51% 55%and telecommunication equipment such as PHS handsets and Information equipment 21% 21% 21% 20% 22% 19%base stations (notable acquisitions include the CDMA mobile Telco equipment 20% 20% 17% 19% 18% 18%phone business from QUALCOMM in 2000 and the mobile Total equipment 41% 40% 39% 40% 39% 37% Other 11% 11% 11% 11% 12% 11%phone business of Sanyo Electric in 2008). The segment is Adjustments -2% -2% -2% -2% -2% -2%also a provider of copiers, Ecosys printers and other office Revenue growth by selected segment:information equipment through Kyocera Mita Corporation. Total components 4% 12% 4% -15% -5% 26% Total equipment -3% 9% -4% -10% -6% 10%Other (~10% of revenue; 7% EBIT margin): includes Adj. EBIT margin by segment:2telecom engineering, management consulting, chemical Electronic devices 10% 16% 12% -2% 7% 17%materials, electrical insulators, real estate and other businesses. Applied ceramic 19% 17% 22% 18% 13% 15% Semiconductor parts 13% 15% 13% 6% 12% 21% Fine ceramic parts 16% 19% 14% 0% -1% 16%INVESTMENT HIGHLIGHTS Total components 13% 16% 15% 6% 9% 17%  Component and equipment provider to the IT Information equipment 11% 13% 14% 6% 10% 11% and telecommunications industries with strong Telco equipment -1% 0% 3% -8% -8% 1% Total equipment 5% 7% 9% -1% 2% 6% expertise in ceramic materials and applications. Other 2% 5% 7% 11% 5% 7%  Commodity businesses mask more valuable Corporate -1% -1% 0% 0% 0% 0% segments such as applied ceramic parts (15+% of Adj. EBIT margin 8% 11% 12% 4% 6% 12% revenue). This business, which includes solar cell % of revenue by geographic destination: Japan 40% 39% 39% 42% 44% 45% products, medical implants, and cutting tools, is Non-Japan 60% 61% 61% 58% 56% 55% higher-margin, faster-growing and less cyclical. Selected items as % of revenue:  Implied EV-to trailing EBIT is <5x despite Gross profit 29% 30% 32% 26% 27% 30% management projecting 8% y-y EBIT growth to R&D 5% 5% 5% 6% 5% 4% Special items3 1% 0% 0% -1% 0% 0% ¥168 billion in the year ended March 2012. Net income 6% 8% 8% 3% 4% 10% Revenue guidance is ¥1,360 billion (up 7% y-y). Net cash from ops 15% 12% 15% 9% 13% 9%  Net cash and investments of ¥870 billion represent D&A 6% 6% 7% 9% 7% 6% ~55% of market cap. Price to tangible book is 1.2x. Capex4 9% 6% 6% 8% 4% 6% Return on tang. equity 6% 8% 8% 2% 3% 10% Tangible equity/assets 66% 68% 71% 73% 72% 71%INVESTMENT RISKS & CONCERNS  shares out (end) 0% 0% 0% -3% 0% 0%  Recent record profitability may not be sustained 1 2 Based on U.S. GAAP. TBV=tangible book value. Excludes special items and equity in earnings/loss of affiliated companies. due to cyclical and commoditization risks. EV-to- 3 Includes gains/losses on foreign currency and securities’ sales, as well as average five-year EBIT is 7-8x, which appears impairments of securities, and other items. 4 Includes purchases of intangibles. appropriate for most Kyocera’s businesses.  Net cash and investments are unlikely to be RATINGS returned to shareholders. Roughly half of the VALUE Intrinsic value materially higher than market value?  ~¥640 billion of investments is represented by a DOWNSIDE PROTECTION Low risk of permanent loss?  13% equity stake in KDDI, a major telco provider MANAGEMENT Capable and properly incentivized?  and key customer accounting for ~10% of revenue. FINANCIAL STRENGTH Solid balance sheet?  MOAT Able to sustain high returns on invested capital? MAJOR HOLDERS (notable non-trustees only) EARNINGS MOMENTUM Fundamentals improving? Insiders <1% | MUFJ 7% | Bank of Kyoto 4% | Kazuo MACRO Poised to benefit from economic and secular trends?  *Inamori (founder) 4% | Scout <1% | RenTech <1% Financials are based on the year ended March 2011.THE BOTTOM LINEKyocera’s profitability has improved to record levels as a result of higher demand from customers including electronicequipment manufacturers and telecom operators. While this makes the shares look cheap on recent financials, the valuation isnot compelling using more normalized profitability. We would be more favorable if management were to use its strongbalance sheet to return capital to shareholders. As this appears unlikely, the risk-reward may be lower than it appears.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 59 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKYOCERA – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 6x estimated ¥120 8x estimated ¥120 10x estimated ¥120 billion of normalized billion of normalized billion of normalized Valuation methodology EBIT (approximates EBIT (approximates EBIT (approximates FY06-11 average FY06-11 average FY06-11 average EBIT) EBIT) EBIT) 1 Normalized revenue ¥1,200 ¥1,200 ¥1,200 2 Normalized EBIT margin 10.0% 10.0% 10.0% 3 Normalized EBIT ¥120 ¥120 ¥120 Fair value multiple 6.0x 8.0x 10.0x Estimated enterprise value ¥720 ¥960 ¥1,200 4 Plus: Net cash 230 230 230 4 Plus: Investments 638 638 638 4 Minus: Net post-retirement liability (29) (29) (29) 4 Minus: Non-controlling interest (63) (63) (63) 5 ¥1,500 billion ¥1,740 billion ¥1,980 billion Estimated fair value of the equity of Kyocera (¥ in billions) ¥8,170 per share ¥9,480 per share ¥10,790 per share 5 $18.1 billion $21.0 billion $23.9 billion Estimated fair value of the equity of Kyocera (US$ in billions) $99 per ADS $114 per ADS $130 per ADS Implied fair value of the equity to tangible book 1.1x 1.3x 1.5x 6 Implied forward earnings yield 7% 6% 6% 6 Implied EV-to-forward revenue 0.5x 0.7x 0.9x 6 Implied EV-to-forward EBIT 4.3x 5.7x 7.1x Implied EV-to-EBIT based on FY06-11 average EBIT 6.7x 8.9x 11.1x Implied FCF yield based on FY06-11 average FCF 5% 4% 4% Implied trailing FCF yield 3% 3% 2% 7 Implied dividend yield 2% 1% 1%1 Average revenue during FYE March 2006-11 is ~¥1,200 billion with a peak of ~¥1,300 billion in FY08 and a trough of ~¥1,050 billion in FY09. Note that thisapproximates revenue for the year ended March 2011 and is ~13% below management guidance of ¥1,360 billion for the year ended March 2012 (up 7% y-y).2 Average EBIT margin during FY2006-11 is ~9%, with a peak of 12% in FY08 and a trough of 4% in FY09. Management’s EBIT guidance for the fiscal year endedMarch 2012 is ¥168 billion (up 8% y-y), which implies an EBIT margin of 12%.3 Our “normalized” EBIT of ¥120 billion approximates the average EBIT during FY06-11, which we believe is representative of “through-the-cycle” earnings for thecompany. Note that our “normalized” EBIT figure is ~20% below trailing EBIT and ~30% below management’s EBIT guidance for the year ended March 2012.4 Based on balance sheet values as of March 31, 2011.5 Based on 184 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.6 Based on management guidance for the year ended March 2012.7 Based on management’s dividend guidance of ¥130 per share for the fiscal year ended March 2012 (flat y-y).Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.KYOCERA – MANAGEMENT GUIDANCE FOR THE YEAR ENDING MARCH 31, 2012“Kyocera expects that the Asian economy, led by China, will continue to grow and that the economies of Europe and theUnited States will maintain steady growth in the year ending March 31, 2012 (‘fiscal 2012’). However, Japanese economywill temporarily slow as a result of the Great East Japan Earthquake, and it requires some time until supply chain systemsincluding procurement of raw materials and components will be normalized. Consequently, Kyocera anticipates thatstagnated production in Japan may negatively affect the global economy from now on. In spite of a considerable uncertaintyregarding the financial forecast 2012, Kyocera will seize market demand and aim to expand the sales and profit in eachbusiness. At this point, Kyocera announces following full-year financial forecast for fiscal 2012.”Source: Consolidated Financial Results of Kyocera Corporation and its Subsidiaries for the Year Ended March 31, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 60 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsKYOCERA – SELECTED SEGMENT INFORMATIONSource: Consolidated Financial Results of Kyocera Corporation and its Subsidiaries for the Year Ended March 31, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 61 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsMitsubishi UFJ Financial (Tokyo: 8306, NYSE: MTU) Financial: Regional Banks Chiyoda-Ku, TK, Japan, 81-3-324-8111 www.mufg.jp Trading Data Consensus EPS Estimates Valuation Price: $4.52 (as of 4/21/11) Month # of P/E FYE 3/31/10 6x 52-week range: $4.36 - $5.68 Latest Ago Ests P/E FYE 3/31/11 10x Market value: $64.8 billion This quarter n/a n/a n/a P/E FYE 3/30/12 10x Shares out: 14,347.1 million Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Ownership Data FYE 3/31/11 0.47 0.47 1 P / tangible book 0.8x Insider ownership: 0% FYE 3/30/12 0.47 0.47 1 Latest EPS Surprise Insider buys (last six months): 0 FYE 3/30/13 n/a n/a n/a Report date: 7/30/10 Insider sales (last six months): 0 LT growth 11.7% 11.7% 1 Estimated EPS: n/a Institutional ownership: 2% Actual EPS: n/a Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 9/30/10 9/30/08 9/30/10 Interest income 16,791 16,991 29,887 46,244 51,571 46,009 32,578 31,691 23,691 15,251 Interest expense 5,037 5,546 10,417 18,730 24,648 18,889 9,146 21,602 10,471 4,039 Pretax income 13,851 8,410 3,807 10,074 (47) (20,685) 14,705 9,752 (7,877) 11,284 Net income 9,625 4,822 1,852 3,546 (6,578) (17,616) 9,898 4,190 (5,063) 6,845 Diluted EPS 1.48 0.74 0.22 0.35 (0.64) (1.63) 0.80 0.90 (0.49) 0.48 Shares out (avg) 6,350 6,510 8,121 10,053 10,306 10,821 12,324 12,777 10,438 14,133 Cash from ops 7,295 2,451 4,182 18,459 6,536 (11,411) 27,281 34,368 (33,055) (19,432) Cash 36,752 49,843 73,638 33,628 48,311 36,271 33,806 34,610 51,988 34,610 ST investments 235,668 235,544 311,544 354,774 495,907 531,374 519,123 585,899 545,206 585,899 LT investments 341,438 340,043 567,425 576,104 491,762 434,808 637,618 662,520 356,417 662,520 Fixed assets, net 6,851 6,722 13,860 13,552 12,705 12,323 11,753 11,489 12,471 11,489 Loans, other assets 600,529 644,286 1,193,215 1,184,245 1,234,788 1,251,868 1,142,983 1,095,217 1,257,691 1,095,217 Intangible assets 3,435 4,012 39,545 36,727 28,498 18,558 17,687 16,888 27,859 16,888 Total assets 1,224,672 1,280,450 2,199,226 2,199,031 2,311,970 2,285,201 2,362,969 2,406,623 2,251,632 2,406,623 Short-term debt 124,766 96,356 135,930 170,165 227,654 199,070 200,293 227,535 188,893 227,535 Long-term debt 66,842 70,644 164,033 169,943 161,503 156,756 167,256 158,942 161,140 158,942 Deposits, other liab. 987,655 1,061,804 1,785,083 1,735,707 1,822,546 1,855,742 1,890,703 1,916,279 1,810,131 1,916,279 Preferred stock 1,619 2,918 2,918 2,918 2,918 5,221 5,221 5,221 2,918 5,221 Common equity 43,790 48,728 111,261 120,298 97,349 68,412 99,496 98,646 88,549 98,646 Ten-Year Stock Price Performance and Trading Volume Dynamics $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 62 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Mitsubishi UFJ is one of the world’s largest banks. YTD2 FYE March 31 2007 2008 2009 2010 12/31/10  tangible BV/share (end) 10% -18% -32% 35% 3%INVESTMENT HIGHLIGHTS  assets (end) 0% 2% 1% 3% 1%  One of three Japanese “mega banks” next to  employees (end) -2% 0% 2% -1% n/a Sumitomo Mitsui (SMFG) and Mizuho (MFG).*  net interest income 41% -2% 1% -14% -9% The company was formed in 2005 via the merger of TBV/share (end) ¥651 ¥537 ¥362 ¥490 ¥507 Japan’s #2 bank, Mitsubishi Tokyo, and #4, UFJ. Assets (¥tn) 186.2 1 0.7 193.5 200.1 202.6 Selected items as % of total assets:  Valuable retail banking franchise, with customer Loans, net 51% 51% 5% 45% 42% deposits representing two thirds of total assets Other assets 49% 49% 49% 55% 58% (~85% of deposits are Japan-based; ~55% are from Customer deposits 68% 68% 66% 68% 64% individuals). The large retail and commercial Other liabilities 27% 28% 31% 28% 32% Common equity 5% 4% 3% 4% 4% banking operations, relative to investment banking, Revenue (¥tn)3 4.3 4.1 2.5 4.4 3.5 potentially make the franchise more valuable. % of revenue by type:  ~25% discount to tangible book may be too high Net interest income 54% 56% 93% 45% 43% relative to ROE prospects and risk profile. ROE, Non-interest income 46% 44% 7% 55% 57% % of revenue by major segment (based on JGAAP): which averaged ~10% over the last two years, may Retail banking 33% 37% 40% 40% n/a be sustained at that level in the future (implies a Corporate banking 53% 50% 50% 43% n/a recent P/E of 6x). While tangible equity is <4% of Trust assets 5% 5% 5% 4% n/a assets, a focus on traditional banking (versus trading) Global markets 8% 8% 12% 15% n/a Adj. pre-provision income margin by selected segment (based on JGAAP):4 and the home market in Japan may mitigate risk. Retail banking 33% 29% 26% 31% n/a  Japan represents ~75% of total assets of ~¥200 Corporate banking 53% 48% 47% 43% n/a trillion and nearly 80% of total gross loans of ~¥85 Trust assets 46% 50% 45% 42% n/a trillion. Roughly three quarters of total interest and Global markets 84% 80% 84% 88% n/a Pre-provision profit margin 44% 38% 34% 39% 35% non-interest income relate to Japanese income. Selected income statement items (¥tn):  Earthquake-related reconstruction may accelerate Pre-provision profit 1.5 0.4 -1.1 1.9 1.2 shift “from risk management to growth,” a stated Loss provision 0.4 0.4 0.6 0.6 0.3 focus of new CEO Katsunori Nagayasu (63). Risk- Net income to common 0.3 -0.6 -1.5 0.8 0.5 Loan loss reserve ratio 1.2% 1.1% 1.2% 1.4% n/a adjusted ROEs for construction loans may be high. NPLs/gross loans5 1.8% 1.7% 1.8% 2.2% n/a  Shrewd overseas strategy? Management has Net interest margin 1.2% 1.2% 1.2% 1.1% n/a shown a contrarian mindset by making a $9 billion ROE (as reported)6 2.8% -5.6% -18.5% 10.7% 8.8% preferred equity investment in Morgan Stanley in Tang. equity/assets (end) 3.9% 3.1% 2.2% 3.5% 3.6% Tier 1 capital ratio (JGAAP) 7.6% 7.6% 7.8% 10.6% 11.7% 2008 (for a 20% fully diluted stake) and acquiring  shares out (end) 6% 0% 7% 21% 0% two FDIC-seized U.S. community banks in 2010.** 1 Based on U.S. GAAP, unless stated otherwise. 2 YTD figures reflect Japanese GAAP (not comparable to FY07-10 figures). The company reports U.S. GAAP figures only for September/March period-ends.INVESTMENT RISKS & CONCERNS 3 Stated net of interest expense.  Tangible book value per share declined ~15% 4 Reflects “operating profit” per JGAAP (excludes, among others, provisions for credit losses, gains/losses on trading assets/securities and foreign exchange). since 2006. While shares trade well below tangible 5 Includes nonaccrual/restructured loans, and accruing loans past due 90 days. 6 book, this may be justified if future ROEs mirror the YTD figure is annualized. ROE is based on returns to common equity. past. Recent ROEs, however, are more encouraging.  Balance sheet risks include non-performing loans MAJOR HOLDERS (notable non-trustees only) (~20% of tangible book) and credit default swaps Insiders <1% | Nippon Life 2% | Meiji Yasuda Life 1% | (notional amount is ~50% of tangible book). Off- Toyota 1% | Fisher <1% | Brandes <1% | Thornburg <1% balance sheet exposure via derivatives is significant.  Market-related risks include potentially rising RATINGS interest rates (Japan gov’t bonds are ~20% of assets). VALUE Intrinsic value materially higher than market value?  Non-Japan investors are also exposed to a potentially DOWNSIDE PROTECTION Low risk of permanent loss?  weaker yen (most assets are yen-denominated). MANAGEMENT Capable and properly incentivized? * Japan Post, a government-run entity and the world’s largest holder of FINANCIAL STRENGTH Solid balance sheet? deposits, is another key competitor in the domestic market. MOAT Able to sustain high returns on invested capital?  EARNINGS MOMENTUM Fundamentals improving? ** Acquired indirectly via the company’s ownership of Union Bank, whichranks fifth and 21st in deposits in California and the U.S., respectively. MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEMitsubishi UFJ is one of the dominant players in Japanese banking. A strong domestic deposit base has enabled it to not onlywithstand the 2008/09 crisis, but to expand overseas, including via a $9 billion investment in Morgan Stanley in 2008. Whilepoor historic returns on equity explain a valuation well below tangible book, the latter may not properly reflect recentimprovements in ROE and capital ratios. Earthquake-related reconstruction could provide incremental growth opportunities.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 63 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsMITSUBISHI UFJ FINANCIAL – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 10x “normalized” net 10x “normalized” net income to common income to common 1.0x tangible common (based on implied net (based on implied net Valuation methodology equity income assuming a income assuming a 10% return on 15% return on 1 1 common equity) common equity) Conservative case metrics: Tangible common equity as of 12/31/2010 (estimated) ¥7,179 Fair value multiple 1.0x Estimated equity value ¥7,179 Base case metrics: “Normalized” net income to common (assuming 10% ROE) ¥866 Fair value multiple 10x Estimated equity value ¥8,659 Aggressive case metrics: “Normalized” net income to common (assuming 15% ROE) ¥1,299 Fair value multiple 10x Estimated equity value ¥12,989 2 ¥7,179 billion ¥8,659 billion ¥12,989 billion Estimated fair value of the equity of MTU (¥ in billions) ¥510 per share ¥610 per share ¥920 per share 2 $85 billion $102 billion $153 billion Estimated fair value of the equity of MTU (US$ in billions) $6.00 per ADS $7.20 per ADS $10.80 per ADS Implied equity fair value to tangible book 1.0x 1.2x 1.8x 3 Implied trailing dividend yield 2.4% 2.0% 1.3% Implied ratios based on net income to common during… …year to March 2011 (management guidance based on JGAAP) 14.4x 17.3x 26.0x …year to March 2010 (actual reported U.S. GAAP net income) 8.6x 10.3x 15.5x1 The return on common equity was 11% in the year ended March 2010. Annualized ROE based on the nine months to December 2010 is 9% (including 9% in theDecember 2010 quarter). Tangible common equity to assets was 3.6% as of yearend 2010.2 Based on 14.2 billion common shares outstanding (1 ADS = 1 share). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥85.3 Based on management guidance for a dividend of ¥12 per share for the year ended March 2011.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.MITSUBISHI UFJ FINANCIAL – COMPARISON WITH MIZUHO AND SUMITOMO MITSUI FINANCIAL GROUPSource: Company presentation dated February 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 64 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsMITSUBISHI UFJ FINANCIAL – LOANS AND DEPOSITSMITSUBISHI UFJ FINANCIAL – SELECTED MEASURES OF LOAN QUALITYSource: Company presentation dated February 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 65 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsMitsui (Tokyo: 8031, OTC: MITSY) Capital Goods: Misc. Capital Goods Chiyoda-ku, TK, Japan, 81-3-328-1111 www.mitsui.co.jp Trading Data Consensus EPS Estimates Valuation Price: $345.44 (as of 4/21/11) Month # of P/E FYE 3/31/10 18x 52-week range: $233.62 - $375.39 Latest Ago Ests P/E FYE 3/31/11 7x Market value: $32.2 billion This quarter n/a n/a n/a P/E FYE 3/30/12 5x Enterprise value: $56.0 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 93.2 million FYE 3/31/11 52.15 51.14 1 EV/ LTM revenue 1.0x Ownership Data FYE 3/30/12 70.20 64.50 1 EV/ LTM EBIT 18x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.2x Insider buys (last six months): 0 LT growth 48.4% 47.3% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 6% Institutional ownership: 1% 11/18/10 n/a n/a LTM pre-tax ROC 13% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 34,867 41,019 48,307 56,266 67,362 64,614 48,083 54,730 11,518 13,727 Gross profit 7,172 8,321 9,605 10,168 11,598 11,729 8,240 10,035 2,067 2,530 Operating income 913 1,800 2,738 2,760 3,659 2,453 909 3,136 23 859 Net income 803 1,422 2,376 3,539 4,813 2,085 1,757 3,903 237 1,087 Diluted EPS 11.13 15.93 29.77 38.50 43.64 22.33 19.38 44.62 2.57 11.91 Shares out (avg) 79 79 80 87 90 91 91 91 91 91 Cash from operations 1,175 2,348 1,718 2,809 4,881 6,839 7,423 6,458 1,291 1,006 Capex 1,329 1,996 2,900 3,842 3,311 2,977 2,725 3,515 839 820 Free cash flow (154) 352 (1,182) (1,034) 1,570 3,862 4,698 2,943 452 186 Cash & investments 8,385 9,953 8,932 9,605 10,783 13,751 16,671 16,468 16,005 16,468 Total current assets 46,182 51,889 55,717 59,555 59,370 51,871 50,016 52,805 51,114 52,805 Intangible assets 1,066 1,224 1,160 1,226 1,508 1,133 995 999 962 999 Total assets 78,831 89,130 100,635 115,187 111,953 98,178 98,233 100,779 98,676 100,779 Short-term debt 13,249 11,982 11,672 13,250 9,632 10,309 7,027 6,565 8,528 6,565 Total current liabilities 35,610 38,521 41,211 44,723 40,396 32,778 27,945 30,363 30,065 30,363 Long-term debt 29,828 34,097 34,167 33,893 34,561 33,351 34,155 33,668 33,345 33,668 Total liabilities 67,525 75,950 80,940 90,417 86,322 76,091 72,057 73,965 73,867 73,965 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 11,307 13,180 19,695 24,770 25,631 22,087 26,177 26,814 24,809 26,814 EBIT/capital employed 4% 8% 11% 10% 12% 9% 4% 13% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $600 $500 $400 $300 $200 $100 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 66 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Conglomerate Mitsui engages mainly in commodities trading YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10and investment activities, with total assets of ¥8.6 trillion.  trading transactions2 10% 3% -3% -11% -29% 5%The main two operating segments (out of a total eleven*) are:  revenue 15% 19% 20% -4% -26% 13%Energy (~18% of assets; ¥126 billion of CY10 net income):  net income 89% 39% 11% -48% -13% 195%  TBV/share (end)3 42% 23% 1% -13% 20% 8%owns interests in oil and gas projects. Attributable proved  assets (end) 13% 14% -3% -12% 0% 2%reserves to Mitsui are ~370 million oil-equivalent barrels  employees (end) 7% 2% -6% 2% 4% 0%(~70% natural gas). Mitsui has a 33% share of the Marcellus TBV/share (end) (¥) 917 1,124 1,131 980 1,176 1,205Shale gas project in the U.S., which is operated by Anadarko. Assets (¥tn) .6 9.8 9.5 8.4 8.4 8.6 Selected items as % of total assets:Mineral & Metal Resources (~12% of assets; ¥141bn of Investments4 33% 35% 34% 34% 36% 34%CY10 net income): owns a 5.0% effective interest in Vale’s Net PP&E 9% 10% 11% 11% 12% 12%(VALE) production and reserves. It also includes Australian Other assets5 58% 54% 55% 54% 52% 54%iron ore mining assets, Chilean copper and other assets. Debt 41% 40% 39% 44% 41% 39% Other liabilities 39% 39% 38% 34% 32% 34%Other segments (~60% of assets; ¥100bn of CY10 net income) Common equity 20% 22% 23% 22% 27% 27%manufacture, trade, and/or finance assets in: 1) Machinery & Trading transactions (¥tn) 14.9 15.3 14.8 13.1 9.4 7.4Infrastructure; 2) Foods & Retail; 3) Chemical; 4) Iron & Revenue (¥tn) 4.0 4.8 5.7 5.5 4.1 3.4 Selected items as % of revenue:Steel; 5) Consumer & IT; and 6) Logistics & Financial. Three Gross profit 19% 18% 17% 18% 17% 19%geographic-focused segments trade commodities in Asia, the EBIT 7% 7% 8% 5% 3% 8%Americas and EMEA, respectively. Corporate costs and inter- Net income 5% 6% 6% 3% 4% 8%segment eliminations reduced CY10 net income by ~¥35 bn. Net cash from ops 3% 5% 7% 10% 15% 11% D&A 2% 2% 2% 3% 3% 3% Capex 4% 6% 3% 4% 5% 6%INVESTMENT HIGHLIGHTS Net income by key segment (¥bn):  Key earnings drivers are iron ore mining and Minerals & metals 45 98 177 90 63 124 oil/gas production, which contribute a majority of Energy 51 76 124 153 84 94 Other 142 141 128 -19 37 88 net income. Similar to Glencore, Mitsui is not just a Eliminations6 -23 -16 -97 -51 -33 -30 trader of commodities and other products (acting as Total net income 215 299 333 174 151 276 agent), but takes equity risk as an investor/owner. % from associates 66% 71% 64% 70% 87% 62%  Liquid balance sheet. Current assets and investments Return on tang. equity 17% 17% 16% 9% 8% 17% Tangible equity/assets 16% 20% 21% 22% 24% 25% are ~50% and ~35% of total assets. A 5.0% interest  shares out (end) 9% 4% 2% 0% 0% 0% in Vale’s (VALE) production and reserves may be 1 Based on U.S. GAAP and continuing operations, unless stated otherwise. 2 worth ~30% of Mitsui’s recent market value. Represents the aggregate nominal value of the sales contracts in which Mitsui acts as a principal and transactions in which it serves as an agent.  Undemanding valuation of 7x run-rate earnings, 3 TBV=tangible book value. 4 if F3Q11 net income of ¥93 billion is sustained. A Investments in associated companies represents ~50% of yearend 2010 figure 25% premium to tangible book appears low given a with another ~30% comprised of non-/marketable equity and other securities. 5 95+% of yearend 2010 figure is represented by current assets. near doubling of tangible book per share since 2005. 6 Nets out intersegment eliminations, corporate costs, and discontinued ops.INVESTMENT RISKS & CONCERNS MAJOR HOLDERS (notable non-trustees only)  Commodities/emerging markets boom (and Insiders <1% | MUFJ 7% | Sumitomo Mitsui 2% | Nippon potential bust?). As cyclical factors drive ROE, a Life 2% | Chuo Mitsui 2% | Mitsui Sumitomo Insurance 1% high premium to tangible book may not be justified.  Conglomerate structure hinders focus and value- RATINGS add. 63% of CY10 net income is from associates, VALUE Intrinsic value materially higher than market value?  over which Mitsui does not have much control. DOWNSIDE PROTECTION Low risk of permanent loss?   Counterparty credit risks due to significant trade MANAGEMENT Capable and properly incentivized?  receivables, project financing and derivatives. FINANCIAL STRENGTH Solid balance sheet?   ¥2.0 trillion of net debt at yearend 2010 (~70% of MOAT Able to sustain high returns on invested capital?  debt is floating rate and ~50% is yen-denominated). EARNINGS MOMENTUM Fundamentals improving?   U.S. Gulf of Mexico oil spill liability? To date, BP MACRO Poised to benefit from economic and secular trends?  * is seeking ~$3 billion from Mitsui affiliate MOEX. Segments operate worldwide and include both principal activities as well as activities in which Mitsui acts as a trading agent for the respective products.THE BOTTOM LINEConglomerate Mitsui has ~300 subsidiaries and ~170 associated companies across various industry sectors, exemplifying thekeiretsu corporate structure. While returns on equity have been surprisingly robust through the 2008/09 downturn, Mitsui’sexposure to booming commodities and emerging markets remains a key risk. As earnings are highly dependent on cyclicalfactors, a valuation at a 25% premium to tangible book may not be justified. We would be more favorable if Mitsui were tomonetize the relatively liquid balance sheet, return capital, and focus on activities where it has a sustainable competitive edge.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 67 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsMITSUI – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 10x estimated 10x estimated normalized net normalized net income of ¥350 1.0x tangible income of ¥250 billion (approx. Valuation methodology common equity billion (approx. annualized net average net income income based on during FY06-10) December 2010 quarter) Conservative case metrics: Tangible common equity as of 12/31/2010 ¥2,199 Fair value multiple 1.0x Estimated equity value ¥2,199 Base/aggressive case metrics: 1 Normalized net income ¥250 ¥350 Fair value multiple 10.0x 10.0x 2 ¥2,199 billion ¥2,500 billion ¥3,500 billion Estimated fair value of the equity of Mitsui & Co. (¥ in billions) ¥1,210 per share ¥1,370 per share ¥1,920 per share 2 $25.9 billion $29.5 billion $41.3 billion Estimated fair value of the equity of Mitsui & Co. (US$ in billions) $284 per ADS $323 per ADS $453 per ADS Implied equity fair value to tangible book 1.0x 1.1x 1.6x 3 Implied dividend yield 4% 3% 2% Implied trailing FCF yield 13% 12% 8% Implied trailing earnings yield 15% 13% 10% Implied FCF yield based on average FCF during FY06-10 9% 8% 5% Implied earnings yield based on average net income during FY06-10 11% 9% 7%1 Average net income to common shareholders was ¥235 billion during FY06-10 with a peak of ~¥335 billion in FY08 and a trough of ~¥150 billion in FY10. Trailingnet income through December 2010 is ~¥335 billion. Annualized net income based on the December 2010 quarter is ~¥370 billion (in line with management’sguidance for the fiscal year ended March 2011). Our net income estimates for the base and aggressive cases imply an ROE of 11% and 15%, respectively, basedon yearend 2010 shareholders’ equity of ~¥2,285 billion.2 Based on 1,825 million shares outstanding (1 ADS=20 shares). Estimated fair value in US$ is based on a conversion of the recent exchange rate at 1US$=¥85.3 Based on a per share dividend of ¥47 forecast by management for the fiscal year ended March 2011.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.MITSUI – SNAPSHOT OF TOTAL ASSETS (¥ in billions)Source: Company data book dated February 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 68 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsMITSUI – GROSS PROFIT BREAKDOWN (¥ in billions)MITSUI – NET INCOME BREAKDOWN (¥ in billions)Source: Company data book dated February 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 69 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNomura Holdings (Tokyo: 8604, NYSE: NMR) Financial: Investment Services Chuo-ku, TK, Japan, 81-3-525-1000 www.nomura.com Trading Data Consensus EPS Estimates Valuation Price: $5.04 (as of 4/21/11) Month # of P/E FYE 3/31/10 19x 52-week range: $4.75 - $7.27 Latest Ago Ests P/E FYE 3/31/11 42x Market value: $19.2 billion This quarter n/a n/a n/a P/E FYE 3/30/12 19x Enterprise value: n/m Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 3,805.5 million FYE 3/31/11 0.12 0.12 1 EV/ LTM revenue n/m Ownership Data FYE 3/30/12 0.27 0.33 1 EV/ LTM EBIT 112x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 0.8x Insider buys (last six months): 0 LT growth 37.8% 37.8% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 1% Institutional ownership: 1% 11/8/10 n/a n/a LTM pre-tax ROC 12% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 12,514 13,475 21,451 24,517 19,068 7,951 16,233 16,334 3,848 4,619 Gross profit 6,135 5,451 8,836 7,623 3,951 (3,022) 6,442 6,155 1,500 1,540 Operating income 3,382 2,451 5,331 3,850 (777) (9,336) 1,259 1,032 215 332 Net income 2,062 1,133 4,260 2,104 (812) (8,473) 811 421 123 160 Diluted EPS 1.06 0.58 1.60 1.10 (0.43) (4.36) 0.26 0.12 0.03 0.04 Shares out (avg) 1,940 1,941 1,914 1,906 1,908 1,942 3,127 3,245 3,521 3,600 Cash from operations (938) (3,939) (5,194) (19,468) (7,752) (8,526) (17,956) (7,138) (9,205) 7,443 Capex 470 710 1,005 1,218 1,511 1,148 994 2,152 170 636 Free cash flow (1,408) (4,649) (6,199) (20,686) (9,263) (9,675) (18,950) (9,291) (9,375) 6,807 Cash & investments 10,602 12,021 18,067 11,447 15,140 13,767 14,568 12,485 6,526 12,485 Total current assets 0 0 0 0 0 0 0 0 0 0 Intangible assets 0 0 0 0 0 0 0 0 0 0 Total assets 355,982 412,645 419,072 429,210 301,939 297,175 385,624 398,432 356,660 398,432 Short-term debt 5,230 6,229 8,277 13,084 17,065 14,159 15,574 11,996 14,796 11,996 Total current liabilities 0 0 0 0 0 0 0 0 0 0 Long-term debt 28,541 33,831 43,056 59,858 62,508 65,602 86,134 96,341 79,470 96,341 Total liabilities 334,617 390,290 394,385 403,056 278,152 278,756 360,176 373,767 331,417 373,767 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 21,365 22,355 24,687 26,154 23,787 18,418 25,448 24,665 25,243 24,665 EBIT/capital employed n/m n/m n/m >100% -12% -166% 25% 12% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $30 $25 $20 $15 $10 $5 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 70 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Investment bank Nomura operates in three segments: YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10Retail (CY2010 pre-tax income: ¥107 billion): receives  TBV/share (end)2 12% -2% -6% -45% 0% -1%commissions/fees from investment services to individuals  assets (end) 1% 3% -29% -2% 30% 12%mainly in Japan; fees from asset managers related to trust  employees (end) 2% 10% 12% 42%3 3% 4%certificates that it distributes; and commissions from insurers TBV/share (end) (¥) 1,076 1,053 989 541 543 535related to products it sells as an agent. Underlying retail client Assets (¥tn) 34.7 35.6 25.2 24.8 32.2 33.3 Selected items as % of total assets:assets increased 2% y-y to ¥72.3 trillion at yearend 2010. Trading assets 39% 37% 42% 47% 46% 45%Wholesale (CY2010 pre-tax income: ¥12 billion): formed in Collateral. agreements 49% 50% 41% 34% 39% 38% Other assets 11% 13% 17% 19% 16% 17%April 2010, this new segment consists mainly of former Trading liabilities 19% 13% 20% 19% 26% 24%global markets (fixed income, equities and asset finance), Collateral. financing 58% 58% 42% 41% 35% 36%investment banking and merchant banking segments. Other liabilities 17% 22% 30% 34% 33% 34% Common equity 6% 6% 8% 6% 7% 6%Asset Management (CY2010 pre-tax income: ¥22 billion): Revenue (¥tn)4 1.1 1.1 0.8 0.3 1.2 0.8manages investment trusts and provides advisory services. % of revenue by segment:Underlying AUM rose 4% y-y to ¥24.1 trillion at yearend ‘10. Retail 39% 40% 51% 93% 34% 36% Global markets 32% 27% 12% -50% 57%INVESTMENT HIGHLIGHTS Investment banking 9% 9% 11% 20% 10% 53%5 Merchant banking 6% 6% 8% -22% 1%  Strong position in Japanese securities markets. Asset management 6% 8% 11% 19% 6% 7% In Japan, Nomura has ~9% share of equity trading Other/Eliminations6 8% 10% 7% 40% -8% 4% (~17% of the off-floor/exchange market), ~11% of Pre-tax income margin by segment: bond trading, and a large presence in underwriting Retail 44% 37% 30% 6% 29% 28% Global markets 43% 20% -237% n/m 26% markets. It manages ~20% of publicly offered Investment banking 52% 45% 27% -90% 1% -5%5 investment trusts in Japan (40+% of bond trusts). Merchant banking 81% 81% 82% n/m 12%  ~25% discount to tangible book is undemanding Asset management 31% 40% 38% 12% 26% 29% if management can reach/sustain its ROE target Other6 -3% -3% -9% -28% -18% -3% of 10-15% in the “medium to long term.” Return on Total pre-tax margin 39% 29% -8% -250% 9% 7% Net income margin 22% 16% -9% -227% 6% 2% equity averaged ~10% in FY03-07 (negative since). ROE (as reported)7 16% 8% -3% -40% 4% 1%  May benefit if Japan’s people shift more of their T. equity/assets (end) 6% 6% 8% 6% 6% 6% financial assets from savings into investments. Tier 1 ratio (Basel II) n/a n/a n/a 12% 17% 17% Nomura is one of the largest asset managers in Employees (end, 000s) 14.7 16.1 18.0 25.6 26.4 27.2 Japan and has a significant retail client base.  shares out (end) -2% 0% 0% 37% 41% -2% 1 Based on U.S. GAAP. 2 TBV=tangible book value.  Seven of the 12 board members are “outside” 3 In 2008, Nomura acquired the majority of Lehman Brothers’ operations in Asia- directors, defined as non-executive directors who Pacific, its equities and i-banking operations in Europe and the Mideast, and hired certain of its fixed income personnel in Europe. Costs incurred totaled $500+ million. have never been employees of the company. 4 Stated net of interest expense. 5 In April 2010, Nomura formed a new segment called “Wholesale.” 6 Includes gain/(loss) on investments in equities, share of affiliate results,INVESTMENT RISKS & CONCERNS impairment losses, corporate items and other financial adjustments.  7 Tangible book value per share declined ~50% Net income/(loss) attributable to Nomura Holdings, Inc. divided by average total Nomura Holdings, Inc. shareholders’ equity. YTD figure is annualized. since 2006. Most of the value destruction occurred since Kenichi Watanabe (58) became CEO in 2008. MAJOR HOLDERS (notable non-trustees only)  Management’s vision to establish Nomura as a Insiders <1% | Sunrise Partners <1% | Jefferies <1% | “globally competitive financial services group” Clearbridge <1% | Bridgeway <1% | SAC <1% may not yield good returns for shareholders. A focus on core capabilities in the Japanese home RATINGS market may provide better risk-adjusted returns. VALUE Intrinsic value materially higher than market value?   Struggling non-Japan operations (~50% of FY10 DOWNSIDE PROTECTION Low risk of permanent loss?  revenue), which likely do not have a sustainable MANAGEMENT Capable and properly incentivized?  competitive edge. A weak U.S. presence appears FINANCIAL STRENGTH Solid balance sheet?  incompatible with management’s stated strategy. MOAT Able to sustain high returns on invested capital?   Cyclical and leveraged business model subjects EARNINGS MOMENTUM Fundamentals improving?  shareholders to significant market-related risks. MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINENomura has not been able to parlay its strong position in Japanese securities markets into shareholder value creation. Whilethe 2008/09 financial crisis has not helped, management’s strategy to create a “globally competitive financial services group”puts shareholders’ capital at significant risk. The ill-conceived $1 billion investment into Fortress in 2007 may portend morevalue-destruction to come in the pursuit of global market share. Given already high market-related risks of a cyclical andleveraged model, a focus on core capabilities in the Japanese home market may provide better risk-adjusted returns.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 71 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNOMURA – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 10x “normalized” net 10x “normalized” net income to common income to common 1.0x tangible (based on implied net (based on implied net Valuation methodology common equity income assuming a income assuming a 10% return on 15% return on 1 1 common equity) common equity) Conservative case metrics: Tangible common equity as of 12/31/2010 (estimated) ¥1,927 Fair value multiple 1.0x Estimated equity value ¥1,927 Base case metrics: “Normalized” net income to common (assuming 10% ROE) ¥206 Fair value multiple 10x Estimated equity value ¥2,061 Aggressive case metrics: “Normalized” net income to common (assuming 15% ROE) ¥309 Fair value multiple 10x Estimated equity value ¥3,092 2 ¥1,927 billion ¥2,061 billion ¥3,092 billion Estimated fair value of the equity of Nomura (¥ in billions) ¥540 per share ¥570 per share ¥860 per share 2 $22.7 billion $24.3 billion $36.5 billion Estimated fair value of the equity of Nomura (US$ in billions) $6.30 per ADS $6.80 per ADS $10.10 per ADS Implied equity fair value to tangible book 1.0x 1.1x 1.6x 3 Implied trailing dividend yield 1.5% 1.4% 0.9% Implied ratios based on net income to common during… …year to December 2010 (based on U.S. GAAP net income) 55x 59x 88x …December Q annualized (based on U.S. GAAP net income) 36x 38x 58x 4 Implied equity fair value per employee (in $ millions) $0.8 $0.9 $1.31 Return on equity averaged ~10% in FY03-07. ROE was 4% in the year ended March 2010. Annualized ROE based on the nine months to December 2010 is 1%(including 3% in the December 2010 quarter). Management targets an average consolidated return on equity of 10-15% “over the medium to long term, subject tochange depending on capital regulation developments.” Tangible common equity to assets was 5.8% as of yearend 2010.2 Based on 3.6 billion common shares outstanding (1 ADS = 1 share). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥85.3 Based on a trailing dividend of ¥8 per share for the year to September 2010.4 Based on 27,215 employees as of yearend 2010.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.NOMURA – COMPONENTS OF ROESource: Company presentation dated May 2010.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 72 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNOMURA – RETAIL BUSINESS: COMMISSIONS REVENUENOMURA – RETAIL BUSINESS: CLIENT ASSETSNOMURA – ASSET MANAGEMENT BUSINESS SNAPSHOTSource: Company presentation dated February 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 73 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNippon Telephone and Telegraph (Tokyo: 9432, NYSE: NTT) Services: Communications Services Chiyoda-ku, TK, Japan, 81-3-520-5581 www.ntt.co.jp Trading Data Consensus EPS Estimates Valuation Price: $22.51 (as of 4/21/11) Month # of P/E FYE 3/31/10 10x 52-week range: $19.59 - $25.18 Latest Ago Ests P/E FYE 3/31/11 10x Market value: $65.5 billion This quarter n/a n/a n/a P/E FYE 3/30/12 10x Enterprise value: $107.0 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 2,909.9 million FYE 3/31/11 2.23 2.23 1 EV/ LTM revenue 0.9x Ownership Data FYE 3/30/12 2.31 2.31 1 EV/ LTM EBIT 7x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.0x Insider buys (last six months): 0 LT growth n/a n/a n/a Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 14% Institutional ownership: 2% 11/10/10 n/a n/a LTM pre-tax ROC 12% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 130,237 126,837 126,077 126,305 125,370 122,264 119,507 124,629 29,668 29,857 Gross profit 81,572 77,521 77,208 74,703 72,822 73,427 72,054 73,936 18,262 18,174 Operating income 18,315 14,217 13,976 12,994 15,313 13,026 13,119 15,091 3,537 3,972 Net income 7,558 8,336 5,853 5,650 7,455 6,323 5,778 6,240 1,605 1,680 Diluted EPS 2.38 2.69 2.04 2.04 2.71 2.35 2.18 2.45 0.61 0.63 Shares out (avg) 3,171 3,095 2,863 2,764 2,755 2,691 2,647 2,646 2,647 2,646 Cash from operations 40,854 33,216 38,064 27,716 36,279 29,510 33,075 34,031 4,807 4,424 Capex 20,726 18,910 19,911 18,880 14,786 16,574 16,092 16,021 3,988 3,689 Free cash flow 20,129 14,306 18,153 8,836 21,493 12,936 16,984 18,010 819 734 Cash & investments 16,802 19,325 17,217 10,660 13,934 12,595 15,180 14,245 9,439 14,245 Total current assets 48,021 53,015 49,936 45,674 46,835 47,750 49,835 53,924 46,523 53,924 Intangible assets 18,855 19,369 19,609 20,151 21,271 21,839 22,933 26,904 22,583 26,904 Total assets 228,122 224,175 221,682 214,697 217,369 220,628 222,302 227,463 218,503 227,463 Short-term debt 13,681 14,110 14,964 14,697 14,410 11,633 12,817 16,702 9,905 16,702 Total current liabilities 44,707 43,190 46,630 43,792 45,917 43,362 42,119 43,413 34,190 43,413 Long-term debt 58,852 52,956 47,466 42,334 40,815 43,889 40,116 39,044 45,225 39,044 Total liabilities 153,024 144,727 142,105 131,115 130,383 134,964 130,887 132,985 129,618 132,985 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 75,098 79,448 79,577 83,582 86,986 85,664 91,416 94,478 88,884 94,478 EBIT/capital employed 14% 11% 11% 10% 12% 11% 11% 12% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $40 $35 $30 $25 $20 $15 $10 $5 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 74 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1NTT provides communications services in five segments: YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10Mobile (~50% of CY10 EBITDA): represents NTT DoCoMo  revenue -1% 0% -1% -2% -2% 0%(DCM) in which NTT owns 67%.* DoCoMo is the largest  employees (end) -1% 0% -3% 1% -1% n/amobile communications provider in Japan, with 57 million  assets (end) -1% -3% 1% 1% 1% 4%subscribers at yearend 2010 (~50% market share).  TBV/share (end)2 7% 7% 5% 0% 7% 2% TBV/share (end) (¥k) 3.7 3.9 4.1 .1 4.4 4.4Regional (~30% of CY10 EBITDA): includes NTT East and Revenue (¥tn) 10.7 10.8 10.7 10.4 10.2 7.5NTT West, which provide intra-prefectural fixed voice and % of revenue by segment:broadband services in Japan. NTT is Japan’s largest provider Mobile (NTT DoCoMo) 44% 44% 43% 42% 42% 42%of fixed-line phone services (~36 million lines), and the #1 Fixed: regional 35% 34% 34% 34% 34% 34% Fixed: long distance/int’l 11% 11% 11% 11% 11% 11%broadband provider with ~18 million users (50+% share). Data: system integration 7% 8% 9% 10% 10% 10%Long distance and International (7% of CY10 EBITDA): Other 3% 3% 3% 3% 3% 3%includes NTT Communications as well as Dimension Data, Revenue growth by selected segment: Mobile (NTT DoCoMo) -2% 0% -2% -5% -4% -1%an IT services provider acquired in 2010. Fixed: regional -4% -3% -2% -3% -1% 1%Data (7% of CY10 EBITDA): provides system integration Fixed: long distance/int’l 9% 2% 3% -1% -4% 0% Data: system integration 7% 13% 6% 7% 1% 2%services mainly through 54%-owned NTT Data Corp.* EBITDA margin by segment:3Other (5% of CY10 EBITDA): includes the operations of Mobile (NTT DoCoMo) 33% 32% 34% 37% 36% 40%NTT holding company, in addition to other businesses. Fixed: regional 29% 29% 35% 28% 28% 30% Fixed: long distance/int’l 18% 18% 21% 20% 21% 20% Data: system integration 27% 27% 22% 24% 21% 22%INVESTMENT HIGHLIGHTS Other 56% 51% 57% 42% 41% 56%  Japan’s largest provider of telecommunications Total EBITDA margin 31% 30% 32% 31% 31% 33% services, with leading market share in mobile (via Capex (¥tn)4 2.2 2.2 2.0 2.0 1.9 1.4 % of capex by selected segment: 67%-owned NTT DoCoMo), fixed-line, broadband, Mobile (NTT DoCoMo) 40% 42% 36% 34% 35% n/a and IT services (via 54%-owned NTT Data). Fixed: regional 42% 39% 40% 41% 44% n/a  Shares are modestly undervalued trading at 85% Other 18% 19% 24% 25% 21% n/a of tangible book and a P/E of less than 10x, based Selected items as % of revenue: Gross profit 61% 59% 58% 60% 60% 61% on attributable net income guidance of ¥500 billion EBIT 11% 10% 12% 11% 11% 14% for the year ended March 2011 (up 2% y-y). Net income (pre-minority) 7% 6% 8% 7% 7% 8%  Decent balance sheet, with consolidated debt to Net income (post-minority) 5% 4% 6% 5% 5% 6% trailing EBITDA of just ~1.0x. NTT had ~¥3.2 D&A 20% 19% 20% 21% 20% 19% Capex4 20% 21% 19% 19% 19% 19% trillion of net debt at yearend 2010, which includes Return on tang. equity 10% 9% 12% 10% 9% 11%5 ¥270 billion of DoCoMo net cash (incl. investments). Tangible equity/assets 29% 31% 33% 33% 33% 34%  Data communications and IT services (~50% of  shares out (end) -7% 0% -1% -3% 0% 0% 1 total revenue) represent growth opportunities. Based on U.S. GAAP. Due to, among others, the consolidation of NTT DoCoMo (NTT owns 67%), NTT reports a significant minority interest in its financials.  Paid dividends every year since formation in 2 TBV=tangible book value. 3 1985.** In 2010, NTT decided to cancel all treasury 4 Corporate costs are allocated to segments. Includes purchases of intangibles and other assets. 5 Annualized. shares (~15% of total issued shares) by March 2012. MAJOR HOLDERS* (notable non-trustees only)INVESTMENT RISKS & CONCERNS Japanese gov’t 40% | Other insiders <1% | NTT Employee  Declining fixed-line and mobile voice businesses Association 1% | Tradewinds 1% | Brandes <1% represent 22% and 21% of CY10 revenue, * Based on 1,323 million shares (excl. 126 million treasury shares at 12/31/10). respectively. While this is offset by increasing data- driven revenue, overall growth remains a challenge. RATINGS  Controlled by the Japanese government, which VALUE Intrinsic value materially higher than market value?  owns ~40% and is obligated to own at least one DOWNSIDE PROTECTION Low risk of permanent loss?  third of issued shares pursuant to the “NTT Law.” MANAGEMENT Capable and properly incentivized?  After NTT cancels its treasury stock, the FINANCIAL STRENGTH Solid balance sheet?  government may become a seller of some shares. MOAT Able to sustain high returns on invested capital? * NTT consolidates both DoCoMo and NTT Data Corp. in its financials. EARNINGS MOMENTUM Fundamentals improving?  ** Based on the per share dividend guidance of ¥120 for the year ended MACRO Poised to benefit from economic and secular trends?March 2011 (flat y-y; ~32% payout ratio), the implied yield is 3+%.THE BOTTOM LINENTT is Japan’s largest provider of telecommunications with leading positions in mobile (via 67%-owned NTT DoCoMo),fixed-line, and broadband services. Growth in data communications and IT services (~50% of total revenue) is offsettingrevenue declines in fixed-line and mobile voice services. While overall growth will likely remain a challenge, the shares aremodestly undervalued trading at 85% of tangible book, and a trailing P/E of <10x, on a relatively unlevered balance sheet.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 75 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNTT – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive Sum-of-the-parts Sum-of-the-parts Sum-of-the-parts (see detailed (see detailed (see detailed Valuation methodology assumptions assumptions assumptions below) below) below) 1 Value of mobile business (NTT DoCoMo): Normalized revenue ¥4,200 ¥4,200 ¥4,200 Normalized EBITDA margin 37.0% 37.0% 37.0% Normalized EBITDA ¥1,554 ¥1,554 ¥1,554 Minus: Normalized capex (800) (800) (800) Estimated normalized EBITDA minus capex ¥754 ¥754 ¥754 Fair value multiple 8.0x 10.0x 12.0x Estimated enterprise value of NTT DoCoMo ¥6,032 ¥7,540 ¥9,048 Plus: Net cash 268 268 268 Plus: Value of equity affiliates 547 547 547 Minus: Net post-retirement liability (144) (144) (144) Minus: Non-controlling interest (27) (27) (27) Estimated fair value of the equity of NTT DoCoMo ¥6,676 ¥8,184 ¥9,692 Estimated fair value of NTT’s 67% equity stake in NTT DoCoMo 4,473 5,483 6,494 as % of NTT recent market value 91% 112% 133% Value of NTT’s other businesses (fixed-line and IT data services): 2 Normalized revenue ¥6,000 ¥6,000 ¥6,000 3 Normalized EBITDA margin 27.5% 27.5% 27.5% Normalized EBITDA ¥1,650 ¥1,650 ¥1,650 4 Minus: Normalized capex (1,000) (1,000) (1,000) Estimated normalized EBITDA minus capex ¥650 ¥650 ¥650 Fair value multiple 8.0x 9.0x 10.0x Estimated enterprise value of NTT excluding NTT DoCoMo ¥5,200 ¥5,850 ¥6,500 5 Minus: Net debt (3,514) (3,514) (3,514) 5 Minus: Net post-retirement liability (1,333) (1,333) (1,333) 6 Minus: Non-controlling interest (350) (350) (350) Estimated fair value of the equity of NTT excluding NTT DoCoMo ¥3 ¥653 ¥1,303 as % of NTT recent market value 0% 13% 27% 7 ¥4,480 billion ¥6,140 billion ¥7,800 billion Estimated fair value of the equity of NTT (¥ in billions) ¥3,390 per share ¥4,640 per share ¥5,900 per share 7 $54 billion $74 billion $94 billion Estimated fair value of the equity of NTT (US$ in billions) $20.40 per ADS $28.00 per ADS $35.50 per ADS 8 Implied earnings yield based on guidance for the year ended 3/2011 11% 8% 6% 9 Implied dividend yield 4% 3% 2% Implied fair value of the equity to tangible book 0.8x 1.1x 1.4x1 See our analysis of NTT DoCoMo elsewhere in this report for further detail regarding the assumptions underlying our valuation.2 Revenue excluding the mobile segment (NTT DoCoMo) was ~¥6,000 billion for the year ended December 2010 (FY06-10 average: ~¥6,000 billion).3 EBITDA margin excluding the mobile segment was 27% for the year ended December 2010 (FY06-10 average: 28%).4 Capex excluding the mobile segment was ~¥1,150 billion for the year ended December 2010 (FY06-10 average: ~¥1,250 billion). Our normalized capex estimateof ¥1,000 billion represents 17% of our normalized revenue estimate.5 Estimated based on NTT balance sheet values as of yearend 2010, excluding values attributable to NTT DoCoMo.6 Estimated value attributable to non-controlling interests other than the minority interest related to NTT DoCoMo. Our figure largely represents the value of the46% minority interest in NTT Data, based on our estimate.7 Based on 1,323 million common shares outstanding (1 share = 2 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.8 NTT is guiding for net income of ¥500 billion (up 2% y-y) for the year ended March 2011. The guidance is for net income attributable to NTT Corp. shareholdersafter attribution of net income to minority interests.9 Based on a per share dividend of ¥120 per management guidance for the fiscal year ended March 2011.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 76 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNTT – COMPARISON OF SELECTED GLOBAL BROADBAND MARKETSNTT – SUBSCRIBERS AND MARKET SHARE IN JAPAN’S BROADBAND MARKETSource: Company presentation dated March 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 77 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNTT DoCoMo (Tokyo: 9437, NYSE: DCM) Services: Communications Services Chiyoda-ku, TK, Japan, 81-3-515-1111 www.nttdocomo.com Trading Data Consensus EPS Estimates Valuation Price: $17.95 (as of 4/21/11) Month # of P/E FYE 3/31/10 13x 52-week range: $14.47 - $19.23 Latest Ago Ests P/E FYE 3/31/11 13x Market value: $77.1 billion This quarter n/a n/a n/a P/E FYE 3/30/12 12x Enterprise value: $75.6 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 4,297.1 million FYE 3/31/11 1.43 1.42 2 EV/ LTM revenue 1.5x Ownership Data FYE 3/30/12 1.48 1.47 2 EV/ LTM EBIT 7x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.7x Insider buys (last six months): 0 LT growth 3.9% 3.9% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 14% Institutional ownership: 0% 11/4/10 n/a n/a LTM pre-tax ROC 29% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 59,253 56,865 55,941 56,202 55,306 52,209 50,289 51,951 12,871 12,571 Gross profit 38,044 34,999 34,114 32,894 32,284 32,252 31,519 32,184 8,147 7,905 Operating income 12,946 9,204 9,773 9,080 9,354 9,075 9,745 10,877 2,552 2,665 Net income 7,630 8,775 7,166 5,367 5,766 5,539 5,808 6,097 1,580 1,576 Diluted EPS 1.54 1.85 1.58 1.22 1.34 1.31 1.39 1.53 0.38 0.38 Shares out (avg) 4,962 4,740 4,525 4,399 4,312 4,224 4,171 4,168 4,170 4,160 Cash from operations 20,075 13,869 18,909 11,510 18,313 13,776 13,884 15,790 981 1,423 Capex 9,425 10,694 9,788 11,136 8,983 8,911 8,517 8,043 2,008 2,026 Free cash flow 10,650 3,175 9,121 374 9,329 4,866 5,367 7,748 (1,027) (603) Cash & investments 9,837 11,972 10,470 5,794 8,206 7,066 8,929 8,670 4,212 8,670 Total current assets 20,956 25,139 22,616 20,329 20,750 21,454 24,191 25,706 21,283 25,706 Intangible assets 7,514 7,934 8,069 8,203 8,383 8,605 9,709 10,126 9,480 10,126 Total assets 73,505 72,029 74,714 71,791 72,901 76,157 79,310 80,387 76,232 80,387 Short-term debt 1,604 1,764 2,276 1,539 908 340 2,122 4,155 166 4,155 Total current liabilities 15,161 12,842 16,061 13,650 14,488 13,480 13,946 14,326 9,944 14,326 Long-term debt 11,209 9,369 7,025 5,539 4,708 7,163 5,042 2,994 7,170 2,994 Total liabilities 30,020 26,159 27,152 22,946 22,705 25,197 24,895 23,602 23,082 23,602 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 43,485 45,870 47,562 48,845 50,197 50,961 54,415 56,785 53,151 56,785 EBIT/capital employed 44% 29% 30% 27% 27% 28% 29% 29% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $40 $35 $30 $25 $20 $15 $10 $5 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 78 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1NTT DoCoMo provides mobile communications services. YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10  subscribers (end) 5% 3% 1% 2% 3% 3%INVESTMENT HIGHLIGHTS  voice ARPU2 -6% -7% -11% -20% -13% -12%  #1 mobile communications provider in Japan,  data ARPU 1% 7% 9% 8% 3% 4% with 57 million subscribers at yearend 2010 (~50%  total ARPU -4 -3% -5% -10% -6% -5% market share), ahead of KDDI (~28% share),  revenue -2% 0% -2% -6% -4% -1% Softbank (~20%) and Emobile (~2%).  employees (end) % 0% 2% -1% 2% n/a  assets (end) 4% -4% 2% 4% 4% 5%  Shares trade at a low-teens trailing FCF yield (3-  TBV/share (end)3 8% 5% 5% 3% 6% 7% 4% dividend yield) despite a solid balance sheet TBV/share (end) (¥k) 76 79 84 86 92 96 with ~¥270 billion of net cash and investments as of Revenue (¥tn) 4.8 4.8 47 4.4 4.3 3.2 yearend 2010. Cumulative FCF of ~¥3.0 trillion in % of revenue by type: CY05-10 approximates 50% of recent market value. Mobile voice services 64% 61% 56% 48% 45% 42% Mobile data services4 23% 26% 29% 34% 37% 39%  Strong history of capital return to shareholders Other mobile services 3% 3% 3% 4% 6% 8% with ~¥1.1 trillion of dividends and ~¥800 billion of Equipment sales 10% 10% 12% 14% 12% 11% share repurchases during calendar years 2005-10. Revenue growth by type: Mobile voice services -2% -3% -10% -19% -11% -10% The overcapitalized balance sheet is a potential Mobile data services 6% 11% 11% 10% 5% 6% source of significant further capital return. Other mobile services -8% -4% 11% 23% 54% 28%  Benefits from share leadership in a consolidated Equipment sales -14% 1% 15% 11% -16% -6% market. Margin expansion is offsetting revenue Selected items as % of revenue: Gross profit 61% 59% 58% 62% 63% 64% pressure due to lower voice ARPU. Revenue may R&D 2% 2% 2% 2% 3% 2% stabilize as data-driven ARPU approximates 50% of EBITDA 33% 32% 34% 37% 36% 39% total ARPU, up from ~25% in FY05. Net income 13% 10% 10% 11% 12% 14%  Exploiting growth opportunities in mobile Net cash from ops 34% 20% 33% 26% 28% 24% D&A 15% 16% 16% 18% 16% 15% Internet applications and overseas markets. Capex5 17% 20% 16% 17% 17% 16% Mobile Internet applications should grow data Selected operating statistics: ARPU over time. DoCoMo has a stake in mobile Subscribers (mn) (end) 51 53 53 55 56 57 market growth in India and the Philippines, among Market share (end)6 56% 54% 52% 51% 50% n/a Voice ARPU (¥k/month) 5.0 4.7 4.2 3.3 2.9 2.6 others, through stakes in affiliated companies. Data ARPU (¥k/month) 1.9 2.0 2.2 2.4 2.5 2.5 Total ARPU (¥k/month) 6.9 6.7 6.4 5.7 5.4 5.2INVESTMENT RISKS & CONCERNS Avg monthly churn 0.8% 0.8% 0.8% 0.5% 0.5% 0.5%  Parent NTT, which owns 67% of shares, may not Return on tang. equity 19% 13% 14% 13% 13% 15%7 Tangible equity/assets 59% 62% 64% 64% 63% 66% act in the best interests of minority shareholders.  shares out (end) -4% -2% -2% -2% 0% 0% Telecommunications provider NTT, which is 1 Based on U.S. GAAP. 2 controlled by the Japanese government, “intends to 3 ARPU=average revenue per user. TBV=tangible book value. maintain its ownership stake at 51% or above.” 4 Referred to as “packet communications revenue” by the company.  Increasing capex requirements. While a transition 5 6 Includes “purchases of intangible and other assets.” Subscriber data source: Telecommunications Carriers Association. from 2G to 3G services (based on W-CDMA) is 7 Annualized. nearly complete, growing data services will require the buildout of fourth-generation networks. MAJOR HOLDERS (notable non-trustees only)  Limited subscriber growth opportunities in NTT 67% | Other insiders <1% | Scout <1% | RenTech <1% Japan given a mature mobile phone market with high penetration, and unfavorable demographics. RATINGS  Yen exposure, as profits are largely in from Japan. VALUE Intrinsic value materially higher than market value?  DOWNSIDE PROTECTION Low risk of permanent loss? COMPARABLE PUBLIC COMPANY ANALYSIS MANAGEMENT Capable and properly incentivized?  P/ This Next FINANCIAL STRENGTH Solid balance sheet?  MV EV EV / Tang. FY FY ($mn) ($mn) Rev. Book P/E P/E MOAT Able to sustain high returns on invested capital?  VOD 142,680 195,960 2.6x 5.2x 10x 10x EARNINGS MOMENTUM Fundamentals improving?  DCM 77,130 75,610 1.5x 1.7x 13x 12x MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINENTT DoCoMo, a subsidiary of NTT, is the largest mobile network operator in Japan with 50% market share. Whileshareholders are exposed to control by NTT (and implicitly the Japanese government, which controls NTT), DoCoMo has astrong record of capital return to all shareholders. Trading at a 10+% trailing FCF yield on a strong balance sheet with netcash, the shares are too cheap to ignore. Despite limited subscriber growth potential in Japan, and uncertain future capexrequirements, free cash flow may remain stable over time based on continued growth in data revenue (~50% of total ARPU).© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 79 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNTT DOCOMO – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 8x estimated 10x estimated 12x estimated normalized EBITDA normalized EBITDA normalized EBITDA minus capex of minus capex of minus capex of Valuation methodology ~¥750 billion (~5% ~¥750 billion (~5% ~¥750 billion (~5% below 5-year below 5-year below 5-year average EBITDA average EBITDA average EBITDA minus capex) minus capex) minus capex) 1 Normalized revenue ¥4,200 ¥4,200 ¥4,200 2 Normalized EBITDA margin 37.0% 37.0% 37.0% Normalized EBITDA ¥1,554 ¥1,554 ¥1,554 3 Minus: Normalized capex (800) (800) (800) Estimated normalized EBITDA minus capex ¥754 ¥754 ¥754 Fair value multiple 8.0x 10.0x 12.0x Estimated enterprise value ¥6,032 ¥7,540 ¥9,048 4 Plus: Net cash 268 268 268 5 Plus: Value of equity affiliates 547 547 547 6 Minus: Net post-retirement liability (144) (144) (144) 6 Minus: Non-controlling interest (27) (27) (27) 7 ¥6,680 billion ¥8,180 billion ¥9,690 billion Estimated fair value of the equity of NTT DoCoMo (¥ in billions) ¥161,000 / share ¥197,000 / share ¥233,000 / share 7 $80 billion $99 billion $117 billion Estimated fair value of the equity of NTT DoCoMo (US$ in billions) $19.40 / ADS $23.70 / ADS $28.10 / ADS Implied trailing FCF yield 10% 8% 7% Implied FCF yield on average FY06-10 FCF 7% 6% 5% 8 Implied dividend yield 3% 3% 2% Implied EV-to-calendar year 2010 EBITDA 3.8x 4.8x 5.7x Implied EV-to-calendar year 2010 revenue 1.4x 1.8x 2.1x Implied fair value of the equity to tangible book 1.7x 2.1x 2.4x 9 Implied EV per subscriber ($) $1,270 $1,590 $1,9101 Revenue guidance for the year ended March 2011 is ¥4,209 billion (down 2% y-y).2 Approximates the trailing EBITDA margin of 37% (year ended December 2010). EBITDA margin averaged 34% during FY06-10 (ended March 2010). Ournormalized EBITDA estimate of ~¥1,550 billion approximates the average annual EBITDA during FY06-10.3 Approximates average annual capex during FY06-10. Capex was ¥685 billion for the year ended December 2010 (~16% of revenue). Our normalized capexestimate of ¥800 billion represents 19% of our normalized revenue estimate.4 Based on balance sheet values of cash and debt as of yearend 2010. Cash includes short-term investments and long-term marketable securities and otherinvestments (excluding investments in affiliates). The overcapitalized balance sheet is a major source of downside protection and potential return of capital toshareholders. Assuming a net debt-to-EBITDA ratio of 2.0x (not uncommon among major mobile communications providers), the company could return 50+% ofrecent market value to shareholders. While this is conceptually important, we ascribe little probability to this scenario playing out due to the Japanesegovernment’s control of the company’s parent NTT, which in turn owns 66% of NTT DoCoMo.5 Based on the carrying value on the balance sheet as of yearend 2010. The company has ~25 affiliates, including a ~27% stake in Tata Teleservices Ltd. and a~14% stake in Philippine Long Distance Telephone Co. Dividends from affiliates totaled ¥13 billion in the fiscal year ended March 2010. Dividends from affiliatesare included in the company’s net cash from operations; earnings from affiliates are reported below the EBIT line in the company’s income statement.6 Based on balance sheet values as of yearend 2010.7 Based on 41.6 million common shares outstanding, excluding 2.2 million treasury shares (1 share = 100 ADS). Estimated fair value in US$ is based on aconversion of the recent exchange rate at 1US$=¥83.8 Based on a per share dividend of ¥5,200 forecast by management for the fiscal year ended March 2011.9 Based on 57.2 million cellular subscribers as of yearend 2010.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 80 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsNTT DOCOMO – MANAGEMENT’S FY 2011 EBIT GUIDANCESource: Company presentation dated April 28, 2011.NTT DOCOMO – MARKET SHARE OF JAPAN’S MOBILE TELEPHONY MARKETSource: NTT presentation dated March 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 81 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsORIX (Tokyo: 8591, NYSE: IX) Services: Rental & Leasing Minato-ku, TK, Japan, 81-3-541-5000 www.orix.co.jp Trading Data Consensus EPS Estimates Valuation Price: $46.68 (as of 4/21/11) Month # of P/E FYE 3/31/10 30x 52-week range: $34.46 - $57.16 Latest Ago Ests P/E FYE 3/31/11 13x Market value: $10.3 billion This quarter n/a n/a n/a P/E FYE 3/30/12 10x Enterprise value: $62.6 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 221.1 million FYE 3/31/11 3.48 3.48 1 EV/ LTM revenue 5.4x Ownership Data FYE 3/30/12 4.69 4.69 1 EV/ LTM EBIT 83x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 0.7x Insider buys (last six months): 0 LT growth 34.2% 34.2% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 1% Institutional ownership: 1% 1/31/11 n/a n/a LTM pre-tax ROC >100% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 8,977 10,901 10,915 13,175 13,517 12,366 10,950 11,645 2,631 2,699 Gross profit 4,467 5,479 6,493 8,111 7,834 6,712 6,087 6,279 1,434 1,476 Operating income 1,026 1,546 2,523 3,299 2,207 626 347 757 110 210 Net income 658 1,130 2,079 2,395 2,168 361 499 717 86 197 Diluted EPS 3.42 5.44 9.47 11.58 9.20 0.65 1.56 2.64 0.29 0.61 Shares out (avg) 167 168 177 181 182 178 204 207 215 215 Cash from operations 1,794 1,484 1,596 2,654 1,835 3,624 2,457 2,490 (23) (86) Capex 10,250 11,063 13,340 12,109 12,774 10,061 4,571 6,167 1,013 1,412 Free cash flow (8,456) (9,578) (11,744) (9,454) (10,939) (6,436) (2,114) (3,677) (1,036) (1,497) Cash & investments 1,787 1,706 2,886 2,526 3,764 5,399 7,502 7,141 7,991 7,141 Total current assets 0 0 0 0 0 0 0 0 0 0 Intangible assets 0 0 0 0 0 0 0 0 0 0 Total assets 66,025 71,236 85,010 96,334 105,581 98,242 90,848 100,116 93,413 100,116 Short-term debt 10,610 11,126 15,687 13,785 15,613 9,369 6,732 5,672 8,628 5,672 Total current liabilities 0 0 0 0 0 0 0 0 0 0 Long-term debt 31,254 33,592 37,984 45,344 52,376 52,278 45,029 53,775 46,162 53,775 Total liabilities 59,404 62,699 73,817 82,316 90,699 84,538 75,604 84,906 78,429 84,906 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 6,621 8,537 11,194 14,018 14,883 13,704 15,244 15,209 14,984 15,209 EBIT/capital employed 11% 16% 21% 25% 17% 7% 13% >100% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 82 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Financial conglomerate Orix operates through six segments: YTD FYE March 31 2007 2008 2009 2010 12/31/10Retail (19% of assets; ¥32 billion of CY10 pre-tax income):*  tangible BV/share (end)2 24% 7% -9% -5% 2%consists of four businesses serving mainly individual clients:  assets (end) 13% 10% -7% -8% 7%1) life insurance; 2) banking (incl. housing loans); 3) cards (via  employees (end) 11% 12% 1% -6% -5%Sumitomo JV); 4) online securities brokerage (via Monex JV). TBV/share (end) (¥)2 11,533 12,341 11,276 10,761 10,725 Assets (¥tn) 8.2 9.0 8.4 77 8.5Real Estate (19%; ¥2 billion): commercial and residential Selected items as % of total assets:development and leasing; asset management, incl. REITs. Cash and equivalents 4% 5% 7% 9% 9% Finance leases/loans3 57% 53% 49% 40% 44%Corporate Financial Services (12%; ¥3 billion): provides Op. leases/securities 21% 24% 26% 30% 28%loans and leasing to core customer base of small and medium Other assets 18% 18% 19% 21% 20%enterprises in Japan (dating back to Orix’ founding in 1964). Debt 61% 64% 63% 57% 59% Deposits 5% 5% 8% 11% 12%Overseas Business (11%; ¥39 billion): includes leasing, Other liabilities 19% 16% 15% 15% 13%corporate financial services (including U.S.-based corporate Common equity 15% 14% 14% 17% 15%advisory firm Houlihan Lokey), and principal investments. % of assets by segment: Retail 17% 16% 19% 20% 19%Investment Banking (6%; ¥16 billion): next to traditional Real estate 11% 12% 14% 14% 19%M&A advisory, the segment includes real estate-related Corporate fin’l services 23% 22% 19% 16% 12%finance, principal investing, loan servicing and securitization. Overseas (non-Japan) 14% 12% 11% 11% 11% Investment banking 16% 19% 16% 15% 6%Maintenance Leasing (6%; ¥25 billion): provides leasing and Maintenance leasing 8% 7% 8% 7% 6%rentals for autos, IT and precision measuring equipment. Other4 11% 12% 14% 16% 27% Loan loss reserve ratio5 1.9% 2.1% 3.8% 4.9% 4.2%The remaining assets (27%) are mainly variable interest entities NPL6/(gross leases+loans) 2.8% 4.2% 11.7% 12.0% 10.2%(~45%) and cash (~30%); CY10 corporate costs: -¥22 billion. ROE (as reported) 18.3% 13.8% 1.8% 3.1% 5.2%7 Tang. equity/assets (end) 13.1% 12.8% 12.6% 15.6% 14.0%INVESTMENT HIGHLIGHTS Revenue (¥bn) 1,115 1,135 1,054 933 706 Selected items as % of revenue:  Evolved from leasing firm to a financial services Provision for credit losses 1% 3% 7% 8% 3% conglomerate, providing products ranging from Pre-tax income 28% 22% 1% 6% 11% leases and corporate loans to life insurance, housing Net income to common 17% 13% 1% 3% 6% loans, and i-banking. 85+% of assets are in Japan. Pre-tax income by geography (¥bn): Japan 265 227 9 33 55  ~30% discount to tangible book ignores improving Non-Japan 69 59 21 36 31 ROE and strong equity capitalization with tangible Eliminations -19 -40 -21 -13 -11 equity at 14% of assets. ROE is up from 2% during Total pre-tax income 315 246 9 56 75 the 2008/09 crisis to 5% annualized in the December  shares out (end)2 1% 1% 0% 20%8 0% 1 Based on U.S. GAAP and continuing operations, unless stated otherwise. 2010 quarter. ROE averaged 15+% during 2005-07. 2 Based on basic shares (excludes potential dilution from convertible debt).  Management targets an ROE of “around 10%,” 3 4 Stated net of loan loss reserve. Loans are ~80% of yearend 2010 gross figure. which implies a P/E of 6-7x, adjusted for dilution. Includes assets of certain variable interest entities (~45%) and cash (~30%). 5 Relates to direct financing leases and loans. 6 Relates to non-performing financing leases and loans defined as 90+ daysINVESTMENT RISKS & CONCERNS past-due as well as loans individually evaluated as “impaired.” 7 Annualized. 8 Reflects the sale of 18 million shares at ¥4,830/share in 2009.  Adequate loss reserves? Non-performing loans of ~¥400 billion (10% of gross loans) exceed loan loss MAJOR HOLDERS (notable non-trustees only) reserves by ~¥230 billion (~25% of market value). Insiders <1% | FMR 15% | Nomura 9% | AllianceBernstein  Conglomerate strategy** of Chairman and CEO 8% | JPM 5% | MUFJ 5% | Mizuho 1% | Nippon Life 1% Yoshihiko Miyauchi (75). Miyauchi joined ORIX at its founding in 1964 and became CEO in 1980. RATINGS  Reliance on wholesale markets for funding as VALUE Intrinsic value materially higher than market value?  deposits represent only 12% of total assets. DOWNSIDE PROTECTION Low risk of permanent loss?   Dilution from ~25 million potential new shares MANAGEMENT Capable and properly incentivized?  underlying convertible bonds and other debt. FINANCIAL STRENGTH Solid balance sheet? * Assets (12/31/10): ¥8.5 trillion; calendar 2010 pre-tax income: ¥94billion.** MOAT Able to sustain high returns on invested capital?  At its extreme, the “strategy” included the purchase of a baseball team in EARNINGS MOMENTUM Fundamentals improving? 1988 to “raise our name recognition and promote our corporate image.” MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEAn aggressive diversification strategy has transformed Orix from a corporate leasing provider into a global financial servicesgroup with assets of ~$100 billion. While 85+% of assets remain in Japan, Orix derived ~40% of 2010 pre-tax income fromoverseas, including from fee-based businesses such as Houlihan Lokey. With shares trading at a ~30% discount to tangiblebook, the valuation is undemanding relative to improving ROE and the solid tangible equity capitalization (14% of assets).Given management’s conglomerate strategy, and little regard for shareholders, however, the gap to intrinsic value may persist.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 83 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsORIX – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 10x “normalized” net 10x “normalized” net income to common income to common 1.0x tangible common (based on implied net (based on implied net Valuation methodology equity income assuming a income assuming a 10% return on 15% return on 1 1 common equity) common equity) Conservative case metrics: 2 Tangible common equity as of 12/31/2010 (adjusted) ¥1,368 Fair value multiple 1.0x Estimated equity value ¥1,368 Base case metrics: 2 “Normalized” net income to common (assuming 10% ROE ) ¥148 Fair value multiple 10x Estimated equity value ¥1,482 Aggressive case metrics: 2 “Normalized” net income to common (assuming 15% ROE ) ¥222 Fair value multiple 10x Estimated equity value ¥2,223 3 ¥1,368 billion ¥1,482 billion ¥2,223 billion Estimated fair value of the equity of Orix (¥ in billions) ¥10,330 per share ¥11,180 per share ¥16,780 per share 3 $16.1 billion $17.5 billion $26.2 billion Estimated fair value of the equity of Orix (US$ in billions) $61 per ADS $66 per ADS $99 per ADS Implied equity fair value to tangible book 1.0x 1.1x 1.6x 4 Implied dividend yield 0.7% 0.7% 0.4% Implied ratios based on net income to common during… …year to December 2010 (based on U.S. GAAP net income) 25x 27x 41x 5 …FY-06-10 average (based on U.S. GAAP net income) 13x 14x 21x1 Return on equity averaged ~11% in FY06-10 (~15% during FY04-08). ROE was 3% in the year ended March 2010. Annualized ROE based on the nine monthsto December 2010 is 5% (including 5% in the December 2010 quarter). Management targets an ROE of “around 10%” in the “medium- to long-term.” Tangiblecommon equity to assets was 14.0% as of yearend 2010.2 Equity at yearend 2010 is adjusted to exclude convertible debt (accounted for under shares outstanding by using a diluted share count).3 Based on ~132 million diluted common shares outstanding (1 share = 2 ADS), including potential new shares from convertible debt and Liquid Yield Option Notesoutstanding. In 2008, Orix issued a ¥150 billion convertible bond, which is convertible into ~22 million shares at ¥6,843 per share. Also, the company issued dollar-denominated Liquid Yield Option Notes in 2002, which are convertible into 2+ million shares at ~$115 per share (1 share = 2 ADS). Estimated fair value in US$ isbased on a conversion of the recent exchange rate at 1US$=¥85.4 Based on a per share dividend of ¥75 declared for the fiscal year ended March 2010 (adjusted for dilution in our valuation).5 Recent total assets approximate average total assets during fiscal 2006-10.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.ORIX – NET INCOME TRENDSource: Company presentation dated January 31, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 84 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsORIX – SELECTED BALANCE SHEET DATA (¥ in billions)ORIX – BOND FINANCING OVERVIEWORIX – ASSET QUALITYSource: Company presentation dated January 31, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 85 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsPanasonic (Tokyo: 6752, NYSE: PC)Consumer Cyclical: Audio & Video Equipment Kadoma, OS, Japan, 81-6-690-1121 www.panasonic.net Trading Data Consensus EPS Estimates Valuation Price: $12.08 (as of 4/21/11) Month # of P/E FYE 3/31/10 n/m 52-week range: $10.76 - $15.02 Latest Ago Ests P/E FYE 3/31/11 22x Market value: $29.8 billion This quarter n/a n/a n/a P/E FYE 3/30/12 45x Enterprise value: $37.2 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 2,464.2 million FYE 3/31/11 0.56 0.56 1 EV/ LTM revenue 0.3x Ownership Data FYE 3/30/12 0.27 0.27 1 EV/ LTM EBIT 10x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 2.2x Insider buys (last six months): 0 LT growth 55.6% 55.6% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 10% Institutional ownership: 4% 2/2/11 n/a n/a LTM pre-tax ROC 15% Operating Performance and Financial Position($ millions, except Fiscal Years Ended LTME FQE FQEper share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10Revenue 87,796 102,279 104,400 106,910 106,449 91,150 87,071 108,169 22,144 26,826Gross profit 25,432 29,786 32,150 31,853 31,595 24,628 24,378 28,537 6,550 6,974Operating income 2,295 3,621 4,275 5,394 6,098 855 2,236 3,657 1,186 1,119Net income 495 686 1,812 2,549 3,309 (4,448) (1,215) 303 379 469Diluted EPS 0.21 0.30 0.82 1.17 1.56 (2.14) (0.59) 0.15 0.18 0.23Shares out (avg) 2,322 2,295 2,222 2,183 2,121 2,079 2,071 2,071 2,071 2,070Cash from operations 5,741 5,616 6,754 6,251 4,374 1,369 6,131 6,931 1,760 1,490Capex 3,234 4,134 4,188 4,828 4,915 6,122 4,409 4,262 1,215 1,097Free cash flow 2,507 1,482 2,567 1,423 (541) (4,753) 1,722 2,669 545 394Cash & investments 16,993 15,570 20,367 18,256 15,639 13,676 14,108 14,164 14,236 14,164Total current assets 44,310 47,310 51,723 49,285 44,594 37,499 44,675 44,293 45,747 44,293Intangible assets 5,775 6,614 6,072 5,810 6,559 6,239 17,934 17,487 17,811 17,487Total assets 87,306 94,570 93,487 92,693 87,372 75,161 98,105 95,527 101,826 95,527Short-term debt 4,316 5,314 4,767 3,225 2,271 1,556 4,210 11,807 5,589 11,807Total current liabilities 30,164 33,205 33,864 32,183 30,060 23,481 33,052 40,990 33,630 40,990Long-term debt 5,407 5,601 3,100 2,662 2,727 7,645 12,077 9,823 13,129 9,823Total liabilities 46,792 52,968 49,029 46,719 43,445 42,483 65,327 64,528 69,392 64,528Preferred stock 0 0 0 0 0 0 0 0 0 0Common equity 40,514 41,602 44,458 45,974 43,927 32,678 32,778 30,999 32,434 30,999EBIT/capital employed 15% 19% 19% 25% 28% 4% 10% 15% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $30 $25 $20 $15 $10 $5 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 86 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Panasonic, formerly Matsushita Electric, makes electronic FYE March 31 2007 2008 2009 2010 2011and electric products. It operates in five major segments:  revenue 2% 0% -14% -4% 17%  employees (end) -2% -7% -4 32% -5%AVC Networks (35% of revenue*): includes plasma and LCD  assets (end) -1% -6% -14% 31% 6%TVs, DVD recorders and players, camcorders, and digital  TBV2/share (end) 8% -5% -28% -44% -15%cameras, as well as IT and telecommunications equipment. TBV/share (end) (¥) 1,594 1,515 1,088 611 516 Revenue (¥tn) 9.1 9.1 7.8 7.4 8.7SANYO (18%): acquired electronic/electric products maker % of revenue by segment:SANYO in December 2009 (Panasonic consolidates SANYO). AVC networks 41% 44% 45% 43% 35% Home appliances 13% 14% 15% 15% 14%PEW and PanaHome (18% of revenue): includes lighting Components and devices 12 13% 12% 11% 9%fixtures, wiring devices, personal-care and health products. PEW and PanaHome 19% 19% 20% 19% 18%Home Appliances (14% of revenue): includes mainly air Other/SANYO (since 12/09) 14% 10% 8% 12% 24% Adj. EBIT margin by segment:3conditioners and refrigerators, as well as other appliances. AVC networks 6% 6% 0% 3% 4%Components and Devices (9% of revenue): includes Home appliances 7% 7% 4% 6% 8%semiconductors, batteries, and general components. Components and devices 9% 9% 1% 4% 4% PEW and PanaHome 5% 6% 3% 2% 5% Other/SANYO (since 12/09) 4% 6% 4% 2% 2%INVESTMENT HIGHLIGHTS Total adj. EBIT margin 5% 6% 1% 3% 4%  One of the world’s leading manufacturers of % of revenue by geography:4 electronic and electric products. Management’s Japan 51% 50% 53% 54% 52% Asia Pacific 21% 23% 22% 23% 26% strategy centers on the flagship Panasonic brand, a Americas 15% 14% 13% 12% 12% globally recognized consumer electronics leader. Europe 13% 13% 12% 10% 10%  EV-to-trailing revenue multiple of 0.4x may not Selected items as % of revenue: Gross profit 30% 30% 27% 28% 26% adequately reflect profitability potential of R&D 6% 6% 7% 6% 6% Panasonic’s businesses and excess assets including Special items5 0% -1% -6% -3% -1% real estate (proceeds from disposals of PP&E have Net income 2% 3% -5% -1% 1% averaged ¥100+ billion per year since at least 2005). Net cash from ops 6% 5% 1% 7% 5% D&A 3% 4% 5% 4% 4%  Targets a 5+% operating profit margin for the Capex6 5% 5% 7% 5% 5% year to March 2013 on revenue of ¥9.4 trillion. Return on tang. equity 6% 9% -14% -6% 6% This appears a realistic target based on historic Tangible equity/assets 45% 46% 43% 28% 18% performance and recent cost-cutting initiatives.  shares out (end) -3% -2% -1% 0% 0% 1 Based on U.S. GAAP. Certain historical data is not comparable y-y due to,  Returned ~¥700 billion in dividends and buybacks among others, the acquisition of SANYO in December 2009. 2 during FY06-10 (~35% of recent market value). 3 TBV=tangible book value (FY11-end tangible book value is estimated). The balance sheet has remained strong, with net Gross profit less SG&A (excludes special items and equity in affiliate earnings). 4 Based on sales destination. debt close to zero after accounting for investments. 5 Includes earthquake-related losses in FY11, as well as the impact of restructuring including impairment losses and expenses associated with the implementation of early retirement programs.INVESTMENT RISKS & CONCERNS 6 Gross capex (excludes proceeds from disposals of PP&E).  Large parts of the business are vulnerable to commoditization. More aggressive restructuring MAJOR HOLDERS* (notable non-trustees only) and a stronger focus on core businesses is likely Insiders 1% | MUFJ 5% | Nippon Life 3% | Sumitomo Mitsui required to achieve sustained profitability. 3% | PC Employee Ass’n 2% | Dodge & Cox 2% | Fisher 1%  Restructuring costs may be higher than * Share count excludes ~380 million treasury shares (~15% of issued shares). management estimates of ¥110 billion in fiscal year 2012 and ¥50 billion in fiscal year 2013. RATINGS VALUE Intrinsic value materially higher than market value? COMPARABLE PUBLIC COMPANY ANALYSIS DOWNSIDE PROTECTION Low risk of permanent loss?  P/ This Next MANAGEMENT Capable and properly incentivized?  MV EV EV / Tang. FY FY FINANCIAL STRENGTH Solid balance sheet?  ($mn) ($mn) Rev. Book P/E P/E MOAT Able to sustain high returns on invested capital?  SNE 30,410 24,090 .3x 1.4x 29x 19x EARNINGS MOMENTUM Fundamentals improving?  PHG 28,770 28,140 .8x 7.9x 13x 12x MACRO Poised to benefit from economic and secular trends?  SHCAY 10,300 18,000 .4x .9x 24x 29x * Financials are based on the year ended March 2011. PC 29,770 37,240 .3x 2.2x 22x 45xTHE BOTTOM LINEPanasonic has a relatively strong brand in consumer electronics—a competitive, capital-intensive business. While sharestrade below intrinsic value, “never-ending” restructuring is absorbing significant cash resources and is a cause of executionrisk. In addition to near-term restructuring, investors need to scrutinize the rate of future compounding of intrinsic value. Wewould need to see the company’s prospective return on equity increase before considering it a compelling long-term investment.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 87 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsPANASONIC – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 8x estimated ¥315 8x estimated billion of norm. ~¥550 billion of 8x estimated ¥450 EBIT (approx. normalized EBIT Valuation methodology billion of FY12 EBIT (10% higher than normalized EBIT guidance, ex. FY13 EBIT quake impact) guidance) 1 Normalized revenue ¥9,000 ¥9,000 ¥9,000 2 Normalized EBIT margin 3.5% 5.0% 6.0% Normalized EBIT ¥315 ¥450 ¥540 Fair value multiple 8.0x 8.0x 8.0x Estimated enterprise value ¥2,520 ¥3,600 ¥4,320 4 Plus: Long-term investments and advances 570 570 570 5 Plus: Excess real estate 100 250 500 4 Minus: Net debt (551) (551) (551) 4 Minus: Net post-retirement liability (436) (436) (436) 4 Minus: Non-controlling interest (387) (387) (387) 6 Minus: Estimated PV of restructuring costs required for stated profitability (250) (350) (450) 7 ¥1,570 billion ¥2,700 billion ¥3,570 billion Estimated fair value of the equity of Panasonic (¥ in billions) ¥760 per share ¥1,300 per share ¥1,720 per share 7 $18.9 billion $32.5 billion $43.0 billion Estimated fair value of the equity of Panasonic (US$ in billions) $9.10 per ADS $15.70 per ADS $20.80 per ADS 8 Implied EV-to-forward revenue 0.29x 0.41x 0.49x 8 Implied EV-to-forward adj. EBIT 8x 12x 14x 8 Implied forward earnings yield 3% 2% 1% 9 Implied dividend yield 1% 1% 1% 10 Implied fair value of the equity to tangible book 1.5x 2.5x 3.3x1 Panasonic is guiding for revenue of ~¥8,800 billion for the year ended March 2012 (up 1% y-y), excluding earthquake-related effects. Under the company’s “mid-term” targets, management expects FY13 revenue of ~¥9,400 billion.2 Average adj. EBIT margin during FY2006-11 is ~4%. Management’s adj. EBIT guidance for the fiscal year ended March 2012 is ¥310 billion (up 2% y-y), whichimplies an EBIT margin of ~3.5%. Management’s “mid-term” plan targets a 5+% EBIT margin in FY13. Adjusted EBIT excludes special items such as earthquake-related and restructuring effects, and equity in affiliate earnings.3 Our “normalized” EBIT of ¥120 billion approximates the average EBIT during FY06-11, which we believe is representative of “through-the-cycle” earnings for thecompany. Note that our “normalized” EBIT figure is ~20% below trailing EBIT and ~30% below management’s EBIT guidance for the year ended March 2012.4 Based on balance sheet values as of March 31, 2011, except for net post-retirement liabilities (as of March 2010).5 Panasonic’s real estate holdings are difficult to value but are likely worth a material percentage of enterprise value. While we note that proceeds from disposals ofPPE have averaged ¥100+ billion per year since 2005, our estimates are pure “guesses.”6 Management is guiding for “structural reform costs” of ¥110 billion in FY12 and ¥50 billion in FY13. Our estimates are modestly higher to reflect our view thatrestructuring costs are likely to be ongoing beyond FY13.7 Based on 2,070 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.8 Based on management guidance for the year ended March 2012, excluding earthquake-related effects.9 Based on the dividend of ¥10 per share for the fiscal year ended March 2011.10 Based on an estimated tangible book of ~¥1,070 billion at March 31, 2011 (based on reported shareholders’ equity as of March 31, 2011 less goodwill andintangibles as of December 31, 2010).Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.PANASONIC – MANAGEMENT GUIDANCE FOR FY2012, ex. Earthquake Impact (¥ in billions)Source: Company presentation dated April 28, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 88 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsPANASONIC – SALES BRIDGE, by Product, FY2010 – FY2011PANASONIC – OPERATING PROFIT BRIDGE, FY2010 – FY2011PANASONIC – FREE CASH FLOW, FY2009 – FY2011Source: Company presentation dated April 28, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 89 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsRicoh (Tokyo: 7752, OTC: RICOY) Technology: Office Equipment Tokyo, TK, Japan, 81-3-627-2111 www.ricoh.co.jp Trading Data Consensus EPS Estimates Valuation Price: $57.77 (as of 4/21/11) Month # of P/E FYE 3/31/10 26x 52-week range: $53.25 - $87.95 Latest Ago Ests P/E FYE 3/31/11 16x Market value: $8.5 billion This quarter n/a n/a n/a P/E FYE 3/30/12 15x Enterprise value: $14.3 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 146.9 million FYE 3/31/11 3.54 3.54 1 EV/ LTM revenue 0.6x Ownership Data FYE 3/30/12 3.76 4.85 1 EV/ LTM EBIT 14x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.3x Insider buys (last six months): 0 LT growth n/a n/a n/a Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 7% Institutional ownership: n/a 10/28/10 n/a n/a LTM pre-tax ROC 12% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 20,896 21,294 22,410 24,285 26,058 24,552 23,667 24,205 5,704 5,496 Gross profit 8,987 8,857 9,332 10,123 10,889 10,029 9,653 9,787 2,467 2,307 Operating income 1,761 1,591 1,744 2,047 2,130 560 773 1,003 279 188 Net income 1,077 976 1,139 1,311 1,250 77 327 397 148 92 Diluted EPS 6.67 6.61 7.60 8.48 8.34 0.51 2.19 2.77 0.99 0.62 Shares out (avg) 148 148 147 146 146 145 145 145 145 145 Cash from operations 1,818 1,588 2,076 1,973 2,281 1,027 2,238 1,833 302 80 Capex 885 987 1,195 1,007 1,000 1,138 786 933 234 250 Free cash flow 933 601 881 967 1,281 (111) 1,452 900 68 (170) Cash & investments 2,924 2,212 2,215 3,021 2,021 3,058 2,863 1,756 2,564 1,756 Total current assets 12,042 12,087 12,249 14,086 13,195 14,225 13,435 12,046 13,108 12,046 Intangible assets 804 1,372 1,539 1,807 2,664 4,877 4,631 4,021 4,687 4,021 Total assets 21,748 22,932 23,959 26,333 25,992 29,503 27,982 25,718 27,965 25,718 Short-term debt 2,126 2,503 2,480 2,393 2,082 3,318 2,136 1,673 2,756 1,673 Total current liabilities 7,130 7,882 8,029 8,635 8,378 9,079 7,752 6,481 7,917 6,481 Long-term debt 3,305 2,659 2,296 2,780 2,652 5,979 6,042 5,908 5,834 5,908 Total liabilities 12,415 12,802 12,688 13,763 13,313 18,054 16,557 15,064 16,670 15,064 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 9,333 10,130 11,271 12,570 12,679 11,449 11,425 10,653 11,295 10,653 EBIT/capital employed 25% 22% 23% 26% 27% 7% 9% 12% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $140 $120 $100 $80 $60 $40 $20 $0 Mar 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 90 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Ricoh manufactures, services and finances office equipment. FYE March 31 2006 2007 2008 2009 2010 2011The Imaging & Solutions segment (~90% of revenue) includes  revenue 5% 8% 7% -6% -4% -4%  employees (end) 1% 8% 2% 30% 0% 0%mainly copiers and printers, and related products/services.  financial receiv. (end) 6% 6% 2% 3% -3% 0%  TBV/share (end)2 12% 11% 6% -35 3% 1%INVESTMENT HIGHLIGHTS TBV/share (end) (¥) 1,137 1,256 1,184 772 798 810  One of the world’s largest providers of office Revenue (¥tn) 1.9 2.1 2.2 2.1 2.0 1.9 printers and copiers. Ricoh benefits from scale, an % of revenue by type: Products 58% 57% 58% 49% 48% 48%3 installed base, and brand/technology leadership. Maintenance/rentals4 36% 37 37% 46% 47% 47%3  Annuity-like income from maintenance, rentals Other5 6% 5% 5% 5% 5% 5%3 and consumables (~45% of revenue) generates Revenue growth by selected type: predictable FCF and mitigates volatile product sales. Products 4% 7% 9% -20% -6% 0%3 Maintenance/rentals 10% 11% 6% 17% 0% -5%3  Trades at a 10+% FCF yield on average free Gross margin by type: cash flow of ~¥70 billion during FY06-11. This Products 33% 34% 34% 31% 29% 33%3 only partly includes the contribution from U.S.- Maintenance/rentals 58% 56% 58% 54% 54% 51%3 based IKON (acquired for ¥170 billion in late ‘08). Other 24% 21% 19% 21% 21% 20%3 Total gross margin 42% 42% 42% 41% 41% 41%  Margin improvement potential. Ricoh’s average % of revenue by segment: FY06-11 EBIT margin of 5-6% is below the 8% Imaging & solutions 86% 86% 86% 88% 89% 88% margin before the global crisis of 2008/09. While Other 14% 14% 14% 12% 11% 12% Ricoh’s FY12 guidance* implies a ~3.5% margin EBIT margin by segment:6 Imaging & solutions 12% 13% 12% 8% 8% 8% (5% excl. restructuring and earthquake-related cost), Other 1% 2% 2% -2% -2% -2% management targets a 10% EBIT margin by 2015. Corporate -3% -3% -3% -3% -3% -4%  ~¥645 billion of finance receivables and ~¥200 Total EBIT margin 8% 8% 8% 4% 3% 3% Japan as % of revenue7 52% 50% 47% 46% 44% 46% billion of cash and investments offset debt of ¥630 EBIT margin by geography (includes allocated corporate expenses): billion at 3/31/11. Price to tangible book is ~1.1x. Japan 10% 11% 10% 6% 4% 3% Non-Japan 6% 7% 6% 1% 3% 3%INVESTMENT RISKS & CONCERNS Selected items as % of revenue: R&D 6% 6% 6% 6% 5% 6%  Product commoditization. Unlike some of its rivals, Net income 5% 5% 5% 0% 1% 1% who are developing value-add service capabilities Net cash from ops 9% 8% 9% 4% 9% 7% (e.g. Xerox’ recent purchase of IT-outsourcer ACS), D&A 4% 4% 4% 5% 5% 5% Ricoh remains a product-driven company. This Capex 5% 4% 4% 5% 3% 4% exposes it to commoditization and technology risk. Fin. receiv. (¥bn) (end) 594 629 640 661 642 6448 Return on tang.equity 12% 13% 12% 1% 5% 3%  Capital allocation. CEO Shiro Kondo (61) spent Tangible equity/assets 42% 44% 43% 35% 28% 30% ¥250+ billion of cash to buy IKON and InfoPrint at  shares out (end) -1% 0% -1% 1% 0% 0% 1 the top of the market in 2007-08. Based on U.S. GAAP. The financials are not comparable throughout the period due to the purchase of IKON Office Solutions for ~¥170 billion in cash in  Leasing ties up capital and leads to credit risk. October 2008 and InfoPrint Solutions for ~¥90 billion in cash in mid-2007. 2* For the year to 3/2012, Ricoh is guiding for revenue of ¥2,090bn (up 8% y- TBV=tangible book value. 2008 and 2009 declines partly reflect the goodwill/y), EBIT of ¥70bn (up 16% y-y), and net income of ¥29bn (up 48% y-y). intangibles resulting from cash acquisitions of InfoPrint and IKON, respectively. 3 Estimated based on actual nine-month results through December 2010. 4 Based on maintenance contracts normally entered into when equipment is sold.COMPARABLE PUBLIC COMPANY ANALYSIS 5 6 Consists mainly of interest income on sales-type and direct-financing leases. P/ This Next Excludes, among others, gains/losses on currency and securities impairment. 7 By origin (by destination would not be materially different). 7 As of 12/31/10. MV EV EV / Tang. FY FY ($mn) ($mn) Rev. Book P/E P/E XRX 14,310 22,920 1.0x 30.1x 9x 8x RATINGS CAJ 57,210 46,500 1.0x 2.0x 18x 18x VALUE Intrinsic value materially higher than market value?  LXK 2,920 2,350 .6x 2.8x 8x 8x DOWNSIDE PROTECTION Low risk of permanent loss?  RICOY 8,480 14,310 .6x 1.3x 16x 15x MANAGEMENT Capable and properly incentivized?  FINANCIAL STRENGTH Solid balance sheet? MAJOR HOLDERS (notable non-trustees only) MOAT Able to sustain high returns on invested capital? Insiders <1% | Nippon Life 5% | MUFJ 5% | Nipponkoa 3% | EARNINGS MOMENTUM Fundamentals improving? New Technology Foundation 2% | Ricoh Employee Ass’n 1% MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEOffice printer and copier manufacturer Ricoh derives high-margin, annuity-like income from equipment maintenance, rentalsand consumables, which represent nearly half of revenue. This offsets the more volatile product sales and leads to relativelystable free cash flow generation. Ricoh’s modest valuation fails to reflect this, as shares trade at 1.1x tangible book and a 10+%FCF yield based on average free cash flow during FY06-10. The balance sheet is stronger than it may appear as cash andfinance receivables offset the gross debt balance. Despite product commoditization risks, the risk-reward is attractive.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 91 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsRICOH – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 8x estimated ¥80 9x estimated ¥100 10x estimated ¥120 billion of normalized billion of normalized billion of normalized EBIT of the industrial EBIT of the industrial EBIT of the industrial business plus/minus business plus/minus business plus/minus Valuation methodology other assets/liabilities other assets/liabilities other assets/liabilities (including (including (including assets/liabilities of the assets/liabilities of the assets/liabilities of the financing business) financing business) financing business) Industrial business: 2 Normalized revenue ¥2,000 ¥2,000 ¥2,000 3 Normalized EBIT margin 4.0% 5.0% 6.0% 4 Normalized EBIT ¥80 ¥100 ¥120 Fair value multiple 8.0x 9.0x 10.0x Estimated enterprise value of industrial business ¥640 ¥900 ¥1,200 5 Other assets/liabilities: Plus: Cash 181 181 181 Plus: Finance receivables, net 644 644 644 6 Plus: Investments 48 48 48 Minus: Debt (630) (630) (630) 7 Minus: Net post-retirement liability (141) (141) (141) Minus: Non-controlling interest (53) (53) (53) 8 ¥689 billion ¥949 billion ¥1,249 billion Estimated fair value of the equity of Ricoh (¥ in billions) ¥950 per share ¥1,310 per share ¥1,720 per share 8 $8.3 billion $11.4 billion $15.0 billion Estimated fair value of the equity of Ricoh (US$ in billions) $57 per ADS $79 per ADS $104 per ADS Implied fair value of the equity to tangible book 1.2x 1.6x 2.1x Implied trailing FCF yield 6% 5% 4% Implied FCF yield based on FY06-11 average FCF 10% 7% 5% 9 Implied dividend yield 3% 3% 2% 10 Implied forward earnings yield 4% 3% 2% Implied peak earnings yield (year ended March 2007) 16% 12% 9%1 While Ricoh’s core business is the manufacture and sale of office equipment including printers and copiers, the company also provides related financing tocustomers. Our valuation accounts for this by valuing the manufacturing (~industrial) business independently of the financing business. We then add ownedfinance receivables and subtract the related debt to/from our enterprise value estimate for the manufacturing business. Although our approach is quite crude, ithighlights the different sources of value within Ricoh.2 Management’s revenue guidance for the year ended March 2012 is ¥2,090 billion (up 8% y-y). Average revenue during FY06-11 (ended March 2011) is ~¥2,050billion. While this average understates Ricoh’s revenue potential due to the acquisition of IKON (included only since October 2008), interest income from leases(~5% of company revenue) is included in the average. As our normalized revenue estimate excludes the financing business, we assume these two factors roughlyoffset each other. IKON, which supplies and services office equipment mainly in North America and Europe, averaged $4+ billion of revenue and ~$200 million ofEBIT in 2003-07.3 Average EBIT margin during FY06-11 is ~6%. Management’s EBIT guidance for the year ended March 2012 is ¥70 billion (up 16% y-y), which implies an EBITmargin of ~3.5%. As our valuation excludes the contribution from the financing business, our normalized EBIT margin estimates are not directly comparable. Weestimate the difference to be about one margin percentage point. Our estimates for all three valuation scenarios are well below management’s target for a“medium-term” EBIT margin of 10%. While Ricoh achieved 10+% EBIT margins in its Japan-based business (~45% of revenue) in the past, the target appearsaggressive based on lower non-Japan margins as well as ongoing risks of commoditization and technological obsolescence.4 Our “base” case EBIT figure of ¥100 billion approximates management’s EBIT guidance for the year ended 2012, excluding the impact of restructuring chargesand earthquake-related costs (Ricoh is guiding for EBIT of ¥70 billion, which includes a negative impact of ¥20 billion from restructuring and ¥10 billion fromearthquake-related sales impacts in Japan and temporary production-related costs).5 Based on balance sheet values as of March 31, 2011, except finance receivables (based on yearend 2010).6 Includes mainly available-for-sale equity securities.7 The related gross benefit obligation was ~¥450 billion at March 31, 2010 based on a discount rate of 2.1% for domestic plans (domestic plans comprise ~60% ofthe total gross obligation).8 Based on 726 million common shares outstanding (1 ADS = 5 shares). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.9 Based on a per share dividend of ¥33 for the fiscal year ended March 2011.10 Based on management guidance for the year ended March 2012 for revenue of ¥2,090 billion (up 8% y-y), EBIT of ¥70 billion (up 16% y-y), and attributable netincome of ¥29 billion (up 48% y-y).Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 92 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsRICOH – OPERATING INCOME BRIDGE, FYE 3/31/2010 – FYE 3/31/2011RICOH – OPERATING INCOME BRIDGE BASED ON MANAGEMENT GUIDANCE, FYE 3/31/2011 – FYE 3/31/2012 FY11/03 FY12/03Source: Company presentation dated April 27, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 93 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsSharp (Tokyo: 6753, OTC: SHCAY) Consumer Cyclical: Audio & Video Equipment Abeno-ku, OS, Japan, 81-6-662-1221 sharp-world.com Trading Data Consensus EPS Estimates Valuation Price: $9.17 (as of 4/21/11) Month # of P/E FYE 3/31/10 183x 52-week range: $8.16 - $13.48 Latest Ago Ests P/E FYE 3/31/11 24x Market value: $10.3 billion This quarter n/a n/a n/a P/E FYE 3/30/12 29x Enterprise value: $18.0 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 1,123.5 million FYE 3/31/11 0.39 0.39 1 EV/ LTM revenue 0.4x Ownership Data FYE 3/30/12 0.32 0.32 1 EV/ LTM EBIT 14x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 0.9x Insider buys (last six months): 0 LT growth n/a n/a n/a Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 7% Institutional ownership: n/a 10/27/10 n/a n/a LTM pre-tax ROC 8% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 27,129 30,525 33,617 37,591 41,076 34,219 33,122 45,630 24,326 9,921 Gross profit 6,540 6,973 7,596 8,571 9,074 5,375 6,327 8,684 4,429 1,794 Operating income 1,443 1,815 1,940 2,161 2,190 (2,205) 383 1,270 61 208 Net income 726 918 1,060 1,223 1,225 (1,512) 53 528 (103) 90 Diluted EPS 0.66 0.84 0.97 1.08 1.04 (1.37) 0.05 0.44 (0.09) 0.08 Shares out (avg) 1,090 1,091 1,091 1,091 1,094 1,101 1,100 1,100 1,100 1,100 Cash from operations 3,000 2,646 3,172 3,810 3,911 314 3,648 1,923 481 206 Capex 2,201 3,250 2,798 3,540 4,362 2,858 2,677 2,482 975 536 Free cash flow 799 (604) 374 270 (451) (2,544) 971 (560) (495) (330) Cash & investments 4,446 4,713 4,523 5,190 4,703 4,050 4,187 3,564 4,081 3,564 Total current assets 13,799 15,872 16,764 20,182 19,742 15,648 17,037 18,532 16,797 18,532 Intangible assets 489 451 577 730 1,131 1,001 915 1,017 913 1,017 Total assets 25,843 28,665 30,771 35,681 36,935 32,314 34,088 35,593 34,131 35,593 Short-term debt 2,519 4,255 3,240 2,740 3,707 4,788 3,538 4,624 4,046 4,624 Total current liabilities 11,418 14,176 14,363 16,733 17,203 14,302 14,710 15,882 14,945 15,882 Long-term debt 2,477 1,562 2,615 4,084 4,227 4,905 6,011 6,642 6,019 6,642 Total liabilities 14,503 16,594 17,564 21,461 22,134 19,826 21,534 23,360 21,763 23,360 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 11,340 12,071 13,207 14,219 14,802 12,489 12,553 12,233 12,368 12,233 EBIT/capital employed 15% 17% 17% 17% 16% -15% 3% 8% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $25 $20 $15 $10 $5 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 94 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Electronics manufacturer Sharp operates in two segments: FYE March 31 2007 2008 2009 2010 2011  revenue 12% 9% -17% -3% 10%Consumer and Information Products (65% of revenue*):  employees (end) 4% 10% 1% 0% 3%includes audio-visual and communication equipment (~70% of  assets (end) 16% 4% -13% 5% 2%segment revenue; mainly LCD color TVs), health and  TBV2/share (end) 8% 3% -16% 1% -2%environmental equipment (~15% of segment revenue; mainly TBV/share (end) (¥)2 1,085 1,119 944 949 933refrigerators and other home appliances) and information Revenue (¥bn) 3,128 3,418 2,847 2,756 3,022 % of revenue by segment:equipment (includes point-of-sale products, electronic cash Consumer/information products 66% 67% 67% 67% 65%registers, multi-function printers and other IT products). Electronic components 34% 33% 33% 33% 35%Electronic components (35% of revenue): includes liquid EBIT margin by segment:3,4 Consumer/information products 4% 3% -2% 2% 4%crystal displays (~60% of segment revenue), solar cells (25% Electronic components 10% 9% -3% 2% 3%of revenue), and other electronic devices. Total EBIT margin 6% 5% -2% 2% 3% % of revenue by geography:5INVESTMENT HIGHLIGHTS Japan 49% 47% 46% 52% 53% China 10% 12% 14% 13% 17%  Electronics manufacturer focused on LCD color Europe 17% 17% 16% 14% TVs and LCD components (~50% of revenue). Americas 19% 18% 17% 12% 30% Mobile phones are another key product area Other 6% 6% 7% 8% accounting for ~15% of trailing revenue. Selected items as % of revenue: Gross profit 23% 22% 16% 19% 19%  Implied EV-to-prior peak EBIT is <5x. If Sharp R&D 6% 6% 7% 6% 6% can sustain recent profitability improvements, the Net income 3% 3% -4% 0% 1% recent enterprise value of less than 0.3x trailing Net cash from ops 0% 0% 0% 11% 6% revenue may be too low. D&A 7% 8% 10% 10% 9% Capex 9% 9% 9% 8% 6%  Measures to improve business performance Return on tang. equity 9% 8% -11% 0% 2% include “producing small- and medium-size LCDs Tangible equity to assets 41% 40% 39% 38% 36% at the Kameyama No. 1 and No. 2 Plants, starting  shares out (end) 0% 1% 0% 0% 0% 1 full-fledged production of large-size LCDs at the Based on Japanese GAAP. 2 TBV=tangible book value (FY11-end TBV est.). 3 EBIT is defined as gross profit less SG&A (excludes special items such as G6 plant in China, starting operations at a solar cell restructuring charges and gains/losses on foreign exchange and securities). plant in Italy in the latter half of 2011, and working Also excludes equity in net earnings of affiliates. 4 Figures may not be comparable year-on-year due to a change in allocation of on solar power generation plant projects.” corporate expenses. 5 Based on customer location.  ~55% of revenue is from overseas production, which helps Sharp to stay competitive and close to COMPARABLE PUBLIC COMPANY ANALYSIS customers. ~45% of staff are based outside Japan. P/ This Next  Cash and long-term investments of ~¥340 billion MV EV EV / Tang. FY FY offset debt of ~¥290 billion, as of March 31. ($mn) ($mn) Rev. Book P/E P/E SNE 30,410 24,090 .3x 1.4x 29x 19xINVESTMENT RISKS & CONCERNS PC 29,770 37,240 .3x 2.2x 22x 45x PHG 28,770 28,140 .8x 7.9x 13x 12x  Weak brand relative to competitors including SHCAY 10,300 18,000 .4x .9x 24x 29x Sony and Panasonic, who may be better-positioned to capture customers’ mind share. Sharp appears relegated to compete mainly on cost. MAJOR HOLDERS (notable non-trustees only)  Pricing pressure reflects the competitive and Insiders <1% | Nippon Life 5% | Meiji Yasuda Life 4% | global nature of the company’s products, with Mizuho 4% | MUFJ 4% | Dai-ichi Life 3% | Sompo 2% increasing competition from Chinese manufacturers. The gross profit margin decline from 23% in FY07 RATINGS to 19% in FY11 may be a reflection of this. VALUE Intrinsic value materially higher than market value?   “Expect a rough financial performance for the DOWNSIDE PROTECTION Low risk of permanent loss?  first quarter…as reflected by the suspension of MANAGEMENT Capable and properly incentivized?  glass input at the large-size LCD plants.” However, FINANCIAL STRENGTH Solid balance sheet?  none of Sharp’s production facilities suffered MOAT Able to sustain high returns on invested capital?  “extensive damage” from the March earthquake. EARNINGS MOMENTUM Fundamentals improving? * MACRO Poised to benefit from economic and secular trends?  Based on the year ended March 2011.THE BOTTOM LINEGiven Sharp’s relatively weak brand positioning in a competitive and fast-changing global consumer electronics industry, wehave little conviction that it can compete effectively over time. As a result, Sharp may be relegated to earning low rates ofreturn in production-oriented businesses in which the investment of tangible capital into capacity expansion is more vital tosuccess than is intellectual property. While the valuation is low relative to revenue, it remains high on average earnings.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 95 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsSHARP – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 8x estimated ¥90 8x estimated ¥120 8x estimated ¥150 Valuation methodology billion of normalized billion of normalized billion of normalized EBIT EBIT EBIT 1 Normalized revenue ¥3,000 ¥3,000 ¥3,000 2 Normalized EBIT margin 3.0% 4.0% 5.0% Normalized EBIT ¥90 ¥120 ¥150 Fair value multiple 8.0x 8.0x 8.0x Estimated enterprise value ¥720 ¥960 ¥1,200 3 Plus: Long-term investments 100 100 100 4 Minus: Net debt (39) (39) (39) 4 Minus: Net post-retirement liability (6) (6) (6) 4 Minus: Non-controlling interest (23) (23) (23) 5 ¥750 billion ¥990 billion ¥1,230 billion Estimated fair value of the equity of Sharp (¥ in billions) ¥680 per share ¥900 per share ¥1,120 per share 5 $9.0 billion $11.9 billion $14.8 billion Estimated fair value of the equity of Sharp (US$ in billions) $8.20 per ADS $10.80 per ADS $13.50 per ADS Implied EV-to-trailing revenue 0.24x 0.32x 0.40x Implied EV-to-trailing adj. EBIT 9x 12x 15x Implied trailing earnings yield 3% 2% 2% Implied trailing FCF yield -3% -2% -2% 6 Implied dividend yield 2% 2% 1% 7 Implied fair value of the equity to tangible book 0.7x 1.0x 1.2x1 Approximates both trailing revenue as well as average revenue during FY07-11.2 Average adj. EBIT margin during FY2007-11 is ~3% (FY11: ~2.5%). Adjusted EBIT excludes special items and equity in affiliate earnings.3 Estimated value of long-term investments, including into affiliated companies.4 Based on balance sheet values as of March 31, 2011, except for net post-retirement liabilities (as of March 2010).5 Based on 1,100 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.6 Based on the dividend of ¥17 per share for the fiscal year ended March 2011.7 Based on an estimated tangible book of ~¥1,025 billion at March 31, 2011 (based on reported shareholders’ equity as of March 31, 2011; assumes no goodwilland intangibles as, to our knowledge, none are disclosed in the company’s filings).Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.SHARP – RESULTS FOR FYE MARCH 31, 2011 vs. MANAGEMENT GUIDANCE (¥ in billions)Source: Company presentation dated April 27, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 96 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsSHARP – OPERATING INCOMESHARP – CAPEX, D&A and R&D (¥ in billions)SHARP – SALES BY PRODUCT CATEGORY (¥ in billions)SHARP – MEASURES TO IMPROVE BUSINESS PERFORMANCESource: Company presentation dated April 27, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 97 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsSony (Tokyo: 6758, NYSE: SNE) Consumer Cyclical: Audio & Video Equipment Minato-ku, TK, Japan, 81-3-674-2111 www.sony.net Trading Data Consensus EPS Estimates Valuation Price: $30.50 (as of 4/21/11) Month # of P/E FYE 3/31/10 n/m 52-week range: $25.85 - $36.97 Latest Ago Ests P/E FYE 3/31/11 29x Market value: $30.4 billion This quarter -$0.58 -$0.45 2 P/E FYE 3/30/12 19x Enterprise value: $24.1 billion Next quarter 0.24 0.29 2 P/E FYE 3/30/13 n/a Shares out: 997.1 million FYE 3/31/11 1.06 1.13 4 EV/ LTM revenue 0.3x Ownership Data FYE 3/30/12 1.57 1.54 4 EV/ LTM EBIT 10x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.4x Insider buys (last six months): 0 LT growth n/a n/a n/a Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 10% Institutional ownership: 8% 2/3/11 $0.89 n/a LTM pre-tax ROC n/m Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 88,531 84,554 88,699 97,971 104,770 91,290 85,196 89,399 2,816 26,056 Gross profit 22,824 19,804 21,581 22,037 24,223 17,971 19,485 21,066 (17,001) 6,378 Operating income 973 1,302 2,628 832 5,459 (2,742) 340 2,419 (21,887) 1,624 Net income 1,047 1,934 1,445 1,492 4,363 (1,168) (482) 858 (22,678) 854 Diluted EPS 1.10 1.92 1.38 1.42 4.15 (1.16) (0.48) 0.88 (22.60) 0.85 Shares out (avg) 924 931 998 1,001 1,003 1,004 1,004 1,004 1,004 1,004 Cash from operations 7,471 7,641 4,722 6,626 8,948 4,808 10,781 9,147 3,660 3,438 Capex 5,047 5,355 5,462 6,230 5,604 5,859 3,992 3,165 1,053 920 Free cash flow 2,424 2,286 (739) 396 3,344 (1,051) 6,789 5,982 2,607 2,518 Cash & investments 13,329 14,654 14,645 15,273 17,882 13,318 20,916 18,506 18,081 18,506 Total current assets 39,721 41,998 44,518 53,696 59,163 42,759 48,809 50,021 49,747 50,021 Intangible assets 9,243 8,856 10,232 9,998 10,300 13,548 13,320 12,215 13,483 12,215 Total assets 107,360 112,183 125,276 138,369 148,246 141,878 151,947 154,546 151,424 154,546 Short-term debt 5,610 2,719 3,972 1,127 4,194 5,328 3,361 2,509 4,000 2,509 Total current liabilities 35,220 33,178 37,794 41,947 47,515 45,006 47,947 49,512 47,359 49,512 Long-term debt 9,184 8,019 9,033 11,822 8,610 7,796 10,915 9,676 11,412 9,676 Total liabilities 79,276 78,285 87,439 98,561 107,324 106,866 116,920 120,057 115,934 120,057 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 28,084 33,898 37,837 39,808 40,922 35,012 35,027 34,489 35,490 34,489 EBIT/capital employed 8% 10% 21% 6% 40% -34% n/m n/m n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 98 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Sony operates through the following main segments: YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10Consumer, Professional & Devices provides TVs, Blu-ray  non-fin’l revenue 2% 13% 8% -13% -12% 3%and other video/audio products, cameras, broadcast  employees (end) 5% 3% 11% -5% -2% 0%equipment, semiconductors and electronic components.  assets (end) 12% 10% 7% -4% 7% 2%  TBV/share (end) 12% 9% 3% -35% 0% 1%Networked Products and Services provides the PlayStation TBV/share (end) (¥) 1,952 2,126 2,189 ,412 1,415 1,456consoles and related software (~50% of revenue) and PCs. Revenue (¥tn) 7.5 8.3 8.9 7.7 7.2 5.6Pictures produces and distributes film and TV programming. % of revenue by selected segment: Audio/video/imaging 21% 20% 21% 19% 16% 15%Financial Services mainly includes the 60%-owned Sony Televisions 12% 15% 15% 17% 14% 17%Financial Holdings (Tokyo: 8729), which owns the insurance Components 11% 10% 10% 9% 7% 6%businesses Sony Life and Sony Assurance, and Sony Bank. Semiconductors2 2% 2% 3% 3% 10% 9% Consumer3 46% 48% 48% 47% 46% 47% Networked products 30% 30% 32% 31% 21% 21%INVESTMENT HIGHLIGHTS Pictures 10% 12% 10% 9% 10% 8%  Globally recognized consumer electronics brand Financial services 10% 8% 6% 7% 12% 11% and entertainment content owner. Sony has large Other4 5% 3% 4% 6% 12% 13% EBIT margin by selected segment: market share in most businesses it competes in, with Consumer -2% 4% few rivals able to match its reputation and/or scale. 0% -1% 4% -4% Networked products -5% 4%  Non-financial business trades at ~0.4x implied Pictures 4% 4% 7% 4% 6% 1% EV-to-trailing revenue, assuming the financial Financial services 26% 13% 4% -6% 19% 18% Total EBIT margin5 3% 1% 5% -3% 0% 5% segment is worth 2.0x tangible book of ~¥300 billion ex. fin’l services 1% 0% 5% -3% -2% 3% (approximates market value of Sony Fin’l Holdings). Net income margin 2% 2% 4% -1% -1% 2%  Appears on track to achieve a 5+% EBIT margin % of revenue by customer location: in the non-financial business (~3% in the nine Japan 29% 26% 23% 24% 29% 29% U.S. 26% 27% 25% 24% 22% 20% months to December 2010). At the recent valuation, Europe 23% 25% 26% 26% 23% 22% the business may trade below 7x normalized EBIT. Other 22% 23% 26% 26% 26% 28%  Key initiatives to turn around profitability Selected items as % of revenue (estimates excl. financial services): include improving the LCD television and game Gross profit 24% 23% 24% 22% 22% n/a R&D 8% 7% 6% 7% 7% 6% businesses, expanding networked products to 350 D&A 6% 5% 5% 6% 6% 5% million units by end of FY13, and growing 3D-related Capex 6% 5% 6% 7% 5% 4% revenue to ¥1+ trillion yen, excl. content, in FY13. Return on tang equity 7% 6% 17% -5% -3% 12%6 Tang. equity/assets 21% 21% 20% 17% 13% 13%INVESTMENT RISKS & CONCERNS  shares out (end) 0% 0% 0% 0% 0% 0% 1 Based on U.S. GAAP. TBV=tangible book value.  Strategy to “integrate hardware, content and 2 FY10 and YTD figures include broadcast- and professional-use products networked services” businesses may fail. While previously reported in consumer and networked segments. 3 Officially termed “consumer, professional & devices.” Howard Stringer (69), chairman and CEO since ‘05, 4 Includes music segment and other businesses, as well as corporate activities. 5 has cut costs, sustained profitability remains elusive. Includes equity in net income/loss of affiliated companies such as the Sony Ericsson JV, businesses not separately listed, and corporate activities. Execution is a risk in this ongoing turn-around. 6 Annualized.  Parts of the electronics businesses are vulnerable to commoditization. More aggressive restructuring MAJOR HOLDERS (notable non-trustees only) and a stronger focus on core businesses is likely Insiders <1% | Dodge & Cox 3% | Primecap 2% | Invesco required to achieve sustained profitability. <1% | Fisher <1% | Brandes <1%COMPARABLE PUBLIC COMPANY ANALYSIS RATINGS P/ This Next VALUE Intrinsic value materially higher than market value?  MV EV EV / Tang. FY FY ($mn) ($mn) Rev. Book P/E P/E DOWNSIDE PROTECTION Low risk of permanent loss?  PC 29,770 37,240 .3x 2.2x 22x 45x MANAGEMENT Capable and properly incentivized?  PHG 28,770 28,140 .8x 7.9x 13x 12x FINANCIAL STRENGTH Solid balance sheet?  SHCAY 10,300 18,000 .4x .9x 24x 29x MOAT Able to sustain high returns on invested capital?  SNE 30,410 24,090 .3x 1.4x 29x 19x EARNINGS MOMENTUM Fundamentals improving?  MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINEWe view Sony as one of Japan’s highest-quality exporters, based on intellectual property ownership and global brand ubiquity.While large parts of the business are exposed to strong competition and may be vulnerable to commoditization, the recentvaluation appears too pessimistic regarding Sony’s earning power. With the non-financial business trading at an implied EV-to-trailing revenue multiple of ~0.4x, the risk-reward is attractive. Management retains plenty of restructuring and assetrationalization options. How quickly and successfully these are pursued will play a key part in closing the gap to intrinsic value.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 99 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsSONY – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive Sum-of-the-parts: Sum-of-the-parts: Sum-of-the-parts: Non-financial Non-financial Non-financial business valued at business valued at business valued at 10x normalized 10x normalized 10x normalized EBIT (based on a EBIT (based on a EBIT (based on an Valuation methodology 4% EBIT margin on 6% EBIT margin on 8% EBIT margin on ¥6.5 trillion of ¥6.5 trillion of ¥6.5 trillion of revenue); Financial revenue); Financial revenue); Financial business valued at business valued at business valued at 2.0x tangible book 2.0x tangible book 2.0x tangible book Non-financial business 1 Normalized revenue ¥6,500 ¥6,500 ¥6,500 2 Normalized EBIT margin 4.0% 6.0% 8.0% Estimated normalized EBIT ¥260 ¥390 ¥520 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value of non-financial business ¥2,600 ¥3,900 ¥5,200 3 Minus: Net debt of non-financial business (195) (195) (195) Estimated equity value of non-financial business ¥2,405 ¥3,705 ¥5,005 Financial services business 3 Estimated tangible shareholders’ equity ¥307 ¥307 ¥307 Fair value multiple 2.0x 2.0x 2.0x Estimated equity value of Financial Services (100%) ¥615 ¥615 ¥615 4 as % of Sony Financial Holdings (8729) recent market value 95% 95% 95% Estimated value of Financial Services attributable to Sony (~60%) ¥369 ¥369 ¥369 Other assets/liabilities 5 Less: PV of restructuring costs required to achieve stated profitability (100) (200) (300) 6 Less: Post-employment benefit provisions, net (265) (265) (265) 7 Less: Non-controlling interests (0) (0) (0) 8 ¥2,410 billion ¥3,610 billion ¥4,810 billion Estimated fair value of the equity of Sony (¥ in billions) ¥2,400 per share ¥3,600 per share ¥4,790 per share 8 $29.0 billion $43.5 billion $58.0 billion Estimated fair value of the equity of Sony (US$ in billions) $28.90 per ADS $43.30 per ADS $57.70 per ADS Implied valuation ratios of the non-financial business: EV-to-calendar 2010 revenue 0.40x 0.60x 0.80x EV-to-average revenue during FY06-10 0.36x 0.54x 0.72x EV-to-prior peak EBIT (FY08 ended March 2008) 6x 9x 11x Implied valuation ratios of Financial Services: Implied P/E assuming a 15% ROE 6x 6x 6x Other implied ratios (whole company): 9 Implied trailing earnings yield 3% 2% 1% 10 Implied dividend yield 1% 1% 1% Implied fair value of the equity to tangible book 1.6x 2.5x 3.3x1 Non-financial revenue was ~¥6,500 billion in calendar 2010 (FY06-10 average: ~¥7,250 billion).2 Non-financial EBIT margin was 3% in the nine months to December 2010 (FY06-10 average: ~0%; FY06-10 peak: 5%). EBIT includes income from equityinvestees (~¥15 billion in calendar 2010). Investments in affiliated companies totaled ~¥220 billion per the balance sheet value as of December 31, 2010.3 As of December 31, 2010 (Sony reports separate balance sheets for financial services and non-financial services businesses in its quarterly filings).4 Most of Sony’ s financial services business is listed as Sony Financial Holdings, Inc. (Tokyo: 8729; listed since 2007), which is a holding company for Sony Life,Sony Assurance and Sony Bank. Sony Financial Holdings remains a consolidated subsidiary of Sony Corp., which owns 60%. Sony’s financial services segmenthas assets of ~¥7.0 trillion, implying that tangible book is 4-5% of total assets.5 Sony recorded ~¥16 billion of restructuring charges within operating expenses in the December 2010 quarter.6 Based on balance sheet value as of December 31, 2010.7 Non-controlling interest was ~¥350 billion per its balance sheet value as of December 31, 2010. We assume most of the non-controlling interest resides withinthe financial services business (already accounted for in our valuation).8 Based on 1,004 million common shares outstanding (1 ADS = 1 share). Estimated fair value in US$ is based on a conversion at the exchange rate of 1US$=¥83.9 Based on net income guidance of ¥70 billion attributable to Sony Corp. for the year ended March 2011 (negative ¥41 billion in the year ended March 2010).10 Based on a per share dividend of ¥25 for the year ended March 2010.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 100 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsSONY – MANAGEMENT GUIDANCE FOR FY10 (¥ in billions)SONY – MANAGEMENT GUIDANCE FOR FY10 CAPEX, D&A, R&D (¥ in billions)SONY – EXCERPT FROM COMPANY PRESENTATION (units in millions)Source: Company presentation of Q3 FY2010 Consolidated Results.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 101 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsTDK (Tokyo: 6762, OTC: TTDKY) Technology: Electronic Instruments & Controls Chuo-ku, TK, Japan, 81-3-520-7116 www.tdk.co.jp Trading Data Consensus EPS Estimates Valuation Price: $49.43 (as of 4/21/11) Month # of P/E FYE 3/31/10 40x 52-week range: $47.26 - $73.70 Latest Ago Ests P/E FYE 3/31/11 12x Market value: $6.4 billion This quarter n/a n/a n/a P/E FYE 3/30/12 15x Enterprise value: $7.1 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: 130.4 million FYE 3/31/11 4.14 4.38 1 EV/ LTM revenue 0.7x Ownership Data FYE 3/30/12 3.38 5.09 1 EV/ LTM EBIT 9x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.4x Insider buys (last six months): 0 LT growth 61.7% 69.3% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 11% Institutional ownership: 0% 11/26/10 n/a n/a LTM pre-tax ROC 14% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 7,698 7,722 9,334 10,118 10,168 8,538 9,494 10,675 2,484 2,582 Gross profit 2,106 2,037 2,458 2,808 2,709 1,426 2,243 2,669 628 636 Operating income 656 713 776 1,041 1,074 (958) 257 793 116 194 Net income 494 391 518 823 839 (741) 159 496 104 148 Diluted EPS 3.84 3.28 3.94 6.21 6.47 (5.75) 1.23 4.00 0.80 1.14 Shares out (avg) 132 132 132 132 130 129 129 129 129 129 Cash from operations 1,349 1,101 1,041 1,708 1,402 695 1,388 1,365 408 305 Capex 522 716 868 827 990 1,155 756 823 178 238 Free cash flow 827 385 174 881 412 (461) 632 542 229 67 Cash & investments 2,671 2,971 2,806 3,537 2,010 2,438 2,621 2,464 2,531 2,464 Total current assets 5,585 5,993 6,652 7,223 5,433 5,648 6,312 6,232 6,136 6,232 Intangible assets 294 264 574 570 1,096 1,680 1,550 1,365 1,613 1,365 Total assets 9,042 9,484 10,840 11,612 10,981 12,924 12,811 12,293 13,011 12,293 Short-term debt 12 9 127 90 143 899 1,091 1,308 990 1,308 Total current liabilities 1,352 1,536 1,991 1,943 1,901 2,343 2,951 3,256 2,757 3,256 Long-term debt 0 1 5 6 2 2,466 2,108 1,787 2,394 1,787 Total liabilities 2,278 1,983 2,595 2,660 2,570 6,418 6,429 6,315 6,731 6,315 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 6,764 7,501 8,245 8,953 8,411 6,505 6,383 5,977 6,280 5,977 EBIT/capital employed 16% 18% 17% 22% 23% -18% 5% 14% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $120 $100 $80 $60 $40 $20 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 102 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1TDK provides components and magnetic products including FYE March 31 2008 2009 2010 2011hard disk drive (HDD) parts. It operates in three segments:  revenue 0% -16% 11% 8%  employees (end) 17% 10% 21% 9%Passive components (49% of revenue; 6% EBIT margin):*  assets (end) -5% 18% -1% -3%comprises (i) capacitors (~35% of segment revenue), (ii)  Tangible book value/share (end) -11% -34% 0% -2%inductive devices (~30% of revenue), and (iii) other passive TBV/share (end) (¥) 4,812 3,187 3,192 3,118components such as sensors and piezoelectric materials. Revenue (¥bn) 866 727 809 876 % of revenue by segment:Magnetic Application Products (42% of revenue; 13% EBIT Passive components n/a 39% 45% 49%margin): comprises (i) recording devices, mainly HDD heads Magnetic application products n/a 51% 47% 42%and suspension assemblies (~70% of segment revenue), and Other n/a 10% 7% 9% Revenue growth by selected segment:(ii) other magnetic products including recording media. Passive components n/a n/a 27% 18%Other (9% of revenue; 7% EBIT margin): includes Magnetic application products n/a n/a 4% -4%rechargeable batteries, mechatronics, and other businesses. Adj. EBIT margin by major segment:2 Passive components n/a n/a -3% 6% Magnetic application products n/a n/a 12% 13%INVESTMENT HIGHLIGHTS Total adj. EBIT margin 8% -5% 4% 7%  Founded in 1935 to commercialize ferrite, a % of revenue by geography:3 Asia and others (ex-Japan) 65% 63% 63% 62% magnetic material. TDK’s growth has centered on Europe 7% 10% 14% 15% ferrite, which is used in electronic equipment. Japan 18% 16% 13% 13%  Investors may underestimate the earning potential Americas 11% 11% 10% 10% of the components business (~50% of revenue) as Selected items as % of revenue: Gross profit 27% 17% 24% 25% trailing segment earnings are well below peak R&D 7% 8% 7% 6% historical earnings including German component Special items4 1% -4% 0% 0% maker EPCOS, which TDK acquired in late 2008. Net income 8% -9% 2% 5% EPCOS had ~€1.5 billion of revenue in 2008. Net cash from ops 14% 8% 15% 12% D&A 8% 12% 10% 9%  Supplying components for smartphones and Capex 10% 14% 8% 9% tablets has driven recent growth. ~25% of FY11 Return on tang. equity 11% -12% 3% 11% component revenue is from communications end- Tangible equity/assets 75% 57% 43% 43% markets, and ~20% each from car/home electronics.  shares out (end) -2% 0% 0% 0% 1 Based on U.S. GAAP. Certain historical data is not comparable y-y due to,  Views materials expertise as the “starting point among others, the acquisition of component maker EPCOS in October ‘08 and for adding value to electronic components.” By the sale of TDK Life on Record brand recording products to Imation in August ‘07. Segment information prior to FY10 is not available due to reporting changes. emphasizing materials technology, TDK seeks to 2 Excludes special items and equity in earnings/losses of affiliates. differentiate itself from rivals focused solely on cost. 3 Based on the location of the customer. 4  80+% of staff and 85+% of sales are outside Japan. Includes restructuring costs, gains/losses on foreign exchange and securities transactions, as well as certain non-recurring items.INVESTMENT RISKS & CONCERNS COMPARABLE PUBLIC COMPANY ANALYSIS  Increased customer concentration may pressure P/ This Next profitability in HDDs, a key earnings contributor. MV EV EV / Tang. FY FY Hard disk drive producers Western Digital and ($mn) ($mn) Rev. Book P/E P/E Seagate have recently proposed to acquire the HDD VSH 3,050 2,580 .9x 2.2x 10x 9x businesses of Hitachi and Samsung, respectively. FCS 2,520 2,410 1.5x 2.5x 12x 11x  Competes in technology industries experiencing TTDKY 6,450 7,080 .7x 1.4x 12x 15x rapid change. Many competitors are Asian firms, with currency exchange affecting competitiveness. RATINGS  Capital allocation. Management spent €1.4 billion VALUE Intrinsic value materially higher than market value?  of cash to acquire EPCOS at the top of the market in DOWNSIDE PROTECTION Low risk of permanent loss?  ‘08. Net debt is ¥13 billion after cash/investments. MANAGEMENT Capable and properly incentivized?   Exposed to raw materials price increases and FINANCIAL STRENGTH Solid balance sheet?  potential earthquake-related production issues. MOAT Able to sustain high returns on invested capital?  EARNINGS MOMENTUM Fundamentals improving? MAJOR HOLDERS (notable non-trustees only) MACRO Poised to benefit from economic and secular trends?  *Insiders <1% | Panasonic 5% | Nippon Life 2% Financials are based on the year ended March 2011.THE BOTTOM LINETDK has strong market positions in the manufacture of hard disk drive parts and passive components used by electronicequipment manufacturers. Unfortunately, the HDD business is challenged by technology change and increasing customerconcentration. While TDK has strengthened its component business via the €1.4 billion purchase of EPCOS in 2008, it hasoverpaid and turned its cash reserves into modest net debt. At the recent valuation, we are not overly interested in the shares.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 103 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsTDK – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive 8x estimated ¥100 billion of normalized 8x estimated ¥75 EBIT (approximates 8x estimated ~¥65 billion of normalized component business billion of normalized EBIT (approximates Valuation methodology EBIT guidance at the EBIT (approximates prior peak EBIT in 1 time of Epcos merger trailing EBIT ) FY07/08, which 2 in 2008 plus the excludes Epcos ) trailing EBIT of the 3 rest of the business ) Normalized revenue ¥850 ¥1,000 ¥1,000 Normalized EBIT margin 7.5% 7.5% 10.0% Normalized EBIT ¥64 ¥75 ¥100 Fair value multiple 8.0x 8.0x 8.0x Estimated enterprise value ¥510 ¥600 ¥800 4 Plus: Investments 103 103 103 4 Minus: Net debt (116) (116) (116) 4 Minus: Net post-retirement liability (80) (80) (80) 4 Minus: Non-controlling interest (5) (5) (5) 5 ¥410 billion ¥500 billion ¥700 billion Estimated fair value of the equity of TDK (¥ in billions) ¥3,180 per share ¥3,880 per share ¥5,430 per share 5 $4.9 billion $6.0 billion $8.4 billion Estimated fair value of the equity of TDK (US$ in billions) $38.30 per ADS $46.70 per ADS $65.40 per ADS Implied fair value of the equity to tangible book 1.0x 1.2x 1.7x Implied trailing earnings yield 11% 9% 6% Implied trailing FCF yield 6% 5% 3% 6 Implied dividend yield 3% 2% 1% Implied EV-to-trailing revenue 0.6x 0.7x 0.9x Implied EV-to-trailing EBIT 8.0x 9.4x 12.5x1 Adjusted EBIT for the year to March 2011 is ~¥64 billion (~7.5% EBIT margin). Adjusted EBIT excludes special items and equity in earnings/losses of affiliates(both were immaterial).2 TDK reported adjusted EBIT of ¥72 billion for the year ended March 2008. This excludes any contribution from German-based component manufacturer EPCOS,which was acquired in October 2008. TDK paid an enterprise value of €1.4 billion for EPCOS, which implied an EV-to-trailing revenue multiple of ~1.0x at the time.3 Based on TDK’s merger presentation from July 2008, management expected the combined TDK-EPCOS component business to achieve annual sales of ¥600-700 billion and an EBIT margin of “over 10%.” TDK reported trailing EBIT of ~¥40 billion, excluding the component segment.4 Based on balance sheet values as of March 31, 2011.5 Based on 129 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.6 Based on a dividend of ¥80 per share for the fiscal year ended March 2011.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.TDK – SELECTED FINANCIAL DATASource: Company presentation dated April 27, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 104 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsTDK – SELECTED FINANCIAL DATA (cont.)Source: Company presentation dated April 27, 2011.TDK – SALES MOMENTUM, BY APPLICATIONSource: Company presentation dated April 27, 2011.TDK – CHANGE IN OPERATING INCOME (FY ended March 31, 2010 to FY ended March 31, 2011)Source: Company presentation dated April 27, 2011.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 105 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsToyota Motor (Tokyo: 7203, NYSE: TM) Consumer Cyclical: Auto & Truck Manufacturers Toyota-shi, AC, Japan, 81-565-282-212 toyota.jp Trading Data Consensus EPS Estimates Valuation Price: $77.80 (as of 4/21/11) Month # of P/E FYE 3/31/10 48x 52-week range: $67.56 - $93.90 Latest Ago Ests P/E FYE 3/31/11 43x Market value: $138.8 billion This quarter $0.54 $0.54 1 P/E FYE 3/30/12 29x Enterprise value: $241.2 billion Next quarter 0.19 0.19 1 P/E FYE 3/30/13 n/a Shares out: 1,784.6 million FYE 3/31/11 1.80 1.80 2 EV/ LTM revenue 1.0x Ownership Data FYE 3/30/12 2.65 2.65 2 EV/ LTM EBIT 38x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.1x Insider buys (last six months): 0 LT growth n/a n/a n/a Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 3% Institutional ownership: 0% 11/5/10 $0.73 $0.67 LTM pre-tax ROC 5% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 207,857 222,962 252,832 287,820 315,958 246,735 227,762 239,913 63,613 56,164 Gross profit 41,154 44,245 49,179 56,724 57,315 24,924 27,248 31,374 8,797 6,948 Operating income 20,034 20,097 22,575 26,906 27,287 (5,541) 1,773 6,324 2,273 1,191 Net income 13,967 14,077 16,492 19,759 20,646 (5,251) 2,517 5,949 1,841 1,125 Diluted EPS 8.24 8.54 10.13 12.30 12.99 (3.34) 1.61 3.86 1.17 0.72 Shares out (avg) 1,695 1,648 1,627 1,605 1,589 1,570 1,568 1,568 1,568 1,568 Cash from operations 27,439 28,495 30,232 38,918 35,835 17,750 30,750 23,340 5,809 2,512 Capex 17,890 23,115 33,306 32,332 33,171 27,942 17,278 19,929 4,124 4,363 Free cash flow 9,549 5,381 (3,074) 6,586 2,664 (10,192) 13,472 3,410 1,685 (1,851) Cash & investments 27,002 25,125 27,097 28,394 27,709 35,873 48,695 42,269 46,660 42,269 Total current assets 106,345 113,456 129,021 142,785 145,258 135,796 157,125 141,851 148,682 141,851 Intangible assets 0 0 0 0 0 0 0 0 0 0 Total assets 264,891 292,471 345,311 391,500 390,101 349,282 364,753 351,353 355,177 351,353 Short-term debt 39,832 42,458 57,171 70,495 74,853 75,923 66,078 64,054 68,077 64,054 Total current liabilities 91,317 98,879 120,530 141,424 143,510 127,268 128,432 120,270 125,167 120,270 Long-term debt 51,046 60,272 67,790 75,279 71,894 75,734 84,315 80,596 83,112 80,596 Total liabilities 166,597 183,764 218,390 249,248 247,447 228,362 240,245 228,405 233,392 228,405 Preferred stock 0 0 0 0 0 0 0 0 0 0 Common equity 98,294 108,707 126,921 142,252 142,654 120,921 124,508 122,949 121,785 122,949 EBIT/capital employed 22% 21% 20% 21% 20% -4% 1% 5% n/m n/m Ten-Year Stock Price Performance and Trading Volume Dynamics $160 $140 $120 $100 $80 $60 $40 $20 $0 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 106 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsBUSINESS OVERVIEW SELECTED OPERATING DATA1Toyota manufactures vehicles and provides related financing. YTD FYE March 31 2006 2007 2008 2009 2010 12/31/10  automotive revenue 13% 13% 10% -23% -7% 6%INVESTMENT HIGHLIGHTS  vehicles sold 8% 7% 5% -15% -4% 6%  One of the largest global vehicle producers, with  vehicles produced 7% 6% 4% -18% -3% 12% ~10% market share based on global vehicle sales of  employees (end) 8% 5% 6% 1% 0% n/a 65 million in 2009 (down 4% y-y).* Toyota’s market  assets (end) 18% 13% 0% -10% 4% -1% share in 2009: Japan (~48%); North America  TBV/share (end) 1% 14% 2% -15% 3% 1% TBV/share (end) (¥) 3,258 3,701 3,769 3,208 3,303 3,262 (~16%); ex-Japan Asia (~13%); and Europe (~5%). Revenue (¥tn) 21.0 23.9 26.3 20.5 19.0 14.4  Asia (ex-Japan) represents ~60% of 2010 EBIT % of revenue by segment: despite accounting for only ~15% of vehicles sold. Automotive 92% 92% 92% 90% 91% 91% This is due to losses in Japan, which accounts for Financial services 5% 5% 6% 7% 7% 6% All other/Eliminations 3% 3% 2% 3% 3% 2% ~30% of vehicles sold and ~40% of revenue. EBIT margin by segment:  Shares are cheap if vehicle EBIT margin reverts Automotive 9% 9% 9% -2% -1% 1% to 5% average, from 1% in 2010. This depends on Financial services 16% 12% 6% -5% 20% 34% turning around the Japanese operations, which had a All other/eliminations 4% 6% 2% 1% -3% 6% Total EBIT margin 9% 9% 9% -2% 1% 3% 2010 EBIT margin of -2% versus 15+% in FY06-08. % of revenue by geography:2  Vehicle business trades at an implied EV-to-2010 North America 35% 37% 35% 30% 29% 28% revenue of ~0.4x, assuming the financial segment is Japan 37% 34% 32% 36% 39% 37% worth 1.0x tangible book of ~¥1.0 trillion. Vehicle Europe 12% 14% 14% 14% 11% 10% Asia/Other 16% 15% 18% 20% 21% 25% segment net cash was ~¥1.2 trillion at 3/31/10. EBIT margin by major geography:3  ~40% of vehicles sold are “global models” using North America 7% 5% 3% -6% 2% 6% common platforms and parts. Global brands include Japan 14% 18% 17% -3% -3% -3% IMV, Vitz/Yaris, Camry and Corolla/Auris. Europe 4% 4% 4% -5% -2% 0% Asia/Other 7% 5% 8% 6% 8% 10%  U.S. recall may have increased accountability. Selected items as % of revenue: Toyota reduced the board from 27 members to 11. R&D 4% 4% 4% 4% 4% 4% Net income 7% 7% 7% -2% 1% 3%INVESTMENT RISKS & CONCERNS D&A 6% 6% 6% 7% 7% 6% Capex4 7% 6% 6% 7% 3% 3%  Industry challenges make it difficult to achieve Selected Automotive segment metrics (mn, worldwide): good returns on capital. Challenges include capital Vehicles sold 8.0 8.5 8.9 7.6 7.2 5.5 intensity, cyclicality, and environmental regulation. Vehicles produced 7.7 8.2 8.5 7.1 6.8 5.4 Gross margin 19% 19% 18% 9% 10% n/a  Profitability improvements may have to wait due Selected Financial Services segment metrics: to the Japan earthquake, which is causing supply Gross receiv. (¥tn)5 8.7 10.1 10.7 10.1 10.4 n/a chain problems and affecting Toyota’s production Loan loss reserve 1.2% 1.1% 1.1% 2.4% 2.2% n/a (~60% of Toyota’s vehicles are produced in Japan). Net income margin 11% 9% 3% -5% 10% n/a Return on tang. equity 14% 15% 14% -4% 2% 5%6  Fallout from the 2010 recall of faulty cars in the Tangible equity/assets 37% 37% 36% 36% 34% 35% U.S. is resulting in market share losses there.  shares out (end) -1% -1% -2% 0% 0% 0%  Credit risk due to the financial services business, 1 Based on U.S. GAAP. TBV=tangible book value. 2 which has ¥13+ trillion of assets (~1.3x market cap). Based on country location of subsidiary transacting the sale to the customer. 3 Excludes unallocated costs/eliminations, which are not material. 4 Excludes equipment leased to others.COMPARABLE PUBLIC COMPANY ANALYSIS 5 Excludes operating leases (¥1.8 trillion at 3/10). 6 Annualized. P/ This Next MV EV EV / Tang. FY FY RATINGS ($mn) ($mn) Rev. Book P/E P/E VALUE Intrinsic value materially higher than market value?  VLKAY 76,760 153,390 .8x 1.6x 10x 8x DOWNSIDE PROTECTION Low risk of permanent loss?  HMC 69,620 103,860 .9x 1.4x 10x 10x GM 48,310 43,680 .3x n/m 8x 6x MANAGEMENT Capable and properly incentivized?  NSANY 42,700 78,520 .6x 1.3x 17x 17x FINANCIAL STRENGTH Solid balance sheet?  MOAT Able to sustain high returns on invested capital?  TM 138,840 241,220 1.0x 1.1x 43x 29x EARNINGS MOMENTUM Fundamentals improving?  MACRO Poised to benefit from economic and secular trends? MAJOR HOLDERS (notable non-trustees only) * Based on company data.Insiders <1% | Toyota Industries Corp. 6% | MUFJ 5%THE BOTTOM LINECar industry pioneer Toyota is struggling following multiple “shocks” including the financial crisis of 2008/09, the massiveU.S. vehicle recall in 2010, and most recently, due to production issues related to the Japanese earthquake. While it may taketime, an eventual reversion to average profitability should reward long-term shareholders. Trading at tangible book, theshares offer an attractive risk-reward as Toyota is likely to deliver normalized ROEs of 10+%, in-line with historical experience.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 107 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsTOYOTA MOTOR – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE (¥ in billions) Conservative Base Case Aggressive Sum-of-the-parts: Sum-of-the-parts: Sum-of-the-parts: Automotive valued at Automotive valued at Automotive valued at 10x normalized EBIT 10x normalized EBIT 10x normalized EBIT (based on a 4% EBIT (based on a 5% EBIT (based on a 6% EBIT Valuation methodology margin on ¥18 trillion margin on ¥20 trillion margin on ¥22 trillion of revenue); Financial of revenue); Financial of revenue); Financial business valued at business valued at business valued at 1.0x tangible book 1.0x tangible book 1.0x tangible book Automotive business 1 Normalized revenue ¥18,000 ¥20,000 ¥22,000 2 Normalized EBIT margin 4.0% 5.0% 6.0% Estimated normalized EBIT ¥720 ¥1,000 ¥1,320 Fair value multiple 10.0x 10.0x 10.0x Estimated enterprise value of Automotive ¥7,200 ¥10,000 ¥13,200 3 Plus: Automotive net cash 1,162 1,162 1,162 Estimated equity value of Automotive ¥8,362 ¥11,162 ¥14,362 Financial services business 4 Estimated tangible shareholders’ equity ¥1,029 ¥1,029 ¥1,029 Fair value multiple 1.0x 1.0x 1.0x Estimated equity value of Financial Services ¥1,029 ¥1,029 ¥1,029 Other assets/liabilities 5, 6 Plus: Estimated value of equity investees ¥1,817 ¥1,817 ¥1,817 5 Less: Post-employment benefit provisions, net (682) (682) (682) 5 Less: Non-controlling interests (578) (578) (578) 7 ¥9,950 billion ¥12,750 billion ¥15,950 billion Estimated fair value of the equity of Toyota (¥ in billions) ¥3,170 per share ¥4,070 per share ¥5,090 per share 7 $120 billion $154 billion $192 billion Estimated fair value of the equity of Toyota (US$ in billions) $76 per ADS $98 per ADS $123 per ADS Implied fair value of the equity to tangible book 0.97x 1.25x 1.56x 8 Implied dividend yield 1% 1% 1% Implied valuation ratios of Automotive: EV-to-calendar 2010 EBIT 47x 66x 87x EV-to-average EBIT during FY06-10 7x 9x 12x EV-to-calendar 2010 revenue 0.40x 0.56x 0.74x EV-to-average revenue during FY06-10 0.36x 0.49x 0.65x Implied valuation ratios of Financial Services: Implied P/E assuming a 15% ROE 7x 7x 7x1 Automotive revenue was ¥18.0 trillion in calendar 2010 (FY06-10 average: ~¥20 trillion).2 Automotive EBIT margin was 1% in calendar 2010 (FY06-10 average: 5%). EBIT excludes income from equity investees. Toyota targets a “consolidatedoperating return on sales” of 5% (approx.¥1 trillion) “as soon as possible.” This is based on 7.5 million vehicles sold and an exchange rate of $1=¥85. Toyota sold7.6 million vehicles in calendar 2010 (FY06-10 average: 8.0 million).3 Based on automotive segment net cash, as of March 31, 2010, excluding non-current marketable securities and other securities investments (this may be a veryconservative assumption!). Toyota reports separate balance sheets for financial services and non-financial services businesses in 20-F filings.4 Estimated based on disclosure as of March 31, 2010. Financial services segment assets are ~¥13 trillion, implying that tangible book is ~8% of total assets.5 Based on balance sheet values as of December 31, 2010.6 Equity in earnings of affiliated companies totaled ¥223 billion in calendar 2010.7 Based on 3,136 million common shares outstanding (1 ADS = 2 shares). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$=¥83.8 Based on a trailing per share dividend of ¥45.Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 108 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsTOYOTA MOTOR – SELECTED MARKET SHARE DATA, by geographic regionThe following table sets forth Toyota’s vehicle unit sales and market share in North America, Europe, Asia and Japanon a retail basis for the periods shown. Each market’s total sales and Toyota’s sales represent new vehicle registrationsin the relevant year (except for the Asia market where vehicle registration does not necessarily apply). All informationon Japan excludes mini-vehicles. The sales information contained below excludes unit sales by Daihatsu and Hino,each a consolidated subsidiary of Toyota. Vehicle unit sales in Asia do not include sales in Pakistan. Calendar Years Ended December 31, (units in millions) 2004 2005 2006 2007 2008 2009 North America Total market sales 20.1 20.4 20.0 19.4 16.3 12.7 Toyota sales (retail basis, excluding mini-vehicles) 2.3 2.5 2.8 2.9 2.5 2.1 Toyota market share 11.4% 12.4% 14.2% 15.1% 15.6% 16.2% Europe Total market sales 20.8 21.1 21.8 23.1 21.2 18.3 Toyota sales (retail basis) 1.0 1.0 1.1 1.3 1.1 0.9 Toyota market share 4.6% 4.8% 5.2% 5.5% 5.4% 4.9% Asia Total market sales 4.8 5.2 5.1 5.5 5.5 5.9 1 Toyota sales (retail basis) 0.7 0.8 0.8 0.8 0.8 0.8 Toyota market share 14.3% 16.1% 14.7% 14.3% 14.6% 13.1%1 Toyota’s principal Asian markets are Thailand, Indonesia, India, Malaysia and Taiwan. Fiscal Years Ended March 31, (units in millions) 2005 2006 2007 2008 2009 2010 Japan Total market sales (excluding mini-vehicles) 3.9 3.9 3.6 3.4 2.9 3.2 Toyota sales (retail basis, excluding mini-vehicles) 1.8 1.7 1.6 1.6 1.3 1.5 Toyota market share 44.5% 44.3% 45.8% 45.6% 46.0% 48.2% CY Ended December 31, (units in millions) 2008 2009 Worldwide vehicle sales 68 65 Toyota worldwide vehicles sold 8.4 6.7 Toyota worldwide market share 12.4% 10.3%Source: Company data, The Manual of Ideas analysis.TOYOTA MOTOR – U.S. VEHICLE SALES MARKET SHARE, by company * 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GM 28% 28% 28% 28% 27% 26% 24% 23% 22% 20% 19% Toyota 9% 10% 10% 11% 12% 13% 15% 16% 16% 17% 15% Ford 23% 22% 20% 19% 18% 17% 16% 15% 14% 15% 16% Honda 7% 7% 7% 8% 8% 8% 9% 9% 11% 11% 10% Chrysler 14% 13% 13% 13% 13% 13% 13% 13% 11% 9% 9% Nissan 4% 4% 4% 5% 6% 6% 6% 7% 7% 7% 8% Other 15% 16% 17% 17% 17% 17% 18% 18% 19% 21% 22%Source: Ward’s Automotive Group, a division of Penton Media Inc.* WardsAuto.com has more detailed U.S. sales data as well as other automotive data sets.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 109 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsAppendix: Selected Statistics on Japan Source: Japan Statistical Yearbook 2011, The Manual of Ideas analysis.© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 110 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 111 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 112 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 113 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 114 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsFavorite Stock Screens For Value Investors“Magic Formula,” based on Trailing Operating IncomeCompanies with high returns on capital employed, trading at high trailing EBIT-to-enterprise value yield  ▼ ▼ Move To Trailing EBIT/ Price/ Insiders Price 52-Week MV EV EV/ EBIT/ Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales EV Employed Rate Book Own. Sells 1 Daily Journal DJCO 73.00 -14% 5% 101 23 .6x 49% infinite 37% 1.5x 4% -/1 2 Argan AGX 9.52 -22% 21% 130 46 .3x 37% infinite 41% 1.7x 2% -/- 3 Bridgepoint Edu. BPI 16.78 -24% 62% 884 605 .8x 36% infinite 41% 3.8x 1% 7/7 4 SuperGen SUPG 2.64 -35% 32% 159 44 .8x 36% infinite n/m 1.3x 0% -/- 5 ITT Educational ESI 73.99 -32% 65% 2,098 1,935 1.2x 32% infinite 39% >9.9x 0% 12 / 2 6 Metropolitan Health MDF 3.88 -23% 37% 158 110 .3x 38% 2665% 38% 2.5x 3% 4/5 7 Unisys UIS 32.50 -48% 27% 1,397 1,392 .3x 27% infinite 26% n/m 1% 19 / 12 8 PDL BioPharma PDLI 6.28 -26% 7% 877 1,197 3.5x 25% infinite 39% n/m 0% 1/- 9 ePlus PLUS 26.96 -39% 13% 228 204 .2x 21% infinite 39% 1.2x 9% 5/8 10 Career Education CECO 21.19 -23% 69% 1,646 1,198 .6x 27% 789% 33% 3.8x 1% 17 / 11 11 Apollo Group APOL 39.80 -15% 68% 5,636 4,794 1.0x 29% 518% 60% 5.3x 3% 12 / 12 12 * ACADIA Pharma ACAD 2.24 -71% 6% 116 79 1.9x 19% infinite n/m 3.9x 0% -/- 13 Oshkosh OSK 34.95 -30% 28% 3,171 3,960 .4x 31% 341% 33% n/m 0% 12 / 7 14 Tessera Technologies TSRA 18.40 -19% 26% 940 465 1.5x 27% 382% 45% 1.8x 1% 6/5 15 Power-One PWER 7.69 -33% 70% 824 652 .6x 46% 243% 41% 3.1x 2% 2/3 16 Amerigroup AGP 64.94 -53% 2% 3,216 2,468 .4x 18% infinite 37% 3.6x 2% 13 / 16 17 USA Mobility USMO 14.80 -18% 30% 327 198 .8x 30% 271% n/m 1.8x 2% 10 / 5 18 Cardiome Pharma CRME 4.46 -9% 110% 273 222 3.4x 17% infinite n/m 5.5x 0% -/- 19 Dell DELL 15.27 -26% 15% 29,116 20,748 .3x 17% infinite 21% >9.9x 13% 13 / 12 20 United Online UNTD 6.21 -24% 40% 547 705 .8x 17% infinite 40% n/m 5% 11 / 11 21 Impax Labs IPXL 26.46 -73% 6% 1,722 1,373 1.6x 29% 241% 36% 3.6x 1% 5/6 22 AutoChina AUTC 26.43 -26% 51% 520 367 .6x 16% infinite 22% 2.3x 0% -/- 23 * GameStop GME 26.54 -33% 2% 3,734 3,272 .3x 20% 288% 35% 5.8x 1% 16 / 11 24 * Forest Labs FRX 32.55 -26% 6% 9,312 5,578 1.3x 24% 198% 22% 2.0x 1% 8/9 25 Global Cash Access GCA 3.10 -27% 194% 201 349 .6x 15% infinite 52% n/m 1% -/4 26 * InterDigital IDCC 45.90 -51% 28% 2,082 1,540 3.9x 15% infinite 36% 9.3x 1% 17 / 13 27 Rigel Pharmaceuticals RIGL 7.82 -23% 13% 409 232 1.9x 15% infinite n/m 2.5x 0% -/1 28 ViroPharma VPHM 19.72 -48% 12% 1,497 1,138 2.6x 19% 277% 37% 5.6x 0% 6/6 29 Veeco Instruments VECO 48.90 -40% 11% 1,989 1,454 1.6x 19% 248% 4% 2.9x 1% 4/5 30 Lihua International LIWA 7.92 -19% 65% 237 149 .4x 36% 148% 27% 1.5x 47% 2/- 31 DeVry DV 49.29 -26% 51% 3,413 2,951 1.4x 16% 334% 33% 6.1x 2% 17 / 6 32 Providence Service PRSC 14.03 -15% 32% 182 303 .3x 19% 195% 43% n/m 2% 6/2 33 Aeropostale ARO 25.90 -18% 24% 2,118 1,852 .8x 21% 161% 40% 4.9x 1% 17 / 9 34 Lincoln Educational LINC 15.67 -38% 80% 351 342 .5x 38% 122% 41% 3.1x 5% 9/8 35 Microsoft MSFT 25.52 -11% 24% 214,429 182,848 2.7x 14% 2353% 24% 6.1x 11% 10 / 11 36 * Almost Family AFAM 36.14 -35% 22% 338 293 .9x 18% 183% 40% 5.1x 10% 10 / 4 37 EarthLink ELNK 8.17 -5% 14% 885 929 1.5x 20% 147% 41% 2.6x 1% 12 / 6 38 AmSurg AMSG 25.84 -37% 8% 807 1,050 1.5x 22% 131% 16% n/m 3% 6/7 39 Amedisys AMED 33.66 -32% 81% 993 1,054 .6x 18% 173% 39% >9.9x 1% 7/7 40 * Rimage RIMG 15.01 -7% 22% 143 26 .3x 45% 111% 37% 1.1x 0% 5/1 41 Deluxe DLX 26.82 -38% 9% 1,381 2,118 1.5x 14% 479% 35% n/m 1% 9/6 42 * IDT Corp. IDT 29.03 -73% 5% 520 302 .2x 13% infinite 6% 2.8x 18% 11 / 3 43 H&R Block HRB 17.65 -43% 8% 5,388 5,683 1.5x 13% infinite 36% n/m 0% 9/- 44 Medicis Pharma MRX 35.08 -40% 2% 2,165 1,630 2.3x 13% infinite 40% 4.0x 1% 1/2 45 * SanDisk SNDK 48.99 -33% 9% 11,596 10,358 2.1x 14% 369% 12% 2.0x 0% 7/9  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted. Screening criteria: ► Market value > $100 million ► ADRs and banks excluded© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 115 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors“Magic Formula,” based on This Year’s EPS EstimatesCompanies with high returns on capital employed, trading at high earnings yields (based on this FY EPS estimates) ▼ ▼ Move To This FY EBIT/ Price to Insiders Price 52-Week MV EV EV/ EPS Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales Yield Employed Rate Book Own. Sells 1 Bridgepoint Edu. BPI 16.78 -24% 62% 884 605 .8x 13% infinite 41% 3.8x 1% 7/7 2 Metropolitan Health MDF 3.88 -23% 37% 158 110 .3x 14% 2665% 38% 2.5x 3% 4/5 3 ITT Educational ESI 73.99 -32% 65% 2,098 1,935 1.2x 13% infinite 39% >9.9x 0% 12 / 2 4 GT Solar SOLR 9.65 -49% 24% 1,206 1,024 1.2x 12% infinite 36% >9.9x 0% 10 / 14 5 * DepoMed DEPO 8.54 -70% 22% 458 390 4.8x 12% infinite n/m >9.9x 1% 2/- 6 ePlus PLUS 26.96 -39% 13% 228 204 .2x 12% infinite 39% 1.2x 9% 5/8 7 Career Education CECO 21.19 -23% 69% 1,646 1,198 .6x 12% 789% 33% 3.8x 1% 17 / 11 8 Dell DELL 15.27 -26% 15% 29,116 20,748 .3x 11% infinite 21% >9.9x 13% 13 / 12 9 Apollo Group APOL 39.80 -15% 68% 5,636 4,794 1.0x 12% 518% 60% 5.3x 3% 12 / 12 10 Power-One PWER 7.69 -33% 70% 824 652 .6x 13% 243% 41% 3.1x 2% 2/3 11 Lihua International LIWA 7.92 -19% 65% 237 149 .4x 23% 148% 27% 1.5x 47% 2/- 12 GameStop GME 26.54 -33% 2% 3,734 3,272 .3x 11% 288% 35% 5.8x 1% 16 / 11 13 Forest Labs FRX 32.55 -26% 6% 9,312 5,578 1.3x 11% 198% 22% 2.0x 1% 8/9 14 Microsoft MSFT 25.52 -11% 24% 214,429 182,848 2.7x 10% 2353% 24% 6.1x 11% 10 / 11 15 Lam Research LRCX 48.98 -28% 21% 6,052 4,812 1.5x 12% 127% 10% 2.9x 1% 14 / 11 16 Veeco Instruments VECO 48.90 -40% 11% 1,989 1,454 1.6x 11% 248% 4% 2.9x 1% 4/5 17 Kulicke and Soffa KLIC 8.76 -40% 21% 626 522 .7x 16% 104% 2% 2.2x 2% 14 / 13 18 Lincoln Educational LINC 15.67 -38% 80% 351 342 .5x 12% 122% 41% 3.1x 5% 9/8 19 Cisco Systems CSCO 16.94 -2% 64% 93,644 68,656 1.6x 9% 3441% 16% 3.6x 0% 17 / 12 20 America’s Car-Mart CRMT 24.36 -16% 24% 258 316 .9x 10% 192% 37% 1.4x 1% -/1 21 Gilead Sciences GILD 39.06 -19% 10% 30,973 32,360 4.2x 10% 173% 26% 7.0x 0% 8/8 22 Nephros NEP 4.20 -33% 117% 124 66 .7x 26% 82% 20% 1.1x 23% -/2 23 * LTX-Credence LTXC 8.89 -44% 27% 440 315 1.2x 12% 101% n/m 2.9x 0% 1/2 24 Actuate BIRT 5.13 -23% 18% 236 197 1.5x 9% infinite 26% 7.9x 4% 6/7 25 * PMC-Sierra PMCS 7.23 -5% 31% 1,687 1,590 2.5x 9% infinite 27% 5.7x 0% 5/8 26 DeVry DV 49.29 -26% 51% 3,413 2,951 1.4x 9% 334% 33% 6.1x 2% 17 / 6 27 * IDT Corp. IDT 29.03 -73% 5% 520 302 .2x 9% infinite 6% 2.8x 18% 11 / 3 28 Teradyne TER 17.81 -50% 8% 3,302 2,648 1.6x 10% 165% 4% 3.3x 0% 5/5 29 Marvell Technology MRVL 15.70 -12% 43% 9,944 7,015 1.9x 9% 188% 1% 3.0x 0% 2/3 30 * SanDisk SNDK 48.99 -33% 9% 11,596 10,358 2.1x 9% 369% 12% 2.0x 0% 7/9 31 Cephalon CEPH 75.91 -29% 2% 5,750 5,634 2.0x 11% 93% 32% 9.6x 1% 10 / 10 32 * Chinacast Education CAST 5.69 -8% 40% 284 179 2.3x 11% 101% 35% 2.1x 0% 2/- 33 Exceed Company EDS 6.96 -16% 34% 177 64 .2x 23% 70% 14% .8x 0% -/- 34 Amedisys AMED 33.66 -32% 81% 993 1,054 .6x 9% 173% 39% >9.9x 1% 7/7 35 China Valves CVVT 4.22 -9% 200% 151 130 .7x 31% 66% 25% 1.1x 0% -/- 36 Gulf Resources GFRE 4.19 -4% 185% 146 77 .5x 43% 65% 26% .8x 12% 6/1 37 * Intel INTC 21.46 -18% 12% 115,566 105,725 2.3x 11% 94% 28% 3.7x 0% 2/3 38 * KLA-Tencor KLAC 42.60 -37% 22% 7,124 6,233 2.5x 11% 91% 28% 3.5x 1% 10 / 6 39 * AsiaInfo Holdings ASIA 19.08 -17% 71% 1,432 1,152 3.4x 8% 795% 15% 5.0x 6% 9/6 40 Aeropostale ARO 25.90 -18% 24% 2,118 1,852 .8x 9% 161% 40% 4.9x 1% 17 / 9 41 SciClone Pharma SCLN 4.80 -57% 1% 231 177 2.1x 11% 83% 9% 2.8x 0% -/- 42 * DST Systems DST 48.78 -27% 13% 2,266 2,929 1.3x 9% 162% 33% 4.2x 4% 12 / 10 43 * Eli Lilly LLY 36.26 -12% 5% 41,977 42,176 1.8x 12% 73% 20% 5.5x 0% 24 / 8 44 * Amtech Systems ASYS 22.46 -64% 37% 211 158 1.0x 10% 99% 39% 2.5x 2% 8/7 45 * Lexmark LXK 36.92 -14% 30% 2,918 2,350 .6x 13% 66% 19% 2.8x 1% 10 / 8  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted. Screening criteria: ► MV > $100 million ► ADRs and banks excluded ► Enterprise value to MV < 1.5© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 116 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors“Magic Formula,” based on Next Year’s EPS EstimatesCompanies with high returns on capital employed, trading at high earnings yields (based on next FY EPS estimates) ▼ ▼ Move To Next FY EBIT/ Price to Insiders Price 52-Week MV EV EV/ EPS Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales Yield Employed Rate Book Own. Sells 1 Metropolitan Health MDF 3.88 -23% 37% 158 110 .3x 16% 2665% 38% 2.5x 3% 4/5 2 GT Solar SOLR 9.65 -49% 24% 1,206 1,024 1.2x 15% infinite 36% >9.9x 0% 10 / 14 3 Bridgepoint Edu. BPI 16.78 -24% 62% 884 605 .8x 14% infinite 41% 3.8x 1% 7/7 4 ePlus PLUS 26.96 -39% 13% 228 204 .2x 12% infinite 39% 1.2x 9% 5/8 5 Power-One PWER 7.69 -33% 70% 824 652 .6x 16% 243% 41% 3.1x 2% 2/3 6 Dell DELL 15.27 -26% 15% 29,116 20,748 .3x 12% infinite 21% >9.9x 13% 13 / 12 7 Lihua International LIWA 7.92 -19% 65% 237 149 .4x 23% 148% 27% 1.5x 47% 2/- 8 GameStop GME 26.54 -33% 2% 3,734 3,272 .3x 12% 288% 35% 5.8x 1% 16 / 11 9 Career Education CECO 21.19 -23% 69% 1,646 1,198 .6x 11% 789% 33% 3.8x 1% 17 / 11 10 Microsoft MSFT 25.52 -11% 24% 214,429 182,848 2.7x 11% 2353% 24% 6.1x 11% 10 / 11 11 America’s Car-Mart CRMT 24.36 -16% 24% 258 316 .9x 12% 192% 37% 1.4x 1% -/1 12 ITT Educational ESI 73.99 -32% 65% 2,098 1,935 1.2x 11% infinite 39% >9.9x 0% 12 / 2 13 Kulicke and Soffa KLIC 8.76 -40% 21% 626 522 .7x 17% 104% 2% 2.2x 2% 14 / 13 14 Actuate BIRT 5.13 -23% 18% 236 197 1.5x 11% infinite 26% 7.9x 4% 6/7 15 PMC-Sierra PMCS 7.23 -5% 31% 1,687 1,590 2.5x 11% infinite 27% 5.7x 0% 5/8 16 Gilead Sciences GILD 39.06 -19% 10% 30,973 32,360 4.2x 12% 173% 26% 7.0x 0% 8/8 17 LTX-Credence LTXC 8.89 -44% 27% 440 315 1.2x 15% 101% n/m 2.9x 0% 1/2 18 Cisco Systems CSCO 16.94 -2% 64% 93,644 68,656 1.6x 10% 3441% 16% 3.6x 0% 17 / 12 19 Lincoln Educational LINC 15.67 -38% 80% 351 342 .5x 12% 122% 41% 3.1x 5% 9/8 20 Nephros NEP 4.20 -33% 117% 124 66 .7x 27% 82% 20% 1.1x 23% -/2 21 Teradyne TER 17.81 -50% 8% 3,302 2,648 1.6x 11% 165% 4% 3.3x 0% 5/5 22 Marvell Technology MRVL 15.70 -12% 43% 9,944 7,015 1.9x 11% 188% 1% 3.0x 0% 2/3 23 * Chinacast Education CAST 5.69 -8% 40% 284 179 2.3x 12% 101% 35% 2.1x 0% 2/- 24 Lam Research LRCX 48.98 -28% 21% 6,052 4,812 1.5x 11% 127% 10% 2.9x 1% 14 / 11 25 Exceed Company EDS 6.96 -16% 34% 177 64 .2x 27% 70% 14% .8x 0% -/- 26 Amtech Systems ASYS 22.46 -64% 37% 211 158 1.0x 11% 99% 39% 2.5x 2% 8/7 27 China Valves CVVT 4.22 -9% 200% 151 130 .7x 36% 66% 25% 1.1x 0% -/- 28 DeVry DV 49.29 -26% 51% 3,413 2,951 1.4x 10% 334% 33% 6.1x 2% 17 / 6 29 * SciClone Pharma SCLN 4.80 -57% 1% 231 177 2.1x 12% 83% 9% 2.8x 0% -/- 30 Gulf Resources GFRE 4.19 -4% 185% 146 77 .5x 47% 65% 26% .8x 12% 6/1 31 Aeropostale ARO 25.90 -18% 24% 2,118 1,852 .8x 10% 161% 40% 4.9x 1% 17 / 9 32 Intel INTC 21.46 -18% 12% 115,566 105,725 2.3x 11% 94% 28% 3.7x 0% 2/3 33 * IDT Corp. IDT 29.03 -73% 5% 520 302 .2x 9% infinite 6% 2.8x 18% 11 / 3 34 SinoCoking Coal SCOK 6.98 -25% 240% 146 176 2.6x 25% 61% 13% 2.1x 0% -/- 35 * AsiaInfo Holdings ASIA 19.08 -17% 71% 1,432 1,152 3.4x 9% 795% 15% 5.0x 6% 9/6 36 Lexmark LXK 36.92 -14% 30% 2,918 2,350 .6x 13% 66% 19% 2.8x 1% 10 / 8 37 * Amedisys AMED 33.66 -32% 81% 993 1,054 .6x 9% 173% 39% >9.9x 1% 7/7 38 * Grand Canyon LOPE 13.71 -6% 96% 617 612 1.6x 10% 111% 39% 4.6x 11% -/6 39 * Hackett Group HCKT 4.04 -34% 12% 167 142 .7x 9% 175% n/m 4.4x 9% 9/3 40 USANA Health USNA 34.26 -7% 33% 543 516 1.0x 10% 126% 34% 6.2x 51% 11 / 14 41 * Walter Energy WLT 136.38 -58% 5% 8,486 8,555 5.1x 11% 78% 32% >9.9x 1% 15 / 10 42 * SanDisk SNDK 48.99 -33% 9% 11,596 10,358 2.1x 9% 369% 12% 2.0x 0% 7/9 43 * KLA-Tencor KLAC 42.60 -37% 22% 7,124 6,233 2.5x 10% 91% 28% 3.5x 1% 10 / 6 44 SkyPeople Juice SPU 4.00 -15% 65% 103 64 .7x 32% 53% 27% .9x 0% 1/- 45 * Integrated Silicon ISSI 9.51 -31% 46% 253 178 .7x 15% 57% 1% 1.4x 0% 1/1  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted. Screening criteria: ► MV > $100 million ► ADRs and banks excluded ► Enterprise value to MV < 1.5© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 117 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsContrarian: Biggest YTD Losers (deleveraged & profitable)Non-financial companies with no net debt, positive analyst estimates for next year’s EPS, and large YTD price drop ▼ Price Change Since Price to Next Insiders Price MV EV December 31, Tangible FY % Buys/ Company Ticker ($) ($mn) ($mn) 2004 2009 2010 Book P/E Own. Sells 1 SemiLEDs LEDS 10.87 296 204 n/m n/m -63% 1.7x 27x 7% 7/- 2 * Gulf Resources GFRE 4.19 146 77 20850% -64% -61% .8x 2x 12% 6/1 3 China Valves CVVT 4.22 151 130 -75% -54% -60% 1.1x 3x 0% -/- 4 * Am. Superconductor AMSC 11.74 595 352 -21% -71% -59% 1.3x 31x 5% 1/1 5 China Xiniya Fashion XNY 3.98 232 100 n/m n/m -57% 1.5x 4x 0% -/- 6 Smith Micro Software SMSI 7.87 275 203 -12% -14% -50% 2.6x 11x 6% 12 / 12 7 Ambow Education AMBO 7.32 523 417 n/m n/m -47% 3.8x 9x 0% -/- 8 Trident Microsystems TRID 0.98 175 81 -88% -47% -45% 1.2x 12x 0% 6/- 9 * QuickLogic QUIK 3.68 141 119 30% 74% -43% 4.8x 37x 0% 4/4 10 * China-Biotics CHBT 8.52 189 56 n/m -45% -42% 1.0x 4x 23% -/- 11 * SmartHeat HEAT 3.09 119 74 n/m -79% -41% .9x 3x 0% 1/- 12 Cree CREE 39.04 4,274 3,201 -3% -31% -41% 2.4x 24x 0% 6/5 13 Novatel Wireless NVTL 5.67 182 105 -71% -29% -41% 1.5x 20x 2% 10 / 6 14 * Anadigics ANAD 4.17 281 184 11% -1% -40% 1.4x 13x 4% 11 / 5 15 * Medifast MED 17.78 274 246 405% -42% -38% 3.9x 9x 9% -/7 16 TEKELEC TKLC 7.55 521 300 -63% -51% -37% 1.4x 18x 1% 8/8 17 * AXT AXTI 6.63 212 187 320% 104% -36% 1.9x 9x 1% 1/2 18 * Uranium Energy UEC 3.85 275 241 n/m 2% -36% 4.6x 15x 2% 1/1 19 Rosetta Stone RST 13.69 283 161 n/m -24% -35% 2.1x 27x 1% -/1 20 * Daktronics DAKT 10.49 436 362 -16% 14% -34% 2.3x 23x 6% 6/8 21 * Quepasa QPSA 7.72 125 118 106% 268% -34% 13.6x 35x 10% 6/1 22 * Global Edu. & Tech. GEDU 6.30 164 39 n/m n/m -34% 1.4x 13x 0% -/- 23 * KIT digital KITD 10.76 408 273 -90% -2% -33% 2.8x 10x 0% -/- 24 * HiSoft Technology HSFT 20.43 590 420 n/m n/m -32% 3.9x 19x 0% -/- 25 * NutriSystem NTRI 14.36 403 392 404% -54% -32% 5.4x 15x 3% -/5 26 * Marchex MCHX 6.54 233 196 -69% 29% -31% 2.3x 23x 7% 5/4 27 * MIPS Technologies MIPS 10.45 546 445 6% 139% -31% 6.0x 18x 0% 13 / 7 28 Entropic Comms ENTR 8.35 715 569 n/m 172% -31% 2.9x 9x 0% 8/8 29 * THQ THQI 4.19 285 276 -73% -17% -31% 2.4x 14x 0% 6/3 30 * Protalix BioTherap. PLX 6.93 571 535 247% 5% -31% n/m 87x 0% -/- 31 * Grand Canyon LOPE 13.71 617 612 n/m -28% -30% 4.6x 10x 11% -/6 32 * Lihua International LIWA 7.92 237 149 n/m -24% -30% 1.5x 4x 47% 2/- 33 * Origin Agritech SEED 7.51 179 154 13% -36% -29% 6.5x 14x 0% -/- 34 * Mattson Technology MTSN 2.12 107 88 -81% -41% -29% 1.7x 8x 0% 2/2 35 EnerNOC ENOC 17.00 446 293 n/m -44% -29% 2.3x 38x 11% 10 / 6 36 * AirMedia AMCN 4.90 321 215 n/m -35% -29% 1.4x 13x 0% -/- 37 * Hawaiian Holdings HA 5.58 281 185 -18% -20% -29% 2.7x 9x 2% 1/1 38 Axcelis Technologies ACLS 2.47 262 216 -70% 75% -29% 1.3x 7x 2% 7/5 39 Dolby Laboratories DLB 47.79 5,355 4,651 n/m 0% -28% 4.4x 16x 0% 15 / 11 40 * Longtop Fin. Tech LFT 26.00 1,484 1,071 n/m -30% -28% 3.5x 12x 0% -/- 41 * CDI CDI 13.37 256 244 -37% 3% -28% 1.4x 18x 1% 5/4 42 * ShengdaTech SDTH 3.55 193 156 n/m -42% -28% 1.2x 6x 0% -/- 43 * eLong LONG 14.40 342 195 -23% 30% -27% 2.2x 24x 0% -/- 44 * Nephros NEP 4.20 124 66 950% -55% -27% 1.1x 4x 23% -/2 45 * MGP Ingredients MGPI 8.06 144 144 -7% 5% -27% 1.8x 12x 2% 3/4  Company website SEC Y! Stock Price Charts Proxy Y! * New additions are highlighted. Screening criteria: ► Positive net cash ► Positive next FY EPS estimate ► Market value > $100 million© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 118 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsValue with Catalyst: Cheap Repurchasers of StockCompanies that may be creating value by reducing their shares outstanding at relatively cheap prices ▼ Q-Q Next Price to Net Cash Insiders Price MV EV Change FY Tangible as % of % Buys/ Company Ticker ($) ($mn) ($mn) in Shares P/E Book MV Own. Sells 1 Allied World AWH 63.42 2,412 n/m -11.5% - .9x n/m 0% -/- 2 * RadioShack RSH 15.83 1,685 1,755 -9.5% 8x 2.1x -4% 1% 8/7 3 * Canandaigua National CNND 354.00 167 n/m -8.5% - 1.5x n/m 8% 8/2 4 * Pernix Therapeutics PTX 11.59 263 260 -7.2% 12x 33.3x 1% 0% -/- 5 Vishay Intertech VSH 18.43 3,049 2,583 -6.6% 9x 2.2x 15% 1% 11 / 3 6 ITT Educational ESI 73.99 2,098 1,935 -6.0% 9x 16.4x 8% 0% 12 / 2 7 * A.M. Castle CAS 17.60 404 437 -5.9% 12x 1.8x -8% 1% 3/2 8 Telenor TELNY 49.06 26,773 30,447 -5.8% 9x 4.0x -14% 0% -/- 9 * Enstar Group ESGR 100.65 1,316 n/m -5.6% 8x 1.4x n/m 1% 1/1 10 * Journal Comms JRN 5.58 357 427 -5.6% 11x 3.7x -20% 0% 2/2 11 Tyson Foods TSN 19.49 7,358 8,784 -5.6% 10x 2.2x -19% 1% 16 / 9 12 * Manulife Financial MFC 17.65 31,376 n/m -5.5% - 1.7x n/m 0% -/- 13 * Aeropostale ARO 25.90 2,118 1,852 -4.9% 10x 4.9x 13% 1% 17 / 9 14 XL Group XL 24.19 7,478 n/m -4.8% - .8x n/m 0% -/- 15 * Travelers TRV 61.32 25,685 n/m -4.4% 10x 1.2x n/m 0% 23 / 17 16 * A. H. Belo AHC 8.18 176 90 -4.4% 28x 1.1x 49% 2% 5/6 17 * Validus VR 32.07 3,248 n/m -4.3% 7x 1.0x n/m 2% 9/2 18 Lukoil LUKOY 69.90 59,385 68,043 -4.2% 5x 1.0x -15% 0% -/- 19 * Argo Group AGII 31.34 860 n/m -4.1% 11x .6x n/m 0% 1/- 20 Corinthian Colleges COCO 4.23 358 549 -4.0% 10x 2.2x -53% 1% 19 / 8 21 Aetna AET 39.06 14,873 n/m -4.0% 9x 3.5x n/m 0% 5/4 22 * DIRECTV DTV 47.00 37,204 46,212 -3.9% 12x n/m -24% 0% 12 / 5 23 * Kohl’s KSS 52.03 15,110 14,929 -3.9% 10x 1.9x 1% 1% 15 / 5 24 O2Micro OIIM 7.23 262 159 -3.8% 11x 1.5x 39% 0% -/- 25 Platinum Underwriter PTP 37.41 1,394 n/m -3.8% 8x .8x n/m 2% 13 / 4 26 * REX American REX 16.46 158 189 -3.7% - .6x -20% 5% 3/3 27 * Celestica CLS 11.04 2,181 1,548 -3.6% - 1.6x 29% 0% -/- 28 Endurance Specialty ENH 45.17 1,791 n/m -3.5% 9x .7x n/m 0% -/- 29 * Meritor MTOR 16.66 1,570 2,325 -3.3% 8x n/m -48% 3% 17 / 13 30 * Comtech Telecomm. CMTL 28.05 749 355 -3.2% 26x 1.5x 53% 2% 3/1 31 * Tower Group TWGP 22.00 924 n/m -3.2% 7x 1.3x n/m 9% 15 / 10 32 * Devon Energy DVN 89.11 38,050 40,669 -3.1% 11x 2.9x -7% 1% 12 / 12 33 * Lubrizol LZ 134.48 8,617 9,073 -3.1% 11x 7.6x -5% 1% 18 / 17 34 * People’s United PBCT 13.20 4,747 n/m -3.1% 17x 1.5x n/m 1% 12 / 14 35 Hewlett-Packard HPQ 40.99 88,700 99,169 -3.0% 7x n/m -12% 0% 16 / 13 36 ProAssurance Corp. PRA 63.45 2,190 n/m -2.9% 12x 1.3x n/m 1% 8/7 37 Employers Holdings EIG 19.59 754 n/m -2.9% 15x 1.7x n/m 1% 12 / 10 38 Alterra Capital ALTE 21.68 2,280 n/m -2.8% 9x .8x n/m 0% -/- 39 PartnerRe PRE 78.45 5,291 n/m -2.8% 9x .8x n/m 0% -/- 40 * Diversified Global DGHG 1.40 122 138 -2.7% - .6x -13% 0% -/- 41 * PowerSecure POWR 0.00 139 140 -2.7% 13x 1.8x -1% 5% 4/4 42 * Gap GPS 0.00 12,813 11,152 -2.6% 11x 3.3x 13% 6% 12 / 11 43 * West Coast Bancorp WCBO 0.00 339 n/m -2.6% 15x 1.3x n/m 0% -/- 44 W.R. Berkley WRB 0.00 4,497 n/m -2.5% 13x 1.2x n/m 4% 3/3 45 Axis Capital AXS 0.00 4,154 n/m -2.5% 9x .8x n/m 0% -/-  Company website SEC Y! Proxy Y! * New additions are highlighted. Criteria: ► MV < 2 * BV ► Next FY P/E < 12 ► Debt/equity < 0.4 ► MV > $100mn ► Q-Q  shares < 0© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 119 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsProfitable Dividend Payors with Decent Balance SheetsDividend-paying companies with no net debt and EPS estimates in excess of 75% of the indicated annual dividend ▼ Move To Dividend Yield Est. P/E Price to Insiders Price 52-Week MV EV Last 12 Annual This Next Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Months Indicated FY FY Book Own. Sells 1 * Invesco Mortgage IVR 21.73 -31% 11% 1,568 1,504 16% 17% 5x 5x 1.5x 0% 7/4 2 Two Harbors Invest. TWO 10.35 -23% 11% 717 n/m 14% 15% 7x 7x 1.9x 1% 9/1 3 Life Partners LPHI 7.40 -10% 165% 138 n/m 14% 11% 5x 5x 2.0x 0% 1/- 4 Himax Tech HIMX 2.38 -16% 36% 426 378 21% 11% 12x 9x 1.1x 0% -/- 5 BBVA Banco Frances BFR 11.14 -52% 24% 2,043 n/m 10% 10% 10x 8x 2.3x 0% -/- 6 PennyMac Mortgage PMT 18.06 -14% 7% 501 n/m 7% 9% 8x 7x 1.6x 3% 16 / 1 7 TICC Capital TICC 11.02 -37% 19% 351 n/m 7% 9% 11x 10x 1.1x 0% -/- 8 Crexus Investment CXS 11.28 -4% 22% 825 n/m 5% 8% 11x 9x 3.1x 0% -/- 9 NGP Capital NGPC 9.27 -27% 17% 201 n/m 7% 8% 12x 10x .9x 0% 1/- 10 Telecom Argentina TEO 22.63 -35% 20% 2,072 1,847 9% 7% 9x 8x 1.7x 0% -/- 11 Gladstone Investment GAIN 7.60 -33% 13% 168 n/m 6% 7% 10x 14x .8x 1% 4/- 12 Colony Financial CLNY 18.49 -11% 16% 609 n/m 5% 7% 12x 9x 1.8x 0% 4/- 13 Mesabi Trust MSB 35.15 -56% 65% 461 n/m 7% 7% 14x 12x >9.9x 0% -/- 14 THL Credit TCRD 13.80 -35% 8% 277 n/m 2% 7% 12x 9x 1.1x 0% 4/- 15 Nokia NOK 8.63 -10% 52% 32,413 22,416 7% 6% 13x 11x 3.1x 0% -/- 16 BGC Partners BGCP 9.00 -48% 12% 891 n/m 5% 6% 11x 10x 3.8x 14% 7/4 17 NY Community Banc. NYB 16.19 -11% 19% 7,081 n/m 6% 6% 14x 12x 2.3x 1% 12 / 6 18 AstraZeneca AZN 49.93 -19% 7% 68,711 65,383 5% 6% 7x 8x >9.9x 0% -/- 19 CTC Media CTCM 22.10 -42% 14% 3,473 3,296 2% 6% 18x 14x >9.9x 0% 7/7 20 * Telular WRLS 6.95 -66% 28% 104 93 3% 6% 25x 21x 1.9x 3% 9/2 21 Lorillard LO 99.21 -29% 2% 14,258 13,964 4% 5% 13x 12x n/m 0% 15 / 3 22 Tower Bancorp TOBC 21.73 -18% 27% 260 n/m 5% 5% 13x 11x 1.1x 4% 22 / 2 23 * Co. Bebidas Americas ABV 31.77 -44% 1% 86,627 86,496 3% 5% 19x 18x >9.9x 0% -/- 24 * NutriSystem NTRI 14.36 -9% 73% 403 392 5% 5% 31x 15x 5.4x 3% -/5 25 Nat’l Australia Bank NABZY 28.98 -36% 0% 62,165 n/m 6% 5% 12x 11x 1.9x 0% -/- 26 * CNB Financial CCNE 13.72 -23% 20% 168 n/m 5% 5% 11x 9x 1.6x 4% 14 / 1 27 People’s United PBCT 13.20 -8% 24% 4,747 n/m 5% 5% 23x 17x 1.5x 1% 12 / 14 28 Bristol Myers Squibb BMY 27.82 -20% 1% 47,424 45,568 5% 5% 13x 13x 6.7x 0% 13 / 13 29 United Bankshares UBSI 25.32 -13% 26% 1,105 n/m 5% 5% 15x 14x 2.3x 3% 4/8 30 American Software AMSWA 7.61 -41% 5% 197 155 5% 5% 30x 22x 3.9x 0% 3/- 31 Westpac Banking WBK 137.08 -37% 0% 82,340 n/m 5% 5% 13x 13x 2.9x 0% -/- 32 Banco Argentaria BBVA 12.12 -29% 19% 54,691 n/m 3% 5% 8x 9x 1.4x 0% -/- 33 Santander Brasil BSBR 11.61 -15% 35% 87,026 n/m 5% 5% 10x 9x 3.4x 0% -/- 34 Australia and NZ ANZBY 25.75 -37% 1% 66,951 n/m 5% 5% 11x 11x 2.4x 0% -/- 35 * AXA AXAHY 21.88 -36% 5% 50,893 n/m 5% 4% 14x 7x 1.3x 0% -/- 36 * HSBC HBC 54.36 -20% 9% 191,568 n/m 3% 4% 11x 7x 1.6x 0% -/- 37 Safety Insurance SAFT 46.75 -27% 7% 710 n/m 4% 4% 15x 15x 1.1x 6% 12 / 8 38 Baldwin & Lyons BWINB 23.52 -15% 12% 345 n/m 10% 4% 24x 26x .9x 5% 6/3 39 Female Health FHCO 4.79 -11% 41% 133 129 4% 4% 20x 16x 8.6x 17% 8/3 40 * Arrow Financial AROW 23.96 -11% 19% 281 n/m 4% 4% 13x 13x 2.1x 3% 10 / 6 41 China Mobile CHL 46.76 -5% 17% 186,306 143,140 4% 4% 11x 13x 2.3x 0% -/- 42 Renasant RNST 16.40 -22% 10% 411 n/m 4% 4% 17x 13x 1.5x 1% 12 / 10 43 * DDi Corp. DDIC 9.77 -40% 26% 198 181 2% 4% 8x 7x 2.4x 2% 7/9 44 American Ecology ECOL 17.77 -27% 4% 324 317 4% 4% 22x 16x >9.9x 1% 6/1 45 * Turkcell TKC 15.18 -20% 31% 13,290 11,823 5% 4% 10x 10x 2.9x 0% -/-  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted. Criteria: ► Positive net cash ► Positive EPS estimates for this FY and next FY ► MV > $100 million© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 120 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsDeep Value: Lots of Revenue, Low Enterprise ValueCompanies that trade at low multiples of net revenue ▼ Move To Est. P/E Price to Insiders Price 52-Week MV EV EV/ This Next Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales FY FY Book Own. Sells 1 Eastman Kodak EK 3.22 -10% 182% 866 487 .07x n/m n/m n/m 0% 9/2 2 Ingram Micro IM 20.91 -30% 3% 3,367 2,848 .08x 10x 8x 1.1x 1% 12 / 9 3 Tech Data TECD 52.51 -34% 2% 2,445 2,100 .09x 10x 9x 1.2x 1% 14 / 15 4 World Fuel Services INT 37.84 -38% 11% 2,674 2,442 .13x 15x 13x 3.7x 3% 5/6 5 Barnes & Noble BKS 10.24 -17% 139% 617 895 .13x n/m n/m n/m 2% - / 10 6 Office Depot ODP 4.24 -21% 117% 1,177 1,638 .14x n/m 27x 1.8x 0% -/4 7 Kelly Services KELYA 19.11 -47% 20% 701 700 .14x 17x 11x 1.3x 13% 11 / 5 8 AmerisourceBergen ABC 40.55 -33% 1% 11,115 11,116 .14x 17x 15x >9.9x 1% 13 / 8 9 Sunoco SUN 42.17 -36% 11% 5,102 6,046 .16x 23x 16x 1.7x 0% 9/3 10 Insight Enterprises NSIT 17.37 -30% 13% 811 780 .16x 10x 9x 1.8x 1% 12 / 10 11 Cardinal Health CAH 42.96 -31% 0% 15,025 16,347 .17x 17x 14x >9.9x 0% 12 / 5 12 SYNNEX SNX 32.47 -30% 13% 1,180 1,586 .17x 9x 8x 1.4x 1% 10 / 6 13 McKesson MCK 82.48 -30% 1% 20,971 21,820 .20x 17x 15x >9.9x 0% 10 / 11 14 IDT Corp. IDT 29.03 -73% 5% 520 302 .21x 11x 11x 2.8x 18% 11 / 3 15 Brightpoint CELL 10.37 -44% 27% 707 756 .21x 10x 9x >9.9x 2% 17 / 15 16 Flextronics FLEX 7.29 -33% 17% 5,541 6,173 .22x - - 2.9x 0% -/- 17 BJ’s Wholesale Club BJ 48.64 -26% 4% 2,612 2,557 .24x 17x 16x 2.3x 0% 3/- 18 Celestica CLS 11.04 -33% 13% 2,181 1,548 .24x - - 1.6x 0% -/- 19 Supervalu SVU 10.97 -36% 48% 2,327 8,906 .24x 9x 9x n/m 0% -/- 20 * Grupo Casa Saba SAB 19.37 -50% 22% 512 653 .25x - - .8x 0% -/- 21 Best Buy BBY 30.12 -7% 62% 11,873 12,457 .25x 9x 8x 2.6x 1% 19 / 3 22 Sanmina-SCI SANM 11.25 -21% 80% 902 1,647 .25x 7x 6x 1.3x 2% 15 / 8 23 Sears Holdings SHLD 82.30 -28% 52% 8,924 11,081 .26x 83x 64x 2.2x 0% 1/4 24 Tesoro TSO 27.55 -62% 4% 3,947 5,294 .26x 11x 10x 1.3x 0% 5/8 25 Valero Energy VLO 29.03 -47% 7% 16,538 21,541 .26x 10x 8x 1.1x 0% 9 / 10 26 Fred’s FRED 13.66 -26% 5% 537 492 .27x 16x 13x 1.3x 5% 2/5 27 Delek US Holdings DK 13.91 -56% 3% 757 1,004 .27x 19x 20x 2.1x 0% -/- 28 * Sony SNE 30.50 -15% 21% 30,410 24,089 .27x 29x 19x 1.4x 0% -/- 29 * Charming Shoppes CHRS 4.61 -38% 37% 534 556 .27x 31x 14x 2.6x 0% 2/6 30 Owens & Minor OMI 33.59 -24% 1% 2,141 2,191 .27x 16x 15x 3.7x 2% 16 / 13 31 Kroger KR 24.51 -22% 2% 15,212 22,279 .27x 13x 11x 3.7x 1% 19 / 7 32 EMCOR Group EME 30.18 -26% 9% 2,017 1,458 .28x 17x 13x 4.0x 1% 12 / 9 33 Rite Aid RAD 1.03 -17% 45% 917 7,207 .29x n/m n/m n/m 0% -/- 34 Kindred Healthcare KND 24.68 -53% 6% 975 1,246 .29x 15x 14x 1.4x 3% 21 / 12 35 Manpower MAN 68.14 -41% 2% 5,580 5,677 .29x 23x 17x 4.8x 1% 17 / 10 36 Avnet AVT 34.85 -36% 7% 5,296 6,564 .29x 9x 8x 2.1x 0% 17 / 15 37 * Insperity NSP 29.70 -32% 6% 786 508 .30x 28x 19x 3.6x 3% 11 / 8 38 Tyson Foods TSN 19.49 -25% 5% 7,358 8,784 .30x 10x 10x 2.2x 1% 16 / 9 39 Coca-Cola FEMSA KOF 80.29 -24% 6% 2,198 2,707 .30x 16x 15x .4x 0% -/- 40 * Benchmark Electron. BHE 17.32 -20% 32% 1,059 724 .30x 13x 11x 1.0x 1% 5/5 41 * Jabil Circuit JBL 19.91 -49% 16% 4,351 4,686 .31x 9x 8x 2.6x 4% 4/9 42 Sonic Automotive SAH 13.49 -39% 15% 712 2,108 .31x 11x 9x n/m 12% 7/6 43 * Brown Shoe BWS 12.45 -18% 60% 552 774 .31x 10x 8x 1.6x 4% 16 / 8 44 * NACCO Industries NC 104.68 -35% 27% 711 841 .31x 9x 8x 1.8x 2% 36 / 8 45 Arrow Electronics ARW 43.21 -50% 2% 5,015 5,911 .32x 9x 8x 2.6x 1% 11 / 11  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted. Criteria: ► EV to trailing revenue less than 0.5x ► MV does not exceed revenue ► MV > $500 million© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 121 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsDeep Value: Neglected Gross ProfiteersCompanies that trade at low multiples of gross profit ▼ Move To Enterprise Value / Est. P/E Price/ Insiders Price 52-Week MV EV Gross This Next Tang. % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales Profit EBIT FY FY Book Own. Sells 1 Stewart Information STC 10.75 -28% 36% 205 123 .1x .1x .1x 25x 8x .9x 2% 7/6 2 * FXCM FXCM 13.28 -16% 16% 230 37 .1x .1x .4x 14x 10x 6.1x 0% -/- 3 Winn-Dixie Stores WINN 6.78 -12% 99% 378 313 .0x .2x n/m n/m n/m .6x 2% 19 / 13 4 Eastman Kodak EK 3.22 -10% 182% 866 487 .1x .2x n/m n/m n/m n/m 0% 9/2 5 Five Star Quality FVE 8.47 -68% 6% 305 316 .3x .3x 12.0x 12x 10x 2.0x 2% 5/- 6 Kindred Healthcare KND 24.68 -53% 6% 975 1,246 .3x .3x 13.0x 15x 14x 1.4x 3% 21 / 12 7 WellCare WCG 41.93 -47% 6% 1,784 425 .1x .5x 55.2x 15x 13x 2.5x 1% 7 / 11 8 Office Depot ODP 4.24 -21% 117% 1,177 1,638 .1x .5x n/m n/m 27x 1.8x 0% -/4 9 Barnes & Noble BKS 10.24 -17% 139% 617 895 .1x .5x n/m n/m n/m n/m 2% - / 10 10 Blyth BTH 46.61 -35% 29% 384 280 .3x .5x 6.0x 16x - 1.6x 28% 1/4 11 Charming Shoppes CHRS 4.61 -38% 37% 534 556 .3x .5x n/m 31x 14x 2.6x 0% 2/6 12 MedCath MDTH 13.26 -47% 11% 269 178 .4x .6x n/m >99x >99x .9x 2% -/5 13 * RealNetworks RNWK 3.57 -27% 27% 487 161 .4x .6x n/m n/m n/m 1.2x 0% 5/4 14 Imation IMN 11.53 -27% 9% 448 143 .1x .6x n/m n/m 41x 1.0x 1% 4/3 15 Natuzzi NTZ 4.43 -40% 14% 244 188 .2x .6x 53.6x 5x - .5x 0% -/- 16 * Tuesday Morning TUES 5.05 -30% 71% 218 200 .2x .6x 9.2x 16x 11x .8x 2% 5/5 17 American Equity AEL 12.48 -32% 12% 740 742 .6x .6x .6x 7x 6x .8x 5% 10 / 7 18 Coca-Cola FEMSA KOF 80.29 -24% 6% 2,198 2,707 .3x .7x 2.0x 16x 15x .4x 0% -/- 19 Corinthian Colleges COCO 4.23 -8% 356% 358 549 .3x .7x 112.0x 5x 10x 2.2x 1% 19 / 8 20 Coldwater Creek CWTR 2.72 -16% 222% 252 212 .2x .7x n/m n/m n/m 1.3x 0% 1/- 21 Haverty Furniture HVT 12.40 -23% 45% 271 222 .4x .7x 30.9x 30x 18x 1.1x 2% 1/3 22 * Hawaiian Holdings HA 5.58 -16% 56% 281 185 .1x .7x 2.0x 12x 9x 2.7x 2% 1/1 23 * Xyratex XRTX 9.97 -5% 105% 302 204 .1x .7x 2.0x 11x 6x .8x 0% -/- 24 * Rosetta Stone RST 13.69 -8% 101% 283 161 .6x .7x 12.5x n/m 27x 2.1x 1% -/1 25 Gleacher & Co. GLCH 1.90 -21% 143% 251 212 .8x .8x n/m 9x 6x 1.1x 11% 2/3 26 Brown Shoe BWS 12.45 -18% 60% 552 774 .3x .8x 10.6x 10x 8x 1.6x 4% 16 / 8 27 * Systemax SYX 12.82 -11% 90% 472 390 .1x .8x 5.7x 9x 7x 1.3x 2% 2/1 28 Kenneth Cole KCP 13.14 -19% 67% 240 157 .3x .8x 173.9x 60x 15x 1.7x 0% 2/2 29 * Career Education CECO 21.19 -23% 69% 1,646 1,198 .6x .8x 4.9x 8x 9x 3.8x 1% 17 / 11 30 * Investment Tech ITG 17.08 -23% 16% 710 393 .7x .8x 7.9x 17x 13x 2.3x 2% 15 / 9 31 * GAIN Capital GCAP 6.51 -7% 57% 225 157 .8x .8x 3.0x 8x 6x n/m 5% 21 / 12 32 * hhgregg HGG 12.12 -2% 157% 481 497 .3x .8x 6.5x 11x 9x 1.6x 3% 5/5 33 Humana HUM 72.34 -40% 3% 12,198 5,730 .2x .8x 3.1x 11x 11x 3.1x 1% 9 / 10 34 Celadon Group CGI 15.12 -29% 11% 340 348 .6x .9x 16.2x 25x 16x 2.4x 8% 9/6 35 Lincoln Educational LINC 15.67 -38% 80% 351 342 .5x .9x 2.8x 8x 8x 3.1x 5% 9/8 36 RadioShack RSH 15.83 -14% 51% 1,685 1,755 .4x .9x 4.7x 9x 8x 2.1x 1% 8/7 37 * Talbots TLB 5.50 -23% 223% 385 400 .3x .9x 12.7x 25x 11x 5.3x 3% 12 / 7 38 * Kelly Services KELYA 19.11 -47% 20% 701 700 .1x .9x 18.4x 17x 11x 1.3x 13% 11 / 5 39 PC Connection PCCC 8.85 -35% 12% 238 206 .1x .9x 5.3x 10x 9x 1.1x 2% 2/3 40 * Bob Evans Farms BOBE 31.12 -26% 12% 943 1,063 .6x .9x 12.0x 14x 13x 1.5x 2% 6/7 41 Spartan Stores SPTN 15.43 -17% 15% 349 499 .2x .9x 8.2x 12x 11x 7.1x 0% -/1 42 Christopher & Banks CBK 6.11 -17% 82% 218 141 .3x .9x n/m n/m n/m 1.3x 1% 4/8 43 * eHealth EHTH 12.62 -26% 27% 269 141 .9x .9x 4.3x 36x 33x 2.0x 1% -/6 44 Hot Topic HOTT 6.50 -30% 27% 290 214 .3x .9x n/m 72x 34x 1.3x 0% 4/1 45 Liz Claiborne LIZ 6.16 -37% 58% 583 1,138 .5x .9x n/m n/m 26x n/m 1% 10 / 1  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted. Criteria: ► EV not more than trailing gross profit ► MV not more than 2x gross profit ► MV > $200 million© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 122 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsActivist Targets: Potential Sales, Liquidations or RecapsCompanies that may unlock value through a corporate event ▼ Move To Price to Next Insiders Price 52-Week MV EV Tangible Net Cash NCAV EV/ FY % Buys/ Company Ticker ($) Low High ($mn) ($mn) Book (% of MV) (% of MV) Sales P/E Own. Sells 1 Qiao Xing Mobile QXM 2.88 -27% 107% 138 (171) .3x 225% 286% n/m - 0% -/- 2 Qiao Xing Universal XING 2.05 -34% 91% 188 (228) .4x 221% 174% n/m - 0% -/- 3 Audiovox VOXX 7.27 -15% 34% 168 121 .6x 28% 133% .2x - 8% 10 / 10 4 Alvarion ALVR 1.76 -6% 127% 105 15 .8x 86% 109% .1x - 0% -/- 5 * SmartHeat HEAT 3.09 -18% 214% 119 74 .9x 38% 108% .6x 3x 0% 1/- 6 Exceed Company EDS 6.96 -16% 34% 177 64 .8x 64% 105% .2x 4x 0% -/- 7 Myriad Pharma MYRX 4.35 -18% 19% 111 (3) .8x 103% 100% n/m n/m 0% 1/- 8 Xyratex XRTX 9.97 -5% 105% 302 204 .8x 32% 98% .1x 6x 0% -/- 9 China Agritech CAGC 6.88 -3% 199% 143 97 1.0x 32% 95% 1.0x - 2% -/2 10 ModusLink MLNK 5.25 -3% 76% 230 76 .8x 67% 90% .1x - 2% 9/- 11 Tuesday Morning TUES 5.05 -30% 71% 218 200 .8x 8% 84% .2x 11x 2% 5/5 12 Imation IMN 11.53 -27% 9% 448 143 1.0x 68% 83% .1x 41x 1% 4/3 13 Flexsteel Industries FLXS 15.57 -35% 26% 105 97 .9x 7% 82% .3x - 16% 7/5 14 Nam Tai Electronics NTE 6.02 -33% 34% 270 42 .8x 85% 82% .1x - 0% -/- 15 Rimage RIMG 15.01 -7% 22% 143 26 1.1x 82% 82% .3x 14x 0% 5/1 16 Ingram Micro IM 20.91 -30% 3% 3,367 2,848 1.1x 15% 82% .1x 8x 1% 12 / 9 17 PC Connection PCCC 8.85 -35% 12% 238 206 1.1x 14% 81% .1x 9x 2% 2/3 18 Benchmark Electron. BHE 17.32 -20% 32% 1,059 724 1.0x 32% 81% .3x 11x 1% 5/5 19 Force Protection FRPT 4.65 -17% 30% 328 178 1.0x 46% 81% .3x 11x 2% 10 / 4 20 * A-Power Energy APWR 4.12 -3% 171% 163 60 .6x 63% 80% .2x 6x 0% -/- 21 Callaway Golf ELY 6.98 -17% 46% 450 395 .8x 12% 78% .4x 19x 0% 6/6 22 Maxygen MAXY 5.12 -39% 6% 155 21 1.2x 86% 78% .6x - 1% 1/- 23 Kimball KBALB 7.57 -36% 14% 206 176 .6x 15% 77% .1x - 2% 8/3 24 Cogo Group COGO 7.98 -27% 20% 287 257 1.3x 10% 75% .6x 7x 1% 2/1 25 Cutera CUTR 8.48 -18% 42% 116 26 1.2x 78% 75% .5x n/m 0% -/- 26 * Advanced Battery ABAT 2.04 -26% 113% 156 45 .8x 71% 75% .5x - 0% -/1 27 InfoSpace INSP 8.51 -22% 28% 310 56 1.3x 82% 74% .2x 22x 2% 5/9 28 * SkyPeople Juice SPU 4.00 -15% 65% 103 64 .9x 38% 72% .7x 3x 0% 1/- 29 Tech Data TECD 52.51 -34% 2% 2,445 2,100 1.2x 14% 72% .1x 9x 1% 14 / 15 30 Exar EXAR 5.96 -9% 30% 265 79 1.1x 70% 71% .5x 75x 1% 4/5 31 FormFactor FORM 10.09 -32% 101% 511 164 1.2x 68% 71% .9x n/m 0% 1/1 32 * China-Biotics CHBT 8.52 -15% 120% 189 56 1.0x 70% 71% .5x 4x 23% -/- 33 Sprott Physical Gold PHYS 13.38 -20% 1% 1,659 487 1.4x 71% 71% n/m - 0% -/- 34 G. Willi-Food WILC 7.44 -30% 9% 101 51 1.2x 50% 69% .5x - 0% -/- 35 * SuperGen SUPG 2.64 -35% 32% 159 44 1.3x 72% 68% .8x 13x 0% -/- 36 * Enstar Group ESGR 100.65 -46% 1% 1,316 (1,942) 1.4x 248% 67% n/m 8x 1% 1/1 37 Movado MOV 16.96 -44% 4% 421 318 1.2x 24% 67% .8x 28x 6% 14 / 8 38 BigBand Networks BBND 2.49 -6% 46% 174 31 1.3x 82% 67% .3x n/m 1% 13 / 9 39 West Marine WMAR 10.80 -23% 26% 245 223 1.1x 9% 66% .4x 11x 0% 3/1 40 * Vital Images VTAL 13.82 -12% 21% 194 60 1.4x 69% 65% 1.0x >99x 0% 2/- 41 QLT QLTI 7.72 -31% 12% 392 183 1.1x 53% 65% 4.1x - 1% 3/- 42 * Tecumseh Products TECUA 10.23 -17% 52% 188 187 .4x 0% 64% .2x - 0% 2/1 43 * Core-Mark CORE 33.26 -23% 12% 378 369 1.1x 2% 64% .1x 13x 2% 14 / 8 44 PennyMac Mortgage PMT 18.06 -14% 7% 501 (32) 1.6x 106% 64% n/m 7x 3% 16 / 1 45 * Opnext OPXT 2.48 -48% 79% 223 186 1.1x 17% 64% .5x n/m 0% -/2  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted. Criteria: ► Tang. book > 50% of MV ► ST assets - liabilities > 50% of MV ► Net cash ► MV > $100mn© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 123 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated InvestorsThis Month’s Top 10 Web LinksA Selection of Our Favorite Freely Accessible Internet ResourcesClick on the link next to each title, or type the Web address into your Web browser: Jeremy Grantham’s Q1 Letter: “Time to Wake Up” http://bit.ly/hfAqWq Leucadia National Annual Letter and Report http://bit.ly/g0QE10 Larry Robbins’ Glenview Capital Annual Letter http://scr.bi/gwCbtp Michael Burry on The Financial Crisis (video) http://bit.ly/i2mHYi WealthTrack Interview with Jim Grant (video) http://blip.tv/file/5026106 World Economic Forum on Long-Term Investing http://bit.ly/eK3CAD East Coast Asset Management Q1 Letter http://bit.ly/ezdExU Chanticleer Holdings Q1 Letter http://bit.ly/emAGj8 Article on Portfolio Concentration http://bit.ly/gfP6iw Salman Khan on Revolutionizing Education http://youtu.be/PhO2gshIVuE?hd=1© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 124 of 126
    • Value-oriented Equity Investment Ideas for Sophisticated Investors distributed for informational purposes only and should not About THE MANUAL OF IDEAS be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a© 2009-’10 by BeyondProxy LLC. All rights reserved. general or personal recommendation or take into accountAll content is protected by U.S. and international the particular investment objectives, financial situations,copyright laws and is the property of BeyondProxy and or needs of individual investors. The price and value ofany third-party providers of such content. The U.S. securities referred to in this newsletter will fluctuate. PastCopyright Act imposes liability of up to $150,000 for performance is not a guide to future performance, futureeach act of willful infringement of a copyright. returns are not guaranteed, and a loss of all of the original capital invested in a security discussed in this newsletterTHE MANUAL OF IDEAS is published monthly by may occur. Certain transactions, including those involvingBeyondProxy. Subscribers may download content to their futures, options, and other derivatives, give rise tocomputer and store and print materials for their individual substantial risk and are not suitable for all investors.use only. Any other reproduction, transmission, display orediting of the content by any means, mechanical or Disclaimerselectronic, without the prior written permission of There are no warranties, expressed or implied, as to theBeyondProxy is strictly prohibited. accuracy, completeness, or results obtained from any information set forth in this newsletter. BeyondProxy willTerms of use: Use of this newsletter and its content is not be liable to you or anyone else for any loss or injurygoverned by the Terms of Use described in detail at resulting directly or indirectly from the use of thewww.manualofideas.com. See a summary of key terms information contained in this newsletter, caused in wholebelow. or in part by its negligence in compiling, interpreting, reporting or delivering the content in this newsletter.Contact information: For all customer service,subscription or other inquiries, please visit Related Personswww.manualofideas.com, or contact us at BeyondProxy, BeyondProxy’s officers, directors, employees and/or427 N Tatnall St #27878, Wilmington, DE 19801-2230; principals (collectively “Related Persons”) may havetelephone: 415-412-8059. positions in and may, from time to time, make purchases or sales of the securities or other investments discussed orEditor-in-chief: John Mihaljevic, CFA. evaluated in this newsletter.Annual subscription price: $1,285 and up; for detailed John Mihaljevic, Chairman of BeyondProxy, is also ainformation, visit www.manualofideas.com/pmr.html principal of Mihaljevic Capital Management LLC (“MCM”), which serves as the general partner of a privateTo subscribe, visit www.manualofideas.com/pmr.html investment partnership. MCM may purchase or sell securities and financial instruments discussed in this newsletter on behalf of the investment partnership or other accounts it manages.General Publication Information and Terms ofUse It is the policy of MCM and all Related Persons to allow a full trading day to elapse after the publication of thisTHE MANUAL OF IDEAS is published by BeyondProxy. Use newsletter before purchases or sales of any securities orof this newsletter and its content is governed by the Terms financial instruments discussed herein are made.of Use described in detail atwww.manualofideas.com/terms.html. For your Compensationconvenience, a summary of certain key policies, BeyondProxy receives compensation in connection withdisclosures and disclaimers is reproduced below. This the publication of this newsletter only in the form ofsummary is meant in no way to limit or otherwise subscription fees charged to subscribers and reproductioncircumscribe the full scope and effect of the complete or re-dissemination fees charged to subscribers or othersTerms of Use. interested in the newsletter content.No Investment AdviceThis newsletter is not an offer to sell or the solicitation ofan offer to buy any security in any jurisdiction where suchan offer or solicitation would be illegal. This newsletter is© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com May 2, 2011 – Page 125 of 126
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