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Morningstar Equity Research Report　2014.12.15

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding the accuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

Improving profitability from real estate sales; accelerating principal investments

Diversified real estate operator, including value-add real estate and REIT management

Stock Price Unit of Investment Market Cap Year High Year Low PER（E）

271yen（12/12）

100Shares 1,354.1Bil yen（12/12）

390yen（14/1/7）

212yen（14/10/17）

22.3（12/12）

Ichigo Group Holdings Co., Ltd.（2337・JASDAQ）

■Ichigo marked higher profitability for real estate sales and achieved a sharp rise in operating profit for 1H of FY2014 　Ichigo Group Holdings Co., Ltd. reported its consolidated results for 1H (March － August 2014) of FY2014 ending February 2015, with revenues falling 52% from the same period last year to 9,879 million yen, but marking a sharp rise in operating profit at 3,124 million yen (up 39.3%). The gross profit margin for the period soared to 45.4% (compared with 8.2% logged in the year ago peri-od). This was due in large part to the improved overall profitability of real estate sales, mainly on the back of a robust real estate mar-ket environment in Japan, coupled with the contribution from in-creased dividends from non-consolidated real estate SPCs (special purpose companies). Gross profit remained at a low level relative to last year despite a sharp rise in revenues from real estate sales. This is attributable to the fact that some real estate assets were sold to the REIT (real estate investment trust) managed by Ichigo (‘Ichigo REIT’) and others were large-scale but low-profitability assets. 　Regarding earnings for other business segments, the asset man-agement (‘AM’) segment suffered sluggish revenue growth amidst its policy to scale back on the management of private real estate funds. However, it recorded higher rental income from its owned real estate properties, while the clean energy segment reduced its operating loss year-on-year thanks to increasing operations from its solar power plants, helping to raise Ichigo’s overall operating profit.■The majority of full-year revenues will be recognized in 4Q as real estate asset sales will be concentrated therein; the share price is relatively undervalued　Ichigo expects that consolidated revenues and operating profit for FY2014 will be 42,000 million yen (up 19.7% year-on-year) and 7,700 million yen (up 96.8%), respectively. The achievement rates against the targets at the end of 1H FY2014 were slightly disappointing, with actual revenues achieved just 23.5% of the target while operating profit reached 40.6% of its target. However, Ichigo anticipates to record revenues and gross profit for 4Q (De-cember 2014－February 2015) at roughly 21.1 billion yen and 2.1 billion yen respectively as it expects a number of real estate assets to be acquired by Ichigo REIT during that quarter. We believe that Ichigo will book further revenues from sales of other real estate as-sets, rental income, and AM fees. Consequently, its full-year results are likely to be roughly in line with its forecasts.　For FY2015, the last year of its mid-term business plan, Ichigo expects operating profit to stand at 11,400 million yen (2.9X vs. FY2013). The revenue forecast for the year is not disclosed. With its steadily profitable business and benefiting from positive factors such as the current favorable market environment, Ichigo is shifting its focus to speedier principal investment rather than seeking funds from third parties. Ichigo has accelerated the

Revenue and Earnings Trend （As of December 12）

Recommendation rating（12/12）

acquisition of real estate assets principally by deploying the funds raised through its first-ever public offering of new shares, executed in November 2013. Its investment plan for FY2014 of 80 billion yen (including real estate acquisitions of 70 billion yen) is highly likely to be achieved, thanks in large part to a substantial number of acquisitions concluded during December 2014. It expects to spend at least the same amount of funds to acquire further assets in FY2015. In this environment, its value-add real estate business, which adds value to acquired real estate assets before it sells them, is expected to continue to see profit growth for some quarters ahead. The AM segment has improved its profitability after it re-duced the amount of less profitable private real estate funds that it manages. This has helped raise its fee levels (on average) for managing private real estate funds and Ichigo REIT. 　The upward momentum of Ichigo’s share price has been moderately held in check, after it sharply rose at the end of October in response to the news that the Bank of Japan had decided to expand its monetary easing program. We think, however, that the market will make a fresh evaluation of its earnings growth potential after this adjustment period has ran its course. Ichigo presents higher rates of earnings growth than its competitors, despite its forecast PER for FY2014 appearing to be undervalued compared with industry peers, such as Kenedix, Inc. <4321> at 36X. We believe that Ichigo’s share price has the potential to rise to the PER level of around 30X. In light of this opinion, we commence valuation of Ichigo shares with a new「BUY」rating, with an estimated share price range of 300 yen to 400 yen.

(Shigeru Matsuo)

Revenue（Yen Mil）

YoY （％）

Operating Profit（Yen Mil）

YoY （％）

Ordinary Profit（Yen Mil）

YoY （％）

Net Profit（Yen Mil）

YoY （％）

EPS（Yen）

2013-2 Past Results 16,397 ▲13.5 1,844 75.6 1,734 77.1 1,637 ▲7.5 3.72014-2 Past Results 35,101 2.1X 3,912 2.1X 3,597 2.1X 4,526 2.8X 9.8

2015-2Company est. 42,000 19.7 7,700 96.8 6,500 80.7 6,055 33.8 12.2

MS est. 42,000 19.7 7,700 96.8 6,500 80.7 6,055 33.8 12.22016-2 MS est. 55,500 32.1 11,400 48.1 9,600 47.7 9,050 49.5 18.3On September 1, 2013 stock split (1:200)

BUY

Yen

212

394

26 Weeks Moving Avg.26 Weeks Moving Avg.

Month

100

200

300

400

500

050100150

12 1 2 3 4 5 6 7 8 9 10 11 12

13 Weeks Moving Avg.13 Weeks Moving Avg.

13 Weeks Moving Avg.13 Weeks Moving Avg.VolumeVolume

1,000Shares

13 Weeks Moving Average

26 Weeks Moving Average

Volume（13 Weeks Average）

￥272 ￥293 24,413,262Shares

Estimated Share Price Range ￥300 ～￥400

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Morningstar Equity Research Report　2014.12.15

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding the accuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

Ichigo Group Holdings Co., Ltd. (2337・JASDAQ)

Risk Factors

Shareholder Return

Change in Ichigo Group Holdings Consolidated Operating Profit

List of Real Estate Assets Acquired from Ichigo REIT (As of December 2014)

Source: Morningstar, based upon Ichigo disclosed data

Source: Morningstar, based upon Ichigo disclosed data

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000(millions of yen)

Forecity Akihabara

Forecity Toyosu

￥1.57 BL￥1.13 BL￥1.22 BL￥0.75 BL￥2.19 BL￥0.65 BL￥0.95 BL￥0.5 BL￥0.71 BL￥0.99 BL￥0.33 BL￥1.65 BL￥1.08 BL￥1.78 BL￥0.98 BL

Acquisition cost

Asset management Real estateReal estate value-add Clean energyOthers

FY2012 FY2013 FY2014 (Company forecast)

Forecity RoppongiForecity Asabu-JubanForecity Asabu-Juban NibankanForecity SiraganedaiForecity AkihabaraSuite One CourtForecity SasazukaGran Presso KawadachoForecity Sakura ShinmaciForecity Sin-KamataForecity NakaochiaiForecity TomigayaForecity RyogokuForecity ToyosuForecity Nishihonmachi

Real estate property

Total acquisition cost ￥16.52 BL（for 15 real estate properties）

（As of December 12）

Dividend Per Share

Midterm Year-End Annual

2013-2 Past Results ￥0 ￥1.00 ￥1.00

2014-2 Past Results ￥0 ￥1.10 ￥1.10

2015-2 Company est. ￥0 ￥1.30 ￥1.30

■ Dividends ■ Shareholder Special Benefits

　Ichigo’s operations and business performance are highly likely to be dependent on the real estate market conditions. Therefore, a rapid fluctuation in the market poses a risk to Ichigo. If the real estate market liquidity lowers, Ichigo’s plans to sell its own real estate assets may fail to progress as scheduled. A large proportion of real estate assets held by Ichigo is located in the Kanto region including Tokyo; this means that it remains vulnerable to natural disasters such as large scale earthquakes in the region. In a phase of higher interest rates, its operations may suffer several challenging conditions like rising capital costs, increasing investors’ cap rates, or falling real estate prices. In addition to the risks above, revisions to relevant laws and regulations, notably the Financial Instruments and Exchange Act and the Building Lots and Buildings Transaction Business Law, could affect its operations.

　Ichigo Group Holdings is a value-add real estate owner/operator and real estate services provider, including managing a J-REIT, Ichigo Real Estate Investment Corporation (Ichigo REIT <8975>). In recent years, Ichigo entered the clean energy business via solar power generation. Ichigo’s name derives from a maxim in the art of the Japanese tea-ceremony, 'Ichigo Ichie’, meaning “treasure every encounter as unique and special.” The predecessor to Ichigo was established in 2000. Since then, it has raised its profile as a pioneer in asset securitization, with major projects including the arrangement of the securitization of assets from the Ikebukuro store of Seibu Department Stores, Ltd., and has diversified its business as it has grown　Ichigo’s reporting segments comprise Asset Management (whose proportion of revenues to total consolidated revenues for FY2013 was 11.7%), Real Estate (22.4%), Real Estate Value-Add (63.5%), Clean Energy (0.4%), and Others (2.0%). 　The Asset Management segment engages in asset management-related services for Ichigo REIT and private real estate funds. The Real Estate segment generates rental income from real estate assets that Ichigo intends to hold either for a long term or sell to Ichigo REIT. The Real Estate Value-Add segment focuses on increasing the value of acquired real estate assets and selling them at a high-level of profitability. 　The geographical distribution of Ichigo’s asset portfolio (for assets outstanding as of August 2014) is Tokyo (52%), other Kanto region (18%) and Fukuoka (13%). Ichigo’s portfolio by asset type is offices (41%), retail (32%) and mixed (8%). Ichigo excels at managing real estate assets valued at around 2 billion yen.

■Company Overview

　The real estate market in Japan has been gathering steam on the back of the government’s aggressive economic policy known as Abenomics, spearheaded by Prime Minister Shinzo Abe, and large scale monetary easing programs promoted by the Bank of Japan. Although there still remains a slight sense of uncertainty about the outlook for the Japanese economy, the domestic real estate market, particularly in Tokyo area, is expected to sustain its steady performance over the medium-term, thanks in part to projects in the run-up to the 2020 Tokyo Olympics. 　Under these circumstances, Ichigo has announced a mid-term business plan titled Shift Up 2016 with FY2015 as its final year. Under the plan, it is pressing ahead with acquiring real estate assets on a principal basis in a timely manner, while in the AM business it is downsizing less profitable private real estate funds to improve overall AM profitability. As the target for the final year of its mid-term plan, Ichigo aims to achieve an operating profit of 11,400 million yen (2.9X vs. FY2013) and ROE (return on equity) at 15% or higher (11.8% in FY2013). In addition to this, Ichigo has set the dual goals of being listed on the first section of the Tokyo Stock Exchange as well as being selected as a component of the JPX Nikkei Index 400.

■Business Environment and Outlook

On September 1, 2013 stock split (1:200)

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Morningstar Equity Research Report　2014.12.15

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding the accuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

Morningstar Japan K.K.　Equity Research Group　Research & Analysis Department　　　　　　　　Analyst　Shigeru Matsuo　03-6229-0810 shimatsuo@morningstar.co.jp

Ichigo Group Holdings Co., Ltd. (2337・JASDAQ)

Ichigo Group Holdings Co., Ltd.

(2337・JASDAQ)　

Kenedix, Inc.(4321・TSE 1st)　

Hulic Co., Ltd. (3003・TSE 1st)

Basic Point

Stock Price ￥271 ￥551 ￥1,108

Unit of Investment 100Shares 100Shares 100Shares

Minimum Investment Amount ￥27,100 ￥55,100 ￥110,800

Fiscal Year End February December December

Share Price Indicator

PER（E） 22.3 36.6 36.5

PBR 2.8 2.1 3.7

Dividend Yield（E） 0.5% 0.5% 0.7%

Growth

Revenue Growth Rate（E） 19.7% 11.3% 84.4%Operating Profit Growth Rate（E） 96.8% 7.0% 16.8%

EPS Growth Rate（E） 23.7% 81.7% 12.4%

Profitability

Operating Margin（E） 18.3% 29.6% 17.0%

ROE 11.8% 3.3% 9.8%ROA（Ordinary income/Total assets） 3.7% 3.6% 3.8%

FinancialHealth

Equity ratio 42.2% 48.0% 24.4%Debt-Equity Ratio 113.1% 92.6% 262.5%

Current Ratio 1130.2% 375.5% 82.7% Our chosen industry peers are Kenedix, Inc. (4321), a leading real estate fund management firm and, although the market capitalization is different from Ichigo, Hulic Co., Ltd. (3003), a developer of real estate properties mainly located in Tokyo. Kenedix, Inc. manages two listed REITs, Kenedix Office Investment Corporation (8972) and Kenedix Residential Investment Corporation (3278), while Hulic Co., Ltd. has one, Hulic Reit, Inc. (3295).

Competitor Comparison（If the number is better than rivals, it's highlighted by red character）（As of December 12）

For the consolidated fiscal year ending February 2015, Ichigo forecasts operating profit to increase 96.8% from the previous year. Ichigo’s earnings growth stands out among industry peers. Its high profit growth projection reflects its confidence in robust profitability and a favorable market environment, as well as an acceleration of real estate investments using its own funds, which allows greater flexibility for Ichigo to make investment decision at its own discretion as it shifts its focus towards the implementation of proactive real estate acquisitions from the accumulation of knowledge and skills in the real estate revitalization business. In addition to its main real estate business, it is pursuing profitability in mega solar and other businesses, with an eye to securing stable revenue flows from multiple business segments, not just real estate operations. About two competitors, Hulic shows notable revenue growth, but this mainly reflects its real estate asset sales to own-managed REIT that went public in February 2014. Kenedix needs to be considered posting extraordinary gains in view of its EPS growth. We believe that Ichigo will expand its profit levels in the medium-term as it places greater emphasis on boosting its EPS growth in its mid-term business plan.

■Growth

Ichigo’s operating profit margins are average among industry peers. However, we think its profitability will show an upward trend due to factors including the expansion of its value-add real estate business and stable rental earnings, although a certain level of sales of relatively low profitable estate assets to REITs managed by Ichigo is likely to be continued. The AM segment has been cutting down on unprofitable private real estate funds. Consequently, while its assets under its management are on a downward trend, Ichigo is improving its profitability. Ichigo boasts the highest ROE (return on equity) among industry peers at 11.8%. Its mid-term business plan aims to achieve a greater than 15% ROE in FY2015 and going forward. Ichigo set this objective with an eye to being selected as a component of the JPX-Nikkei Index 400, which consists of high-ROE companies.

■Profitability

Thanks in part to Ichigo’s first-ever capital increase through a public share offering conducted in November 2013 (offering new and existing shares to investors), it currently holds ample funds. It has steadily increased the amount of real estate assets held for sale, running an extremely high current ratio compared with industry peers. Its capital adequacy ratio is also at a robust level. The debt/equity ratio at 113.1% is not at a particularly alarming level, but its interest-bearing debt ratio as at the end of 1H FY2014 has increased to 176.0%, so we need to be mindful of its future direction. Overall, Ichigo’s financial condition appears to be sound and stable.

■ Financial Health

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding the accuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

How to Read Morningstar Equity Research Report

■ Analyst Comment Each analyst reports and evaluates the most recent earnings trend and business environment. It shows the most important information for stock investment such as evidence for investment decisions, perspectives on earnings forecasts and business prospects. Also to make sure it is easy to comprehend, we write in 2-4 paragraphs and use bold to emphasize important texts.

■ Revenue and Earnings Trend It reports earnings in past two fiscal years, company forecasts and our forecasts for the current and next fiscal year. We predict earnings based on research as well as past quarterly earnings trend and analysis by segments.

■ Company Overview It explains in detail what businesses the company is engaged in and how revenue sources are defined. Also on the basis of our research, it discusses what businesses the company will focus on in years to come and how it carries out mid-term business plan.

■ Business Environment and Outlook It discusses current circumstances and growth potential of the industry to which the company belongs. A comprehensive report on the industry from different perspectives is provided through research interviews to competitors. Specific figures of the industry data are also introduced.

■ Risk factors It shows the company’s risk factors and describes various aspects of risks such as business, earnings and financials. Typical stock market risks are also taken into consideration.

■ Growth For the current fiscal year, we compare the company’s forecasts of growth rates for sales, operating profit and EPS with competitors, and evaluate past background and growth potential of the main business.

■ Profitability We compare the company’s forecast of operating margin for the current fiscal year, and return on equity and return on asset based on the past year result with competitors, and evaluate profitability trends over the past years.

■ Financial Health We compare the company’s equity ratio, debt equity ratio (=interest-bearing debt/equity*100) and current ratio (=current assets/current liabilities*100) for the past fiscal year with competitors, and evaluate financial stability based on the amount of cash and deposits and cash flow.

Analysis Points

（1）Emphasize Its Position as an Independent 　　　　　　　　　　　Evaluation OrganizationMorningstar emphasizes its position as an independent evaluation organization and is committed to providing objective comparison and assessment in the Morningstar Equity Research Report. For all stocks covered by us, we determine investment decisions, estimated share price range and earnings forecasts based on expertise of an individual analyst as well as the stock assessment committee consisting of several analysts.

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【Stock Selection Criteria】 ● Domestic emerging companies that are rarely covered by　　 analysts ● Stocks that are popular among retail investors 　　　　　

(refer to data from online security brokers) ● Size of market capitalization (over about 5 billion yen)● Exclude stocks which are liquidated or trade control, or　　　 stocks with going concern and excessive debt

（3）Investment Decisions Classified into　　　　　　　　　　　　 Three GroupsWe determine investment decisions for covered stocks after consultation with the stock assessment committee based on research, interview and analysis by each Morningstar analyst.

Each stock is classified into either of three groups according to the following criteria.BUY (Bull)： Forecasted to go beyond the current stock price　　　　　　 level by 15% or more in the next 6 months.HOLD (Neutral)： Forecasted to fall into the range of － 15％　　　　　　　　　~+15％ of the current stock price level in the　　　　　　　　 next 6 months.SELL (Bear)： Forecasted to go below the current stock price　　　　　　 level by 15% or more in the next 6 months.We flexibly respond to any changes of observations regarding earnings forecasts, financial situations and stock price trends, and change investment decisions accordingly. “Under Review” status may be applied if any new information comes out and extra time is needed to determine investment decisions. Also we don’t change investment decisions during trading hours. “Suspension” status may be applied when an analyst leaves our company.

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