Bandai Namco (7832 JP): Dragon Ball Takes IP Strategy to New Level

Main Points
• Bandai Namco has one of the lowest EV/OPs amongst listed video game stocks globally – the implication of this is not just that investors think Bandai Namco can’t improve margins, it can’t grow top-line much either.
• Given the firm’s exposure to what could be considered demographically vulnerable businesses, Bandai Namco’s strategy to overcome a stagnant toy market has been to grow its overseas business and broaden the age appeal of its character goods.
• The shift to hard core gaming took off when Dragon Ball Xenoverse, One Piece: Pirate Warriors 3, Dark Souls II, Project Cars and Naruto Shippuden 4 came out, sending overseas console game sales through the 20mil mark.
• Contributions from IP is capped as Bandai Namco only licenses the IP – so only has partial access to the earnings stream. Having spent ¥5bil between FY15 and FY17 on IP creation, the company intends to spend ¥25bil on IP creation between FY18 and FY20.
• The fortunes of Dragon Ball started to move up a gear in FY15, but it was Xenoverse that really made a difference. The whole franchise moved to a new level in FY17, with the release of Dragon Ball FighterZ.
• Having successfully transformed the fortunes of the Dragon Ball franchise, management is now looking to see if it can repeat the trick with One Piece.
• Monetization of the Tekken franchise is helped by the game’s popularity as an eSport as downloadable content can generate a steady form of revenue for the game. Moreover, with 259 arcades in Japan, and another 702 with revenue-sharing agreements, Bandai has the biggest access to arcades of any game publisher.
• While our FY18e OP is below sell-side consensus due mainly to the stronger yen, given valuations for the stock, we are not entirely convinced that sell-side consensus reflects buy-side consensus, and there is certainly room for upside in our forecasts if the company’s live performances do better in FY18.