Thursday, August 2, 2007

Who Is Buying Nintendo Stock?

Given the price rise of Nintendo stock, it seems appropriate to find out who owns its shares. It is especially important to discover whether the number of shareowners is expanding and if they are adding to or liquidating their holdings.
Treasury Stock
Nintendo has authorization to issue 400 million shares. Of those shares, 127,903,013 were outstanding on March 31, 2007.
At its annual meeting on June 27, 2002 the board of Nintendo authorized the company to buy back as many as 14 million shares at a maximum price of 250 billion yen. By March 31, 2003 the company had bought back 7,334,448 shares at a cost of 81.521 billion yen. During the following 12 months, Nintendo acquired an additional 650,107 shares at a cost of 5.378 billion yen. In its 2005 fiscal year it acquired an additional 3,607,056 shares at a cost of 41.998 billion yen. It purchased 1,002,389 more shares at a cost of 25.216 billion yen in 2006.
Nintendo bought an additional 1,171,987 shares during its fiscal 2007 year bringing its treasury stock holdings to 13,765,987 shares. During the five years ending March 31, 2007 Nintendo repurchased 9.7% of its outstanding shares. The amount spent to buy those shares was 155.396 billion yen ($1.26 billion). The average price Nintendo paid for its treasury stock was 11,288 yen ($917.7 million).
It is important to understand that the Nikkei stock average declined 28% in the 12 months ending March 31, 2003, which was during the time the board authorized Nintendo to buy back shares. The board’s action should provide a source of comfort to Nintendo shareholders. After all, Nintendo was willing and able to step-up to support its stock through share repurchases when those shares were under significant downward pressure. Nintendo’s president recently reaffirmed that the company remains willing to provide support for its shares in the event that is needed in the future. Furthermore, Nintendo is able to buy back shares because it had $8.15 billion in cash at the end of its 2007 fiscal year and that cash hoard grew by $1.27 billion in 2007 alone.
The Owners of Nintendo
There were 32,371 Nintendo shareholders as of March 31, 2007. By comparison, Sony has 630,554 shareholders and Microsoft has about 150,000.
The largest single Nintendo shareholder is Hiroshi Yamauchi who owns 141,650,000 or 11.07% of the company. His shares have a market value of about $6.4 billion, and he reportedly is now the third wealthiest man in Japan. He was Chairman, President and undisputed leader of Nintendo for 53 years from 1949 until he retired in 2002 at the age of 75.
Among other things, Yamauchi is credited with keeping the Seattle Mariners in Seattle. He achieved that distinction by buying the biggest piece of ownership in The Baseball Club of Seattle, which was organized to buy out the Mariners owner, who had run into financial problems in his other ventures. The group formed to rescue the Mariners originally approached Bill Gates of Microsoft, but he chose not to participate.
After being rebuffed by Gates, the group decided to approach Microsoft’s Redmond, Washington neighbor, Nintendo of America (NOA). Hiroshi Yamauchi’s son-in-law, Minoru Arakawa was President of NOA and had established himself as a leading member of the Seattle business community, so Yamauchi decided to fund a majority of the $125 million purchase price. In 1992 he paid $67 million for his 54% ownership stake in the Seattle Mariners. Interestingly, in the summer of 2004 he sold his entire stake in the Mariners to Nintendo of America for the same amount he paid even though Forbes estimated that the Seattle Mariners franchise was worth more than $400 million.
Yamauchi, apparently, had no interest in baseball and purchased his share as a goodwill gesture to help local leaders keep the team in Seattle. In 13 seasons as an owner, Yamauchi never visited Seattle or witnessed a game.
Banks and Trust Companies
The second through tenth largest shareowners are all banks or trust companies. The 2nd largest owner is the Bank of Kyoto, Ltd. with 6,387,300 shares and the 10th largest is Mellon Bank Treaty Clients Omnibus with 3,084,500. Most of these shares are probably held in custodial accounts for the benefit of their customers.
Unlike their counterparts in publicly-traded corporations in the United States, the officers and directors of Nintendo are not flush with stock. As a group, the 13 members of Nintendo’s board own only 14,315 shares. The value of those shares is about 701 million yen ($5.7) million. Satoru Iwata, Nintendo’s President, is the largest stockowner among directors with 4,300 shares. The second largest stock position is held by Takao Ota, General Manager of Manufacturing, who owns 2,079 shares.
As of March 31, 2006 foreigners owned 41% of the outstanding shares of Nintendo of Japan. This was a higher percentage than observed in 2005 (38%), 2004 (39%), 2003 (30%), and 2002 (37%). The noticeably lower percentage in 2003 is worth noting because that was when the stock market in Japan was in a sharp decline. During that stock market decline, Nintendo’s foreign owners showed a greater propensity to liquidate their holdings. This trait did not endear foreign shareowners to Nintendo officials.
Institutional Owners of Nintendo of Japan
Various investors, including mutual funds, are required to disclose their portfolio holdings quarterly to the U.S. Securities Exchange Commission (SEC). A comparison of those quarterly reports reveals if a fund is accumulating or liquidating a stock. Investors like to know if and when professional money managers are accumulating or liquidating a position, since it could influence a stock’s price.
Exhibit 1 shows a listing of 41 current shareowners of Nintendo of Japan. It also shows whether an owner increased or reduced their position since their last quarterly report. These owners hold 5,162,763 shares or 4.0% of all the shares outstanding. During their most recent quarter they were net buyers of 668,988 shares, a 14.9% increase in their holdings.

Exhibit 1Institutional/Mutual Fund Owners of Nintendo of Japan 2007
OwnerShares Change
Fidelity Diversified International Fund1,850,000150,000
William Blair & Company 865,700 865,700
Fidelity Overseas Fund602,500 -84,700
Fidelity International Discovery Fund340,10036,600
Vanguard Pacific Index Fund 316,915 10,140
Fidelity Advisor Diversified International Fund225,200 14,300
Fidelity Japan Fund222,000 -211,600
Fidelity Select Software and Computer Services 137,800 -9,300
The Japan Fund83,600 -74,600
Fidelity International Small Cap Opportunity 79,600 1,500
Fidelity Select Technology Portfolio76,900 -3,100
Fidelity Advisor Overseas Fund 53,400 -10,900
Fidelity Worldwide Fund41,400 -1,700
Fidelity Pacific Basin Fund 33,500 1,500
Matthews Asia Pacific Fund30,400 -5,800
Matthews Japan Fund 29,315 -17,900
Matthews Asian technology Fund16,585 1,000
iShares S&P/Topix 150 Index Fund 16,400 16,400
Excelsior Pacific/Asia Fund16,000 -24,000
Morgan Stanley Institutional Active International 10,900 NC
Templeton Transamerica Global10,700NC
SPDR Russell/Nomura Prime Japan ETF 9,248 9,248
MFS International Equity8,900 -1,200
Fidelity Advisor Japan Fund 8,500 600
iShares S&P Global Technology Sector Index Fund8,100 8,100
Fidelity Strategic Income and Dividend Fund 7,800 -1,100
Gartmore Worldwide Leaders Fund7,100 NC
ICON Asia-Pacific Region Fund 7,000 7,000
ICON International Equity Fund6,900 6,900
Gartmore International Growth Fund 6,700 900
Pacific Capital International Stock Fund6,700 -1,200
Fidelity Global Balanced Fund 6,000 3,600
IXIS Hansberger International Fund4,400 NC
Henderson Global Technology Fund 3,500 NC
Capital Guardian Global2,700 NC
Van Kampen Active International Allocation 2,600 NC
Fidelity Select Multimedia Portfolio2,200 -700
Morgan Stanley Institutional International Magnum 2,100 NC
Matthews Asia Pacific Equity Income2,000 NC
Commonwealth Japan Fund 1,000 NC
Gartmore International Index Fund400 -16,700
Total5,162,763 668,988

Sixteen of the owners in Exhibit 1 are recent net buyers, 15 are net sellers, and 10 did not change (NC) their holdings. The largest net buyer is William Blair & Company, which acquired all of its 866,700 shares between December 31, 2006 and March 31, 2007. The second largest buyer is Fidelity Diversified International Fund, which acquired an additional 150,000 shares.

In addition to William Blair & Company, five others established new positions in Nintendo. Those five are Ishares S&P/Topix 130 Index Fund (16,400), SPDR Russell/Nomura Prime Japan ETF (9,248), iShares S&P Global Technology Sector Index Fund (8,100), ICON Asia-Pacific Region Fund (7,000), and ICON International Equity Fund (6,900).
Fidelity Mutual Funds
By far the largest owner of Nintendo is the Fidelity Diversified International Fund, which holds 1,850,000 shares. William Blair & Company is the second largest Nintendo of Japan shareowner with 865,700. Fidelity’s Overseas Fund is the third largest holder with 602,500 shares, but it reduced its holdings by 84,700 from the preceding quarter. The owner with the fourth largest Nintendo position is also a Fidelity fund; the Fidelity International Discovery Fund, which owns 340,100 shares adding 36,600 during its last quarter.
Of the 41 funds that owned Nintendo shares, 15 of them were Fidelity mutual funds. Those 15 held a combined 3,686,900 shares and accounted for 85.8% of all Nintendo of Japan shares owned. Fidelity, therefore, controlled 2.88% of all outstanding shares of Nintendo of Japan.
Nintendo Portion of Owner Portfolios
Among the owners with more than 100,000 share positions, Nintendo accounted for 3.94% of the net assets of the Fidelity Select Software and Computer Services portfolio and that was the largest percentage among those owners with more than 100,000 shares. The Fidelity Japan Fund is a close second with 3.87% of its assets in Nintendo shares followed by Fidelity Overseas Fund (2.22%), Fidelity Diversified International Fund (1.11%), and Fidelity International Discovery Fund (0.93%).
American Depositary Receipts (ADR)
American Depositary Receipts (ADRs) were created to aid US investors who wished to purchase shares of non-US corporations. An ADR is a negotiable certificate evidencing ownership of shares in a foreign corporation from a country outside the market in which the ADR is traded. Each ADR denotes depositary shares, which represent a specific number of the underlying shares on deposit in the issuer's home market.
ADRs are quoted in dollars and are governed by the trading and settlement procedures of the exchange on which they trade. Each ADR can represent one, more than one, or a fraction of underlying shares. The relationship between the ADR and the ordinary share is referred to as the ratio. While many ADR programs are established with a 1:1 ratio (one underlying share equals one depositary share), current ADR programs have ratios ranging from 100,000:1 to 1:100. The ease of trading and settling ADRs makes them an attractive investment option for investors wishing to purchase shares in foreign companies.
The Nintendo ADR ratio is 8:1; therefore, eight ADR shares equal one share of Nintendo of Japan. These ADRs trade on the over-the-counter (OTC) market under the symbol NTDOY. The average daily trading volume is about 150,000 shares.
Anyone can create Nintendo ADRs by pre-arrangement with one of the depositary banks. In order to create such ADRs, shares of Nintendo of Japan would be purchased on the Tokyo Stock Exchange and placed in a custodial account in Japan designated by the U.S. depositary. Once the New York depositary was notified by the custodian that they had possession of the purchased shares then the New York depositary would issue eight NTDOY shares for every one deposited in Japan. Japanese banks that serve as custodians for Nintendo of Japan shares include The Bank of Tokyo – Mitsubishi, Sumitomo Mitsui Banking Corporation,Sumitomo Trust and Banking Company, and Deutsche Bank - UK.
An owner of NTDOY shares could also turn their ADR shares into the depositary bank and have their shares turned back into Nintendo of Japan shares through a process called cancellation. The ability of holders to redeem shares in the U.S. for shares in Japan and vice versa insures that the shares will trade close to their intrinsic values. The conversion of shares also creates arbitrage opportunities during periods of stock market and foreign exchange instability.
Intrinsic Value of NTDOY
Buyers and sellers of NTDOY shares need to recognize that they are quoted and trade in U.S. dollars, while Nintendo of Japan shares are quoted and trade in Japanese yen. The intrinsic or underlying value of a NTDOY share is calculated by dividing the price of a share of Nintendo of Japan by the number of yen in a U.S dollar and then dividing that quotient by eight.
Because of time differences, the Japanese market is a day ahead of the U.S. stock market and the intrinsic value of NTDOY is known before the U.S. markets open. The correlation between the price of a share of NTDOY and the price of a share of Nintendo of Japan is not perfect. Fluctuations in the yen dollar exchange rate and market volatility influence the price of NTDOY, but it has always traded within a 95-105% band of its intrinsic value.
Nintendo knowingly passed up a rare opportunity to issue sponsored ADRs in 2007 when the Banks' Shareholdings Purchase Corp liquidated 1.987 million shares of Nintendo in a secondary offering in Japan. The company could have easily purchased all of those shares, filed a F-6 registration statement with the SEC, and then issued its own sponsored ADRs in a secondary offering to cover the purchase of the Banks’ shares. It seems reasonable to assume that they did not take that route, because they did not want to increase the foreign ownership of Nintendo.
At the time of the Banks’ secondary, Nintendo officials stated they were supporting the offering because it would help widen its shareholder base and encourage shareholding by individual investors. Nintendo stated that it had experienced a growing interest by individuals in owning Nintendo stock, which it attributed to the growing popularity of its DS handheld player and Wii console.
Given these expressions of individual interest in owning Nintendo stock and the company’s desire to broaden ownership, it is surprising that Nintendo maintains its 100 share minimum purchase size on the Tokyo Stock Exchange (TSE) and/or fails to split its stock. On July 6, 2007 Nintendo closed at 48,950 yen on the TSE; therefore, an individual would have to pay 4.9 million yen ( $39,796) to purchase the minimum amount of Nintendo.
Nintendo ADRs became available in 1993 when the Bank of New York and then Citibank were established as depositaries. They were followed in 1994 by Deutsche Bank and by JP Morgan Chase in 2006. Registration statements filed with the SEC in 1993 authorized the issuance of 50 million Nintendo ADRs with BNY as depositary and 50 million with Citi as the depositary. A 1994 registration statement authorized the issuance of an additional 100 million Nintendo ADRs with Deutsche Bank as depositary. A 2006 registration statement was filed authorizing the issuance of an additional 50 million Nintendo ADRs with JP Morgan Chase serving as depositary. These four registration statements, therefore, permit the issuance of up to 250 million Nintendo ADRs, which would be the equivalent of 31.25 million shares of Nintendo of Japan or 24.4% of its outstanding shares.
Institutional Owners of NTDOY Shares
Exhibit 2 identifies 45 owners of NTDOY shares who are required to notify the SEC about their portfolio holdings via quarterly filings. It shows these owners hold 6,345,370 shares of NTDOY and their combined ownership increased by 2,792,765 shares or 76.7% versus their prior reporting quarter.

Exhibit 2Institutional/Mutual Fund Owners of NTDOY 2007
Thornburg Asset management 941,809941,809
William Blair & Company 738,135738,135
Alger MidCap Growth Institutional Fund 735,330-18,300
Fidelity Independence 590,000520,000
Firsthand Value Technology Fund 413,407413,407
Alger MidCap Growth Fund 321,640-13,400
Alger American Growth Portfolio 279,225-106,900
SunAmerica Series – Alliance Growth Portfolio278,60028,300
Parametric Portfolio Associates 224,169-38,401
Zeke, LP 200,000NC
Alger American MidCap Growth 177,950-8,900
Par Capital Management175,000NC
Alger Large Cap Growth Fund 174,700-33,400
Simms Capital Management152,370152,370
Fidelity VIP II Asset Manager Fund 126,200NC
JNL/Alger Growth Fund119,0006,000
Alger American Balanced Fund 84,000-26,400
Fidelity OTC Portfolio73,20073,200
Summit Investment Partners/Calvert Variable Series 68,600-9,800
National Bank Canadian Opportunities63,00063,000
RS Information Age Fund 59,600NC
Munder International Equity Fund57,000NC
Eagle Asset Management53,505 53,505
RS Internet Age Fund 53,230-1,770
BNY Hamilton International Equity40,800-8,000
Private Asset Management37,406 25706
Alger Balanced Fund 36,34536,345
Alger American Income and Growth Portfolio 31,600-14,450
Alger Large Cap Growth Institutional Fund 23,800-10,150
Navellier & Associates17,92517,925
Aperio Group 15,092NC
Windward Capital Management 9,3309,330
The Connable Office9,3109,310
JNL/FMR MidCap Equity Fund 9,000NC
JNL/Select Global Growth Fund8,000-5,000
Janney Montgomery and Scott 6,3906,390
JNL/Oppenheimer Global Growth Fund6,000-2,000
IXIS Moderate Diversified Portfolio 4,537-3,697
JNL/Mellon Capital Management International Index4,000NC
IXIS Equity Diversified Portfolio 2,096-2,952
JNL/FMR Balanced Fund2,000NC
SM&R Alger Growth Fund 1,775-55
Navellier International Growth984984
Gilder, Gagnon and Scott 624624

Fourteen of the 45 owners shown in Exhibit 2 acquired all of their shares during the last quarter. Among those 13 are the top seven net buyers for the past quarter. These seven largest net buyers are Thornburg Asset Management (941,809), William Blair & Company (738,135), Firsthand Technology Value Fund (413,407), Simms Capital Management (152,370), Fidelity OTC Portfolio (73,200), NatCan Investment Management (63,000), and Eagle Asset Management (53,505).
Fred Alger Management is the largest owner of Nintendo ADRs with 2,529,622 shares in its mutual funds. In its prior reporting period it owned 2,946,094 shares; therefore, it was a net seller of 416,472 shares. Interestingly, on March 31, 2006 Fred Alger Management owned 4,447,380 NTDOY shares, a position it probably wishes it had kept given the uninterrupted rise in Nintendo’s stock price.
Nintendo ADRs account for 5.77% of assets managed by Zeke, LP and that was the highest percentage of assets observed. The RS Information Age Fund has the second highest percentage of assets, 3.41%, invested in NTDOY shares and is followed by the RS Internet Age Fund with 3.27%. Among other large fund holders, the JNL/Alger Growth Fund has 2.61% of its assets in Nintendo ADRs, Alger Mid Cap Growth Fund has 2.40%, and the Alger American Mid Cap growth Fund has 2.28%.
Thornburg Investment Management’s Nintendo ADRs accounts for only 0.14% of its assets under management. Similarly, William Blair and Company’s position only represents 0.08% of its managed assets. The market value of Fred Alger Management’s 2.5 million share position represents about 1% of the total assets it manages.
Nintendo and Shareowner Relations
Following Nintendo 2007 annual meeting, company officials acknowledged they were aware of the need to make share ownership more affordable. At the same time, they mentioned that the Tokyo Stock Exchange was requiring all its listed companies to convert to book-entry securities by June 2009. Nintendo officials then went on to say that a stock split now would be too expensive, therefore, they had decided to do nothing until January 2009.
The explanation offered by company officials is absurd given that Nintendo has less than 33,000 shareowners and there is nothing to prevent them from moving to a book-entry system before 2009. Furthermore, their inaction reveals a cheapness that is unacceptable, inappropriate, and unnecessary for a Topix 30 corporation with over $8 billion in cash.
The number of owners of Nintendo of Japan and NTDOY shares is bound to increase regardless of what Nintendo does to encourage ownership. With expanded ownership will come increased coverage of Nintendo by the financial press, which has much to learn about the video game industry.
The inevitable increase in the number of Nintendo shareholders will coincide with growing revenue and income from its hugely popular DS and Wii hardware consoles and its proprietary and licensed video games. These forces will drive the stock to significantly higher prices.
If Nintendo decides to truly cultivate share ownership then it should take five actions. First, it should reduce the minimum number of its shares that can be purchased on the Tokyo Stock Exchange from 100 down to 1. Second, it should declare a stock split sufficient enough to reduce Nintendo’s share price to about 3,075 yen ($25); as of mid-2007 a stock split of about 20 to 1 would be required. Third, Nintendo should reduce its burgeoning cash position by buying back more of its stock. Fourth, it should work with current depositary and custodian banks to convert the existing unsponsored NTDOY ADRs into Nintendo sponsored shares to be traded on the New York Stock Exchange (NYSE). Fifth, it should be among the first Japanese companies to become cross-listed on the Tokyo and NYSE when that program is initiated.
The aforementioned actions by Nintendo would benefit existing shareowners of Nintendo of Japan and as well as owners of NTDOY shares. Furthermore, these actions would encourage people to become shareholders.