Stockholder Suggests Nintendo Make Shareownership Affordable for Individuals in Japan

The Tokyo Stock Exchange (TSE) classifies listed stocks into TOPIX categories that rank TSE first section stocks according to market capitalization and liquidity. The TOPIX Core 30 includes the 30 most liquid and highly capitalized shares. The TOPIX Large 70 includes the next 70 most liquid and highly capitalized shares. The TOPIX 100 includes all stocks in the Core 30 and Large 70 categories.

On February 28, 2007 Nintendo was ranked #16 on the TOPIX 30. With 127.9 million shares outstanding and a market price on that date of 31,400 yen, the total market value (market capitalization) of Nintendo was 4 trillion yen or $33.5 billion.

The minimum number of shares of Nintendo that can be purchased on the TSE is 100. Accordingly, at the end of February 2007 a purchaser would have had to pay 3.14 million yen or $26,167 to become a Nintendo shareholder. Only 4 other companies in the TOPIX 100 have a higher entry price to become a shareholder. How many individuals in Japan can afford to place such a stock order?

The entry price to become a shareholder in Nintendo is clearly too high in Japan. It simply does not sync with Nintendo’s recent public statement that it wants to widen its shareholder base and encourage shareholding by individual investors. Nintendo has stated that it has experienced a growing interest by individuals in owning Nintendo stock, which it attributes to the growing popularity of its DS handheld player and Wii console. Given these expressions of individual interest in owning Nintendo stock, it is time for Nintendo management to take positive action to promote such ownership.

The simplest and most meaningful way for Nintendo to achieve its stated objective of encouraging individual ownership is to lower the minimum number of shares of Nintendo that can be purchased on the Tokyo Stock Exchange to one (1) from the current 100 share minimum. There are currently 8 companies in the TOPIX 30 and 14 companies in the TOPIX 100 who already allow the purchase of a single share of their stock. Interestingly, this action would allow individuals to purchase a share of Nintendo stock at essentially the same price as a Wii console.

Going forward, the share price of Nintendo should rise dramatically during the next few years as production and sales of Wii consoles, DS handhelds, and related games expand. It will, therefore, become necessary for Nintendo to keep the entry price of ownership within the reach of the average individual by declaring either stock splits or stock dividends.

It would be a good idea for Nintendo to always keep the minimum price of stockownership close to the selling price of its Wii console. Millions of Nintendo fans could then enjoy their games, while participating in the profits they generate for the company. Such profits could then allow them to buy more games, thereby, further adding to Nintendo’s financial success.

Nintendo Secondary Offering Price of 30,478 Yen Should Provide Support

The secondary offering of the 1.987 million shares of Nintendo stock owned by the Banks' Shareholdings Purchase Corp was priced at 30,478 yen on Tuesday, March 6th after the Tokyo Stock Exchange closed. The offering price represented a 2.47% discount from the Tuesday's closing price of Nintendo which was 31,250 yen. Brokerage firms in the syndicate selling these shares include Nomura Securities, Nikko Citigroup, Shinko Securities, Mitsubishi UFJ Securities and Daiwa Securities SMBC.

Given the large number of non-Nintendo shares that must be liquidated going forward by the Banks Shareholdings Purchase Corp, there is considerable pressure on member firms in the selling group to make this offering a success. A successful offering will go a long way toward insuring that these brokerage firms will be included in future sales.

It would be embarrassing to the Japanese government if the price of Nintendo dropped below the offering price. In that event, a wave of public criticism would surely be leveled at government officials for allowing the Banks entity to dump shares on unwitting purchasers.

Accordingly, the pressure on brokerage firms and the Banks Shareholdings entity for a successful sale strongly suggests that the Nintendo secondary will be over-subscribed, the price will rise above the offering price, and 30,478 will become a floor under which Nintendo will not trade in the immediate future.

Intrinsic Value of NTDOY

On Wednesday, May 2nd Nintendo closed at 38,650 yen on the Tokyo Stock Exchange. That was down 150 yen or 0.38% from the previous close. As of 8 AM New York time, the U.S. dollar was trading at 120.185 yen. Accordingly, the intrinsic value of NTDOY at the start of Wednesday's trading in New York is $40.20. The Tokyo Stock Exchange will be closed on May 3 and May 4.

Shareholder Criticizes Nintendo Management for Encouraging Government Entity to Sell its Stock

On February 23, 2007 after the close of trading in Tokyo the Nintendo Company announced that 1.987 million shares of its common stock held by Banks Shareholdings Purchase Corporation through Japan Trustee Services Bank were going to be sold in a secondary offering.

These shares represented the entire stake in Nintendo owned by this government-controlled body, which was established in 2002 to buy stocks from banks. Such stock purchases were designed to prevent the wholesale liquidation of stocks as banks were required to cut cross-shareholding arrangements with customers. The shares being sold equal about 1.4% of all the outstanding shares of common stock in Nintendo.

This government entity started selling shares in various companies in January 2007. It has until 2017 to unload all its holdings. Data on the size of its holdings in each company is not available.

Bloomberg reported that Ken Toyoda, a Nintendo Company spokesman, said by telephone that Nintendo initiated the sales by approaching the government-body. Reportedly, Nintendo is looking to widen its shareholder base and encourage shareholding by individual investors and it saw this as a way to achieve those objectives. The company noted that the popularity of its DS handheld player and Wii console have caused a growing interest in owning Nintendo stock.

What was Nintendo management drinking when they came up with this idea? Encouraging a large shareholder to liquidate their entire position is stupid and a disservice to all Nintendo shareholders. It artificially increases the supply of stock or float and acts as a significant depressant on the price of the stock.

Management’s portrayal of this as a way to expand the shareholder base is absurd and evidences a total lack of investment knowledge. It strongly suggests that Nintendo management needs to learn the basics about the care and feeding of shareholders.

If they want to increase the number of shareholders there are at least two actions they need to immediately take. First, they need to institute a stock-split to reduce the current stock price to a lower level. How many gamers and other individuals can afford to pay more than 30,000 yen ($250) for an ownership position? Second, they need to officially sponsor the issuance of Nintendo shares in the United States where Nintendo has a large and growing fan base. Those shares could then be traded on the New York Stock Exchange (NYSE) or the NASDQ and the company would enjoy much higher visibility. Currently unsponsored Nintendo ADR's (symbol NTDOY) trade in the pink sheets and there are only 50 million such shares registered with the SEC and their underlying 6.25 million shares represent only about 5% of the total outstanding shares of Nintendo

At the end of 2006 Nintendo had 866.6 billion yen ($7.2 billion) in cash and deposits and that was up 71.4 billion yen ($595 million) from December 31, 2005. The company clearly has more than enough cash and cash equivalents to simply buy the entire block of stock from the government entity and reduce the number of shares outstanding or use those shares to support the issuance of American Depositary Receipts (ADR’s) in the U.S. The cost of such a purchase would be about 67.3 billion yen ($557 million) as of the day of the secondary was announced and absorb less than 10% of Nintendo’s cash.

Nintendo management can still rectify their grave mistake by instituting a major stock buyback before, during, and after the secondary offering, which is scheduled for early March 2007. It is the only way they can easily make amends for the needless pain they have inflicted on their loyal shareholders by violating the fundamental tenets of maximizing shareholder value.

Nintendo Shares Ready To Soar

As a regular viewer of Jim Cramer's Mad Money show, I was surprised when he stated on his Friday, November 17, 2006 show: "You can't play the Wii by buying Nintendo because it doesn't even trade here." That statement is not correct.

Since February 2006 people have been able to buy Nintendo American Depositary Receipts (ADRs) (symbol NTDOY) on the over-the-counter market. A total of 50 million NTDOY shares were registered with the SEC in February 2006. JP Morgan Chase is the depositary and eight (8) NTDOY shares equal one (1) Nintendo Japan share. The intrinsic value of a share of NTDOY can be calculated by converting the yen price of a share of Nintendo stock as quoted on the Tokyo Stock Exchange into dollars and then dividing by eight (8). It should be noted that Japan is 14 hours ahead of the United States; therefore, Tokyo trading generally dictates the price of NTDOY.

As an avid gamer and investor, I am a big fan of Nintendo. I own NTDOY shares and believe that everone who buys a Nintendo Wii or DS Lite needs to also buy NTDOY shares. I am convinced that the profit they will earn as shareholders will dwarf the cost of their consoles and games.

On February 21, 2007 NTDOY closed at $33.80, whereas Nintendo Japan closed on the Toyko Stock Exchange at 31,400 Yen. At those prices, Nintendo has a reported PE of 29.8 and a dividend yield of 1.25%.

Nintendo's fiscal year ends March 31. In a recent (January 25, 2007) news release Nintendo management announced impressive nine-month results for the period ended December 31, 2006. It stated that both "Nintendo DS" hardware and software recorded very strong sales for the nine month period ended December 31, 2006. "Nintendo DS" hardware has been the fastest rising game platform ever in the Japan market, and, in addition, has sold well in overseas markets. As a result, sales in the first three quarters have reached 18.88 million units on a worldwide basis. As for ” Nintendo DS” software, net sales have also accelerated, supported by a number of millon-seller titles. Sales have been led by "New Super Mario Bros.", with 8.64 million units sold on a worldwide basis and continuing strong sales of "Touch! Generations" titles such as "Brain Age: Train Your Brain in Minutes a Day!" and "Nintendogs". In the console business, "Wii" hardware (launched at the end of last year) got off to a favorable start and “Wii” software
titles such as "The Legend of Zelda : Twilight Princess" enjoyed brisk sales as well.

As a result, net sales rose to 712.5 billion yen (72.8% up y/y), causing operating income to reach 167.6 billion yen (102.5% up y/y) despite a rise in selling, general, and administrative expenses, which was primarily driven by higher marketing expenses. Income before income taxes and extraordinary items was 220.7 billion yen (50.5% up y/y) primarily due to 26.0 billion yen (45.2 billion yen last nine-month period) of foreign exchange gains. Net income reached 131.9 billion yen exceeding last year by 43.1%.

Importantly, Nintendo has a stated dividend policy of distributing the higher of the amount calculated by dividing 33% of consolidated operating income by the total number of outstanding shares, excluding treasury stock, as of March 31, 2007 rounded up to the 10 yen digit, or the amount calculated based on the 50% consolidated net income standard rounded up to the 10 yen digit. Based on this policy, the year-end dividend per share and the annual dividend per share are expected to be 410 yen and 480 yen, respectively. The ex-dividend date for the year-end dividend will be in March.

Unlike Sony with its PS3 and Microsoft with its XBox, Nintendo offers a pure play on a widely heralded new game product and has said it will make a profit on its Wii console sales. Nintendo says it will ship 4 million Wii units before the end of 2006. Importantly, most of Nintendo's biggest selling titles like "Legend of Zelda" and "Super Mario Brothers" are proprietary.

The trading volume in NTDOY has been rising as more people discover they can buy shares in Nintendo and for the past 10 trading days the average daily volume according to eTrade has been 356,824 shares.

A report in the The Financial Times on Wednesday, February 21, 2007 quotes one of Tokyo's more prominent game analysts, Merrill Lynch's Yoshiyuki Kinoshita, as being beyond bullish on the Wii. He told the UK-based business daily that he expects the console, which has appealed to nongamers via its motion-sensing capabilities, to be in 30 percent of US homes by 2011. In Japan, Kinoshita expects a full third of households to have the machine in four years. He believes the future of the Wii console will be brighter than anyone previously thought.