FAQ
Company Information
May 2018
January 31 every year
Please refer to the “IR calendar”.
Please refer to the “IR calendar”.
Unfortunately, we do not accept inquiries regarding IR over the phone. If you are unable to resolve your issue by referring to the FAQ section. Please contact us through the “IR Inquiry” for further assistance.
M&A Strategy
1) Amusement arcade
We have achieved robust PMI results. For details, please refer to the following documents.
April 23, 2024″M&A Progress andFY2025/1 Q1 Outlook” P10～18
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/154262/00.pdf#page=18
In M&A in the amusement business, as disclosed today in “M&A Progress and First Quarter Outlook”, all of the six amusement arcades acquired after SEGA ENTERTAINMENT have shown significant growth in operating income before depreciation and amortization (EBITDA), and and PMI is progressing well.
In addition, for the three amusement arcade projects prior to the IPO, the timing of the cash flow to GENDA stated in February 2022, a little over two years ago for Takarajima, and October 2022, about 18 months ago for Sugaidinos and Avice, but they have already achieved a full recoup of the initial investment, and the cash flow generated now is all upside for stakeholders. The current cash flow is entirely upside for stakeholders.
In addition to appropriate entry valuations based on cash flow (that is not assuming PMI), which is GENDA’s primary focus, the PMI has actually been successful and the situation is showing a “flywheel effect”. With regard to amusement arcades, since the PMI “format” has been established, we will proceed in the same manner for projects after the IPO.
PMI is also progressing very well in the karaoke business. Specifically, Shin Corporation, which had been making loss in the single-month of February for 35 consecutive years since its establishment, quickly returned to surplus in February 2024, the first single-month profit since its establishment, when GENDA began consolidation. The Company’s full-year target of achieving its highest profit since its establishment is now even more certain.
We will continue to strive to maximize synergies outside of amusement arcades, such as karaoke. We will announce these results at the appropriate time once we have comparable data for a certain period of time after the M&A.
As mentioned above, the synergies themselves from the affiliated group of entertainment companies can be realized in a wide range of fields. However, as we answered in “Q1” of this document, GENDA is thoroughly committed to acquiring companies at appropriate valuations, and our Investment Committee is leading us in the basic principle of investment: invest money and recover more money than it is invested. We are thorough in our efforts.
Therefore, GENDA conducts M&A transactions that allow for a sufficient return on investment even without the improvement of business performance through PMI, and for GENDA, PMI only adds extra value.
2)Amusement arcade-related
We have achieved robust PMI results. For details, please refer to the following documents.
June 11, 2024 “FY2025/1 1Q Earnings Presentation” P20～21
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym3/157494/00.pdf#page=21
3)Karaoke
We have achieved robust PMI results. For details, please refer to the following documents.
June 11, 2024 “FY2025/1 1Q Earnings Presentation” P20～21
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym3/157494/00.pdf#page=23
4)F&B
We have achieved robust PMI results. For details, please refer to the following documents.
June 27, 2024 “Latest Announced M&As” P21
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/158415/00.pdf#page=21
We advocate “Continuous Transformational Growth” as we consider M&A in the entertainment industry to be a pillar of our growth strategy. Therefore, we consider “companies that grow discontinuously through repeated M&A in a specific industry” to be our comparable companies.
Companies that engaged specifically in the “M&A” industry have long existed in Europe and the U.S., engaging in dozens to hundreds of M&A transactions per year, and are generally classified as “Serial Acquiror”.
However, as shown on page 25 of the “M&A Progress and Earnings Forecasts from December 2023 onward” disclosed on January 22, 2024, GENDA expects net sales to exceed 53.0 billion yen, EBITDA to exceed 7.8 billion yen, and operating income to be 5 billion yen in the fiscal year ending January 31, 2024. As shown on page 25 of the “M&A Progress and Earnings Forecast after December 2023” disclosed on January 22, 2024, we expect net sales to exceed 90 billion yen, EBITDA to exceed 12.0 billion yen, and operating income to exceed 6.5 billion yen in thefiscal year ending January 31, 2024, as a result of the contribution to earnings of companies acquired through M&A during fiscal year of January 31, 2024.
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/148590/00.pdf#page=25
This is significantly different from the organic growth rates in the amusement arcade industry, which accounts for a large portion of our sales, which is centered on new store openings and existing store sales growth, and from the organic growth rates in the general entertainment industry. This is significantly different from organic growth in the arcade industry, which accounts for a large portion of our sales, and from organic annual growth in the entertainment industry in general.
This simply translates to YoY growth of +70% in sales, +54% in EBITDA, and +30% in operating income. This is significantly different from the organic growth rate in the amusement arcade industry, which is driven mainly by new store openings and existing store sales growth. This is also significantly different from the organic annual growth rate in the entertainment industry in general.
As stated above, we assume that we will continue to accumulate Continuous Transformational Growth through M&A in the entertainment industry, and therefore, the industry in which we are engaged is “companies that grow through repeated M&A in a particular industry” as a comparative company. We believe that the industry in which we are engaged is “M&A”.
In conclusion, using an earnings measure from which goodwill amortization has been deducted to determine enterprise value would result in a double deduction of enterprise value for the reasons discussed below.
First, we believe that for a normal company that only does organic growth, it is appropriate to measure it in terms of operating income. This is because depreciation is something that will “actually” continue to cash out in the future due to capital expenditures. We do not believe that it is inherently necessary to add it back to operating income.
On the other hand, there is no additional cash outflow for amortization (of course, capital investment will be made, and the same arguments apply for depreciation as described above). In this respect, it differs significantly from depreciation, that actually need additional cash outflow whereas none for amortization.
Because of this difference, if goodwill amortization is also deducted in the analysis of performance, as discussed below, it is doubly deducted from the value of the enterprise. This is because the cash outflow has already been completed at the completion of the acquisition, it has already been factored into the balance sheet either through a decrease in cash or an increase in debt, and unlike capital expenditures, it will not occur in the future.
In the DCF method, which measures the intrinsic corporate value of a company, the equity value is calculated by adding up all the free cash flows that will be generated forever, and then deducting the “Net Debt” on the balance sheet at the end, which exactly deducts the completed cash out for the M&A. Therefore, judging the M&A company by its operating income afterwards is a double deduction of value.
M&A companies emphasize the addition back of goodwill amortization because only the amortization of goodwill differs from companies with organic growth, and GENDA, in that regard, is an appropriate inspection indicator as long as the goodwill amortization is added back to operating income. In other words, it is precisely speaking, “EBITA”.
In addition, companies that only grow organically basically have zero goodwill amortization, so in a sense, operating income = EBITA as a figure that adds back (zero) goodwill amortization to operating income.
However, EBITA is not an indicator that is displayed in a general-purpose database, so we recommend that you make your decision based on EBITDA, which is a common indicator.
The above is the concept of calculating value on an all-share basis based on the assumption that control is acquired. When looking at value per share without control, we believe that it is common to refer to P/E multiple and compare relative to other companies in the same industry.
For investors who look at valuations of M&A companies in terms of P/E multiple, we believe it is appropriate to think in terms of P/E multiple before goodwill amortization. This is because it is the same as P/E multiple under pseudo IFRS. This is because P/E multiple before goodwill amortization is almost the same regardless of which accounting standard is adopted.
In other words, if GENDA were to adopt IFRS in the future, the P/E multiple based on GENDA’s net income in each database would suddenly drop, giving the appearance of being undervalued, even though there would naturally be no essential change in GENDA, because this is not inherently correct. Therefore, we believe that the P/E multiple before amortization of goodwill, which remains unchanged regardless of which accounting standard is introduced, is appropriate.
On the other hand, P/E multiple before goodwill amortization is not available in general databases, so for your reference, I will explain a simplified way to look at GENDA’s P/E multiple before goodwill amortization. In GENDA’s case, it is “P/E multiple of net income × 0.8x = P/E multiple of net income before amortization of goodwill”.
This is because GENDA’s forecast for the current term is 5.4 billion yen for net income before amortization of goodwill and 4.3 billion yen for net income, a difference of approximately 1.25 times, and thus a PER of (1/1.25=) 0.8 when calculated at 1.25 times the P/E multiple normally seen in a database.
The entry valuation being high relative to the cash flow to be generated by the target company in the M&A transaction, is a critical issue. This is because there is a high probability that the cash invested will not be recouped in the future.
Therefore, GENDA places the highest importance on cash flow-based valuations in its M&A strategy.
From the above perspective, the absolute amount of goodwill itself is not necessarily a problem in theory. However, in general, the absolute amount of goodwill tends to be larger for more high valuation M&As, and it is important not to increase the absolute amount of goodwill in order to avoid unnecessarily depressing operating income, after deducting goodwill amortization expenses under Japanese GAAP.
In light of the above, GENDA’s “M&A discipline” places the highest importance on entry valuation on a cash flow basis in M&A and ensures that M&A are conducted at appropriate valuations. Once this premise is fulfilled, we also strive to minimize the amount of goodwill to the extent possible.
As a result, the recoup of the initial investment is progressing smoothly, as described in the “M&A Progress and First Quarter Outlook” disclosed today.
In addition, as described in “Q3” of this report, PMI has been more successful than expected due to significant synergies in areas other than amusement arcades. We will announce the status of PMI in areas other than amusement arcades in the future as well.
For example, in amusement arcade M&A, assets with relatively small book value such as crane games, or assets that have depreciated to a small amount in terms of book value, may generate ample cash flow, supported by customer demand due to the popularity of cartoons and other factors.
In such cases, the net asset value on the balance sheet may appear smaller than the valuation based on future cash flows, and as a result, goodwill may easily arise as a result. However, based on the theory of valuation, GENDA gives priority to valuations based on cash flows, while also trying to minimize the amount of goodwill as much as possible.
In conclusion, to prioritize the speed of M&A.
Our company, along with SHIFT, became “the company with the most M&A deals in Japan in 2023 (10 deals)”. We went public in July 2023, and we executed those 10 deals (and 15 others combined) in the 5 months following our listing. You can see that we are currently executing M&A projects most speedily in Japan.
On the other hand, all of the subject companies in our past projects have adopted Japanese GAAP, and we believe that this trend is likely to continue. If we adopt IFRS, we will need to recalculate prior year financial statements for the companies we M&A (even if they are small) as if they had adopted IFRS. We understand that this would fall far short of the speed of M&A at the beginning of this section.
In light of the above, when weighing the nominal profit-increasing benefits of IFRS adoption against the speed of our M&A activities, and considering M&A as our biggest growth driver, our final decision was to prioritize the speed of M&A and return the fruits of discontinuous growth to our shareholders, even if we had to forego the adoption of IFRS.
On top of that, in order to compensate for the disadvantages of not adopting IFRS as an M&A company, we are in a situation where we repeatedly emphasize the explanation of EBITDA and income before amortization of goodwill from the perspective of informing investors of the actual situation.
There are many M&A companies (commonly known as Serial Acquirors) in Europe and the United States, and the concept is common in Western capital markets. In addition, IFRS and U.S. GAAP, which do not amortize goodwill, are common for both the M&A company and the acquiror.
In the Japanese market, where the above concept has not been widely accepted, I believe that it will take time for it to spread. Conversely, however, we believe that until the above ideas become widespread, there are still opportunities for further investment by our company. This is because, if GENDA were to switch to IFRS, operating income and net income would suddenly rise significantly, and P/E ratios would suddenly drop significantly, making the company look cheap, even though there would be no substantive difference as a company.
When our company, which aims to be the world’s largest entertainment company by 2040 in terms of market capitalization and EBITDA, is five to ten times larger than it is today, we will reach a point where the overall importance of repeating a number of small M&A transactions will decrease, or the organization will be large enough to handle them adequately. At that time, we will be in a position to make the change to IFRS. At that point, I think it is possible that the benefits of the change to IFRS will prevail at some point.
As stated on P24 of the “M&A Strategy and Earnings Forecast” Script disclosed on November 20, 2023, if we adopt IFRS, we would need to incur trouble calculating the prior-year results of the acquired company as if IFRS had been applied to the acquired company which will potentially slow down our M&A speed, therefore we adopt JGAAP to ensure flexible M&A. As an alternative to transitioning to IFRS, we disclose EBITDA and Net income before amortization of goodwill, which can easily indicate IRcash flow.
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/145625/00.pdf
Although GENDA is committed to acquiring assets at appropriate valuations, we understand that some investors may have concerns about whether the acquisition price is at an appropriate valuation, since the acquisition price is undisclosed.
As a disclosure on this point, we have announced that it is making steady progress in recovering its investment, as described in the “M&A Progress and First Quarter Outlook” disclosed today. In the case of M&A, which generally requires a long period of time to recoup the initial investment, GENDA has completed the recovery of investment in the pre-IPO amusement arcade M&A at an early stage, and all cash flows generated now and in the future will be returned to GENDA’s stakeholders in excess of the original investment amount. (See “Q3” below for the status of PMI other than amusement arcades.)
Furthermore, by financing the majority of the acquisition price with debt financing and minimizing GENDA’s cash contribution, GENDA’s actual recouped cash has exceeded the aforementioned gross basis recoup of the initial investment.
(1) Growth in existing businesses (organic growth) and (2) growth through M&A (inorganic growth).
(1) Growth of existing businesses
They are broadly classified into the following three categories.
- Increase in sales of existing businesses
- Increase in sales due to the full-year contribution in the current fiscal year of new stores opened during the previous fiscal year
- Increase in sales due to the contribution of new stores opened during the current fiscal year
We will open a certain number of new stores each year.
(2) Growth through M&A
They are broadly classified into the following three categories.
- Increase in sales due to the full-year contribution in the current fiscal year of the stores acquired through M&A during the previous fiscal year
- Increase in sales due to the contribution from stores acquired through M&A during the current fiscal year
- M&A of companies other than amusement arcades
We will aim to improve business performance by appropriately conducting post merger integration (PMI) of the newly grouped companies. We will also work to deliver “fun” to customers in rural areas by serving as a receptacle for stores that are suffering from a lack of successors to owners in regional cities and other areas.
M&A as inorganic growth will be conducted mainly in the amusement business and its peripheral areas.
Currently, the GENDA Group has consolidated subsidiaries in the U.S., China, and Taiwan, respectively.
In the U.S., Kiddleton, Inc. (“Kiddleton”) is focusing on amusement arcade for children, amusement complexes including food and beverage, and mini-location operations. In particular, for mini-location operations, we are accelerating the monthly opening of new locations, as noted in our monthly store development report; since opening our first location in 2021, we have expanded to 205 locations (as of the end of October 2023) in approximately two years. Although we do not currently plan to disclose our annual target number of locations, we will proceed with even greater speed.
In China, Five Colors Inc. (hereinafter referred to as “Five Colors”) is engaged in amusement machine rentals, sales of goods, and purchase and sales of prizes and amusement machines. Just as prize game sales are on the rise in Japan, prize games are becoming increasingly popular in China due to the popularity of Japanese animation. Since Five Colors provides prizes and other items purchased from Japanese manufacturers to Chinese facility operators, we believe we will be able to capture the growing demand for prize games. In addition, amusement machines used in Kiddleton’s mini-location operations are developed and exported by Five Colors. By conducting transactions among the group companies in this way, it is possible to promote efficient business development for both parties.
We entered Taiwan in December 2021 with the acquisition of three SEGA-brand amusement arcades, and on November 20, 2023, we changed our company name to “GiGO Taiwan Inc.”. We intend to continue to aggressively open new amusement centers in the future.
As for overseas expansion in new regions, there are no facts that we can disclose at this time, but we are discussing and examining the matter internally.
GENDA does not plan to announce its medium-term management plan for the following reasons
While we place M&A at the core of our growth strategy, we believe that if we announce a medium-term management plan that incorporates M&A, there is a risk that we may carry out unreasonable M&A to achieve our business performance, resulting in a high price tag, while on the other hand, if we announce a medium-term management plan that only incorporates organic growth, we believe that the disclosure of a medium-term management plan that incorporates only organic growth would increase the possibility of presenting a growth trajectory that differs significantly from that of our group, which places M&A at the core of its growth strategy. For these reasons, we refrain from disclosing our medium-term management plan.
Please refer to page 31 of “M&A Progress and Earnings Forecasts after December 2023” for the growth image up to 2040.
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/148590/00.pdf#page=31
In the roll-up of amusement arcades to this point, many stores have converted to the GiGO brand, and we will continue to largely follow that approach. However, if we determine that this is not necessarily optimal for our customers and stakeholders, we will not be limited to that.
For more information, please see the “Transcript of the 6th Annual General Meeting of Shareholders” posted on logme Finance.
We believe that “food” can be broadly divided into two categories: “food for living” and “food for leisure”. We have already been engaged in the “food for leisure” business for a long time in our amusement business, and we believe that this is an area in which we can continue to expand.
Specifically, our group has a track record of “food” initiatives in the context of entertainment, such as the “GiGO COLLABO CAFE” and “GiGO’s Taiyaki”, in which restaurants collaborate with popular content such as anime, manga, artists, and characters, and offer menus named after the works and characters at GiGO. We have a track record of “food” initiatives in the context of entertainment.
We will continue to consider investment in “food for leisure” that can bring enjoyment to people, as an area in which our group could enjoy synergies. On the other hand, we have no plans to enter the general restaurant business (e.g., food service industry) as “food for life”.
Even if Net Debt/EBITDA rises temporarily due to M&A, Deleveraging will proceed rapidly due to the utilization of the target company’s Debt Capacity, EBITDA growth through PMI of the target company, and ample cash flow from existing businesses. With the M&As announced today, we expect that the ratio will temporarily be 2.0x at the end of this fiscal year, but if there are no additional M&A in the future, the deleverage will accelerate and we expect the ratio to go down to 1.5x at the end of the next fiscal year and 1.1x at the end of the year after that.
The wholly owned subsidiary of C’traum through partial share exchange announced today is the first M&A project utilizing GENDA shares. This has the following advantages, which we will take advantage of this opportunity.
(1) M&A can be conducted while preserving Debt Capacity.
At the time of our IPO, the Company’s Net Debt/EBITDA was 0.1x, which meant that it was virtually unable to utilize its debt, resulting in a low level of capital efficiency. From this point on, we have achieved a certain level of improvement in capital efficiency by utilizing appropriate leverage through debt-financed M&A. However, from this point on, we will need to manage M&A activities while controlling debt capacity rather than focusing solely on borrowing. As an intermediate method between debt and equity financing, we believe that M&A with stock deal is an effective way to promote M&A while preserving our debt capacity.
However, from Cash EPS standpoint, entry valuation is more important for stock deal M&A than M&A solely with debt. This point is explained in section (2) below.
(2) If PER of GENDA is higher than the PER of target, Cash EPS will increase even with stock deal M&A.
The above is our approach to PER and Cash EPS in stock deal M&A, which is described in detail in the appendix of M&A materials released today. In addition, when the M&A consideration is a mix of stock and cash (borrowings), the PER of the target company multiplied by the percentage of the acquisition via stock is compared with our PER, and the hurdle for increasing Cash EPS is lowered. For example, for the C’traum acquisition, Cash EPS will increase significantly by acquiring 80% of C’traum’s PER of 5.9x by acquiring GENDA shares at a PER of 20.6x (20% of the shares have already been acquired through debt).
As we place importance on Cash EPS in M&A, we will limit our stock deal M&A to companies with lower PER (after taking into account the acquisition ratio) compared to our own PER. In the future, we will continue to consider M&A by way of shares as an effective means to (1) preserve Debt Capacity while pursuing our M&A strategy, and (2) improve Cash EPS if our PER is high compared to the PER of the target company.
In addition to (1) and (2), the M&A of the partial share exchange to C’traum has further advantages.
(3) It will also be an incentive after participation in GENDA.
The representative of C’traum, which is also the seller, will continue to be the representative of C’traum after the participation in GENDA. Therefore, this M&A with GENDA shares can be used as an incentive to increase the value of the shares after joining GENDA. Thus, if the seller of the target company’s shares continues to promote its business in GENDA after the completion of the M&A, it will be able to enjoy an upside by receiving GENDA shares as consideration, and will have an incentive to increase the value of GENDA’s shares after the M&A is completed.
(4) A partial share exchange to C’traum, which is largely net cash, is effectively funded by equity.
In a typical M&A transaction, since the target company usually has interest-bearing debt, even debt minus cash will be positive (net debt position), and thus even a stock deal M&A will usually result in the addition of incremental target company’s debt.
However, in this M&A of C’traum via partial share exchange, the subject company was “debt free” as of the end of the most recent fiscal year with cash on hand of ¥2.02bn, and had negative net debt (net cash position). As a result, the EV of the target company was ¥1.98bn and a equity value of ¥4bn. Therefore, with regard to the ¥4bn equity value of C‘traum’s shares, the 20% cash consideration on May 1 plus the current 80% acquisition via new GENDA shares, ¥1.98bn is the consideration for the acquisition of C’traum’s business, and the rest of ¥2.02bn is effectively consideration for the company‘s cash and deposits itself.
This has the same economic impact as if GENDA had completed equity financing. Furthermore, in this case, GENDA will be able to improve its Cash EPS while, practically raising funds through equity. In addition, from the subject company owner’s perspective, it is more reasonable from a tax perspective to sell the target company’s cash, rather than withdrawing the cash as dividends from the target, and we believe that this will have a certain level of replicability in the future.
We will continue to utilize equity M&A from the perspective of (1) and (2) alone, but we will also make good use of projects like this one, which have all the elements of (3) and (4), to control Debt Capacity. We will continue to manage our business with an awareness of “continuous and discontinuous growth” and Cash EPS through M&A.
Financial Results
Please refer to “Financial Highlights”.
Please refer to “Financial Highlights”.
The majority of the Company’s sales and profits are derived from the amusement arcade of its subsidiary, GENDA Inc. GiGO Entertainment Inc.
Therefore, sales tend to be higher in quarters with long holidays, when amusement arcades are in the midst of their commercial season.
Our fiscal year ends in January, and sales tend to be higher in the following order: 1Q (Feb-Apr) < 2Q (May-July/GW) < 3Q (Aug-Oct/summer vacation) < 4Q (Nov-Jan/New Year's holiday). In addition, we have our own "campaigns," which differ from seasonality. Depending on the timing of the campaign, our performance may fluctuate differently from normal seasonality.
The number of amusement arcade stores and the number of M&A sourcing are disclosed as KPIs. For details, please refer to page 3 of the “Financial Results for the Third Quarter of the Fiscal Year Ending January 31, 2024.
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym3/145597/00.pdf#page=3
On the other hand, from a performance perspective, as a company that focuses on M&A as a pillar of its growth strategy, we place the greatest importance on “EBITDA (operating income + depreciation and amortization + amortization of goodwill),” which represents the Group’s consolidated annual cash flow generation capacity, and “Net income before amortization of goodwill,” an indicator similar to net income under IFRS.
Currently, we are executing a large number of M&A projects. However, in light of the fact that all of the target companies in past projects have adopted Japanese GAAP, a trend that is likely to continue, we have adopted Japanese GAAP rather than IFRS in order to ensure flexibility in our M&A and accounting practices. Therefore, we will incur a certain amount of “goodwill amortization expense” (which does not occur under IFRS) as our M&A strategy progresses in the future.
If we change to IFRS, our operating income and net income will increase by the amortization of goodwill, but this will not increase our intrinsic corporate value.
Since enterprise value is only the sum of future free cash flow (after adding back goodwill amortization and other non-cash items) discounted by the time value, and since we repeatedly finance each M&A project based on the target company’s ability to generate cash flow.
We believe that it would be more appropriate for investors to focus on our ability to generate cash flow when judging the fair value of our company, which is growing through M&A, and we believe this is important in order to more accurately convey our company’s situation. For this reason, we disclose “EBITDA” and “Net income before amortization of goodwill” in our earnings announcements and forecasts, including our financial statements, in addition to the usual step-by-step profit and loss.
Quarterly results for the previous period and the current period are shown on page 35 of the FY2024/1 Q2 Earnings Presentation. (https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym3/141438/00.pdf)
Basically, sales are higher in the first quarter, second quarter, third quarter, and fourth quarter, in that order, as is the case in most years.
On the other hand, profits can be blurred by multiple factors. Just as the previous quarter’s quarterly results fluctuated, this quarter’s results will fluctuate due to a variety of factors when compared to the results of the current quarter, which are only isolated to the quarterly accounting period. In the third quarter of this fiscal year, we expect cost accrual factors, and since we expect sales to grow in the fourth quarter in accordance with our seasonality, we believe that profits will tend to be more heavily weighted in the fourth quarter than in the third quarter. Since these variable factors have been factored in since the initial planning, we believe that we are generally making very good progress toward our full-year plan.
ROA was 12.1% as of the end of January 31, 2023, and 9.2% for the nine months ended October 31, 2023, with total assets increasing due to an increase in cash and cash equivalents and other assets from the proceeds from the IPO and an increase in fixed assets from new store openings.
ROE was 36.9% as of the end of January 31, 2023, and 22.2% for the nine months ended October 31, 2023. GENDA manages its operations with capital efficiency in mind, using appropriate leverage.
In conclusion, the various businesses we acquire as M&A companies are not necessarily the same profit margin, and this will naturally occur as we are acquiring businesses with different profit margins. And that is not a problem from an M&A perspective, as we will explain below.
GENDA, as an M&A firm, sometimes acquires companies in industries different from its existing businesses, which causes profit margins to fluctuate. For example, comparing FY2024/1 and FY2025/1, GENDA acquires a karaoke business, and since the profit margin of the karaoke business is lower than that of the amusement arcade business, the profit margin will be lower.
So, in the case of GENDA, based on the above assumptions, would a lower profit margin as a result of M&A be a negative?
Indeed, for many general business companies with only organic growth, it is negative if the same business has a lower profit margin on a year-to-year comparison. However, as an M&A firm, GENDA merges and acquires companies with different business models and different profit margins; therefore, if a company has a lower profit margin, its profit margin will naturally decrease.
So next, is it negative to M&A a company that is less profitable than the existing business?
This is the point in M&A that is a bit difficult to understand, but in conclusion, it depends on the acquisition price.
For example, Shin Corporation, which is responsible for GENDA’s karaoke business, is expected to generate more than ¥2 billion in EBITDA in the proceeding fiscal year, the highest profit in its 35-year history.
The acquisition price of the company is undisclosed, but just as an extreme metaphor for intuitive clarity, if you could buy the company for 100 million yen, would you pass on M&A because of low margins? 100 million yen is an investment that will turn into 2 billion yen a year later.
Rather, forgoing this M&A is what must be avoided as a company is required to maximize shareholder value. In other words, you can see that high or low margins are a means, not an end. GENDA, led by its Investment Committee, adheres to the basic principle of investment, which is solely to invest funds and recover more funds than they are invested.
We would also like to add that we have already seen synergies in many areas of the companies we have acquired, not only in the amusement arcade business, which is our forte, but also in the karaoke business, and these synergies have actually materialized as a result. We will disclose these results at the appropriate time once we have comparable data for a certain period of time after the M&A.
Currently, we continue to see a positive cycle of acquisitions at appropriate valuations and growth for the company.
In conclusion, we have not lost goodwill in either the first half or the full year. In other words, in both the first half and the full year, operating income from M&A target companies > amortization of goodwill from M&A target companies.
Next, I would like to explain the reasons for the year-on-year decrease in profit, although we did not lose goodwill in the first half of the year.
First, due to the seasonal nature of the GENDA group, sales are more heavily weighted toward the second half of the year (August through January), when consecutive holidays and farewell parties are more frequent than in the first half (February through July). On the other hand, amortization of goodwill is expensed on a straight-line basis.
While All.Net usage fees begin to rise, “sales are seasonal, being lower in the first half and higher in the second half,” while “goodwill amortization expenses are always recorded in the same amount in both the first and second half (ultimately, every day of every month),” and if only the first half is taken out, operating income, a profit indicator after goodwill amortization, does not appear to be beating back the cost increase.
On the other hand, if we take only the first half of the year, even after taking into account the increased cost of All.net usage fees, EBITDA is expected to increase significantly from the previous year, even after deducting the impact of amortization of goodwill. GENDA uses EBITDA as an indicator to judge the health of the actual business.
Above all, the company plans to increase operating income after amortization of goodwill by 30% from 5.3 billion yen to 7.0 billion yen for the full year as planned (EBITDA after deducting goodwill amortization is expected to increase by 60%).
Although GENDA tries to avoid “full year” operating income reductions due to goodwill amortization as much as possible, goodwill amortization does not affect the decision-making process in the first place, and “whether the first half of the year is a goodwill loss” is even less relevant to decision-making.
Goodwill is likely to occur when there is a large difference between an asset that has been depreciated on its book value over time (e.g., a karaoke or amusement arcade) and an asset that is generating ample cash flow each year in the future.
At GENDA, we determine the amount of capital to be invested in an M&A transaction based solely on the total amount of cash flow that we expect to recover in the future. In other words, we thoroughly adhere to the basic principle of investment, which is to invest capital and recover more than the amount of capital invested.
This is essentially the same concept that applies to capital investment in the core business, which is the same act of making a capital investment and earning cash flow over and above that through the business. However, in today’s entertainment industry, GENDA has experienced discontinuous growth over the past six years due to the outstanding efficiency of capital investment in mergers and acquisitions (it has succeeded in increasing the amount of money invested to far more than it has invested).
First of all, it is assumed that the acquisition price of the four former Avice stores is recoverable from the cash flow from the four stores, and there is no actual problem from the standpoint of investment recovery, i.e., from the standpoint of M&A.
Rather, GENDA has repeatedly rolled up amusement arcade M&As and generated numerous synergies, and in fact, the four former Avice stores (now referred to as three stores due to a change in store definition) have a high comparable store growth rate of 107% in GENDA’s pre- and post-GENDA in-place comparison.
Despite this, the goodwill impairment is due to the following structural factors in management accounting.
Briefly stated, the four former Avice stores will incur a loss in management accounting if GENDA GiGO Entertainment’s Headquarters SG&A expenses are allocated to the four former Avice stores. However, the existing GiGO stores will incur less expenses, and their profits will increase in management accounting, by the same amount that the Headquarters’ SG&A expenses are allocated to the four former Avice stores. Therefore, the debate is which store will have its profits prorated for management accounting purposes.
On the other hand, from a company-wide perspective, the acquisition of the four former Avice stores has increased both company-wide profits and cash flow, and the increased cash flow will be used to recover the original acquisition price, so there is no problem with this investment.
For details, please refer to page 11 of the “Financial Results for the Fiscal Year Ended January 31, 2024 and Forecast for the Fiscal Year Ending January 31, 2025” disclosed on March 11, 2024.
https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym/152154/00.pdf#page=11
Simply put, corporate income taxes will be paid from the fiscal year ending January 31, 2025.
In other words, while total income taxes for the fiscal year ending January 31, 2024, were suppressed to only approximately 200 million yen due to the loss carried forward, the plan for the fiscal year ending January 31, 2025 is approximately 2 billion yen due to the normalization of income tax payments. In fact, the fact that net income is expected to increase despite a 1.8 billion yen increase in income tax payment compared to the previous year is something that would not have been possible without the M&A in the previous year.
While net income, the numerator of EPS, has increased, EPS has decreased because the number of shares outstanding, the denominator, has increased due to the exercise of stock options.
As stated above, this matter does not inherently impair GENDA’s intrinsic value.
In addition, Net income before amortization of goodwill per share (Cash EPS), which reflects the reality of GENDA’s earning power, is expected to grow 18.8% despite a 1.8 billion yen increase in income taxes, from131.91 yen for the full year ended January 31, 2024 to 156.73 yen for the year ending January 31, 2025.
GENDA will continue to pursue “maximization of shareholder value” as well as “maximization of Net income before amortization of goodwill per share (Cash EPS).
In conclusion, we have seen strong organic growth, particularly in amusement arcades and karaoke, in our footprint.
Originally, in the guidance disclosed on January 22, 2024, we expected net sales of approximately 90 billion yen, EBITDA of approximately 12 billion yen, and operating income of approximately 6.5 billion yen (please refer to “M&A Progress and Earnings Forecasts from December 2023” on page 25).
https://ssl4.eir-parts.net/doc/9166/tdnet/2382538/00.pdf#page=25
However, the various synergy measures implemented in the M&A target company have been successful, and we have observed strong organic growth, especially in amusement arcades and karaoke. We will disclose these results at the appropriate time once we have comparable data for a certain period of time after the M&A.
The entire amount is expected to be financed in GENDA in Japanese yen, and the borrowing will be executed at the time of closing. We aim to maximize shareholder value through M&A by borrowing to take advantage of the low interest rate environment in Japan.
In terms of foreign exchange risk, we will (not lend but) conduct capital injection from GENDA (through GiGO) to Kiddleton for the consideration to be paid to NEN. Thus, the impact of foreign exchange gains or losses will only incur within our balance sheet (net assets foreign currency translation adjustments), which will not impact on the PL.
Furthermore, since our domestic operations generate ample cash flow in yen, the repayment of the loan will not depend on NEN’s dollar-denominated cash flow, so the foreign exchange risk is practically negligible.
Business
Please refer to “Overview of GENDA Group”.
Prizes of prize games are created by the manufacturers and purchased by each amusement arcade, so basically the same prizes are available at almost all amusement arcades. On the other hand, in some cases, our Group negotiates with IP publishers and other parties to purchase unique prizes that are available only to our Group. We refer to these unique prizes as “campaigns. Since the handling of prizes that other companies do not offer increases customers’ willingness to visit our stores, this is a factor that causes fluctuations in business performance that differ from normal seasonal fluctuations.
The main promotions conducted during the period under review are as follows during this period, exclusive GiGO prizes were offered.
| Campaign Name (in Japanese) | Implementation Period | |
| First Quarter | ムーミン コスメポーチプレゼントキャンペーン | February 11 – March 5 |
| 崩壊 3rd×GiGO キャンペーン～火追の宴～ | February 25 – March 26 | |
| にじさんじ SNS 風クリアカードプレゼントキャンペーン | March 6 – April 9 | |
| 星のカービィ プププなピクニックキャンペーン | March 24 – May 7 | |
| すみっコぐらし アクリルチャームプレゼントキャンペーン2023 | March 11 – April 9 | |
| 東京リベンジャーズ×GiGOキャンペーン2023 | April 15 – May 7 | |
| Second Quarter | hololive×GiGO キャンペーン | May 13 – June 18 |
| ハイキュー!! キャンペーン | May 20 – July 2 | |
| 映画『五等分の花嫁』GiGOプライズキャンペーンHappy Birthday! 2023 | May 3 – May 28 | |
| 「たべっ子どうぶつ Tropical キャンペーン | June 24-August 16 | |
| ヘブンバーンズレッド キャンペーン in ギーゴ 2023 | June 17 – July 17 | |
| GiGO×チェンソーマン キャンペーン | July 22-August 27 | |
| 原神×GiGO キャンペーン～花笑むひととき、彩のパーティー～ | July 29 – September 17 | |
| Third Quarter | 映画『五等分の花嫁』Happy Birthday! 2023 プライズキャンペーン 第2弾 | August 10 – August 27 |
| TVアニメ【推しの子】×GiGO Dress Up Blooming | August 19 – September 18 | |
| ハイキュー!! キャンペーン | September 23-October 22 | |
| Crazy Raccoon×GiGOキャンペーン | September 30 – October 29 |
The GiGO Sohonten, the flagship store of all GiGO stores, opened on September 20 in Ikebukuro, Toshima-ku, Tokyo. On the day of the opening, we had such high expectations that about 500 customers lined up waiting for the opening. One month after the opening, sales have been quite strong, exceeding our plan by 15%.
The store has 269 crane games, 118 interactive music games, 72 large video card games, and 18 print sticker machines, making it a flagship store of GiGO. In addition, the store has a permanent food and beverage (F&B) shop featuring “GiGO Taiyaki Sohonten” and “Hill Valley,” a gourmet popcorn brand originating in Japan, as well as a café space where customers can enjoy these items on the spot.
Currently, the store receives about 10,000 customers on weekdays and about 30,000 customers on weekends and holidays (both figures are the total number of customers per day, as measured by a headcount counting sensor). Sales in the first trailing month after the opening were approximately 200 million yen (preliminary basis), with prize games accounting for about 80% of sales, and many customers visit the store in search of prizes, especially those of popular IPs. For example, on the opening day of the ” Crazy Raccoon×GiGOキャンペーン”, about 150 customers lined up to win prizes and limited-edition items.
In F&B, as in the case of prize games, products made in collaboration with popular IPs have been well received by customers. “Hill Valley” is currently selling “ドズル社 コラボポップコーン” with an illustration of “ドズル社”, which is that led by president “ドズル”, a medical student turned YouTuber who established his own company based on his YouTube activities, the five members are active as video game players in Japan, printed on the package. On the first day of sales, about 100 customers lined up even before the store opened to get their hands on this product. GiGO Taiyaki Sohonten” is currently offering ” GiGOのたい焼き”ブルーロック焼き 第 2 弾”,” a taiyaki made in collaboration with “ブルーロック”, which is famous as a football manga in Japan. These taiyakis have also been well received by “ブルーロック” fans.
As “an entertainment facility where everyone can enjoy their own time as if they were the hero”, we will continue to introduce the fun of amusement arcades from Japan to the rest of the world.
The amusement arcades in which our group operates can be broadly classified into two types: general-style amusement arcades with permanent staff and game areas without permanent staff (“mini-locations”).
Many amusement arcade customers visit for prizes of their favorite animated cartoons and IPs for prize games, and for their favorite machines for video and music games. Therefore, although our group’s amusement arcades are visited by customers of all ages, we consider customers in their 20s and 30s to be the largest age group. Mini-locations, on the other hand, are located in vacant spaces such as karaoke and mass merchandisers in Japan and food supermarkets and restaurants in the U.S., and their customer base is dependent on the flow of people in those spaces.
Stock Information
July 28, 2023
Tokyo Stock Exchange Growth Market
It is planned April annually.
The company does not currently pay dividends.
The reason for this is that we recognize numerous attractive investment pipelines which would exceed the cost of equity, so that we would dare to reinvest in our business rather than to directly return the cash flow we are currently generating to our shareholders, thereby increasing the value of our shares more in the future.
Going forward, our basic policy will always be to implement the most appropriate capital allocation at any given time from the perspective of optimizing the allocation of capital to increase shareholder value.
There is no fact that has been decided on the market change at this point in time.
Regarding dividends, we are aware of a number of attractive business investment opportunities that exceed the cost of equity, thus we understand that reinvesting our current cash flow will contribute more to shareholder value, rather than returning right now the cash flow to shareholders. For these reasons, we are not considering dividends at this moment.
The concept of share buybacks is generally the same as that of dividends. However, in cases such as when our share price is traded at a significant discount from our fair value, it may be judged that share acquiring “our” shares are more effective in increasing share value as a result of a higher return on investment than acquiring “other company’s” shares through M&A activities We believe that the share buyback is more effective in improving shareholder value relative to dividends, owing to this agility of being able to control the timing of implementation.
On the other hand, although nothing has been decided on shareholder benefits at this time, since our entertainment platform business is a B to C business, we recognize that shareholder benefits are an effective measures for our group from a variety of perspectives.
For example, unlike dividend payments and share buybacks, which are also forms of shareholder return but involve actual cash outflows, shareholder benefits do not directly interfere with the growth investments that are part of our M&A strategy.
In addition, while the shareholder benefits will lead to the development of a new customer base and expansion of the investor base, we believe that the expansion of the shareholder base will also have the effect of reducing the daily volatility of the share price, resulting in a lower cost of capital and subsequent increase in shareholder value.
Based on the above assumptions, our basic policy is to always continue to implement the optimal allocation of capital from time to time in order to realize an increase in shareholder value.
As a Serial Acquirer, we have been growing through continuous M&A and expanding our business performance with 1.8 times sales and 1.6 times EBITDA compared to the previous fiscal year, we have recently been receiving substantial interest particularly from overseas institutional investors. On the other hand, while the majority of our shareholders since our IPO have been stable shareholders (see below for details), we have been receiving comments about increasing the liquidity of our shares, especially from institutional investors with large investment funds who are considering new investments in our shares in the market.
In addition, we are planning further growth through M&A for the next fiscal year, and while we advocate Transformational Growth in the future, we are also making daily efforts to transformationally increase the value of our stock along with our growth. On the other hand, if we were to introduce shareholder benefits in the future, in light of the price level of GENDA Group’s B to C services, it is necessary to maintain the minimum investment amount of our stock at a certain level to create a meaningful shareholder benefit program.
As mentioned above, we have made the decision to carry out this stock split for two reasons: to increase liquidity and to maintain the minimum investment amount. Next, we will explain our stable shareholder base as mentioned at the beginning of this document.
First, as disclosed in our Annual Securities Report, “Hidetaka Yoshimura Midas B Investment Limited Partnership” and “Midas Capital G Fund Limited Liability Partnership” owned approximately 44% of our shares as of January 31, 2024. In addition, officers and employees of GENDA hold approximately 24% of our shares in total.
In addition, at the time of the IPO, Asset Management One Co., Ltd. acquired 564,900 shares (1.52%) of our stock through “Oyabike” (A promise by the company issuing the new shares to sell a portion of the new shares to a specific party after consulting with a securities company in advance.), as described in the “Amended Securities Registration Statement (Initial Public Offering)” disclosed on July 19, 2023, and its holding policy at that time was “expected to be a long-term holding”.
https://disclosure2dl.edinet-fsa.go.jp/searchdocument/pdf/S100RFK6.pdf
And we received an Indication of Interest from Capital Group in the amount of 2,711 million yen (4.19%), as described in the “Amended Securities Registration Statement (Initial Public Offering)” disclosed on July 10, 2023. (Since this is only an expression of interest, the actual allocation of shares in the IPO is not disclosed.)
https://disclosure2dl.edinet-fsa.go.jp/searchdocument/pdf/S100RD51.pdf
While we are not in a position to comment on future shareholder trading due to the nature of our stock being listed on a liquid stock market, it is true that the majority of our shareholders are stable shareholders with relatively low liquidity, although our business performance is expanding compared to last year. Therefore, we will make efforts in IR activities to increase liquidity by having more shareholders deepen their understanding of our company.
Please refer to the Annual Securities Report for more information, including the status of other major shareholders.
https://disclosure2dl.edinet-fsa.go.jp/searchdocument/pdf/S100TC50.pdf