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”.

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

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.