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Sponsored Research October 11, 2022

Sessa Investment Research

GOLFTEC ANYWHERE concept is launched

GDO raising stake in GOLFTEC to 97%, acquires SKYTRAK business

SUMMARY

  • GDO net sales have only declined twice in its history, -8% in FY11/12 after the Mar-2011 earthquake/tsunami, and -2% in FY20/12 in the wake of the COVID-19 pandemic (see graph on P33). Since FY12/06 with comparable Dec-end FY, even factoring in those 2 declines, GDO has achieved 15-yearnet sales CAGR of +11.2% through FY21/12, and 15-yearOP CAGR of +31.8%. More importantly, the decision to acquire a majority stake in GOLFTEC Enterprises in Jul-2018 is now finally paying off, with high growth in high- margin US business entering a new period of accelerating Group earnings expansion.
  • When GDO made the decision to acquire a majority stake in GOLFTEC Enterprises LLC (GTE) in 2018, at the time it was viewed as a long-dated,out-of-the-money call option, offering a clean way to enter the enormous US market with a highly recognized blue- chip name. In the first full three years through FY21/12 since GDO obtained a majority stake, GOLFTEC has achieved net sales CAGR +25% and EBITDA CAGR of +37%, and it expects negative equity to disappear by the end of 2022. US GOLFTEC business is no longer theoretical, and its contribution is real and measurable, with significant upside.
  • Along with 1H results, GDO announced on August 10 that GOLFTEC would acquire SKYTRAK business, the no.1 launch monitor in the US for the affordable consumer home market, offering various accessories to assemble home simulators. The Company expects this acquisition to be accretive to profits from year one. Then on September 22,
    GDO announced that it intends to increase its equity stake in GOLFTEC from the current 60% → 97%, subject to approval at an extraordinary meeting of shareholders on November 24 for the issuance of Type A preferred shares (bond-type, non-convertible).The total fundraising for these two transactions of JPY 20.9bn includes JPY 14.9bn in 5- year syndicate loans (3.36x revised FY22/12 EBITDA), and JPY 6.0bn in preferred shares. While net assets will initially drop from JPY 9.1bn to JPY 3.0bn, GDO expects to rebuild that through Group profit growth over the next several years. It is worth noting that 3
    GDO Board of Directors members collectively own 29% of shares outstanding.

GOLFTEC ANYWHERE initiative takes off

'GOLFTEC ANYWHERE'

  • In person with a GOLFTEC coach
  • On-the-goat a course or range
  • At home with a simulator

Possibilities for golfers everywhere are unlimited to improve their skills and enhance their golfing experience, with large potential Group synergies.

Full Report

Focus Points:

'Only one' golf specialist online gear retail, course reservations and media platform operator entering a new growth phase on acquiring the world's largest golf lessons operator in the US.

Key Indicators

Share price (10/7)

1,402

YH (22/8/25)

2,250

YL (22/3/9)

882

10YH (22/8/25)

2,250

10YL (13/1/4)

82.0

Shrs out. (mn shrs)

18.274

Mkt cap (¥ bn)

25,620

Shr equity ratio (6/30)

37.0%

22.12

P/E (CE)

19.9x

22.12

EV/EBITDA (CE)

5.6x

22.06

P/B (act)

2.82x

21.12

ROE (act)

15.1%

22.12

DY (CE)

0.68%

6M stock price (weekly)

2,400

2,000

1,600

1,200

800

Chris Schreiber CFA

Company Specialist research@sessapartners.co.jp

This report was prepared by Sessa Partners on behalf of Golf Digest Online Inc. Please refer to the legal disclaimer at the end for details.

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Table of Contents

① INTRODUCTION: Business description and corporate history

3

② BACKGROUND: US golf industry and launch of GOLFTEC ANYWHERE

10

③ EARNINGS: 1H Results & Revised FY22/12 full-term earnings outlook

23

④ SHAREHOLDERS: Share price, valuations and major shareholders

29

⑤ SUPPLEMENT: Annual IR FactSheet, METI Japan golf industry data

32

GDO Group Driving Principle: Golf × Technology

Each of the key GDO Group companies is No.1 in its respective market:

  • GDO is the largest online retailer of golf gear, with an award-winning golf news portal, broadly dividing the market with Rakuten for online tee-time bookings, and is the domestic partner for rolling out TOPTRACER in driving ranges across Japan
  • GOLFTEC is the world's largest provider of golf lessons with professional instructors, with a suite of proprietary technologies to analyze and improve student swings, as well as custom club-fittings, and
  • SKTRAK delivers the No.1 launch monitor for the consumer home market, as well as various accessories to assemble a complete home simulator system

GOLFTEC ANYWHERE offers endless possibilities for golfers to enhance the thrill and satisfaction of their game with large potential synergies for the GDO Group

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PART ① INTRODUCTION

Online golf gear sales

Highly effective and scalable business model: self-reinforcing ecosystem based on IT around core media specialized in all things golf

GDO was established in May-2000 at the height of the 'dot.com' internet bubble. Founder and CEO Nobuya 'Mike' Ishizaka, a veteran of Mitsubishi Corporation and holder of a Harvard Business School MBA, had a simple premise: build a media platform specialized in golf, and develop IT-based businesses revolving around the core media. The graphic below shows the initial 3 main 'tricycle' wheels of RETAIL (golf gear online sales), COURSE (online tee time bookings), and MEDIA (on-site ad placement).

The core media is GDO News, which covers all news, topics and tournament/event related information. The company has a dedicated Editorial Department with staff writers producing proprietary content as well as culling together a myriad of information of interest to golfers. GDO News attracts visitors to the site, creating a powerful platform for various services aimed at golfers. In 2016, 2019, 2020, and 2021, GDO News won the LINE NEWS AWARD Grand Prize in the Sports Category awarded to the media most supported by users (2017 & 2018 winner was soccer's Football ZONE).

The trend of GDO Club Members, shown in the graph on the following page, is a key leading indicator for Japan business. This is the textbook definition of structural growth, driven in large part by the rising EC ratio. GDO club members topped 5 million in 3Q FY12/21. GDO's current best estimate of total golfers in Japan is roughly 7.8 million, so GDO Club Members account for well over half of all golfers. In this report we summarize key trends in the US golf market. For a detailed overview of the golf market in Japan, please refer to our last GDO Full Report dated March 29, 2021, as well as METI monthly industry data in the SUPPLEMENT at the end of this report.

Early-stage development in Japan: at the core is 'only one' GDO golf dedicated portal site

Used clubs etc. (6)

Golf Gear

RETAIL

Online Sales

Database

News and

❶

Golf with family

PC and mobile

other content

attract site

visitors

❸

❷

SCHOOL ❹

MEDIA

COURSE

On-Site Ad

Online Tee Time

Lessons, Club

Placement

Bookings

Fitting & Sales

Source: compiled by SIR based on YUHO financial statements and company interviews. Note: KIDS GOLF by GDO was merged with GOLFTEC by GDO in 2020.

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Dentsu Japan Ad

Spending (JPY bn)

TV

Internet

3,000

2,705

2,500

Internet ads

surpassed

TV in 2019

1,839

2,000

1,500

1,000

500

0

03

06

09

12

15

18

21

Source: compiled by SIR from Dentsu Advertising Expenditures in Japan 2022

Non-financial KPI: Quarterly Trend of GDO Club Members - topped 5mn in 3Q FY21.12

million (LHS)

% YoY (RHS)

5.50

5.2

13.5

5.00

4.6

12.0

4.50

4.1

10.5

4.00

3.7

9.0

3.50

3.4

7.5

3.0

2.8

3.00

2.5

6.0

2.3

2.50

2.2

4.5

1.9

2.00

3.0

1.50

1.5

1.00

0.0

11.1Q

12.1Q

13.1Q

14.1Q

15.1Q

16.1Q

17.1Q

18.1Q

19.1Q

20.1Q

21.1Q

22.1Q

Source: compiled by SIR from GDO IR FactSheet.

GDO SHOP Golf Gear Sales and Market Share

GDO SHOP Golf Gear Sales (mainly online, JPY bn, LHS)

mkt share (RHS)

24.0

12.0%

20.9

21.0

10.5%

17.4

17.9

18.2

18.0

9.0%

16.3

15.0

14.9

7.5%

12.5

13.4

5.6%

11.0

5.0%

12.0

4.8%

6.0%

4.4%

4.0%

9.0

3.7%

4.5%

3.3%

6.0

3.0%

3.0

1.5%

2014

2015

2016

2017

2018

2019

2020

2021*

2021**

Source: compiled by SIR from share data provided by GDO IR. *Pre- and **post- revenue recognition standard applied.

METI Annual E-Commerce Market Survey

B2C Merchandising Sector (JPY bn, LHS)

EC ratio (RHS)

16,000

16.0%

14,000

13,287

14.0%

12,233

12,000

12.0%

9,299

10,052

8.8%

10,000

8,601

8.1%

10.0%

8,004

7,240

6.8%

8,000

6,804

6.2%

8.0%

5.8%

5,993

5.4%

4.8%

6,000

4.4%

6.0%

3.9%

4,000

4.0%

2,000

2.0%

0

0.0%

2013

2014

2015

2016

2017

2018

2019

2020

2021

Source: compiled by SIR from METI's annual 'E-Commerce Market Survey,' August 12, 2022.

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Chiba Distribution Center

GDO is the largest online retailer of golf gear, ranking 5th in overall golf gear sales including brick-and-mortar chains like Alpen Group & XEBIO HD. GDO's market share shown in the middle graph on the previous page mirrors the rise in the EC ratio for overall e-commerce in B2C merchandising. This structural growth driver is ongoing.

While RETAIL business has the highest contribution to sales, COURSE business (online tee time reservations) has the highest margins. The market for online golf course reservations by stand alone platforms with comprehensive nationwide coverage is basically split between Rakuten GORA and GDO. First, a GDO Club member logs on, and inputs the requested date, time, and course, as well as the number of players in his or her party. Then, after the member and party actually visit the course and play, a commission of several hundred yen is paid by the corresponding golf course to GDO times the number of players. There is no commission paid in the event of cancellation. The biggest risk factor for this business is weather events and natural disasters like typhoons, flooding, earthquakes etc.

MEDIA business (on-site ad placement) is positioned more as a way to offset costs to operate GDO News, at the core of all business, rather than a priority focus area.

Original three businesses and two new businesses added to the Domestic Segment

GDO Golf Course Reservations

Easy golf course reservations from more than 2,000

courses nationwide, with a large number of special offers. 12 FC training centers in Japan offering lessons and club fitting

GDO Golf Shop

120,000 golf products to choose from! One of the largest golf stores in Japan. You can get popular golf gear at reasonable and convenient prices.

GDO Score

Easily enter and analyze scores while playing. It assists your golfing experience seamlessly!

GDO Golf News

Breaking news from domestic and international tours! You can view the latest rankings and player information.

Opened in over 80 facilities nationwide and growing

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Golf Digest Online Inc. published this content on 11 October 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 12 October 2022 07:31:05 UTC.