POLA ORBIS HOLDINGS (4927 / 4927 JP)

Asia Pacific/Japan Equity Research Personal Products (Small and Mid-Cap, Japan) Rating OUTPERFORM* Price (04 Sep 12, ) 2,722 Target price ( ) 3,400¹ Chg to TP (%) 24.9 Market cap. ( bn) 150.48 (US$ 1.92) Enterprise value ( bn) 106.05 Number of shares (mn) 55.28 Free float (%) 35.0 52-week price range 2,751-1,850 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Research Analysts Stephen Barker 81 3 4550 9907 stephen.barker@credit-suisse.com Share price performance Price (LHS) Rebased Rel (RHS) 4000 3000 2000 1000 0 12-10 4-11 8-11 12-11 4-12 8-12 The price relative chart measures performance against the TOPIX which closed at 718.09 on 04/09/12 On 04/09/12 the spot exchange rate was 78.38/US$1 200 150 100 50 0 Performance Over 1M 3M 12M Absolute (%) 2.6 22.9 35.2 Relative (%) 2.2 21.8 39.0 POLA ORBIS HOLDINGS (4927 / 4927 JP) INITIATION A winning "barbell" strategy; initiating at OUTPERFORM with a 3,400 TP Action: We initiate coverage of POLA ORBIS with an OUTPERFORM rating and a 3,400 target price. Investment case: (1) POLA ORBIS s mix of high- and low-end cosmetics brands constitutes a barbell play on Japanese consumption. (2) The firm s direct selling and Internet marketing distribution model improves communications with clients and avoids discounting by retailers. (3) POLA ORBIS specialises in skin care, where growth rates and margins are high. (4) POLA THE BEAUTY same stores sales grew 9.9% in 1H. (5) ORBIS profits grew 32% in 1H on rising Internet sales. (6) Revenues generated by recent acquisitions Jurlique and H2O+ are growing by double digits due to demand from China. (5) POLA ORBIS trades at a discount to peers, despite having better growth prospects, in our view. Catalysts/Risks: (1) OP growth should accelerate to 30% in 2H as M&Arelated expenses decline. (2) Annual OP growth should accelerate from an estimated 13% in FY12/12 to 17% in FY12/13 as recent acquisitions move into the black. (3) If POLA brand sales continue to grow in 2H at the same 3.5% rate recorded in 1H then we believe POLA ORBIS will exceed currentyear consensus OP estimates. Potential risks to our target price include: (1) market share losses to competing brands and (2) the possibility that the company would fail to adequately manage its overseas acquisitions. Valuation: Our 3,400 TP is based on a P/E of 20x, a 16% premium to next year s local sector median P/E (17.1x), and FY12/13E EPS of 173. Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue ( bn) 166.7 182.7 189.0 195.5 Operating profit ( bn) 12.9 14.5 17.1 18.5 Recurring profit ( bn) 13.3 15.0 17.6 19.1 Net income ( bn) 8.0 7.4 9.5 10.5 EPS ( ) 145.4 134.7 171.3 190.4 Change from previous EPS (%) n.a. IBES Consensus EPS ( ) n.a. 133.0 160.4 179.9 EPS growth (%) 13.4-7.4 27.2 11.2 P/E (x) 14.3 20.2 15.9 14.3 Dividend yield (%) 2.2 1.8 2.0 2.2 EV/EBITDA(x) 3.0 5.7 4.8 4.2 P/B (x) 0.73 0.94 0.90 0.86 ROE(%) 5.2 4.7 5.8 6.2 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

Table of contents Company description 3 Barbell strategy focuses on two attractive demographics 3 Better than the competition 3 Acquisitions driving overseas growth 4 POLA THE BEAUTY has reinvigorated the brand 4 What is direct selling? 4 Basis of recommendation 5 Profit growth to accelerate in 2H 5 POLA and ORBIS are growing against the trend 5 POLA THE BEAUTY 5 Craving a good experience 5 China set to become a pillar of growth 6 Asset play 6 Valuation and TP 6 POLA ORBIS strengths 8 Favorable product positioning 8 Focusing on skincare 8 Vertical integration 8 Mail order/internet sales ratio high 8 Flexible cost structure 8 Well defined brand concepts 8 Strong management 8 Brands 9 POLA 9 ORBIS 11 H2O+ 12 Jurlique 13 Brands under development 13 China 14 Direct selling in China 15 1H results and outlook for full-year 16 M&A hurt profits in 1H but results are set to improve in 2H 16 Existing business sales up 3% 16 Segments 17 Beauty care 17 Real estate 18 Others 18 Segment sales and profits 19 Consolidated forecasts 22 Profit and loss statement 22 Balance sheet 23 Cash flow statement 24 Key ratios and valuations 24 Management 25 Shareholder returns 25 Medium term targets 25 Long-term vision 25 Approach to M&A 25 Holt analysis 27 POLA ORBIS HOLDINGS (4927 / 4927 JP) 2

Company description More than 90% of POLA ORBIS sales come from cosmetics in Japan. The firm s barbell strategy focuses on two attractive demographics; seniors with money and cost-conscious youngsters. Barbell strategy focuses on two attractive demographics The firm s venerable POLA brand, accounting for roughly 60% of sales, is positioned in the prestige zone and marketed to mainly older women using direct sales channels such as those employed by Avon. The value-priced ORBIS brand, accounting for roughly 30% of sales, is sold via Internet/mail order mainly to young women. Figure 1: Brands Overseas brands Flagship brands Brands under development POLA ORLANE High Jurlique H2O+ THREE Middle Price range Future LABO ORBIS decencia pdc Low Source: Company data, Credit Suisse estimates Market size Better than the competition POLA ORBIS is better positioned than most of its competitors because: (1) It focuses on the high- and low-ends of the Japanese cosmetics markets and avoids the middle, which is shrinking. (2) It focuses on skincare, where prices, margins and growth rates are higher than average. (3) The firm s direct sales and Internet/mail-order distribution means that the company is in full control of the firm s image and pricing and much better connected with its clients than most cosmetics companies. (4) The company s strategy adheres to the principles of experience marketing, where the goal is to create an emotional bond with the consumer via repeated positive experiences, most importantly at the point of purchase. (5) The firm s holding company structure protects the integrity of each brand by giving them autonomy in terms of marketing decisions while supporting them with the essential, and saleable, back-office functions such as purchasing and logistics. POLA ORBIS HOLDINGS (4927 / 4927 JP) 3

Acquisitions driving overseas growth POLA ORBIS has recently embarked on a strategy of internationalisation and has made two major acquisitions over the past ten months. The company acquired US firm H2O+ in November 2011 for 7.8bn and acquired Australian brand Jurlique in February for 27.3bn. Both brands are enjoying double-digit growth overall, but especially in China. We see potential in the medium term for POLA ORBIS to launch direct sales of its POLA brand in China, where according to the World Federation of Direct Selling Associations (WFDSA), the direct sales market is growing 19% per year. Figure 2: POLA ORBIS: Estimated FY12/12 sales and profits by brand in millions, unless otherwise stated Forecast 3yr sales CAGR to FY12/15 Brand Sales % of sales OP OPM Target Market Distribution POLA 100,469 55.0% 6,168 6.1% High Direct selling 3.0% ORBIS 48,955 26.8% 6,526 13.3% Low Mail order 1.0% China sales weight Jurlique 8,932 4.9% 1,173 13.1% High/Middle Own boutiques and spas, department stores and third party spas 15.0% 20% H2O+ 3,698 2.0% 185 5.0% Middle/High Own boutigues, drug stores, department stores 12.0% 25% * Profit estimates for h2o+ and Jurlique are before goodwill amortisation, M&A-related and other one-off costs Source: Credit Suisse estimates POLA THE BEAUTY has reinvigorated the brand The POLA brand has been revitalised by a new sales channel, POLA THE BEAUTY (PB), which combines the strengths of direct selling and specialty retail. PB same-store sales grew 9.9% in 1H. Unlike traditional direct sales, where salespeople visit clients in their homes, clients visit the POLA Lady at her own POLA THE BEAUTY store, where products are demonstrated in the course of administering aesthetic services. This creates an optimal retail experience without the fixed costs of a regular retail store. The POLA Ladies do not receive any fixed compensation, and it is the POLA Ladies themselves that find and rent the facilities. POLA ORBIS does make a small capital investment averaging 8mn per store, which they depreciate over four years. What is direct selling? Direct selling is broadly defined as the selling of products directly to consumers away from a fixed retail location. The world s largest and best-known direct selling organization is Avon, which is considered to have started the modern industry in 1886 when the firm s founder began recruiting female sales representatives. As a business, direct selling is attractive because it reduces or eliminates costs such as advertising, rents and fixed salaries. These expenses are, however, replaced with the cost of paying sales commissions. Recruiting is also a major challenge for direct selling organizations. Direct selling is generally viewed as not a particularly prestigious way to earn a living, and the fastest growing markets tend to be less developed economies where employment opportunities, for women in particular, are limited. The World Federation of Direct Sellers Associations (WFDSA) estimates that in 2009 there were 75mn direct sellers worldwide generating retail sales worth $117bn, with the US accounting for 16mn sellers and $28bn of annual sales, followed by Japan with 2.7mn sellers generating $22bn of annual sales. China was next with sales of $12.5bn followed by Brazil ($10.8bn), South Korea ($8.9bn) and Mexico ($5.6bn). China s direct selling market has subsequently grown to $16bn per annum. POLA ORBIS HOLDINGS (4927 / 4927 JP) 4

Basis of recommendation Profit growth to accelerate in 2H We estimate OP growth is set to accelerate to 30% in 2H as the profit contribution from two recent acquisitions, H2O+ and Jurlique, improves from a 1H operating loss of 1.5bn to OP of 0.9bn in 2H. Furthermore, annual OP growth should rise from 13% in FY12/12 to 16.5% in FY12/13 (our estimates) as H2O+ and Jurlique turn profitable. POLA and ORBIS are growing against the trend Sales of the high-prestige POLA and value-priced ORBIS brands are growing even as Japan s cosmetics market stagnates overall. Shiseido estimates that Japan s over-thecounter cosmetics market will grow by only about 1% this year. POLA ORBIS is not burdened with mid-market products where demand is shrinking but is, instead, positioned at the high and low ends of the market with its POLA and ORBIS brands, respectively. The direct sales channel employed by the POLA brand and Internet sales channels employed by the ORBIS brand also appear to confer an advantage over companies such as Shiseido and Kose, which overwhelmingly rely on third-party retailers for distribution. Between March 2009 and March 2012 Shiseido s and Kose s domestic cosmetic sales declined by 7.8% and 5.6%, respectively, while POLA ORBIS sales increased by 1.7%. POLA THE BEAUTY POLA THE BEAUTY (PB), a relatively new sales channel for the high-end POLA brand, is reinvigorating the brand by attracting younger clients 60% of new clients are in their 20s and 30s and by attracting new POLA Ladies. PB combines the strengths of direct selling with the advantages of a custom-designed retail setting. PB is still relatively new and benefits for the brand are likely to build over time. The number of PB stores rose by 17 during 1H to 550, channel sales grew by 11.3% overall and same-store sales rose by 9.9%. The company plans to expand store numbers to 600 by 2013. Craving a good experience POLA ORBIS is successful, in our view, because it gives clients a good experience. The firm s high degree of vertical integration means it controls the entire value chain of products and most critically their client s retail experience. Unlike most cosmetics companies, which rely on department stores, drug stores, and convenience stores to sell their product, POLA ORBIS controls the point of sale. As per the theories of Michael Dart and Robin Lewis, set out in their book The New Rules of Retail 1 (Palgrave Macmillan, 2010), consumers will gravitate to brands with which they feel a positive emotional connection, created most commonly at the point of sales. The PB sales channel augments a direct sales model with promotions such as discount aesthetic treatments that are delivered in a customised setting, optimizing the purchasing experience. Jurlique, the Australian skincare company that POLA ORBIS acquired in February, employs similar methods to enhance consumers image of the brand. Even the mail order sales model employed by the ORBIS brand has been optimized to the point where, based on the Nikkei Business Survey, ORBIS is regularly nominated as the number one website in terms of client satisfaction. 1 The New Rules of Retail was written by Robin Lewis and Michael Dart. Robin Lewis is a retail industry consultant and CEO founder of the ROBIN REPORT. Michael Dart is a Principal, Head of Private Equity & Strategy at Kurt Salmon Associates, a global consulting firm specialising in retail, consumer products and healthcare. POLA ORBIS HOLDINGS (4927 / 4927 JP) 5

China set to become a pillar of growth China is set to become a pillar of growth for POLA ORBIS, in our view. The company is already enjoying strong demand for its H20+ and Jurlique brands in China and has recently launched an ORBIS direct sales website in China. We think that the company may consider launching its PB sales channel in China as well. Asset play As of end-1h the company had cash and short-term securities of 47.5bn and debt of only 1.6bn for net cash of 45.9bn, equivalent to 30% of the company s market cap. The company also had long-term securities holdings of 10.8bn and a P/B of only 0.9x. On top of that, POLA ORBIS real estate assets comprised mainly of office buildings in Ginza, Shibuya and Aoyama are held on the firm s books at a value of 22bn but have an appraisal value of 41bn. Adjusting for these real estate assets brings the company s P/B down to 0.8x. Valuation and TP POLA ORBIS next year s consensus P/E of 17.1x is in line with the local sector median, although on estimates we see the company trading on a FY12/13 P/E of only 16x. Our 3,400 TP is based on a P/E of 20x and estimated FY12/13 EPS of 173. We think that POLA ORBIS superior positioning in terms of product portfolio, strategy and potential growth rates, and the hypothesis that its normalized 12-month ROE of 5.7% is 16% higher than the local sector median ROE of 4.9% is sufficient justification for a target P/E (20x) that is 16% higher than the local sector next year median (17.1x). Figure 3: Sector valuations in millions, unless otherwise stated; Figures as of 3 Sep 2012. Target Market Curr. Year Next year Normalized Current Year estimated OP Code Name Rating Price Cap P/E est. P/E est. ROE (t12m) P/B ratio growth 4927 POLA ORBIS OUTPERFORM 3,600 156,844 20.6 17.1 5.7 1.0 13% 4911 SHISEIDO NEUTRAL 1,300 439,200 20.7 17.9 4.9 1.5 8% 4921 FANCL CORP UNDERPERFORM 650 59,767 29.5 23.4 3.8 0.8 2% 4922 KOSE CORP NOT RATED 110,097 16.1 15.2 4.9 1.0 5% 4924 DR CI:LABO NOT RATED 77,268 13.2 11.3 40.0 4.9-4% Median 20.6 17.1 4.9 1.0 5.1% Source: Bloomberg consensus estimates POLA ORBIS HOLDINGS (4927 / 4927 JP) 6

Figure 4: Current-year consensus P/E 23.0 P/E 21.0 19.0 17.0 15.0 13.0 11.0 9.0 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Est. Cur. P/E Average Source: Bloomberg POLA ORBIS HOLDINGS (4927 / 4927 JP) 7

POLA ORBIS strengths We believe POLA ORBIS has the following advantages over its competitors. Favorable product positioning Demand for high-prestige products, such as POLA, and low-priced products, such as ORBIS, is growing in Japan. POLA ORBIS has negligible exposure to mid-market products, where demand is shrinking. Focusing on skincare On a consolidated basis, skincare products account for 60% of sales, which is considerably higher than the industry average of 45%. Skincare products sell for higher than average prices because of the functional properties, such as anti-aging and whitening, that can be claimed for these products. In addition, demand for these products is growing in line with the aging of Japanese society and what POLA ORBIS perceives to be a trend towards heightened beauty consciousness. Vertical integration POLA ORBIS controls the entire value chain for its products, including the crucial point of sale. This gives it a big advantage in terms of being able to optimize the experience of its clients and getting direct feedback from them. Mail order/internet sales ratio high About 70% of ORBIS sales are accounted for by mail-order sales, which is the fastestgrowing cosmetics sales distribution channel in Japan. Mail order sales of cosmetics are growing at the expense of department stores and drugstore/mass retailers. Flexible cost structure The direct sales model (POLA) and mail-order sales model (ORBIS) do not rely on an army of salaried sales consultants, which is the major cost item for companies such as Shiseido. At Shiseido, personnel expenditure of about 160bn per year accounts for about 35% of total SG&A and equates to about 25% of sales. At POLA ORBIS, by contrast, personnel expenditure of about 18bn accounts for only 15% of SG&A and equates to about only 11% of sales. POLA ORBIS pays out about 45% of its POLA sales equivalent to about 25% of consolidated sales on sales commissions. However, this expenditure is directly linked to sales. Well defined brand concepts POLA ORBIS has carefully cultivated a limited number of core brands with well-defined concepts. The venerable POLA line has, over many years of promotion, been imbued with a timeless image, and the newer ORBIS brand is well known for its non-oil based formulas and minimalist packaging. Jurlique and H20+ also have well-developed concepts, with products being made from organic, pesticide-free ingredients in the case of Jurlique and sea-derived natural ingredients in the case of H20+. Strong management To guard against the dilution of each brand s well-defined image, the company is structured as a holding company, with each product line established as an independent entity responsible for all branding, pricing, marketing, advertising and promotion decisions. However, each business is backed up by the parent entity, which supports all back office functions and helps optimize purchasing and logistics functions. In this way, POLA ORBIS operates like US apparel brand manager VF Corp., which owns a wide range of unique life-style brands. Each brand s identity is protected while efficiency is optimized. POLA ORBIS HOLDINGS (4927 / 4927 JP) 8

Brands POLA POLA is a high-prestige brand sold through a network of 4,500 sales offices and 135,000 POLA Ladies. Products are typically priced around 10,000 15,000. The consulting-based direct sales method gives the company a high degree of control over all aspects of the product s marketing and maximises customer feedback. Figure 5: POLA campaign commercial Source: Company data POLA s products are focused on skincare and, according to the firm, incorporate leadingedge technology in the fields of anti-ageing and skin-whitening. The brand dates back to the company s founding in 1929 and is conceived of as being timeless. About 95% of sales are made via direct sales. Approximately 30% of direct sales are made via the traditional door-to-door channel, 40% via the company s Esthe Inn channel and 30% via the newer PB sales channel. Figure 6: POLA sales by channel 100% 700 90% 80% 70% 52% 40% 30% 20% 600 500 60% 40% 400 50% 40% 40% 40% 300 30% 20% 10% 46% 20% 30% 40% 200 100 0% 2% 2005 2008 2011 2013e 0 POLA THE BEAUTY Esthe In Traditional door-to-door PB store numbers (RHS) Source: Credit Suisse estimates POLA ORBIS HOLDINGS (4927 / 4927 JP) 9

Under the Esthe Inn concept POLA Lady, rather than visiting clients in their homes, are visited by the clients in a POLA Lady s home. As the Esthe Inn name implies, POLA Ladies provide aesthetic services to the clients, enhancing the purchase experience. This strategy was developed in response to the decline of the traditional door-to-door sales channel, which declined as a rising proportion of women joined the workforce. POLA ORBIS subsequently expanded on the Esthe Inn concept to create the PB sales channel. Under the PB concept, POLA Ladies find and rent an appropriate retail space which they then fit out and decorate using an investment averaging 8mn from POLA ORBIS. POLA ORBIS amortizes this investment over a period of four years, while maintenance capex is funded from a levy taken directly from the POLA Lady s sales commissions. Amortization expenses means that the PB channel is initially less profitable than Esthe Inn. However, as the amortization costs of existing stores decline, overall profitability improves. The PB concept has been successful in terms of growing sales and also helped improve the brand s image. This has helped attract new clients, 60% of whom are in their 20s and 30s, and has also helped attract new, young POLA Ladies. POLA sales grew 3.5% YoY in 1H. PB all-store sales grew 11.3% and same-stores sales grew by 9.9%. PB store numbers increase by 17 during 1H to 550. The overall performance of the POLA brands seems set to accelerate as the high-growth PB channel grows to dominate the firm s traditional door-to-door and Esthe Inn channels, where 1H sales were down 8.2% and up 3.6%, respectively. Figure 7: White Shot Source: Company data Recent POLA product launches, such as WHITE SHOT CX, which sells for about 15,000 per bottle, and B.A. THE MAKE SUMMER, which sells for 10,000 15,000 per bottle, also helped POLA sales during 1H. POLA ORBIS HOLDINGS (4927 / 4927 JP) 10

ORBIS The ORBIS range of products is relatively low priced at around 1,500 per item. About 70% of sales are made via mail order and about half of these sales, or about 35% of total ORBIS sales, are made over the internet and this proportion is rising. The original concept behind ORBIS is OIL-CUT. That is, the products do not contain oil. This appeals to users who associate ORBIS with a higher degree of product safety. The product is also shipped with minimal packaging, minimizing waste. Figure 8: ORBIS products Source: Company data ORBIS mail-order website has been voted the No.1 online shop in terms of after-sales service satisfaction for the third year in a row by Nikkei Business survey. ORBIS endeavors to apply a customer s perspective to its website to enhance the shopping experience. The company offers free shipping even for single-item orders and free returns and exchange within thirty days of purchase. ORBIS was also ranked highest by the Ministry of Economy Trade and Industry s 2011 Japanese Customer Satisfaction Index survey in the mail order sales category. ORBIS sales grew 1% in 1H while OP grew 31.9% to 3.8bn. Products such as EXCELLENT ENRICH, which was launched in December, continued to perform well as did the limited edition launch in March of AQUA FORCE SHEET MASK. The company is focusing on skincare products, which demand higher prices and this helped increase average spending per mail order customer by 11.4%. A rising proportion of sales made via the internet helped reduce spending on catalogues by 180mn, boosting profits. POLA ORBIS HOLDINGS (4927 / 4927 JP) 11

H2O+ The H2O+ line of products is formulated from natural sea-derived ingredients such as seaweed and are sold through a network of 2,300 locations in 24 countries, primarily in North America and Asia. Figure 9: H2O+ products Source: Company data The company s website states that, From a vibrant marine ecosystem, we infuse your skin with deepest source of life, strength and vitality. POLA ORBIS completed its $91mn acquisition of H2O Plus Holdings in July 2011. At the time of the announcement in May 2011 H2O+ Plus Holdings was forecast by POLA ORBIS to have 2011 sales of $45.8mn (+28% YoY), EBITDA of $6m (+300%) OP of $2mn and NP of $1.6mn. H2O+ Plus Holdings had December 2010 gross assets of $39mn and net assets of $26.3mn. POLA ORBIS s spent 7.8bn on acquiring H2O+ Plus Holdings, generating 3.7bn of goodwill. We estimate that H2O+ generated 1H sales of 1.3bn and an operating loss of 500mn. H2O+ changed its sales agent in China this year and we expect this to reduce currentyear sales and OP by about 300mn. We estimate that H2O+ will turn profitable in FY12/13 and make a positive 232mn contribution to OP by FY12/15. POLA ORBIS has said it should be able to reduce H2O+ s costs by about 10% by, for example, taking advantage of group production facilities. POLA ORBIS HOLDINGS (4927 / 4927 JP) 12

Jurlique Jurlique was established in Australia in 1985 as a specialist in producing natural and organic skincare products. The firm claims to have unparalleled botanical expertise drawn from the experience of operating their own 153-acre farm in South Australia. Figure 10: Jurlique products Source: Company data Jurlique s products, positioned in the prestige segment, are sold globally through a network of Jurlique shops and aesthetic salons, department stores, third-party aesthetic salons and though their own online shop. POLA ORBIS announced its decision to acquire Jurlique in November 2011 for AUD300mn, or about 27.3bn. The deal was completed in February. Goodwill of 13.8bn will be amortized over a period of 20 years. The company is projecting annual amortisation expenses of 800 900mn. Revaluation of inventories at Jurlique raised expenses by 733mn in 1H, and the disappearance of this expense item is likely to help support higher profits in 2H. Jurlique generated 1H revenues of 3.7bn and an operating loss of about 966mn. But the disappearance of inventory revaluation expenses mean that Jurlique is likely to generate a quarterly profit in 4Q and annual OP of 763mn in FY12/13, rising to 1.5bn by FY12/15. Brands under development The company is cultivating a number of new brands such as THREE, a prestige branch that has been developed around the concept of natural and traditional Japanese skincare techniques. The product was launched in department stores in 2009 and is growing at an annual rate of 50%. Other brands under development include French high-prestige brand ORLANE and the FUTURE LABO brand, which offers products with exceptional properties through TV shopping channels. Losses within this segment have declined from 2.2bn in FY12/08 to 1.8bn in FY12/11 as sales have grown from 6.3bn to 7.7bn. POLA ORBIS HOLDINGS (4927 / 4927 JP) 13

China POLA ORBIS estimates that the China skincare market was worth 300bn in 2005, 800bn in 2010, and is likely to grow at a rate of about 12% per annum to reach a value of 1,400bn by 2015. POLA ORBIS strategy in China is focused on four brands: POLA, ORBIS, H2O+ and Jurlique. In 2005 the firm launched the POLA brand in China using directly-operated stores and department stores. The company states that POLA has been successfully positioned as a high-prestige brand sold mainly at high-end department stores such as Jiu Guang. We think the company may also consider launching a direct-sales model, along the same lines as Japan s PB sales channel. In 2005 ORBIS opened a store in Hong Kong and in 2009 the company began developing a store network in mainland China. In July 2011 ORBIS launched its own Chineselanguage mail order website. H2O+ began sales in China in 2003 which have been growing by double-digits since. About 75% of this brand s product sales are accounted for by high margin skincare products. The company is using local sales agents to expand its network of stores where H2O0 is sold. Jurlique entered mainland China on its own in 2009 and now continues its expansion as a subsidiary of POLA ORBIS. Jurlique is sold in China via its own directly operated stores and at high-end department stores. Sales in 1Q were almost double those during the same period last year. Figure 11: POLA counter in Shanghai department store Source: Company data POLA ORBIS HOLDINGS (4927 / 4927 JP) 14

Direct selling in China China is to the world s fastest growing direct sales market, with industry revenues doubling from $8bn in 2007 to $16bn (+21%YoY) in 2011. Progressive deregulation has supported strong growth. Direct selling away from fixed retail establishments was effectively banned in China 1998 in reaction to a proliferation of pyramid schemes. However, China agreed to relax this ban as a condition for entry into the World Trade Organisation (WTO), and the market is being progressively opened. However, according to Nu Skin Enterprises, there are still only 30 companies that are licensed to engage in direct sales in China. Requirements for licensing include local manufacturing of products, physical presence in the form of retail outlets and restrictions on compensation. We do not view any of these as insurmountable problems for POLA ORBIS and think it is likely that the company may consider launching a direct sales strategy in China at some point over the next few years. Figure 12: China s direct selling market in USD billions 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2007 2008 2009 2010 2011 Source: WFDSA Nu Skin estimates that Amway is the leading direct seller in China with 2011 revenues of $4.2bn (+21.4% YoY) followed by local health food supplements company Perfect with 2011 revenues of $1.9bn (+18% YoY) and Chinese medicine company Infinitus with 2011 revenues of $1.3bn (+88.9% YoY). The fourth biggest direct seller in China is US skincare and cosmetics company Mary Kay, with 2011 sales of $1bn (+32% YoY). Nu Skin is number 12 on the list with 2011 revenues of $152mn (+59% YoY). POLA ORBIS HOLDINGS (4927 / 4927 JP) 15

1H results and outlook for full-year POLA ORBIS posted 1H sales of 86.4bn (+9.5% YoY), OP of 5.6bn (+2.1%), RP of 6bn (+0.8%) and NP of 2.8mn ( 6.8%), which was considerably better than guidance for sales of 86.4bn, OP 4.7bn, RP 4.9bn and NP 2.0bn. The company also raised its fullyear OP target by 400mn from 13.8bn to 14.2bn. This is 500mn less than the 900mn by which the company beat its original 1H OP target. The company explains that certain costs budgeted for 1H are likely to be booked in 2H and that it is also planning to boost spending on Jurlique in China. However, we think the company s new targets are conservative and expect it to achieve full-year OP of 14.5bn. Of the 7.5bn increase in 1H sales 5.1bn came from the acquisition of H2O+ and Jurlique, which have been consolidated since 3Q last year and 1Q this year, respectively. The company s 1H COGS rose by 2.5bn (16.7%). However, 1.5bn of this rise came from Jurlique and was boosted by a 733mn revaluation of Jurlique inventories. The negative impact from this accounting treatment is now largely exhausted, as inventory that existed at the time of the acquisition is now mostly gone. The company s 1H SG&A rose 4.8bn (8.2%) to 29.7bn, but about 3.2bn of this increase stems from consolidation of Jurlique and we estimate that goodwill and other M&A-related amortization charges for the six-month period amounted to 380mn. M&A hurt profits in 1H but results are set to improve in 2H POLA ORBIS estimates that Jurlique reduced the company s 1H OP by a total of 966mn and we estimate that H2O+ reduced its 1H OP by 511mn for a total negative impact of 1.5bn. However, adjusting for the 733mn inventory revaluation expenses at Jurlique and what we estimate were goodwill and other amortization expenses of about 280mn at Jurlique and 100mn at H2O+, we estimate that Jurlique had underlying OP of 47mn and that underlying operating losses at H2O+ were only 411mn. The relatively poor result from H20+ partly reflects the fact that the company changed its distributor in China during the period. For the full year we estimate that H2O+ will post an operating loss of 260mn and Jurlique will record an operating loss of 294mn. Therefore, we expect the negative impact from these subsidiaries on the firm s OP to decline from 1.5bn in 1H to only 554mn by the year-end. For full-fy12/13 we expect the two companies to record OP of 65mn and 763mn, respectively. Existing business sales up 3% Leaving aside the contribution from H2O+ and Jurlique, POLA ORBIS sales of existing products increased by 3% in 1H compared with last year, which is a good effort in the context of a domestic cosmetics market that we estimate may be growing at a rate of only about 1% overall. POLA-brand sales were up 3.5% YoY, ORBIS-brand sales rose 1.1% YoY while sales of Brands Under Development increased 14% YoY. POLA ORBIS HOLDINGS (4927 / 4927 JP) 16

Segments Beauty care is the firm s biggest segment, accounting for 93% of sales in FY12/11. This is further broken down into Cosmetics (85% of sales) and Fashion (8% of sales). Real estate accounted for 2% of sales and Others, which is mainly accounted for by the firm s pharmaceutical business, account for 5% of sales. Cosmetics and real estate accounted for 87% and 10% of OP, respectively. Figure 13: Sales by segment Real estate 2% Fashion 7% others 11% Figure 14: OP by segment Real estate 10% other 3% Cosmetics 80% Cosmetics 87% Source: Company data, Source: Company data Figure 15: Segment sales and OP margin In millions, unless otherwise stated 250,000 12.0% 200,000 10.0% 150,000 8.0% 6.0% 100,000 4.0% 50,000 2.0% 0 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e 0.0% Cosmetics total Fashion Real estate Pharmaceuticals Other OP margin Source: Company data, Credit Suisse estimates Beauty care The Beauty care segment, which accounts for 93% of sales and 84% of OP, is further split out into Fashion (8% of sales) and Cosmetics (85% of sales). POLA, accounts for about two thirds of the Cosmetics segment while ORBIS accounts for the majority of the rest. H2O+, consolidated from 3Q last year, contributed sales of about 1.9bn. The Fashion segment has consistently lost money, but the company is in the process of streamlining this business and losses may be eliminated in future. POLA ORBIS HOLDINGS (4927 / 4927 JP) 17

Figure 16: Cosmetics sales and OPM in millions, unless otherwise stated 250,000 12.0% 200,000 10.0% 150,000 8.0% 100,000 6.0% 50,000 4.0% 0 (50,000) FY12/08 FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e 2.0% 0.0% H20 Jurlique POLA ORBIS New brands Adjustment OP margin Source: Company data, Credit Suisse estimates Real estate POLA ORBIS owns a number of mainly commercial buildings in prestige areas such as Ginza, Aoyama and Shibuya. Revenues and profits have suffered in line with softening rents. Figure 17: Real estate revenues and OPM in millions, unless otherwise stated 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Real estate Real estate OPM (RHS) Source: Company data, Credit Suisse estimates Others The company s pharmaceutical business is the biggest component of this segment. Products include ant-fungal Lulicon and generics. POLA ORBIS HOLDINGS (4927 / 4927 JP) 18

Segment sales and profits Figure 18: Quarterly sales and profit forecasts ( mn) Sales 1Q 2Q 3Q 4Q FY12/11 1Q 2Q 3QE 4QE FY12/12E Co. Est. FY12/12 H2O+ 1,851 1,851 598 733 1,007 1,360 3,698 Jurlique 1,550 2,182 2,400 2,800 8,932 o/s brands total 1,851 1,851 2,148 2,915 3,407 4,160 12,630 POLA 20,613 25,836 22,898 28,006 97,353 21,391 26,678 23,400 29,000 100,469 ORBIS 10,588 12,810 12,165 12,355 47,918 10,929 12,726 12,400 12,900 48,955 New brands 1,605 1,818 2,806 1,426 7,655 1,850 2,053 2,800 1,800 8,503 Adjustment (2,302) (3,468) (2,885) (4,669) (13,324) 2 (6,047) (2,800) (2,800) (11,645) Cosmetics total 30,504 36,996 34,984 38,969 141,453 36,320 38,325 39,207 45,060 158,912 Fashion 2,302 3,469 2,884 4,669 13,324 3,456 2,590 2,400 3,500 11,946 Beauty care total 32,806 40,465 37,869 43,637 154,777 39,776 40,915 41,607 48,560 170,858 170,200 Real estate 775 777 784 753 3,089 745 699 750 706 2,900 2,900 Other 1,896 2,218 2,356 2,321 8,791 1,878 2,393 2,360 2,269 8,900 8,900 Total 35,477 43,460 41,009 46,711 166,657 42,399 44,007 44,717 51,535 182,658 182,000 Operating profit 1Q 2Q 3Q 4Q FY12/11 1Q 2Q 3QE 4QE FY12/12E Co. Est. FY12/12 H2O+ (81) (81) (296) (215) (50) 301 (260) Jurlique (394) (572) (100) 772 (294) o/s brands total (81) (81) (690) (787) (150) 1,073 (554) POLA (97) 2,601 1,045 2,619 6,168 356 2,937 1,100 2,700 7,093 ORBIS 1,411 1,489 649 2,977 6,526 2,746 1,079 800 3,000 7,625 New brands (509) (376) (557) (384) (1,826) (416) (337) (500) (360) (1,613) Adjustment 456 (455) 2,061 (1,657) 405 (680) 820 100 100 340 Cosmetics total 1,261 3,259 3,198 3,474 11,192 1,316 3,712 2,363 6,113 12,891 Fashion (457) 41 (123) 135 (404) (321) 181 (100) 178 (62) Beauty care total 804 3,716 2,658 3,609 10,787 995 3,892 2,263 6,291 12,829 12,500 Real estate 319 340 338 286 1,283 354 273 235 238 1,100 1,100 Other (44) 188 199 207 550 (216) 204 180 132 300 300 Adjustments 86 125 55 (33) 233 92 58 70 80 300 300 Total 1,165 4,369 3,250 4,069 12,853 1,225 4,427 2,748 6,741 14,529 14,200 OP margin 1Q 2Q 3Q 4Q FY12/11 1Q 2Q 3QE 4QE FY12/12E Co. Est. FY12/12 H2O+ -4.4% -4.4% -49.5% -29.3% -5.0% 22.1% -7.0% Jurlique -25.4% -26.2% -4.2% 27.6% -3.3% o/s brands total -4.4% -4.4% -32.1% -27.0% -4.4% 25.8% -10.3% POLA -0.5% 10.1% 4.6% 9.4% 6.3% 1.7% 11.0% 4.7% 9.3% 7.1% ORBIS 13.3% 11.6% 5.3% 24.1% 13.6% 25.1% 8.5% 6.5% 23.3% 15.6% New brands -31.7% -20.7% -19.9% -26.9% -23.9% -22.5% -16.4% -17.9% -20.0% -19.0% Adjustment -19.8% 13.1% -71.4% 35.5% -3.0% n/a -13.6% -3.6% -3.6% -2.9% Cosmetics total 4.1% 8.8% 9.1% 8.9% 7.9% 3.6% 9.7% 6.0% 13.6% 8.1% Fashion -19.9% 1.2% -4.3% 2.9% -3.0% -9.3% 7.0% -4.2% 5.1% -0.5% Beauty care total 2.5% 9.2% 7.0% 8.3% 7.0% 2.5% 9.5% 5.4% 13.0% 7.5% 7.3% Real estate 41.2% 43.8% 43.1% 38.0% 41.5% 47.5% 39.1% 31.3% 33.7% 37.9% 37.9% Other -2.3% 8.5% 8.4% 8.9% 6.3% -11.5% 8.5% 7.6% 5.8% 3.4% 3.4% Total 3.3% 10.1% 7.9% 8.7% 7.7% 2.9% 10.1% 6.1% 13.1% 8.0% 0.2% Source: Company data, Credit Suisse estimates POLA ORBIS HOLDINGS (4927 / 4927 JP) 19

Figure 19: Annual segment sales and sales growth forecasts in millions, unless otherwise stated Sales FY12/08 FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e Co. Est. FY12/12 H2O+ 1,851 3,698 4,142 4,639 5,196 Jurlique 8,932 10,381 11,938 13,728 o/s brands total 1,851 12,630 14,523 16,577 18,924 POLA 105,567 101,614 96,543 97,353 100,469 103,483 106,588 109,785 ORBIS 42,560 40,866 49,356 47,918 48,955 49,445 49,939 50,438 New brands 6,304 7,192 7,655 8,503 9,353 10,289 11,317 Adjustment (6,261) (12,565) (13,453) (13,324) (11,645) (11,645) (11,645) (11,645) Cosmetics 141,865 136,219 139,638 141,453 158,912 165,159 171,747 178,820 Fashion 16,376 14,137 13,453 13,324 11,946 12,000 12,000 12,000 Beauty care total 158,241 150,356 153,091 154,777 170,858 177,159 183,747 190,820 170,200 Real estate 3,228 3,216 3,102 3,089 2,900 2,900 2,900 2,900 2,900 Pharmaceuticals 7,090 6,744 6,936 Other 2,279 2,016 2,124 8,791 8,900 8,900 8,900 8,900 8,900 Total 170,838 162,332 165,253 166,657 182,658 188,959 195,547 202,620 182,000 others 22,712 19,852 19,354 19,535 20,604 21,508 22,444 23,472 Sales growth FY12/08 FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e Co. Est. FY12/12 H2O+ 99.8% 12.0% 12.0% 12.0% Jurlique 16.2% 15.0% 15.0% o/s brands total 582.3% 15.0% 14.1% 14.2% POLA -3.7% -5.0% 0.8% 3.2% 3.0% 3.0% 3.0% ORBIS -4.0% 20.8% -2.9% 2.2% 1.0% 1.0% 1.0% New brands 14.1% 6.4% 11.1% 10.0% 10.0% 10.0% Adjustment 100.7% 7.1% -1.0% -12.6% Cosmetics -4.0% 2.5% 1.3% 12.3% 3.9% 4.0% 4.1% Fashion -13.7% -4.8% -1.0% -10.3% 0.5% Beauty care total -5.0% 1.8% 1.1% 10.4% 3.7% 3.7% 3.8% 10.0% Real estate -0.4% -3.5% -0.4% -6.1% -6.1% Pharmaceuticals -4.9% 2.8% -100.0% Other -11.5% 5.4% 313.9% 1.2% 1.2% Total -5.0% 1.8% 0.8% 9.6% 3.4% 3.5% 3.6% 9.2% Source: Company data, Credit Suisse estimates POLA ORBIS HOLDINGS (4927 / 4927 JP) 20

Figure 20: Annual operating profit and profit margin forecasts in millions, unless otherwise stated Operating profit FY12/08 FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e Co. Est. FY12/12 H2O+ (81) (260) 65 141 232 Jurlique (294) 763 1,101 1,507 o/s brands total (81) (554) 828 1,242 1,738 POLA 5,293 5,075 5,592 6,168 7,093 7,451 7,887 8,344 ORBIS 5,022 4,700 6,169 6,526 7,625 7,763 7,890 8,020 New brands (2,156) (1,926) (1,826) (1,613) (968) (484) (194) Adjustment 26 802 783 405 340 290 290 290 Cosmetics 10,341 8,420 10,618 11,192 12,891 15,364 16,826 18,198 Fashion (798) (347) (452) (404) (62) (10) 20 30 Beauty care total 9,543 8,073 10,165 10,787 12,829 15,354 16,846 18,228 12,500 Real estate 1,620 1,598 1,304 1,283 1,100 1,100 1,100 1,100 1,100 Other 633 452 399 550 300 300 300 300 300 Adjustments 457 967 751 233 300 300 300 300 300 Total 10,868 9,706 12,270 12,853 14,529 17,054 18,546 19,928 14,200 OP margin FY12/08 FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e Co. Est. FY12/12 H2O+ -4.4% -7.0% 1.6% 3.0% 4.5% Jurlique -3.3% 7.4% 9.2% 11.0% o/s brands total -4.4% -4.4% 5.7% 7.5% 9.2% POLA 5.0% 5.0% 5.8% 6.3% 7.1% 7.2% 7.4% 7.6% ORBIS 11.8% 11.5% 12.5% 13.6% 15.6% 15.7% 15.8% 15.9% New brands -34.2% -26.8% -23.9% -19.0% -10.3% -4.7% -1.7% Adjustment -0.4% -6.4% -5.8% -3.0% -2.9% -2.5% -2.5% -2.5% Cosmetics total 7.3% 6.2% 7.6% 7.9% 8.1% 8.7% 9.2% 9.6% Fashion -4.9% -2.5% -3.4% -3.0% -0.5% -0.1% 0.2% 0.3% Beauty care total 6.0% 5.4% 6.6% 7.0% 7.5% 8.7% 9.2% 9.6% 7.3% Real estate 50.2% 49.7% 42.0% 41.5% 37.9% 37.9% 37.9% 37.9% 37.9% Other 27.8% 22.4% 18.8% 6.3% 3.4% 3.4% 3.4% 3.4% 3.4% Total 6.4% 6.0% 7.4% 7.7% 8.0% 9.0% 9.5% 9.8% 7.8% Source: Company data, Credit Suisse estimates POLA ORBIS HOLDINGS (4927 / 4927 JP) 21

Consolidated forecasts Profit and loss statement Figure 21: Profit and loss statement and forecasts In millions, unless otherwise stated FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e Sales 162,332 165,253 166,657 182,658 188,959 195,547 202,620 COGS 32,843 33,321 33,461 35,070 35,146 35,590 36,877 GP 129,489 131,932 133,196 147,588 153,812 159,958 165,743 GP margin 79.8% 79.8% 79.9% 80.8% 81.4% 81.8% 81.8% Sales commissions 43,390 43,073 43,477 44,910 46,257 47,645 49,074 Sales promotion 15,427 16,627 16,676 16,700 16,800 16,900 16,900 Transportation 4,556 4,562 4,438 4,500 4,600 4,700 4,700 Advertising 7,496 7,366 7,373 7,400 7,500 7,600 7,600 Salary and bonus 18,253 17,645 17,882 18,000 18,100 18,200 18,200 Welfare 2,689 2,764 2,869 2,900 3,000 3,000 3,000 Retirement benefits 750 754 733 754 754 754 754 Provision for bonus 1,149 1,428 1,331 1,400 1,400 1,400 1,400 Discount points 1,520 1,701 1,602 1,700 1,750 1,800 1,800 Depreciation 2,833 2,912 3,345 3,300 3,300 3,300 3,300 Goodwill amortisation 80 80 91 874 874 874 874 Trademark amortisation 54 54 54 54 Other SGA 21,640 20,750 20,526 30,567 32,370 35,186 38,159 SGA 119,783 119,662 120,343 133,059 136,759 141,412 145,815 SGA ratio 73.8% 72.4% 72.2% 72.8% 72.4% 72.3% 72.0% OP 9,706 12,270 12,853 14,529 17,054 18,546 19,928 OP margin 6.0% 7.4% 7.7% 8.0% 9.0% 9.5% 9.8% EBITDA 14,698 17,369 18,303 20,816 23,488 25,129 26,646 EBITDA margin 9.1% 10.5% 11.0% 11.4% 12.4% 12.9% 13.2% Interest income 311 311 311 405 446 490 539 Interest expenses (120) (103) (53) (53) (53) (53) (53) Other non-operating 475 (231) 211 150 150 150 150 Recurring profit 10,372 12,247 13,322 15,031 17,596 19,133 20,564 RP margin 6.4% 7.4% 8.0% 8.2% 9.3% 9.8% 10.1% Extraordinaries (1,917) (217) (2,067) (1,000) (1,000) (1,000) (1,000) Pre-tax income 8,455 12,030 11,255 14,031 16,597 18,133 19,565 Tax (4,483) (5,038) (3,226) (6,595) (7,137) (7,616) (8,021) Tax rate -53.0% -41.9% -28.7% -47.0% -43.0% -42.0% -41.0% Minority interests 87 94 10 10 10 10 10 Net profit 4,059 7,086 8,039 7,447 9,470 10,527 11,553 NP ratio 2.5% 4.3% 4.8% 4.1% 5.0% 5.4% 5.7% EPS 79 128 145 135 171 190 209 Goodwill amortisation 80 80 91 874 874 874 874 EPS before amortisation 81 130 147 151 187 206 225 Source: Company data, Credit Suisse estimates POLA ORBIS HOLDINGS (4927 / 4927 JP) 22

The company s tax rate is likely to be high this year because losses at the firm s overseas subsidiary are not expected to offset the firm s profits in Japan. However, we expect the tax rate to decline from next year. Balance sheet POLA ORBIS has a solid balance sheet with cash and short-term securities adding up to about 33% of the market cap, with only negligible debt. The company s real estate assets mainly commercial buildings in prestigious areas of central Tokyo have been appraised at a value of 41bn, versus a book value of only 22bn. Adjusting for this factor brings the company s P/B down from 0.9x to 0.8x. Figure 22: Balance sheet in millions, unless otherwise stated FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e Cash 42,132 34,651 50,638 21,411 26,467 32,287 38,855 Securities 30,984 32,169 18,412 26,218 26,218 26,218 26,218 Receivables 18,780 19,469 20,650 22,633 23,413 24,230 25,106 Inventories 16,930 15,341 15,663 16,416 16,452 16,659 17,262 Other current assets 7,229 5,600 5,730 5,730 5,730 5,730 5,730 Total Current Assets 116,055 107,230 111,093 92,408 98,280 105,124 113,171 Tangible fixed assets 50,892 51,651 49,420 55,061 56,555 57,899 59,109 Goodwill 3,583 15,000 14,126 13,253 12,379 Other intangibles 4,539 4,140 8,553 19,746 19,692 19,638 19,584 Investments 1,792 17,589 13,582 9,690 9,690 9,690 9,690 Others 8,631 7,161 6,796 6,796 6,796 6,796 6,796 Total non-current assets 65,854 80,541 81,934 106,293 106,859 107,276 107,558 Total Assets 181,909 187,771 193,027 198,701 205,139 212,400 220,729 Payables 3,285 3,549 2,894 4,036 4,045 4,096 4,244 ST debt 10,199 1,753 1,500 1,634 1,634 1,634 1,634 Other current liabilities 16,412 17,896 18,771 20,000 20,000 20,000 20,000 Current Liabilities 29,896 23,623 23,788 25,670 25,679 25,730 25,878 LT debt 509 1,300 1,562 1,562 1,562 1,562 1,562 Pension liabilities 7,741 7,306 6,795 6,795 6,795 6,795 6,795 Other LT liabilities 2,873 2,438 3,825 3,825 3,825 3,825 3,825 LT Liabilities 11,123 11,044 12,182 12,182 12,182 12,182 12,182 Total Liabilities 41,019 34,667 35,970 37,852 37,861 37,912 38,060 Minorities 173 103 86 86 86 86 86 Equity 140,717 153,001 156,971 160,763 167,192 174,403 182,583 Total Liabilities and Equity 181,909 187,771 193,027 198,701 205,139 212,400 220,729 Source: Company data, Credit Suisse estimates POLA ORBIS HOLDINGS (4927 / 4927 JP) 23

Cash flow statement Figure 23: Cash flow statement In millions, unless otherwise stated FY12/09 FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e Goodwill amorisation 80 80 91 874 874 874 874 Trademark amortisation 54 54 54 54 Depreciation 4,912 5,019 5,359 5,359 5,506 5,655 5,790 Amortisation&Depreciation 4,992 5,099 5,450 6,287 6,434 6,583 6,718 Net profit 4,059 7,086 8,039 7,447 9,470 10,527 11,553 Change in working capital 603 1,164 (2,158) (1,594) (808) (973) (1,331) Other 2,876 4,557 3,070 Operating Cash Flow 12,530 17,906 14,401 12,139 15,096 16,137 16,940 Capex (6,588) (4,095) (2,421) (11,000) (7,000) (7,000) (7,000) Other 2,214 (36,272) (1,023) (27,736) 0 0 0 Investment Cash Flow (4,374) (40,367) (3,444) (38,736) (7,000) (7,000) (7,000) Dividends (1,025) (1,025) (3,300) (2,764) (3,041) (3,317) (3,372) Change in debt 708 (7,655) 9 134 0 0 0 Other (8,285) 23,660 8,321 Financial Cash Flow (8,602) 14,980 5,030 (2,630) (3,041) (3,317) (3,372) Change in Cash (446) (7,481) 15,987 (29,227) 5,056 5,820 6,568 Source: Company data, Bloomberg, Credit Suisse estimates The major cash flow item in the current year is the estimated 24.8bn that the company has spent on acquiring Jurlique. As a result, goodwill and trademark amortization costs should rise. Key ratios and valuations POLA ORBIS came to the market in December 2010 at a low P/B of only 0.6x. The stock has performed well since in line with rising profits, but we think it remains undervalued. Figure 24: Key ratios and valuations FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e Debt/Equity 0.02 0.02 0.02 0.02 0.02 0.02 Net Debt/Equity (0.42) (0.42) (0.28) (0.30) (0.32) (0.34) Interest coverage 168.6 345.3 392.8 443.2 474.1 502.8 Sales/Assets 0.88 0.86 0.92 0.92 0.92 0.92 Profit/Sales 4.3% 4.8% 4.1% 5.0% 5.4% 5.7% Assets/Equity 1.23 1.23 1.24 1.23 1.22 1.21 ROE 4.6% 5.1% 4.6% 5.7% 6.0% 6.3% ROA 3.8% 4.2% 3.7% 4.6% 5.0% 5.2% EV/EBITDA 1.7 2.7 5.1 4.3 3.8 3.4 PE 12.3 14.3 20.3 16.0 14.4 13.1 PBR 0.6 0.7 0.88 0.85 0.81 0.78 EV/Cashflow (1.31) 4.5-3.2 10.6 9.4 8.6 EV/Sales 0.2 0.3 0.5 0.5 0.4 0.4 Price/Sales 0.6 0.7 0.8 0.8 0.8 0.7 Adjusted BV/Share 2,768 2,839 3,125 3,241 3,372 3,520 Dividend per share 40.0 45.0 50.0 55.0 60.0 61.0 Dividend Yield 2.4% 2.2% 1.8% 2.0% 2.2% 2.2% Payout ratio 31.2% 30.9% 37.1% 32.1% 31.5% 29.2% Source: Bloomberg, Credit Suisse estimates POLA ORBIS HOLDINGS (4927 / 4927 JP) 24

Figure 25: Key valuations and ratios before goodwill FY12/10 FY12/11 FY12/12e FY12/13e FY12/14e FY12/15e PE 13.0 14.1 18.2 14.6 13.3 12.2 ROE 4.7% 5.2% 5.2% 6.2% 6.5% 6.8% ROA 3.8% 4.2% 4.2% 5.0% 5.4% 5.6% Source: Bloomberg, Credit Suisse estimates Management Satoshi Suzuki, the current president of POLA ORBIS Holdings, is a descendant of the firm s founder, who established company in Shizouka prefecture in 1929. President Suzuki owns 22% of the company, making him the second largest shareholder after the POLA Art Foundation and its 34% stake. Including the Zaidan the Suzuki family controls close to 60% of the firm s shares. Shareholder returns The company s stance on dividends is to maintain a stable dividend with increases in line with increasing profits. Accordingly, the company expects to raise the annual dividend from 45 in 2011 to 50 in the current year. Medium-term targets Management plans to grow sales by 2 3% per annum over the three-year period to 2013 and OP by an average annual 10%. The company also aims to achieve an OPM of 9% in 2013 and 10% in Japan. We forecast an OP margin of 9% in 2013. Long-term vision The company has a vision for 2020 by which time it plans to have annual sales of 250bn and an OP margin of 13 15%. This is to be achieved in three stages, with the first stage (scheduled to end in 2013) focusing on the creation of a successful overseas business model. The second stage, from 2013 16 is likely to see an acceleration of the Group s global presence and the third stage, ending 2020, is expected to see the company becoming a highly profitable global enterprise. Approach to M&A The company has said that potential M&A targets must satisfy a number of criteria: (1) well-defined brand concept, (2) high potential for growth in Asia, particular China, (3) present opportunities for management synergies, (4) posses excellent management structures. Risk factors Risks to our 3,400 TP are as follows. (1) Consumer trust in the company s brands could be lost, which may affects sales and profits (2) The company could lose market share as a result of competing product launches or aggressive marketing. (3) The multi-brand strategy being implemented by POLA ORBIS Holdings could result in competition between group companies. (4) The company s expansion into overseas markets increases the risk that unexpected turmoil in these countries could harm the firm s results. (5) The firm s increasing exposure to overseas markets increases the firm s exposure to currency fluctuations. (6) The company could fail to adequately manage their recent overseas acquisitions. POLA ORBIS HOLDINGS (4927 / 4927 JP) 25