H2O Retailing : Cost of Capital and Stock Price

To Achieve Management Conscious of

Cost of Capital and Stock Price

May. 15, 2024

H2O RETAILING CORPORATION

Analysis of Current Status and Direction of Initiatives

Current issues

(PBR is below 1.0x)

• PBR continues to be below 1.0x despite an improving trend, due to PER which are lower than sector levels.
• ROE (8.5% ) > Cost of shareholders' equity (6.6%)
  ROIC (4.7%) > WACC (4.0%) *FY2024
• • ROE is above cost of shareholders' capital, but below in actual, and further ROE improvement is needed in the future.
  • Aim to secure stable ROIC above WACC by promoting the utilization of non-business assets with low profitability, which has been an issue for the company.

Direction of Initiatives

(PBR to remain 1.0x over)

• Gain market credibility by formulating growth strategies, enhancing

shareholder returns, and strengthening IR communications.
(ⅰ) Clarify growth strategy
	PER
(ⅱ) Enhancing shareholder returns

1. Expand the shareholder/investor base and improve IR communication

⚫ Practices management conscious of cost of capital	ROE
(ⅳ) Control of total assets and equity

1. Concentrated Investment in high-growth/high-profit businesses

Current		Future

PBR 0.85 X

• • ROE 8.5%* × PER10 X
• Actual ROE excluding extraordinary gains from asset sales and other special gains and tax effects: 5.1%.

PBR 1.2 X over

• ROE 8% over × PER 15 times over

(ⅳ) Control of total assets and equity		(ⅰ) Clarify growth strategy
(ⅴ) Concentrated investment in high-		(ⅱ) Enhancing shareholder returns
growth/high-profit businesses		(ⅲ) Expand the shareholder/investor
		base and improve communication

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ROE and cost of shareholders' equity

ROE recovered due to improved profitability, but actual ROE in FY2024 was still lower than shareholders' equity.

◼ Cost of shareholders' equity

◼ Assumptions for calculating cost of shareholders' equity

			Risk	β	Market Risk
			Free rate	Premium
	Extraordinary
	gains and losses
Cost of	Tax effect		0.75%	0.98	6.0%
	6.6%
shareholders'
equity
8.5%				Cost of
				shareholders' equity
	5.1%
				6.6%
FY 2024	FY 2024		WACC=4.0% (D/E ratio 0.73, cost of shareholders' equity 6.6%, cost of debt 0.54%)
ROE	Actual ROE*
*Excluding extraordinary gains such as asset sales and tax effects

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Enhancing Corporate Value and Equity Value

Aim to achieve and sustain PBR of 1.0x as soon as possible by executing business strategies and aggressively promoting capital and financial strategies that will be fully implemented in FY2025.

KPI	FY2025-2027	FY2024
ROE	Over 6.6% (FY27)	5.1% (actual)
ROIC	5.9% (FY27)	4.7%
EBITDA-Interest-
2.0 X	2.3 X
Bearing-Debt-Ratio
Total payout ratio	Approximately 60%	22%
Dividends	¥40 per share	¥28 per share

Business Strategy

1. Concentrated investment in high-growth/high-profit

businesses	ROE	PER

Deepen existing businesses and strengthen response to high-net-worth customers

• Making Hankyu Main Store a "Global Department Store"
• Focus on and strengthen overseas customer businesses with high growth potential

(ⅰ) Clarify growth strategy	PER

Develop and deploy new sources of revenue by utilizing the "customer base".

• Continue to launch and develop customer service business (Food and Health)
• Launch of customer data utilization business

Capital/financial strategy

(ⅱ) Enhancing shareholder returns

PER

Active return of surplus shareholders' capital

• Dividends per share increased to ¥40 (¥28 in FY2024)

• Plan to acquire treasury stock on the scale of ¥30 bn. in FY2025-2027 (over ¥50 bn. including KFM wholly owned subsidiary)

(ⅳ) Control of total assets and shareholders' equity
ROE
Improvement of return on capital

• Controlling WACC by leveraging interest-bearing debt
• Sale of low-profit assets such as policy stock holdings
• Restructuring of B/S in line with the targeted business portfolio by making KFM a wholly owned subsidiary and Ningbo Hankyu a subsidiary

(ⅲ) Expand the shareholder/investor base and improve communication	ROE	PER
(Strengthening IR communications)
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Shareholder Returns Plan for FY2025-2027

In principle, the Company will pay out dividends based on a DOE of over 1.8% and will flexibly return profits to shareholders in accordance with business performance.

• Dividends: Increased to ¥40 per share (started from FY2025)
• Acquisition of treasury stock: Scale of ¥30 bn. in 3 years
  Total payout ratio (including acquisition of treasury stock) to be approximately 60% for cumulative period.

(100 millions of yen)

300	Shareholder Returns/Changes in profit

260

			Dividends payout
			Acquisition of treasury stock						219
			Profit
									164
150		141	143	146
	116										Acquisition of treasury shares
								99
										¥30 bn. scale
									93
		35			22
										19
	27	37	46	49	49	49	40	31	31	29
0	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020	FY 2021	FY 2022	FY 2023	FY 2024	FY2025	FY2026	FY2027
(Total payout ratio)
(23%)	(51%)	(32%)	(34%)	(229%)	(▲38%)	(▲16%)	(31%)	(76%)	(22%)
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Cash Flow Allocation (FY2025-2027)

	Cash Flow Allocation
Cash-in	Cash-out
¥217 bn.	¥217 bn.

Operating profit

¥86 bn.

Depreciation and

goodwill

amortization

¥86 bn.

Asset sales, etc.

¥45 bn.

Cash and deposits

¥75 bn.

*Including cash and

deposits in Ningbo Hankyu

Total Acquisition of treasury stock

Over ¥50 bn.

¥20 bn.

¥30 bn.

Scale

Investment for Growth

¥60 bn.

Existing

investment

¥35 bn.

Investments

for M&A

¥39 bn.

Shareholder

Returns

¥44 bn.

Structural Reform ¥2 bn.

Tax

¥37 bn.

Reduction of

liability ¥46 bn.

Cash and deposits

¥29 bn.

• Focus investment on growth of highly profitable businesses, deepen existing businesses and establish new business area.
• • Active investment in Hankyu Main Store, remodeling of Ningbo Hankyu, resumption of supermarket store openings.
  • Application development for customer service business, development of Business Infrastructure
• Strengthening business foundations
• Utilize cash generated from asset sales, etc. for M&A, etc.
  Build B/S in line with the targeted business portfolio and maximize synergies.
• • Made Kansai Food Market a wholly owned subsidiary (¥22 bn.)
  • Made Ningbo Hankyu a subsidiary (¥16.5 bn.)
• Based on stable dividends, aimed at enhancing corporate value and capital efficiency by acquiring treasury stock
• • Dividends of ¥40 per share,
  • Acquisition of treasury stock ¥30 bn.

Total payout ratio (including acquisition of treasury stock) to be approximately 60% for cumulative period.

• Secure financial soundness with a target EBITDA interest-bearing debt ratio of 2x.

Aggressive capital and financial strategy to generate cash, and aim to exceed 1x PBR as soon as possible by strengthening business investment and returns to shareholders

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Balance Sheet Changes

End of FY2021

Total assets ¥630 bn.

End of FY2024

Total assets ¥710 bn.

End of FY2027

Total assets ¥670 bn.

【Current assets】 ¥180 bn.

【Liabilities】 ¥420 bn.

【Current assets】 ¥150 bn.

【Liabilities】

【Current assets】 ¥140 bn.

【Non-current assets】

¥490 bn.

【Liabilities】

¥400 bn.

• Interest-bearingdebt

¥170 bn.

【Net assets】 ¥230 bn.

Change in non- current assets

• Kansai Super Market management integration ¥40 bn.
• Sale of policy stock holdings, sale of land, etc. ¥40 bn.

【Non-current assets】

¥530 bn.

• Property, plant and equipment

¥290 bn.

• Intangible assets・ Investments and other assets

¥240 bn.

• Interest-bearingdebt

¥170 bn.

【Net assets】 ¥290 bn.

Change non-current assets

• Kansai Food Market made a wholly owned subsidiary
  ±0
• Ningbo Hankyu Made a subsidiary ¥32.5 bn.
• Sale of policy stock holdings, sale of land, etc. ¥45 bn.

【Non-current assets】

¥520 bn.

• Property, plant and equipment

¥320 bn. (+¥30 bn.)

• Intangible assets・ Investments and other assets

¥200 bn.

(▲ ¥40 bn.)

¥390 bn.

• Interest-bearingdebt

¥130 bn.

Secure financial soundness with a target EBITDA interest- bearing debt ratio of 2x

【Net assets】 ¥280 bn.

(▲ ¥10 bn.)

Control through dividends and acquisition

of treasury stock

• ¥30 bn. in treasury stock

(Consider retirement)

Profit ▲¥24.8 bn.	Profit ¥21.9 bn.
ROE▲10.5%	ROE 8.5 % (actual ROE5.1 %)	ROE over 6.6%

To maintain B/S at an appropriate size while aggressively investing in high-growth, highly profitable businesses, promote asset efficiency by selling low-profit assets, etc., which will lead to ROE improvement along with an improved profit level

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Expand the shareholder/investor base and improve communication

Engaging in more active communication with capital markets and reflecting this communication in management to enhance corporate value.

To expand the investor base, improve the convenience of shareholder benefits and implement measures to increase the number of fan shareholders.

• Promoting Dialogue with the capital market
• • Disclosure of financial and capital strategies of high interest by investors
  • Continuous information provision and enhanced interactive communication by the president and executive officers.
• Enhancement of shareholder benefits and introduction of selection system
• • Under consideration of the following
  • • Enhanced shareholder benefits at supermarkets, etc. (e.g., point redemption)
    • Improve convenience of department store shareholder benefits (e.g., apps)
    • Distribution of rice and other goods
• Implementation of measures to expand fan shareholders
• • Holding briefings for individual shareholders and holding fan meetings, tours, and hands-on events using stores
  • Enhancement of information provision, including upgrading of the website for individual investors

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8

The information contained in this material reflects judgments made by H2O Retailing Corporation at the time of preparing this material, and no guarantees are provided concerning the accuracy of the information. The information is also subject to change without prior notice.

The Company and the information providers assume no responsibility for any damage arising from the use of the information.

This document is to be used solely as a reference and in cases where any differences occur between English version and the original Japanese version, the Japanese version shall prevail.

Also, the Company holds the copyright on this material, and accordingly, any duplication, reprinting or similar act beyond the scope of personal use or any other use permitted by the Copyright Law is prohibited without the prior consent of H2O Retailing Corporation.

H2O RETAILING CORPORATION