Global Music - Credit Suisse | PLUS [PDF]

KEY CONCLUSIONS Equity Research Global Entertainment 25 June 2014

Global Music GLOBAL VIEW

Please contact your Sales person to access the supplemental analysis behind this report.

RESEARCH ANALYSTS Omar Sheikh 44 20 7883 8507 [email protected]

Buy exposure to record labels: Growth in paid streaming services is a major emerging theme in Global Media, which will have positive implications for the valuation of recorded music labels, including Universal Music and Sony Music (owned by Sony, OP, ASIA FOCUS LIST). It also has important implications for Apple (N, $96 price target) – in a separate report (see Apple – iTunes to "i-Services" to the i-Annuity), our Global Tech team conclude that while the digital download market may have peaked, Apple has already responded with the acquisition of Beats Music, and will likely look to scale the service rapidly. With an installed base of >800m connected devices, and fiercely loyal customers, this could significantly accelerate the take-up of paid streaming services globally. Kulbinder Garcha 212 325 4795 [email protected]

Shunsuke Tsuchiya 81 3 4550 9740 [email protected]

160 140 120 100 80 60 40 20

Spotify (m)

Deezer (m)

2025E

2024E

2023E

2022E

2021E

2020E

2019E

2018E

2017E

2016E

2015E

2013

2014E

0

2012

Music majors set for a period of strong growth: Our analysis suggests paid streaming will drive a return to industry revenue growth by 2016, and 3% CAGR 2013-2020. More importantly, because streaming revenues generate higher margins than both physical and digital download revenues, EBITDA growth will be much higher, at 13% CAGR 2013-2020, pushing aggregate EBITDA margins up to 27% from 15%. Our assumptions are based on streaming penetration rising to 20% of the adult population in the top 10 music markets, not aggressive given Sweden and Norway are already at 19%-24%.

180

2011

Paid streaming will transform the music industry: In this report, we analyse how the rapid shift in music consumption towards paid streaming will drive a period of structural growth in the industry and refocus investors on the value of owning music content. Our key call is to buy Vivendi (OP, €24 price target, added to EUROPE FOCUS LIST), which owns the largest global label group, Universal Music. In a separate report (see Vivendi – Music: the forgotten content growth story) we raise our valuation of Universal to €10bn, materially ahead of consensus at around €6.5bn.

2010

The Ideas Engine series showcases Credit Suisse’s unique insights and investment ideas.

Figure 1: We expect global paid streaming customers to grow from 14m in 2013 to 148m by 2025

Dancing to a new tune

2009

IDEAS ENGINE SERIES

Other platforms (m)

Source: Spotify, Deezer, Credit Suisse assumptions Figure 2: We forecast paid streaming/subscription services will increase penetration from 5% in 2014 to 20% in 2025 in the top 10 global music markets 2014

2025

Source: Credit Suisse research

Sophie Bell 44 20 7883 1488 [email protected]

Luk Janssens 44 20 7888 4796 [email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US 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.

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Key Charts Figure 3: Global recorded music revenues ($m) 1973-2040E, monthly subscriptions are likely to dominate 30,000

Figure 4: Competition between paid streaming services could create competition for music content

We expect an inflection point in global recorded music revenues in 2016

25,000

Universal Music

Warner Music

Sony Music

Independent labels

20,000 15,000 Physical

10,000 5,000

Walmart

Amazon

Digital downloads

Other retail

Digital subscriptions

iTunes

Spotify

Deezer

Beats Music

Amazon

Other

Physical revenues

Digital download revenues

2025E

2023E

2021E

2019E

2017E

2013

2015E

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

0 Consumer

Consumer

Consumer

Consumer

Consumer

Consumer

Consumer

Consumer

Consumer

Consumer

Consumer

Consumer

Consumer

Subscription revenues

Note: Credit Suisse definition of "digital download revenues" and "subscription revenues" may differ from those of IFPI Source: Credit Suisse research, IFPI

Source: Credit Suisse research

Figure 5: Major label group EBITDA ($m) 2012-2020E

Figure 6: Subscription revenues have been grown strongly but in 2013 download revenues declined

4,500

700

4,000

600

3,500

500

3,000

400

2,500

300

2,000

200

1,500

100

1,000

571 423

406

372

263

262

223

102

30

0

500

-100

0

2012

2013

2014E

2015E

Universal Music*

2016E Warner Music**

* includes licensing; ** includes artist services & licensing Source: Company data, Credit Suisse estimates

IDEAS ENGINE Global Music

2017E

2018E

Sony Music

2019E

2020E

-116

-200 2009

2010

2011

∆ Digital download revenues

2012

2013

∆ Subscription revenues


2

Investment Summary ■

Music is the forgotten content growth story in Global Media. While it is now conventional wisdom that ownership of content IP is the only 'undisruptable' part of the media value chain, investors' focus has thus far been primarily on video, ie. TV and movies. This is partly because it appears the owners of music content IP (record labels and music publishers) have many years of migration from physical to digital formats in front of them, and look weakly positioned to control the economics of digital distribution because they currently rely on a single digital aggregator, ie. Apple. We think a major change in music consumption is under way – the emergence of paid music streaming services – which will substantially enhance the competitive position and profitability of the three remaining music majors.

■

streaming services are well-placed to generate substantial incremental value for the industry, in our view. ■

Paid streaming platforms, including Spotify, Deezer and Beats Music, are already transforming the music industry. The latest industry data show these services have grown from zero in 2008 to $1.1bn of revenues in 2013. We estimate the two largest platforms, Spotify and Deezer, had 12m paid subscribers globally in 2013, which we think should rise to 20m by the end of 2014. By providing on-demand 'access' to music rather than the traditional pay-as-you-go 'à la carte' model for physical CDs or digital downloads, paid

Figure 7: Spotify has grown to 7m paid subscribers in 2013, which we believe will grow to 13m in 2014…. 70

We see three ways in which this might happen: 1)

A subscriber to Spotify, Deezer or Beats Music generates 2.4x the annual revenue ($120 pa) for the industry than that generated by the average purchaser of physical or digital music ($50) (source: BPI);

2)

Because margins earned by the music industry on paid streaming revenues are substantially higher than both physical and digital download revenues, a migration of music consumption towards these platforms should be significantly accretive to music industry margins;

3)

The 'access' model offers more utility to the consumer, including music discovery at zero marginal cost and access to shared playlists – we think this model stands a good chance of encouraging some of the 50% of consumers in developed markets who pay nothing for music today to do so for the first time.

Figure 8:…while Deezer has grown to 5m paid subscribers in 2013, which is likely to grow to 7m in 2014 25

60

20

15

40

5

30 7 20

10

3

44

2 4

5

2009

2010

9

2011 Spotify free users (m)

15 2012 Spotify paid users (m)

Source: Company data for 2013, Credit Suisse assumptions 2009-2012, 2014


11

5

22

6

4 2013

2014E

17

2

5

10 0

7

13

50

0

0.5 2009

2010

2011

Deezer free users (m)

8

2012

2013

2014E

Deezer premium/Premium+ users (m)

Source: Company data for 2013, Credit Suisse assumptions 2009-2012, 2014

3

■

We think Apple is likely to further accelerate the music subscription market's development, via its recent purchase of Beats Music. Apple has an installed base of >800m connected hardware devices and >500m registered users of its iTunes platform – these provide a global distribution platform and, crucially, a virtually frictionless payment system. For us, it seems logical to expect Apple to include Beats Music in a software upgrade to its entire global installed base, and/or bundle a free/discounted subscription for a fixed period with new hardware at the point of sale. We would regard both these developments positively for the whole industry.

Figure 9: We expect global paid streaming customers to grow from 14m in 2013 to 148m by 2025E…

■

With a compelling consumer value proposition; a successful partnership strategy in place; significant penetration in certain 'leading edge' markets; and now with the potential for Apple to expand the market through a global roll-out of Beats Music, we believe paid streaming services look well-placed to grow strongly. Based on detailed bottom-up analysis, we forecast paid music streaming platforms can grow from 14m paying subscribers in 2013 to 148m by 2025, with penetration of adult populations (15-64 years) rising from 5% to 20% in the 10 major music markets.

Figure 10: …based on 20% of the adult population using paid streaming services 2014

180

2025

160 140 120 100 80 60 40 20

Spotify (m)

Deezer (m)

Source: Spotify, Deezer, Credit Suisse assumptions


2025E

2024E

2023E

2022E

2021E

2020E

2019E

2018E

2017E

2016E

2015E

2014E

2013

2012

2011

2010

2009

0

Other platforms (m)

Source: Credit Suisse estimates

4

■

If we are right that paid music streaming will become a mainstream consumer media product, this has profound implications for the profitability of the owners of music IP, ie. the record labels and publishers. We estimate recorded music labels make just 10% EBITDA margins on physical sales; 34% on digital download revenues; and 40% on revenues generated by paid streaming platforms. As we highlighted above, given the 'average' buyer of physical and digital downloads spends $50 pa, but annual subscription revenue is $120 pa, when the 'average' buyer of music on physical formats switches to digital downloads, we estimate annual EBITDA generated for the recorded music labels grows by 3.7x. If the same buyer of physical music switches to paid streaming, annual EBITDA generated grows by 10.3x. Importantly, this means the EBITDA contribution from a paid streaming customer is 2.8x that of the 'average' digital download customer – we would put any concerns

Figure 11: Credit Suisse global music forecasts ($m) 2008 Global recorded m usic m arket ($) Physical 14,510 Digital dow nloads 2,345 Paid streaming 0 Free streaming & other 1,900 Total 18,755 y/y % change

investors might have that the migration to paid streaming may cannibalise the digital download market in this context. ■

We publish new forecasts on global recorded music, based on our assumptions on subscriptions, physical purchases and digital downloads. We believe a step change in the revenue mix is likely, with subscriptions rising from 8% to 65% of the total. In aggregate, we see global recorded music returning to year-on-year growth in dollar terms from 2016, for the first time since 1999. This assumes the digital download market peaked in 2013, and declines from 2014 onwards; and that the physical market will trend to below 100m annual units within 10 years, down 97% from the peak in 1996.

2009

2010

2011

2012

2013

2014E

2015E

2016E

2017E

2018E

2019E

2020E

12,422 2,751 276 1,104 16,552 -12%

10,719 3,013 336 912 14,980 -10%

9,845 3,583 486 918 14,833 -1%

8,515 4,006 731 901 14,153 -5%

7,848 3,890 1,100 822 13,660 -3%

6,825 3,726 1,766 774 13,091 -4%

5,794 3,625 2,740 763 12,923 -1%

4,743 3,595 4,149 785 13,271 3%

3,795 3,566 7,286 807 15,455 16%

2,953 3,537 10,194 831 17,514 13%

2,214 3,533 11,214 856 17,817 2%

1,685 3,529 11,582 883 17,679 -1%

Source: Credit Suisse estimate, IFPI Figure 12: Global recorded music revenues ($m) 1973-2040E – we expect the market to be dominated by monthly subscriptions 30,000

3,000

We expect an inflection point in global recorded music revenues in 2016

25,000

Figure 13: Global recorded music unit volumes (m) by format 1973-2040E – the end of the era of one-off purchases?

2,500

Physical revenues

Digital download revenues

Subscription revenues



We expect no recovery in digital download unit sales

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E 2021E 2023E 2025E 2027E 2029E 2031E 2033E 2035E 2037E 2039E

2025E

2023E

2021E

2019E

2017E

2013

2015E

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

0

1989

0

1987

500

1985

5,000

1983

1,000

1981

10,000

1979

1,500

1977

15,000

1975

2,000

1973

20,000

Vinyl albums

Cassette albums

CD albums

Digital albums

Source: Credit Suisse research, IFPI

5

Figure 14:Paid streaming subscribers generate 2.4x the annual revenue of "average" physical and digital download customers; and 3.7x-10.3x the EBITDA contribution

PHYSICAL

DIGITAL DOWNLOADS

PAID STREAMING

Annual spend

Annual spend

Annual spend

$50.00

$50.00

$120.00

Sales tax

Sales tax

Sales tax

20% $8.33

20% $8.33

20% $20.00

Retailer revenue

Platform revenue

Platform revenue

35%* $14.58

30%** $12.50

30%** $30.00

Label revenue

100% $22.92

A&R

33%

100%

$4.17

Label revenue

100% $25.00

Writer royalty

$7.56

Manufacturing

23%

Publisher revenue

$5.27

70%

$2.92

100% $10.00

A&R costs

30%

$18.00

Writer royalty

70%

$7.00

Publisher G&A

Sales & marketing

Publisher G&A

2%

12%

2%

$1.17

$3.75

G&A

18%

Distribution

$4.50

Label EBITDA

$0.23

$4.13

$2.92

Publisher revenue

15%

28%

G&A

Writer royalty

70%

Label revenue

100% $60.00

Sales & marketing

$0.08

Publisher EBITDA

18%

$4.17

Publisher G&A

15%

1%

$8.25

100%

2%

Sales & marketing

$3.44

A&R costs

33%

Publisher revenue

34%

$8.50

$0.08

Publisher EBITDA

28%

$1.17

$7.20

G&A

18%

$10.80

$0.20

Publisher EBITDA

28%

$2.80

Label EBITDA

40%

$24.00

3.7x 10.5x

Label EBITDA

10%

$2.29

*Retailer gross margin; **Platform share of after-tax spend Source: Credit Suisse estimates


6

■

Growth in music subscription services is a major emerging theme in Global Media, which will have positive implications for the valuation of both recorded music labels and subscription platforms.

We believe the change in industry revenue mix will have a profound impact on the profitability of the labels. We see the aggregate EBITDA of the three major label groups (Universal Music, Sony Music and Warner Music), which control 78% of the global market, rising from $1.7bn in 2013 to just under $4bn in 2020. We see aggregate label EBITDA margins rising from 15% to 27%, as higher margin subscription revenue streams grow and lower (maybe close to zero) margin physical sales decline in importance.

Figure 15: Major label EBITDA margin (%) 2012-2020E

Figure 16: Major label group EBITDA ($m) 2012-2020E

30% 24%

25%

26%

26%

27%

4,000 3,500

21% 19%

20% 15%

14%

15%

4,500

3,000

17%

2,500 2,000 1,500

10%

1,000

5%

500 0

0% 2012

2013

2014E

2015E

2016E

2017E

2018E

Major label EBITDA margin (%)

Source: Company data (Universal Music, Warner Music, Sony Music), Credit Suisse estimates


2019E

2020E

2012

2013

2014E

2015E

Universal Music*

2016E Warner Music**

2017E

2018E

2019E

2020E

Sony Music

* includes licensing; ** includes artist services & licensing Source: Company data, Credit Suisse estimates

7

Vivendi (VIV.PA) Price (23-Jun-14,€) Market Cap (€mn)

19.1 25715.2 Current Value OUTPERFORM 24.00 0.59 0.75 0.87

Previous Value Rating Target Price (€) EPS FY1E (€) EPS FY2E (€) EPS FY3E (€) Source: Credit Suisse Estimates, IBES Income Statement Sales Revenue EBITDA Depr. & Amort. EBIT Net interest income (exp) Other adj. Profit before tax Income tax Profit after tax Minorities Associates & Other Net profit (CS) Other NPAT adjustments Net profit (Reported) Cash Flow EBIT Net Interest Cash taxes paid Change in Working capital Other cash and non-cash items Cash flow from Operations CAPEX Free cashflow to the firm Cash flow from Investments Cashflow from financing activities Changes in Net Cash/Debt Net debt at start Change in Net debt Net debt at end Balance Sheet Total Current Assets Total Fixed Assets Total liabilities Shareholder equity Minority interests Total liabilities and equity Net debt


1.04 1.15 1.18 2013FYA 22,135 4,926 -2,353 2,574 -528 67 2,113 -328 1,785 -117 -33 1,635 332 1,967 2013FYA 2,574 -528 -687 -308 2,416 3,467 -2,674 793 993 -2,138 2,322 13,419 -2,322 11,097 2013FYA 15,730 7,541 30,150 17,457 1,573 49,180 11,097

2014FYE 11,653 2,047 -625 1,422 -56 -126 1,241 -327 914 -80 -34 799 -462 337 2014FYE 1,422 -181 -447 -9 625 1,410 -916 494 18,184 -1,324 18,270 11,097 -18,270 -7,173 2014FYE 11,083 8,074 33,978 17,391 1,653 53,022 -7,173

2015FYE 12,012 2,267 -584 1,683 -33 -76 1,574 -443 1,131 -87 -35 1,009 -462 547 2015FYE 1,683 -109 -567 -9 584 1,583 -919 664 -7,919 -403 -6,740 -7,173 6,740 -433 2015FYE 11,204 8,636 34,203 17,535 1,740 53,478 -433

2016FYE 12,350 2,433 -595 1,838 -152 136 1,821 -528 1,293 -90 -36 1,167 -462 705 2016FYE 1,838 -16 -656 -9 595 1,752 -956 796 -956 -403 393 -433 -393 -826 2016FYE 11,317 9,227 34,285 17,837 1,830 53,952 -826

Per Share No. of shares (wtd avg.) (mn) EPS (CS Adj.) (€) Prev. EPS (€) DPS (€) Dividend yield (%) Dividend Payout (%) Earnings Sales Growth (%) EBIT Growth (%) Net Income Growth (%) EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Pretax Profit Margin (%) Net Income Margin (%) Valuation EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) Price to book (x) Asset Turnover Returns Return on equity stated (%) ROIC (%) Interest burden (X) Tax rate (%) Financial leverage Gearing Net debt/equity (%) Net Debt to EBITDA (x) Interest coverage ratio (X)

2013FYA 1,327 1.23 1.23 1.00 5.23 81.18 2013FYA -23.66 -51.28 -35.88 -37.08 22.26 11.63 9.55 7.39 2013FYA 1.5 6.7 12.9 15.5 1.4 0.5 2013FYA 11.0 7.2 0.8 20.3 0.7 2013FYA 58.3 2.3 4.9

2014FYE 2015FYE 2016FYE 1,348 1,348 1,348 0.59 0.75 0.87 1.04 1.15 1.18 0.30 0.30 0.30 1.57 1.57 1.57 50.59 40.08 34.64 2014FYE 2015FYE 2016FYE -47.36 3.08 2.81 -44.76 18.37 9.18 -51.11 26.24 15.68 -51.86 26.24 15.68 17.56 18.87 19.70 12.20 14.01 14.88 10.65 13.11 14.75 6.86 8.40 9.45 2014FYE 2015FYE 2016FYE 1.3 1.8 1.7 7.2 9.5 8.7 10.4 12.8 11.5 32.2 25.5 22.1 1.5 1.5 1.4 0.2 0.2 0.2 2014FYE 2015FYE 2016FYE 1.9 3.1 4.0 8.8 6.4 6.9 0.9 0.9 1.0 43.9 41.1 39.9 0.0 0.4 0.4 2014FYE 2015FYE 2016FYE -37.7 -2.2 -4.2 -3.5 -0.2 -0.3 25.5 50.9 12.1 Source: Company data, Credit Suisse Estimates

8

Apple Inc (AAPL.OQ) Price (23-Jun-14,US$) Market Cap (US$mn) Previous Value Rating Target Price (US$) Year EPS (CS Adj.) (US$) EPS Prev (US$) EPS (Qtr 1) (US$) EPS (Qtr 2) (US$) EPS (Qtr 3) (US$) EPS (Qtr 4) (US$) Source: Credit Suisse Estimates, IBES Income Statement Sales revenue EBITDA Depr. & amort. EBIT (US$) Net interest exp Other adj. PBT (US$) Income taxes Profit after tax Associates & other Net profit (US$) Other NPAT adjustments Reported net income EBIT Net interest Change in working capital Other cash & non-cash items Cash flow from operations CAPEX Free cashflow to the firm Cash flow from investments Cashflow from financing Changes in Net Cash/Debt Net debt at start Change in net debt Net debt at end Balance Sheet Total current assets Total fixed assets Total liabilities Shareholder equity Total liabilities and equity Net debt


9/13A 5.66

9/14E 6.39

9/15E 6.69

1.97 1.44 1.07 1.18

2.07 1.66 1.23 1.42

2.24 1.67 1.34 1.44

2012FYA 156,508 58,518 -3,277 55,241 -0 522 55,763 -14,030 41,733 1,303 43,036 0 43,036 55,241 -0 -299 -4,086 50,856 -8,295 42,561 -48,227 -1,698 3,177 -25,952 -3,177 -29,129 2012FYA 57,653 15,452 57,854 118,210 176,064 -29,129

2013FYA 170,910 55,756 -6,757 48,999 -0 1,156 50,155 -13,118 37,037 1,662 38,699 0 38,699 48,999 -0 6,478 -1,811 53,666 -8,165 45,501 -33,774 -16,379 -5,543 -29,129 5,543 -23,586 2013FYA 73,286 16,597 83,451 123,549 207,000 -23,586

2014FYE 182,430 59,927 -7,988 51,939 -0 1,200 53,139 -13,816 39,323 1,662 40,985 0 40,985 51,939 -0 886 1,008 53,833 -7,327 46,506 -7,327 -47,107 -1,627 -23,586 1,627 -21,959 2014FYE 70,210 15,123 86,727 119,730 206,457 -21,959

90.8 547675.2 Current value NEUTRAL 96.00 9/16E

2015FYE 187,180 59,181 -8,039 51,142 -0 1,500 52,642 -13,687 38,955 1,662 40,618 0 40,618 51,142 -0 -2,410 251 48,984 -9,359 39,625 -9,359 -37,267 2,358 -21,959 -2,358 -24,317 2015FYE 74,813 16,443 86,741 125,818 212,560 -24,317

Per Share Equiv. FPO (period Avg.) (mn) EPS (CS Adj.) (US$) Prev. EPS (US$) DPS (US$) Dividend yield (%) Dividend Payout (%) Earnings Sales growth (%) EBIT growth (%) Net income growth (%) EPS growth (%) EBITDA margin (%) EBIT margin (%) Pretax profit margin (%) Net income margin (%) Valuation EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) Price to book (x) Asset turnover Returns ROE ROGIC (%) Interest burden Tax burden Financial leverage Gearing Net debt/equity (%) Net Debt to EBITDA (x)

2012FYA 6,615 6.3 6.3 0.0 0.0 0.0 2012FYA 44.6 63.5 60.5 59.6 37.4 35.3 35.6 27.5 2012FYA 3.3 8.9 9.4 14.4 5.0 0.9 2012FYA 44.2 0.6 1.0 0.3 1.5 2012FYA -24.6 Net Cash

2013FYA 2014FYE 2015FYE 6,542 6,156 5,826 5.7 6.4 6.7 5.7 6.4 6.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2013FYA 2014FYE 2015FYE 9.2 6.7 2.6 -11.3 6.0 -1.5 -10.1 5.9 -0.9 -10.3 12.8 4.7 32.6 32.8 31.6 28.7 28.5 27.3 29.3 29.1 28.1 22.6 22.5 21.7 2013FYA 2014FYE 2015FYE 3.1 2.9 2.8 9.4 8.8 8.8 10.7 10.1 10.2 16.0 14.2 13.6 4.8 4.6 4.2 0.8 0.9 0.9 2013FYA 2014FYE 2015FYE 32.0 33.7 33.1 0.4 0.4 0.4 1.0 1.0 1.0 0.3 0.3 0.3 1.7 1.7 1.7 2013FYA 2014FYE 2015FYE -19.1 -18.3 -19.3 Net Cash Net Cash Net Cash Source: Company data, Credit Suisse Estimates

9

Sony (6758.T) Price (24-Jun-14,¥) Market Cap (¥ bn) Rating Target Price (¥) (Upside %) Source: Credit Suisse Estimates, IBES Income Statement All Values in (¥ bn) Revenue Cost of goods sales SG&A Other op income(expense) EBITDA Depr. & Amort. Goodwill impairment EBIT Net interest expense Net other non-op income(exp.) Profit before tax Taxes Profit after tax Minority interest Net Income Cash Flow Operating cashflow Investing cashflow Financing cashflow Free cash flow Balance Sheet Cash and cash equivalents Accounts Receivables Inventory Other Current Assets Current Assets Plant, property, Equipment Intangibles Other Non-current assets Total Fixed Assets Total Assets Accounts Payables Short term debt Other short term Liabilities Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity Minority interests Total equity & liabilities


1,708 1,782,612 Current Value OUTPERFORM 2,600 (52%) 2013FYA

2014FYA

2015FYE

2016FYE

6795.5 4485.4 1457.6 295.4 557.1 330.6 0.0 226.5 4.7 10.9 242.1 141.5 101 -61.1 41.5 2013FYA 476 -705 89 -229 2013FYA 826 776 710 1,604 3,917 862 0 9,433 10,294 14,211 572 88 3,655 4,315 938 6,283 11,536 2,190 480 14,206

7767.3 5140.1 1728.5 495.5 403.2 376.7 0.0 26.5 6.8 -7.6 25.7 94.6 -69 -59.5 -128.4 2014FYA 664 -711 208 -46 2014FYA 1,046 871 734 1,829 4,481 750 0 10,103 10,853 15,334 713 112 3,959 4,784 917 6,846 12,546 2,258 525 15,330

7915.0 4975.0 1686.0 662.0 592.0 340.0 0.0 252.0 7.0 -10.5 248.5 122.0 126 -56.0 70.5 2015FYE 431 -300 -221 131 2015FYE 775 944 811 1,974 4,503 852 0 9,997 10,849 15,352 820 108 3,877 4,805 936 6,716 12,457 2,375 520 15,352

8081.0 5018.0 1721.0 662.0 680.0 340.0 0.0 340.0 7.0 -10.5 336.5 148.0 188 -51.0 137.5 2016FYE 482 -300 -6 182 2016FYE 874 960 811 1,974 4,619 852 0 10,033 10,885 15,504 840 108 3,897 4,845 936 6,716 12,497 2,487 520 15,504

Per Share No. of shares (mn) EPS (CS Adj.) (¥) BPS (¥) DPS (¥) Dividend Payout (%) Operating cash flow per share (¥) Earnings Sales Growth (%) EBIT Growth (%) Net Income Growth (%) EBIT Margin (%) EBITDA Margin (%) Net Income Margin (%) Valuation EV/SALES (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) P/B (x) Dividend Yield (%) FCF yield (%) Returns Return on Equity (%) Return on Invested Cap. (%) Asset turnover (%) Gearing ND/ND+E (%) Net Debt to EBITDA (x) Int Cover (EBIT/Net Int.) (X) Financial leverage(x) Net debt/equity (%)

2013FYA 1,011 41.1 n.m 25.0 60.8 471.0 2013FYA 4.7 436.7 109.1 3.3 8.2 0.6 2013FYA 0.3 3.6 8.9 40.0 0.8 1.5 -13.8 2013FYA 2.0 3.2 47.8 2013FYA 11.8 0.6 48.5 6.5 16.3

2014FYA 2015FYE 2016FYE 1,044 1,038 1,038 -123.0 67.9 132.5 n.m n.m n.m 25.0 25.0 25.0 -20.3 36.8 18.9 636.3 415.4 464.5 2014FYA 2015FYE 2016FYE 14.3 1.9 2.1 -88.3 851.1 34.9 -409.0 154.9 95.0 0.3 3.2 4.2 5.2 7.5 8.4 -1.7 0.9 1.7 2014FYA 2015FYE 2016FYE 0.3 0.3 0.3 5.7 3.6 3.0 87.0 8.4 6.0 -16.0 25.1 12.9 0.9 0.7 0.7 1.3 1.5 1.5 -2.3 7.4 10.3 2014FYA 2015FYE 2016FYE -5.8 3.0 5.7 -2.3 4.1 5.8 50.7 51.6 52.1 2014FYA 2015FYE 2016FYE 8.2 10.7 8.1 0.6 0.6 0.4 3.9 36.0 48.6 6.8 6.5 6.2 11.0 14.6 10.7 Source: Company data, Credit Suisse Estimates

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Companies Mentioned (Price as of 23-Jun-2014) AT&T (T.N, $35.39) Amazon com Inc. (AMZN.OQ, $327.24) Apple Inc (AAPL.OQ, $90.83, NEUTRAL, TP $96.00) Deutsche Telekom (DTEGn.F, €12.64) Google, Inc. (GOOGL.OQ, $574.29) KPN (KPN.AS, €2.683) News Corporation (NWS.AX, A$18.17) Orange (ORAN.PA, €11.74) Pandora Media (P.N, $28.2) Sony (6758.T, ¥1,715, OUTPERFORM, TP ¥2,600) Sprint Corp (S.N, $8.36) TeliaSonera (TLSN.ST, Skr49.55) Vivendi (VIV.PA, €19.1, OUTPERFORM, TP €24.0) Vodafone Group (VOD.L, 191.5p)

Disclosure Appendix Important Global Disclosures Omar Sheikh, Kulbinder Garcha, Shunsuke Tsuchiya, Sophie Bell, Joseph Barnet-Lamb and Luk Janssens each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Apple Inc (AAPL.OQ) AAPL.OQ Date 12-Oct-11 25-Jan-12 22-Feb-12 19-Mar-12 12-Apr-12 24-Jan-13 24-Apr-13 11-Sep-13 28-Jan-14 24-Apr-14 03-Jun-14

Closing Price (US$) 57.46 63.81 73.29 85.87 88.94 64.35 57.95 66.83 72.42 81.11 91.08

Target Price (US$) 71.43 78.57 85.71 100.00 107.14 85.71 75.00 75.00 71.43 80.00 85.71

Rating O

N O U T PERFO RM N EU T RA L

* Asterisk signifies initiation or assumption of coverage.


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3-Year Price and Rating History for Sony (6758.T) 6758.T Date 25-Aug-11 09-Sep-11 13-Oct-11 13-Jan-12 20-Feb-12 10-Oct-12 14-Mar-13 25-Oct-13

Closing Price (¥) 1,581 1,557 1,562 1,327 1,681 897 1,503 1,851

Target Price (¥) 2,400 2,400 1,500 1,750 900 1,600 2,600

Rating O R O N

O

* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM REST RICT ED N EU T RA L

3-Year Price and Rating History for Vivendi (VIV.PA) VIV.PA Date 18-Aug-11 29-Mar-12 07-Sep-12 05-Dec-12 16-Sep-13 25-Feb-14 07-Apr-14

Closing Price (€) 14.79 13.19 15.65 16.70 17.57 21.02 20.62

Target Price (€) 20.70 17.90 17.60 19.10 20.80 24.00

Rating O

R

* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM REST RICT ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all com panies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies c overed by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attrac tive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2n d October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshol d replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +1015% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japa nese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional be nchmark.


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Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sec tors.

Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution

Rating

Versus universe (%)

Of which banking clients (%)

Outperform/Buy* 44% (54% banking clients) Neutral/Hold* 40% (49% banking clients) Underperform/Sell* 13% (46% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, resp ectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definit ions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Sony (6758.T) Method:

We think the PS4 could drive top-line growth from 4Q, and see the relative P/B rising as it did during the last phase of top-line growth. We base our ¥2,600 target price for Sony on a fair-value P/B of 1.1x (sector averages are 1.3–1.5x), applied to FY3/15E BPS.

Risk:

Risks that may cause the share price to diverge from our ¥2,600 target price for Sony include: Downside risks: (1) Poor sales of PS4/smartphones; (2) yen strength.

Price Target: (12 months) for Apple Inc (AAPL.OQ) Method: Risk:

Our target price for Apple is $96. We calculate this by applying a 12x multiple to our FY2015 EPS and adding back $14/share of net cash to be returned by the end of FY15.

Risks to achievement of our $96 target price for Apple Inc. include competitive pressures from global consumer electronics companies, failure to launch innovative products, loss of key executive managers, failure to maintain key media distribution for iTunes, and regulatory risk


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Price Target: (12 months) for Vivendi (VIV.PA) Method:

We value Vivendi at €24 per share, which assumes a €22.30 "base" SOTP valuation plus €1.80 per share accretion from a €5.5bn share buyback. We also highlight that if the company were to sell GVT for €8bn in cash and spin-off UMG (or Canal Plus) into a separate listed entity, this would yield a "Blue Sky" valuation of €28. Moreover, if we were to strip out Vivendi's cash, liabilities and listed assets, the media assets are trading at a 2014E EV/EBITDA multiple of 6.9x, which looks very low when compared with other content assets in Global Media, which trade at 12.6x.

Risk:

Risks to our €24 target price for Vivendi are: (1) forecast or multiple changes for wholly owned business units; (2) changes in the market prices of listed assets; (3) impact of potential acquisitions/disposals on our holding discount; and (4) foreign exchange fluctuations.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names

The subject company (6758.T, AAPL.OQ, VIV.PA, AMZN.OQ, DTEGn.F, GOOGL.OQ, NWS.AX, ORAN.PA, S.N, T.N, TLSN.ST) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (6758.T, VIV.PA, AMZN.OQ, DTEGn.F, GOOGL.OQ, ORAN.PA, S.N, T.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (6758.T, AAPL.OQ, VIV.PA, DTEGn.F, NWS.AX, S.N, T.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (VIV.PA, DTEGn.F, GOOGL.OQ, S.N, T.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (6758.T, VIV.PA, AMZN.OQ, DTEGn.F, GOOGL.OQ, ORAN.PA, S.N, T.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (6758.T, AAPL.OQ, VIV.PA, AMZN.OQ, DTEGn.F, GOOGL.OQ, NWS.AX, ORAN.PA, P.N, S.N, T.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (6758.T, AAPL.OQ, VIV.PA, DTEGn.F, NWS.AX, S.N, T.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (6758.T, AAPL.OQ, AMZN.OQ, GOOGL.OQ, P.N, S.N, T.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (AAPL.OQ, VIV.PA, VOD.L, P.N). Credit Suisse has a material conflict of interest with the subject company (VIV.PA) . Credit Suisse Securities (Europe) Ltd is acting as financial advisor to Numericable Group and as Joint Bookrunner and Mandated Lead Arranger for the debt financings by Altice SA and Numericable Group to support the proposed acquisition of SFR. Credit Suisse has a material conflict of interest with the subject company (S.N) . Credit Suisse acted as financial advisor to a shareholder of Clearwire in connection with the announced proposed acquisition of Clearwire by Sprint. As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL. For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (6758.T, AAPL.OQ, VIV.PA, VOD.L, AMZN.OQ, DTEGn.F, GOOGL.OQ, NWS.AX, ORAN.PA, P.N, S.N, T.N, TLSN.ST) within the past 12 months An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL.OQ) within the past 12 months The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.


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Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (VIV.PA, VOD.L, DTEGn.F, ORAN.PA, TLSN.ST). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (VIV.PA, DTEGn.F, GOOGL.OQ, ORAN.PA, S.N, T.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating. The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same security). The CS Model Portfolio and important disclosures about it are available at www.credit-suisse.com/ti. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited .................................................................................................................................. Shunsuke Tsuchiya Credit Suisse Securities (Europe) Limited ........................................................ Omar Sheikh ; Sophie Bell ; Joseph Barnet-Lamb ; Luk Janssens For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.


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