Konami (Tokyo: 9766, NYSE: KNM)

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1 Konami (Tokyo: 9766, NYSE: KNM) Technology: Software & Programming Minato-ku, TK, Japan, Trading Data Consensus EPS Estimates Valuation Price: $18.90 (as of 4/21/11) Month # of P/E FYE 3/31/10 16x 52-week range: $ $22.47 Latest Ago Ests P/E FYE 3/31/11 15x Market value: $2.7 billion This quarter n/a n/a n/a P/E FYE 3/30/12 12x Enterprise value: $2.6 billion Next quarter n/a n/a n/a P/E FYE 3/30/13 n/a Shares out: million FYE 3/31/ EV/ LTM revenue 0.8x Ownership Data FYE 3/30/ EV/ LTM EBIT 12x Insider ownership: <1% FYE 3/30/13 n/a n/a n/a P / tangible book 1.8x Insider buys (last six months): 0 LT growth 16.2% 16.2% 1 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 8% Institutional ownership: 0% 8/5/10 n/a n/a LTM pre-tax ROC 19% Operating Performance and Financial Position ($ millions, except Fiscal Years Ended LTME FQE FQE per share data) 3/31/04 3/31/05 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 12/31/10 12/31/09 12/31/10 Revenue 3,286 3,133 3,151 3,369 3,574 3,723 3,151 3, Gross profit 1, ,043 1,108 1, Operating income Net income Diluted EPS Shares out (avg) Cash from operations Capex Free cash flow Cash & investments 1,044 1, Total current assets 1,836 1,946 1,735 1,662 1,684 1,643 1,617 1,754 1,673 1,754 Intangible assets Total assets 3,539 3,658 3,637 3,662 3,837 3,626 3,584 3,689 3,642 3,689 Short-term debt Total current liabilities 875 1, Long-term debt Total liabilities 2,312 2,385 1,668 1,562 1,640 1,479 1,367 1,462 1,459 1,462 Preferred stock Common equity 1,227 1,272 1,969 2,099 2,197 2,147 2,217 2,226 2,183 2,226 EBIT/capital employed 90% 63% 5% 41% 42% 32% 21% 19% n/m n/m $45 $40 $35 $30 $25 $20 $15 $10 $5 Ten-Year Stock Price Performance and Trading Volume Dynamics $0 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! May 2, 2011 Page 50 of 126

2 BUSINESS OVERVIEW Gaming company Konami operates in four segments: Digital Entertainment (54% of CY10 revenue; 18 billion of CY10 EBIT): develops and distributes computer and video game software (50+% of segment revenue), video games for amusement arcade machines, card games, and online games. Health & Fitness (33%; - 2 billion): entered the fitness club business in 2001; operates 200+ own clubs (mostly leased) and ~115 clubs on an outsourced basis. ~10% of revenue derives from the manufacture and supply of fitness equipment. Gaming & System (8%; 5 billion): Develops and services casino machines and systems, mostly for the U.S. market. Other (6%; - 3 billion): includes corporate/other activities. INVESTMENT HIGHLIGHTS One of the largest global publishers of video game software for gaming consoles such as Sony PlayStation, Nintendo Wii, and Microsoft Xbox. Computer and video game software, which represents ~30% of total revenue, is a key earnings contributor. Valuable content franchise as Konami produces its own games, which can then be monetized across various channels. DanceDanceRevolution, for example, was first sold as an arcade game, then as a home title, and, most recently, as an iphone game. Valuation ignores the earning power of the games business and value of non-core fitness operations, which contribute a third of revenue and little EBIT. EV-to-revenue is <0.8x and EV-to-prior peak EBIT is <6x. The FCF yield is 8% on 5-year average FCF. Non-core fitness segment is the largest fitness club operator in Japan with ~20% market share. Owns gaming licenses in the U.S. and other jurisdictions tied to the supply of gaming machines. Chairman and CEO Kagemasa Kozuki (70) founded Konami as an arcade games producer in Kozuki owns 28% of the company. 9 billion of net cash at yearend INVESTMENT RISKS & CONCERNS Emergence of the Internet as a medium for creative collaboration and games distribution threatens the company s competitive advantages. Gaming software business depends on hit products and is vulnerable to new entrants such as online-based gaming providers. Konami s content ownership and online gaming efforts mitigate this. Losses in non-core fitness club operations destroy value and divert management attention. A turnaround and subsequent sale should be pursued. Sony devices drive 50+% of video game unit sales. SELECTED OPERATING DATA 1 FYE March YTD 12/31/10 revenue 1% 7% 6% 4% -15% -1% employees (end) 13% 1% 6% 3% 1% n/a assets (end) -1% 1% 5% - % -1% 1% Revenue ( bn) % of revenue by segment: Digital entertainment 62% 59% 60% 60% 54% 52% Health & fitness 31% 32% 29% 29% 33% 34% Gaming & system 4% 6% 6% 6% 8% 8% Other/eliminations 3% 4% 5% 5% 6% 6% Revenue growth by selected segment: Digital entertainment 1% 1% 8% 5% -24% -3% Health & fitness 3% 9% -2% 4% -5% 1% EBIT margin by selected segment: Digital entertainment 21% 18% 20% 22% 15% 13% Health & fitness -21% 9% 6% -9% -2% 2% Gaming & system 1% 13% 15% 19% 23% 26% Total EBIT margin 2 1% 10% 11% 9% 7% 9% Japan as % of sales 3 74% 74% 74% 72% 76% 75% Selected items as % of revenue: Gross profit 30% 31% 31% 31% 29% 27% EBIT adjusted 4 8% 10% 11% 12% 8% 9% Net income 9% 6% 6% 4% 5% 5% Net cash from ops 9% 11% 10% 10% 5% 9% D&A 5% 4% 4% 4% 5% 5% Capex 6% 3% 4% 3% 2% 4% Employees (end) (k) n/a Return on tang. equity 28% 15% 16% 9% 11% 10% 6 Tangible equity/assets 32% 45% 47% 48% 51% 51% shares out (end) 12% 0% 0% -7% 0% 0% 1 Based on U.S. GAAP. TBV=tangible book value. 2 Includes corporate costs and EBIT of other/eliminations segment. 3 Based on where the company sold products or rendered services. 4 Excludes restructuring and impairment charges. 5 On full-time basis (excl. ~7,400 part-time staff at 3/2010). 6 Annualized. COMPARABLE PUBLIC COMPANY ANALYSIS P / This Next MV EV EV / Tang. FY FY ($mn) ($mn) Rev. Book P/E P/E ATVI 13,030 9, x 5.4x 16x 13x ERTS 6,820 4, x 6.3x 30x 24x TTWO 1,330 1, x 4.6x 18x 14x THQI x 2.5x n/m 14x KNM 2,730 2,620.8x 1.8x 15x 12x MAJOR HOLDERS (notable non-trustees only) Founder and CEO Kozuki 28% Other insiders <1% MUFJ 4% AllianceBernstein <1% Jane Street <1% DFA <1% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends? THE BOTTOM LINE Under the direction of CEO and founder Kagemasa Kozuki, Konami has expanded from an arcade games producer in the 1970s to one of the world s major gaming companies, with a strong franchise in video game software publishing. Despite conglomerate tendencies, including a loss-making foray into fitness clubs, Kozuki remains incentivized to create long-term value as the largest shareholder with 28%. Recent valuation is attractive relative to the earning power inherent in Konami s businesses by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! May 2, 2011 Page 51 of 126

3 KONAMI OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ( in billions) Conservative Base Case Aggressive Valuation methodology Digital Entertainment (video game development): Normalized revenue Normalized EBIT margin % 15.0% 20.0% Estimated normalized EBIT Estimated enterprise value of Digital Entertainment (A) implied EV-to-trailing segment revenue 0.9x 1.6x 2.5x implied EV-to-trailing segment EBIT 6.9x 12.5x 19.4x Health & Fitness (operation of fitness clubs): Normalized revenue Normalized EBIT margin 4 5.0% 7.5% 10.0% Estimated normalized EBIT Estimated enterprise value of Health & Fitness (B) implied EV-to-trailing segment revenue 0.5x 0.7x 1.0x implied EV-to-prior peak segment EBIT (year ended March 07) 5.7x 8.5x 11.3x Gaming & System (manufacture of casino gaming machines): Normalized revenue Normalized EBIT margin % 20.0% 25.0% Estimated normalized EBIT Estimated enterprise value of Gaming & System (C) implied EV-to-trailing segment revenue 1.1x 2.0x 3.2x implied EV-to-trailing segment EBIT 4.9x 8.7x 13.6x Other/Corporate (other businesses and corporate activities): Trailing segment EBIT ( 3) ( 3) ( 3) Estimated value drag of Other/Corporate (D) ( 30) ( 30) ( 30) Estimated total enterprise value = (A) + (B) + (C) + (D) Plus: Net cash Minus: Net post-retirement liability 7 (3) (3) (3) Minus: Non-controlling interest 7 (5) (5) (5) Estimated fair value of the equity of Konami ( in billions) billion 300 billion 469 billion 1,210 per share 2,250 per share 3,510 per share Estimated fair value of the equity of Konami (US$ in billions) 8 $1.9 billion $3.6 billion $5.6 billion $14.60 per ADS $27.10 per ADS $42.30 per ADS Implied trailing FCF yield 11% 6% 4% Implied FCF yield based on average FCF during FY % 5% 3% Implied dividend yield 9 3% 1% 1% Implied EV-to-trailing revenue 0.6x 1.1x 1.8x Implied EV-to-trailing EBITDA 5.2x 9.8x 15.3x Implied EV-to-trailing EBIT 8.8x 16.5x 25.8x Implied fair value of the equity to tangible book 1.3x 2.3x 3.7x 1 Calendar year 2010 revenue is 140 billion. Revenue averaged 167 billion during fiscal years (ended March 2010). 2 Calendar year 2010 EBIT margin is 13%. EBIT margin averaged 19% during fiscal years Calendar year 2010 revenue is 86 billion. Revenue averaged 86 billion during fiscal years Calendar year 2010 EBIT margin is -2%. EBIT margin averaged -4% during fiscal years , with a peak of 9% in FY07 and a trough of -21% in FY06. 5 Calendar year 2010 revenue is 20 billion. Revenue averaged 17 billion during fiscal years Calendar year 2010 EBIT margin is 23%. EBIT margin averaged 14% during fiscal years Based on balance sheet values at yearend Based on 133 million common shares outstanding (1 share = 1 ADS). Estimated fair value in US$ is based on a conversion at an exchange rate of 1US$= Based on dividend guidance of 32 per share for the fiscal year ended March Source: Company filings, The Manual of Ideas analysis, assumptions and estimates by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! May 2, 2011 Page 52 of 126

4 KONAMI A CLOSER LOOK AT THE DIGITAL ENTERTAINMENT BUSINESS Operating income by segment: Recent Digital Entertainment segment performance: Video game unit sales: Source: Company presentation dated February 3, by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! May 2, 2011 Page 53 of 126

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