COMPANY RESEARCH AND ANALYSIS REPORTRIZAP GROUP, Inc.
2928
Sapporo Securities Exchange Ambitious

21-Feb.-2019
FISCO Ltd. Analyst

Hiroyuki Asakawa

FISCO Ltd.
http://www.fisco.co.jp

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/■ Index■Summary---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 01
1. Recovery of earnings delayed at subsidiaries, forecasts downwardly revised,
conducting sweeping structural reforms......................................................................................................

01

2. The two main structural reforms are “the restructuring of existing businesses” and“business selection and concentration”. .....................................................................................................

01

3. Expectations of the Company are great, as hard-landing measures show the Company’s confidence andcommitment to a rapid recovery of earnings. ..............................................................................................

01■Results trends--------------------------------------------------------------------------------------------------------------------------------------------------------------- 02
1. Overview of the FY3/19 1H results. . .............................................................................................................

02

2. FY3/19 forecast...........................................................................................................................................

04■The structural reforms and the state of progress----------------------------------------------------------------------- 07
1. Overview of the sweeping structural reforms toward sustainable growth. ...................................................

07

2. Corporate governance reforms.............. ......................................................................................................

07

3. The outlook for the future. . ...........................................................................................................................

09

4. Conditions in the RIZAP-related businesses. ...............................................................................................

13■Shareholder returns------------------------------------------------------------------------------------------------------------------------------------------------- 14

We encourage readers to review our complete legal statement on “Disclaimer” page.

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/██Summary
Conducting sweeping structural reforms toward the early recoveryof earnings
RIZAP GROUP, Inc. <2928> (hereafter, also “the Company”) is expanding the scope of its business while actively
utilizing M&A, with the “self-investment industry” as its business domain. In 2016, it shifted to a pure holding
company structure, and the group contains 85 companies, including 9 listed companies, that are developing
businesses in the 3 domains of beauty and healthcare, lifestyle, and platforms.
1. Recovery of earnings delayed at subsidiaries, forecasts downwardly revised, conducting sweeping
structural reforms
In the Company’s FY3/19 1H results, despite achieving record high revenue for the 7th consecutive fiscal period,
it posted an operating loss of ¥8,829mn. This was mainly because earnings are recovering slower than planned,
mainly at the companies and businesses that entered the group within the past year. Following this, the Company
has set management’s top priority as recovering the results of group companies and businesses as soon as possible,
and it has decided to conduct sweeping structural reforms. Also, in conjunction with this, it downwardly revised the
FY3/19 full year forecasts, lowering the consolidated operating income forecast by ¥26.3bn, from the initial forecastof operating income of ¥23bn to an operating loss of ¥3.3bn.
2. The two main structural reforms are “the restructuring of existing businesses” and “business selection
and concentration”
The Company has set five items as the specific structural reforms it is conducting, but if we consider them broadly,
they can be summarized into the following two; “freeze new M&A, in principle, and focus on restructuring existing
businesses” and “in the process of reconstruction, implement business selection and concentration.” As phase oneof these structural reforms, the Company has announced corporate governance reforms. They involve the separationof management and execution through reforming the Board of Directors, with the number of directors on the Board
being greatly reduced and the majority being outside directors. Representative Director Takeshi Seto and Mr. Akira
Matsumoto, who will be in charge of the structural reforms, will remain as directors, and it is considered that theCompany has put in place a framework to promote the structural reforms in a form that will be accompanied bytheir results. Also, with regards to the progress made for the restructuring and the specific content of the businessselection and concentration, the Company has announced that on November 13, 2018, it had conducted a business
transfer through a company split of the game, bowling, and cinema business of SD Entertainment, and that on
January 25, 2019, it had sold its Japan Gateway shares. We can expect further such announcements in the future.
3. Expectations of the Company are great, as hard-landing measures show the Company’s confidence andcommitment to a rapid recovery of earnings
Within the Company’s series of measures, the one that we are focusing on is the “hard-landing” approach that it has
adopted for this crisis. Executing this requires an appropriate degree of corporate strength and an earnings recovery
scenario, but there is no guarantee of its success. It is considered that the Company has a considerable degree ofconfidence and preparedness for its success. The earnings recovery will be undertaken mainly by the RIZAP-related
businesses, particularly the body shaper business, and it seems that its number of new members is continuing tosteadily increase. If the Company can carry out precise selection and concentration for its loss-making businesses
and businesses for which synergies are not expected while this business steadily grows, then we can expect it torealize its earnings recovery scenario.

We encourage readers to review our complete legal statement on “Disclaimer” page.

01 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

Summary

Key Points
Conducting sweeping structural reforms, with a framework including group companies’ reconstruction andbusiness selection and concentration• The adoption of hard-landing measures expresses the strength of its confidence in a recovery• New member numbers continue to steadily increase in the body shaper business, while the contributions toearnings of GOLF and ENGLISH are also in sight•㻾 㼑㼟㼡㼘㼠㼟㻌㼠㼞㼑㼚㼐㼟㻔¥㼙㼚㻕㻾㼑㼢㼑㼚㼡㼑㻌㻔㼚㼑㼠㻌㼟㼍㼘㼑㼟㻕㻌㻔㼘㼑㼒㼠㻕㻻㼜㼑㼞㼍㼠㼕㼚㼓㻌㼕㼚㼏㼛㼙㼑㻛㼘㼛㼟㼟㻌㻔㼞㼕㼓㼔㼠㻕㻟㻜㻜㻘㻜㻜㻜

㻝㻢㻘㻜㻜㻜

㻝㻟㻘㻡㻥㻜㻌

㻞㻠㻜㻘㻜㻜㻜

㻔¥㼙㼚㻕㻝㻞㻘㻜㻜㻜

㻝㻜㻘㻞㻝㻞㻌

㻝㻤㻜㻘㻜㻜㻜

㻤㻘㻜㻜㻜㻡㻘㻜㻢㻢㻌

㻝㻞㻜㻘㻜㻜㻜

㻞㻟㻜㻘㻥㻜㻜

㻞㻘㻝㻜㻤㻌
㻝㻟㻢㻘㻞㻜㻝

㻢㻜㻘㻜㻜㻜

㻜㻥㻡㻘㻞㻥㻥
㻟㻥㻘㻝㻜㻝
㻲㼅㻟㻛㻝㻡

㻠㻘㻜㻜㻜㻜㻙㻟㻘㻟㻜㻜㻌

㻡㻡㻘㻠㻠㻤

㻙㻠㻘㻜㻜㻜
㻲㼅㻟㻛㻝㻢

㻲㼅㻟㻛㻝㻣

㻲㼅㻟㻛㻝㻤

㻲㼅㻟㻛㻝㻥㻌㻱

Note: Transitioned to IFRS from FY3/17
Source: Prepared by FISCO from the Company’s financial results██Results trends
In FY3/19 1H, despite record high revenue for the 7th consecutive
period, recorded an operating loss due to the delays in groupcompanies’ earnings recoveries
1. Overview of the FY3/19 1H results
In the Company’s FY3/19 1H results, while revenue increased greatly, every profit item from operating income down
declined for substantial losses, with revenue of ¥109,105mn (up 74.3% year on year (YoY)), an operating loss of¥8,829mn (compared to income of ¥4,987mn in the same period in the previous fiscal year), a loss before income
taxes of ¥9,705mn (income of ¥4,377mn), and net loss attributable to owners of the parent company of ¥8,532mn(income of ¥2,932mn).

We encourage readers to review our complete legal statement on “Disclaimer” page.

02 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.

21-Feb.-2019

2928 Sapporo Securities Exchange Ambitious

https://ir-english.rizapgroup.com/

Results trends

Overview of FY3/19 1H results(¥mn)
FY3/18

FY3/19YoY

1H

Full year

1H

Revenue

62,581

136,201

109,105

74.3%

46,524

Operating income/loss

4,987

13,590-8,829--13,816% change

ChangeOperating margin

8.0%

10.0%

-8.1%

-

-

Income/loss before income taxes

4,377

12,047-9,705--14,082

Net income/loss attributable to owners of the parent company

2,932

9,250

-8,532--11,464

Source: Prepared by FISCO from the Company’s financial results

Revenue increased greatly, up 74.3% YoY, for a record high for the 7th consecutive period. This was because
sales steadily increased in the RIZAP-related businesses, which include the RIZAP body shaper business of the
management of personal training gyms, RIZAP GOLF, and RIZAP ENGLISH. It was also from the effects of the newconsolidation of companies that entered the group following M&A.
But profits decreased and an operating loss was recorded. This was mainly because the restructuring progressedslower than expected, particularly in the companies and businesses that joined the group in the past year, including
Wonder Corporation <3344>, Japan Gateway Co., Ltd., SANKEI LIVING SHIMBUN Inc., Pado Corporation <4833>,
and Tatsumi Planning's mega solar business. It was also due to the impact of production delays at MRK HOLDINGS
INC. <9980>, which had been expected to contribute to earnings, and the recording of an extraordinary loss at SD
Entertainment Inc. <4650> due to the effects of the Hokkaido Eastern Iburi Earthquake.
In the breakdown of the factors causing operating income to decrease, the Company cites the following threefactors; 1) the total operating loss of non-listed subsidiaries increased by ¥1.82bn, from ¥1.39bn in the same
period in the previous fiscal year to ¥3.21bn, 2) the total operating income of the listed subsidiaries decreased by¥7.86bn, from operating income of ¥3.54bn in the same period in the previous fiscal year to an operating loss of¥4.32bn, and 3) upfront investment-related expenses increased, including advertising expenses and school andstore opening-related expenses (an increase of ¥7.9bn YoY on a group-wide basis). As a result of these factors,
operating income decreased ¥13.8bn and as previously stated, became an operating loss of ¥8,829mn.
The Company itself applies IFRS (International Financial Reporting Standards), but many of its subsidiaries apply theJapanese standards. In IFRS, extraordinary items in the Japanese standards are also reflected in operating income.
The above-described YoY profit-decrease amount of ¥13.8bn contained a non-ordinary loss of ¥6.83bn, includingfrom structural reforms-related expenses. On looking at the qualitative aspect of the decline in profits, after excluding
the amount from the effects of the non-ordinary loss, it can be said that ¥6.97bn was from the impact of the delaysin the recoveries of the main businesses.

We encourage readers to review our complete legal statement on “Disclaimer” page.

03 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

Results trends

The FY3/19 full year forecasts have been significantly downwardly
revisedCompared to the previous forecast, the full fiscal year operating
income forecast has been reduced by ¥26.3bn to an operating lossof ¥3.3bn
2. FY3/19 forecast
Following the 1H results, the Company decided that recovering results in the group companies and business assoon as possible should be management’s top priority. In conjunction with this, it significantly downwardly revised
the FY3/19 full year forecasts. The new forecasts are for revenue of ¥230,900mn, an operating loss of ¥3,300mn, aloss before income taxes of ¥4,900mn, and a net loss attributable to owners of the parent company of ¥7,000mn.
Overview of FY3/19 forecast(¥mn)
FY3/18

FY3/191H

2H

Full year

1H

2H (E)

YoY

Full year(initial
forecast)

Full year(revised
forecast)

Revenue

62,581

73,620136,201

109,105

121,795

48,175250,000

Operating income/loss

4,987

8,603

13,590-8,8295,529-3,07423,000Operating margin

8.0%

11.7%

10.0%

-8.1%

4.5%

-

Income/loss before income taxes

4,377

7,670

12,047-9,705

4,805

Net income attributable to owners of
the parent company

2,932

6,318

9,250

-8,532

1,532

YoY

vs. FY3/18
forecast

230,900

94,699-19,100-3,300-16,890-26,300

9.2%

-1.4%

-

-

-2,865

21,100-4,900-16,947-26,000-4,786

15,940-7,000-16,250-22,940

Source: Prepared by FISCO from the Company’s financial results

Operating income has been downwardly revised by ¥26.3bn, from the initial forecast of operating income of ¥23bn
to an operating loss of ¥3.3bn. Breaking this down, 1) the total amount of operating income downwardly revised dueto the delays in restructuring at the subsidiaries (net value) is ¥7.16bn, 2) the recording of an non-ordinary operating
loss, including for structural reforms-related expenses, is ¥8.35bn, 3) the effects of freezing new M&A, in principle,is ¥10.36bn, and 4) other consolidated adjustments, etc., is ¥430mn.
Breakdown of the downward-revision amounts for the FY3/19 full year operating income forecast
(¥bn)
230.0

Initial forecast

Factors-71.6

1

Delays in restructuring (mainly at companies that entered the group within the past year)2

Non-ordinary loss, including from structural reforms-related expenses

-83.5

3

Freezing of new M&A, in principle-103.6

4

Other consolidated adjustments, etc.

-4.3

Total

-263.0

Revised forecast-33.0

Source: Prepared by FISCO from the Company's results briefing materials

The breakdown of the non-ordinary loss, which includes from structural reforms-related expenses, is as follows.
Wonder Corporation is scheduled to record an extraordinary loss for the full fiscal year of ¥3.9bn. Also, among
the non-listed subsidiaries, structural reforms-related expenses of more than ¥3bn are forecast, mainly for Japan
Gateway and the mega solar business of Tatsumi Planning.

We encourage readers to review our complete legal statement on “Disclaimer” page.

04 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

Results trends

Breakdown of the non-ordinary loss, including from structural reforms-related expenses

Source: The Company's results briefing materials

The operating loss forecast after the downward revision is ¥3.3bn, which is a contraction from the 1H result of
approximately ¥8.82bn. In other words, the forecast for 2H is for a return to profitability to record operating incomeof ¥5.5bn. Compared to the same period in the previous fiscal year, income is forecast to decline by approximately¥3bn, from the 2H result of ¥8,603mn in the previous fiscal year.
Trend in profit/loss(¥mn)
FY3/19FY3/16

FY3/17

FY3/181H

Full year E

53,937

95,299136,201

109,105

230,900

-

76.7%

42.9%

74.3%

69.5%

32,51346,03465,81647,732--41.60%

43.0%

54.9%

-

Gross margin

60.3%

48.3%

48.3%

43.7%

-

SG&A expenses

28,63541,73859,68253,132

-

-

45.8%

43.0%

86.5%

-

53.1%

43.8%

43.8%

48.7%

-

Other income/loss

227

6,687

9,817

1,794

-

Other expenses

947

770

2,360

5,223

-

Operating income

3,159

10,212

13,590-8,829-3,300-223.3%

33.1%

-

-

5.8%

10.7%

10.0%

-8.1%

-1.4%

2,806

9,604

12,047-9,705-4,900-242.2%

25.4%

-

-

1,587

7,678

9,250

-8,532-7,000-383.7%

20.5%

-

-

EPS after the stock split (¥)

3.13

15.06

18.15

-15.9

-12.81Dividend after the stock split (¥)

1.9

3.03

3.65

-

0

Revenue
YoY
Gross profit
YoY

YoY
SG&A expenses ratio to sales

YoY
Operating margin
Income/loss before income taxes
YoY
Net income/loss attributable toowners of the parent company
YoY

Note: The FY3/18 results are the values at the time of the results announcement in May 2018
Source: Prepared by FISCO from the Company’s financial results

We encourage readers to review our complete legal statement on “Disclaimer” page.

05 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

Results trends

Trend in the balance sheet(¥mn)
Transition to
IFRS date (Apr.
1, 2015)

As of March
31, 2016

As of March
31, 2017

As of March
31, 2018

As of
September 30,
2018

22,72432,52262,086116,614141,167

Cash, deposits and equivalents

8,366

10,48324,643

43,63057,220Trade and other receivables

8,974

12,062

20,54433,01933,598

Other

5,384

9,977

16,89939,96550,34916,40021,25533,562

57,76061,117

Property, plant and equipment

9,647

11,331

17,616

29,69630,184

Goodwill

2,473

4,675

6,291

7,820

7,953

Intangible assets

846

689

1,013

2,160

3,197

Investment, other

3,434

4,560

8,642

18,084

19,783

Total assets

39,12553,777

95,648174,375

202,285

Current liabilities

19,89827,296

43,63680,57985,780Trade payables

10,766

13,75624,326

39,20441,020Interest-bearing debt

7,820

10,914

15,99633,58736,947

Other

1,312

2,626

3,314

7,788

7,813

12,286

15,34430,55750,91249,644

Interest-bearing debt

10,371

12,85325,204

43,197

40,835

Other

1,915

2,491

5,353

7,715

8,809

6,077

10,226

17,01828,40153,553

Capital stock

132

1,400

1,400

1,400

19,200Capital surplus

200

1,799

1,692

5,436

23,453

5,720

7,001

13,696

21,406

10,401

23

25

228

158

498

863

910

4,436

14,481

13,307

Total equity

6,940

11,13721,45442,882

66,860Total liabilities and equity

39,12553,777

95,648174,375

202,285

End-FY3/17

End-FY3/18

End-FY3/19 1H

Current assets

Non-current assets

Non-current liabilities

Total equity attributable to owners of
the parent company

Retained earnings
Other capital composition items
Non-controlling interests

Source: Prepared by FISCO from the Company’s financial results

Cash flows(¥mn)
End-FY3/16
Cash flow from operating activities

868

175

87

Cash flow from investing activities-3,973

2,914-3,495-7,616-8,764

Cash flow from financing activities

5,137

11,08822,72529,945

-27

-18

-35

24

2,004

14,16019,282

13,589Cash, deposits and equivalents at the start of the period

8,478

10,48324,643

43,630Cash, deposits and equivalents at the end of the period

10,48324,643

43,63057,220Cash, deposits and equivalents conversion difference
Change in cash, deposits and equivalents

Source: Prepared by FISCO from the Company’s financial results

We encourage readers to review our complete legal statement on “Disclaimer” page.

06 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/██The structural reforms and the state ofprogressAnnounced sweeping structural reforms comprised of 5 items,
including Group companies’ management reconstruction andbusiness selection and concentration
1. Overview of the sweeping structural reforms toward sustainable growth
Following the FY3/19 1H results, as previously explained the Company downwardly revised its forecasts on
November 14, 2018, while it also announced that it had started sweeping structural reforms toward achieving
sustainable growth.
These structural reforms are comprised of five items, with the first being the “early completion of restructuring ofgroup companies and businesses.” The content of the reforms is not limited to these five items, but the Company
intends to first conduct the reforms with a focus on these five.
The five items for “sweeping structural reforms for sustainable growth”
The five main items

Content

1. C
 ompleting restructuringof group companies andbusinesses

The Company is aiming to quickly return to profitability from the next period onwards by concentrating its
management resources into the early completion of restructuring that is currently underway at companies andbusinesses, including Wonder Corporation, Japan Gateway, SANKEI LIVING SHIMBUN, Pado, and the mega solar
business (of Tatsumi Planning), and also at MRK HOLDINGS, which is being affected by a temporary factor.

2. T ransforming to a strong
management structure

During the current fiscal period, the Company will record structural reforms-related expenses, such to optimize theinventories of companies and businesses, including Wonder Corporation, Japan Gateway, Pado, and the mega
solar business (of Tatsumi Planning), and also for the impairment of non-current assets.

3. B
 usiness selection andconcentration

Targeting all the businesses in the group, the Company will withdraw from, contract in scale, sell, or conduct othersuch measures for businesses for which improving earnings will be difficult in the short term, and businesses forwhich the initially envisaged Group synergies cannot be expected.

4. F
 reezing of new M&A, in
principle

In order to concentrate management resources into steadily implementing items one to three described above, theCompany will freeze new M&A (including acquisitions of companies and businesses), in principle, during the period
until the recovery of the group companies and businesses that are currently undergoing restructuring.

5. C oncentrating management
resources into growthbusinesses

The Company intends to strengthen its management foundation by accelerating the concentration of management
resources into the RIZAP-related businesses, which include the RIZAP body shaper business, GOLF, and
ENGLISH, and also into the growth fields that have high affinity with the RIZAP method, of sports, food, andhealthcare.

Source: Prepared by FISCO from news releases

Announced corporate governance reforms as phase one
Separate management and execution and shift to structure in which
the majority of directors are outside directors
2. Corporate governance reforms
Within the five items described above, due to the nature of the two items of “completing restructuring of groupcompanies and businesses” and “transforming to a strong management structure,” they will be mainly conductedindividually by each operating company. However, as the holding company, the Company is expected to be moredeeply involved than it has been until now in each of the structural reforms, including these two items.

We encourage readers to review our complete legal statement on “Disclaimer” page.

07 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

The structural reforms and the state of progress

As the specific actions in phase one, on December 28, 2018, the Company announced that it would change therepresentative directors and officers as part of its series of corporate governance reforms (the effective date for thechanges of officers was January 1, 2019).
The corporate governance reforms consist of the following four points; 1) reforming the Board of Directors, 2)
introducing an executive officer system, 3) transitioning to a structure with one representative director, and 4)
appointing a director in charge of structural reforms.
In the Board of Directors reforms, the number of directors has been reduced from the previous 12 to 5 directors, withthe majority of them, of 3 people, being outside directors. The 2 inside directors are the President and Representative
Director Seto, and Mr. Matsumoto (formerly a representative director, who will now be the director in charge ofthe structural reforms). In conjunction with the introduction of the executive officer system, the Company has
implemented a structure aimed to separate supervision and execution.
The three outside directors who have been appointed are Mr. Shoji Otani, who has extensive experience as an
executive and corporate auditor in the Company’s listed subsidiaries; Mr. Naohiro Chikada, who is a certified public
accountant; and Mr. Yoshihiro Yoshida, who is a lawyer.
As the executive officers, five of the seven directors who left their positions as directors have been appointed towork as the heads of divisions and the representatives of operating companies.
The representative-director structure had previously been for two people. But due to the Board of Directors reforms
and alongside the transition to a two-person structure for the inside directors, founder Mr. Seto will continue andremain as the sole representative director.
The Company is currently advancing structural reforms, so it decided to appoint a director in charge of these reforms
so that they will be quickly and assuredly implemented. Mr. Matsumoto has been appointed to this position.
Details of changes in representative directors and officers (effective January 1, 2019)Name

New title and main responsibilities

Former title and main responsibilities

Takeshi Seto

Representative Director, President
Also supervising the healthcare business

Representative Director, President

Akira Matsumoto

Director in charge of structural reforms

Representative Director in charge of structural reforms

Masayoshi Naito

Executive Officer supervising the platform business
Representative Director, Chairman and President of Wonder
Corporation

Director,
General Manager of Purchasing & Logistics Division
Representative Director, Chairman and President of Wonder
Corporation

Tetsuo Kozai

Executive Officer supervising business strategies
General Manager of Business Strategy OfficeDirector
General Manager of Corporate Alliance Division

Shoji Okada

Executive Officer in charge of information systems
Director
General Manager of IT Infrastructure and Development Division General Manager of IT Infrastructure and Development Division

Masato Mori

Executive Officer supervising the lifestyle business
Representative Director and President of IDEA
INTERNATIONAL CO., LTD.

Director
Representative Director and President of IDEA
INTERNATIONAL CO., LTD.

Shinji Iwamoto

Executive Officer supervising the beauty business
Representative Director and President of MRK HOLDINGS
INC.

Director
Representative Director and President of MRK HOLDINGS
INC.

Source: The Company’s news releases

The press release of December 28, 2018, stated that, in addition to the corporate governance reforms describedabove, the specific policies decided at the current stage were two items; “redefining the business domain” and“transforming to a strong business foundation.”

We encourage readers to review our complete legal statement on “Disclaimer” page.

08 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

The structural reforms and the state of progress“Redefining the business domain” is comprised of two contents; concentrating on the important segments (thegrowth businesses, centered on the beauty and healthcare fields) and arranging the non-core businesses (including
contractions in scale, withdrawals, and sales), but the Company has made no further comments on it at the present
time. “Transforming to a strong business foundation” is also comprised of two contents; converting to cash flow
management, and implementing cost reductions and rationalization across the group. But it has not yet touchedon the specific measures for it, and we await further announcements in the future.

The adoption of hard-landing measures expresses the strength of
the Company’s intent and confidence to recover earnings. It will be
important to judge its success or failure through a careful analysis,
based on the results announcements.
3. The outlook for the future
Above, we reflected on the developments alongside the passage of time from the FY3/19 1H results announcement
until the start of January 2019. The 1H results and the downward revisions to the full fiscal year results forecast
represent a 180 degree change of direction from the Company’s rapid growth trend up to the current time. The
magnitude of this is extremely large, and it is thought that it will take a considerable amount of time for stakeholders
and market participants to digest its impact. But at FISCO, we consider that by organizing the details and thinking
about these developments while thoroughly examining individual items, the points to focus on in the future andthe evaluation criteria will eventually become clearer, which should enable the improvements in the accuracy of
judgments about the future.
(1) Downward revisions to the results forecasts
Following the major decline in profits in 1H, the Company significantly downwardly revised the full fiscal year forecasts. With regards to this, our understanding at FISCO is that the Company is taking a so-called “hard-landing”
approach. One choice to resolve a problem should it occur is a “soft landing” approach to reduce its impact,
but the Company has instead chosen a hard-landing approach. A hard landing causes a temporary shock, but
if the correct path is taken, this approach makes it possible to achieve a recovery in a shorter period of time.
The problem is that making a hard landing a success requires considerable corporate strength and an earnings
recovery scenario.
It would seem that the Company’s confidence in its corporate strength is supported by the fact it greatly strengthened its balance sheet through a capital increase by a public offering in June 2018.
On the other hand, it is considered that in the background to the earnings recovery scenario is the fact thatmember numbers are steadily increasing in the core body shaper business, while maintaining the same upward
trend as up to the present time (based on an increase of 1,500 to 2,000 people a month). There is also the sensethat it is performing strongly in the healthcare domain, such as through collaborations with local governments
and industry-academia collaborations.

We encourage readers to review our complete legal statement on “Disclaimer” page.

09 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.

21-Feb.-2019

2928 Sapporo Securities Exchange Ambitious

https://ir-english.rizapgroup.com/

The structural reforms and the state of progress

The companies that have suffered a sudden and major deterioration in results and a dramatic change to theirbusiness environment are not limited to the Company. Based on the experiences of many such companies that
we have seen up to the present time, our impression is that those that adopted the hard-landing approachsuccessfully achieved an earnings recovery. As a major reason for this, at FISCO we think that although it issomewhat analogue, the key seems to be the psychological aspect. Specifically, companies that select a hardlanding have a certain level of “preparedness.” In contrast, choosing a soft landing had a negative impact in theend in many cases because it ultimately only postponed dealing with the core problem even though it dealt withimmediate factors such as corporate strength and earnings recovery. From these experiences, we consider that
the Company’s bold selection of a hard-landing scenario can be positively evaluated.
(2) Possibility of achieving the full year forecasts
At the current point in time, there is no information on which to judge whether the Company’s adoption of hardlanding measures is the correct one or not. The evaluation criteria for its success or failure will primarily be theresults, so the first evaluation point will be the 3Q results. As previously stated, in the current 2H, the Company
is forecasting operating income of ¥5.5bn. On dividing this into the results of 3Q (October to December) and 4Q(January to March), in the most recent 3 years (FY3/16 to FY3/18), after excluding a gain on bargain purchases,
operating income was higher in 3Q than in 4Q. Therefore, in terms of securing profits in the current 2H, at FISCO
we think that whether or not it can steadily record profits in 3Q (October to December) will be the first step for thejudgement on the feasibility of the Company’s earnings recovery scenario.

㼀㼞㼑㼚㼐㻌㼕 㼚㻌㼛㼜㼑㼞㼍㼠㼕㼚㼓㻌㼕㼚㼏㼛㼙㼑㻌㼎㼥㻌㼝㼡㼍㼞㼠㼑㼞㻻㼜㼑㼞㼍㼠㼕㼚㼓㻌㼕㼚㼏㼛㼙㼑㻛㼘㼛㼟㼟㻌㼒㼞㼛㼙㻌㼑㼤㼕㼟㼠㼕㼚㼓㻌㼎㼡㼟㼕㼚㼑㼟㼟㼑㼟㻳㼍㼕㼚㻌㼛㼚㻌㼎㼍㼞㼓㼍㼕㼚㻌㼜㼡㼞㼏㼔㼍㼟㼑㻌㼠㼔㼞㼛㼡㼓㼔㻌㻹㻒㻭㼟

㻔¥㼙㼚㻕
㻢㻜
㻠㻜

㻝㻤

㻥

㻞㻜
㻜

㻝㻡

㻜

㻝㻠

㻞

㻞㻟

㻝㻥

㻟

㻝㻢

㻝㻣
㻡

㻞㻝

㻞㻟

㻣

㻞㻝

㻠㻠

㻝㻜

㻙㻞㻜

㻤

㻜

㻙㻠㻡

㻙㻡㻝

㻝㻽

㻞㻽

㻙㻠㻜
㻙㻢㻜
㻝㻽

㻞㻽

㻟㻽

㻠㻽

㻝㻽

㻞㻽

㻲㼅㻟㻛㻝㻢

㻟㻽㻠㻽㻲㼅㻟㻛㻝㻣㻝㻽㻞㻽㻟㻽㻲㼅㻟㻛㻝㻤

㻠㻽㻲㼅㻟㻛㻝㻥

Source: Prepared by FISCO from the Company's results briefing materials

We encourage readers to review our complete legal statement on “Disclaimer” page.

10 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

The structural reforms and the state of progress

When evaluating the results’ numerical values, it goes without saying that one point is whether a profit or a loss
was recorded, but it is also necessary to examine their quality. The Company’s consolidated results would seem tobe easier to understand on dividing the group companies into three sub-groups; the RIZAP-related businesses, thelisted subsidiaries, and the non-listed subsidiaries. Ideally, it would be preferable that all three of these sub-groups
achieve an increase in profits in 2H compared to 1H, but it is also necessary to pay attention to other factors
when evaluating the results. As previously stated, the Company’s consolidated results are based on IFRS, so
operating income includes the extraordinary profit and loss items of each of the operating companies (structuralreforms-related expenses are mainly recorded in extraordinary losses). Therefore, in addition to a decrease in
the extraordinary loss recorded in 1H, we think an important task is to ascertain whether or not earnings havebottomed out in the results of the main businesses. On this point, at the very least the listed subsidiaries can be
examined individually.
The operating income forecast for 2H is ¥5.5bn, which on a reporting basis, is a YoY decline of approximately¥3bn. However, after excluding the gain on bargain purchases, operating income in the same period in theprevious fiscal year was around ¥3.2bn, so in actuality it will be an increase in income of ¥2.3bn. So while thisis absolutely not a low hurdle to clear, at FISCO we think that it is fully possible that the Company can achieve
it if it succeeds with two aims; firmly growing profits in the profitable businesses, like the body shaper business,and stemming the bleeding in the loss-making businesses. Through interviews with the Company itself andsome of the listed subsidiaries, we received the impression that basically, steady progress is being made in the
profitable businesses. On other hand, the impression is that there remain uncertain points for the situation for thehealing (stemming the bleeding) of the loss-making companies and businesses, which are mainly the non-listedcompanies.
(3) The content of the structural reforms and the state of progress
As stated above, the Company’s structural reforms consist of five items, with the first being the “early completion
restructuring of group companies and businesses.” All of the items are related, so they can be summarized into
two items; 1) in principle, freezing new M&A and concentrating management resources into the restructuring ofexisting businesses, and 2) in the management reconstruction process, implementing business selection andconcentration.
The specific policies for phase one, which were announced on December 28, 2018, are centered on the reformsof the Board of Directors as corporate governance reforms. For the items of “redefining the business domain”(leading to business selection and concentration) and “transforming to a strong business foundation” (relating to
the restructuring as the other side of the same coin), a part of SD Entertainment’s business was sold on November
13, 2018, although a symbolic example of a fully-fledged measure was the sale of the shares of Japan Gateway
announced on January 25, 2019.
We can expect even further progress to be made in the future, but a certain amount of time will be required forbusiness transfers, sales, and withdrawals, and also there must be the other party to such transactions. External
third parties will have no choice but to wait for announcements in the future, but to some extent speculationis possible. At FISCO, we speculate that the intention of the corporate governance reforms is to optimize themanagement team and the execution structure by changing directors and rapidly achieve the recovery scenario
from a hard-landing approach. We consider this to be correct choice as a first step. So it would seem that thefoundation for executing the structural reforms is in place, and we assume that the Company has shifted to aphase of fully progressing the business selection and concentration and restructuring.

We encourage readers to review our complete legal statement on “Disclaimer” page.

11 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

The structural reforms and the state of progressa) Business selection and concentration
For business selection and concentration, the points to pay attention to are where and to what extent to cut.
On the point of “where,” the briefing materials for the 1H results provide us with one clue. The materials disclose indetail which companies and businesses have caused the deterioration of results. Also, the delays in restructuring
suggest at which companies and businesses it has not been possible to realize the synergies that were expected.
It would seem that the business selection and concentration will be advanced from these viewpoints.
“To what extent” means the number of companies and businesses for which measures such as transfers andwithdrawals will be implemented. Investors may be disappointed if this is limited to only a few companies. Looking
at the current deterioration of results by operating company, there are only a few large ones, such as Wonder
Corporation’s extraordinary loss and Japan Gateway’s operating loss, and these losses take the form of theaccumulation of “miscalculations” and operating losses on units of a few hundred million yen to around ¥500mn
to ¥600mn. If the loss is around a few hundred million yen, then in terms of the possibility of a sufficient recovery,
it is possible that a recovery can be achieved by many of the companies simply by maintaining the current path.
Ultimately this could of course be correct, but on the other hand, it is conceivable that the investors and otherstakeholders feel that there is potential risk from the number of companies in the group, of 85 companies (as of theend of September 2018). The freezing of new M&A, in principle, has eliminated the concerns that this number will
increase in the future, but the investors’ biggest concern is whether it is possible for the Company to carry out the
restructuring (and the strengthening of the business foundation), while monitoring all 85 companies. On setting the
viewpoint of the “possibility of recovering results” when implementing the business selection and concentration, it
is possible that the Company will narrow down the businesses to sell or withdraw from. However, it goes without
saying that the sustainability of this is not guaranteed over the medium to long term. At FISCO, we think that the
viewpoint of whether or not it can realize synergies for sustainable growth is the more important viewpoint. In thiscase, the reduction in the number of Group companies should become larger.
For the time frame, the significance of taking a hard-landing approach is increased by realizing it in the shortest
time possible. It is thought that the Company itself is taking this approach with a considerable sense of urgency
and speed. However, it needs to have partners to transactions, so we should assume that it might take moretime than it expects and has planned for.
b) Restructuring
The progress made in restructuring will first of all be judged from the numerical values in each of the quarterly
results. The Company’s consolidated results are important, but in the current situation of advancing restructuringof each individual operating company, it is more important than ever to ascertain the management reconstruction
situation at each operating company. All of the main operating companies have fiscal years ending in March,
except for IDEA INTERNATIONAL (ending in June). Basically, there are many B-to-C companies, and also many
companies with seasonality in that their 3Q results grow due to the demand period from Christmas until the New
Year. In light of this situation, in the cumulative 3Q results, first of all the key point will be whether or not we cansee improvements in profits in 3Q (October to December) compared to the results in the previous quarter and in
the same quarter in the previous fiscal year.
For the qualitative aspect, it is important whether or not the improvements to the results are sustainable andreproducible. In addition to the business cycle and the demand cycle, if synergies can be confirmed for eachgroup company, then expectations will rise accordingly for the likelihood of the improvements being sustainable.

We encourage readers to review our complete legal statement on “Disclaimer” page.

12 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

The structural reforms and the state of progress

In the 1H results briefing materials, the Company described a recovery and restructuring scenario for MRK
HOLDINGS and other listed subsidiaries. On the one hand, there are operating companies for which the likelihoodof a successful restructuring is high, including Jeans Mate <7448>, which achieved profitability in the 1H results,
and MRK HOLDINGS, for which the reason for the slump in 1H is clear and it is progressing measures in response.
But on the other hand, there are also cases like Wonder Corporation whose results deteriorated in 3Q also, so
the unpredictable situation is continuing.

New members continue to steadily increase in the body shaperbusiness
GOLF and ENGLISH have also reached the profit-loss breakevenpoint and their contributions to earnings are in sight
4. Conditions in the RIZAP-related businesses
Among the reasons why the Company selected a hard landing, it is considered that the presence of the RIZAPrelated businesses, centered on the RIZAP body shaper business, occupies the major position.
The core RIZAP body shaper business had 121,796 members at the end of September 2018, which was an increaseof 116,000 people on the end of June 2018, and the pace of increase of 2,000 people a month is continuing. The
results were announced in the middle of November and also the Company’s deterioration of results was reported
on by television and in newspapers, and on the same timing it narrowed down its broadcasting of TV commercials.
Therefore, there might be the opinion that the momentum and the popularity of the RIZAP body shaper businesshas declined, but at FISCO we think that the risk of this is small. It seems that the reason for narrowing down the
TV commercials was a seasonal factor, of being in advance of the end-of-year holidays. The situation is that theCompany resumed TV commercials as normal to reflect the New Year demand period, and the same as in a typicalyear, it is working to capture demand from 4Q to 1H of the next fiscal year.
In the body shaper business, the Company is developing RIZAP WOMAN, which is exclusively for women, andEXPA, which are weight training and diet studios intended for women. These developments are backed by needs
and are expected to steadily grow.
It is also working to continue and steadily expand the collaborations with local government and the developments
for corporations from the same routes as previously. In terms of earnings, it would seem to be at the upfront
investment stage, but in its medium- to long-term strategy in which it is aiming to enter into the healthcare domain
with RIZAP body shaper as the core business, this investment is an element that cannot be avoided. Therefore,
the Company’s concentrated investment of management resources into these growth businesses and domains issufficiently persuasive. Even within the five sweeping structural reforms described above, its consistent attitude ofstrengthening for this point is expressed in the item “concentrating management resources in growth businesses.”

We encourage readers to review our complete legal statement on “Disclaimer” page.

13 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.
2928 Sapporo Securities Exchange Ambitious

21-Feb.-2019https://ir-english.rizapgroup.com/

The structural reforms and the state of progress

In addition to the body shaper business, RIZAP GOLF and RIZAP ENGLISH are also making comparatively strong
progress. Since April 2018, 13 RIZAP GOLF schools have opened, and as of the end of September, it had a networkof 27 schools. In terms of earnings, on a quarterly basis it continued to record an operating loss up to 1H, but
on a single-month basis, it achieved profitability in September and October. It would seem to have put in place astructure in which profits can be generated if new school openings are kept down, so going forward, the focus will
be on whether it can achieve a balance between securing profits and the pace of school openings. RIZAP ENGLISH
doubled its number of schools in 1H, and as of the end of October 2018, it had a network of 8 schools. For earnings,
it achieved profitability in 2Q (July to September), but it would still seem necessary to ascertain whether it is thenarrow gap between new school openings and temporary or has continuity. Also, compared to the body shaperbusiness and GOLF, it is difficult to develop this business in regions and there are also a number of competingalternatives, and therefore there remains room to examine whether it would be appropriate to apply to it the growth
pattern achieved by the body shaper and GOLF businesses.
The starting point for the RIZAP-related businesses is to aim to develop in each business “the power to do,” whichis the core of the RIZAP method. In addition to the three businesses for which progress has already been made, ofbody shaper, GOLF, and ENGLISH, the group is developing businesses in various other fields, including cooking,children, sports, dance, and health. However, there remains some doubt about whether or not the development of
all of these businesses is appropriate in terms of their affinity with the RIZAP method and marketability. As part ofthe structural reforms, it seems likely that re-examining the contents of each of the RIZAP-related businesses will
be extremely significant from the viewpoint of selection and concentration.

██Shareholder returns
Announced it will not pay a dividend in FY3/19 based on the revised
forecasts and the implementation of structural reforms
The Company positions returning profits to shareholders as an important management issue. It has a basic stance ofreturning profits to shareholders and accompanying shareholder benefit program as it strives to strengthen returns,
centering on individual investors. There has been no change to this stance and policy. In terms of the dividend
amount, since FY3/17 the Company has revised the standard for the dividend to a consolidated dividend payout
ratio of 20%.
As was announced in the press release of November 14, 2018, the Company will not pay a dividend in FY3/19
based on the revised forecasts and the implementation of structural reforms.
It is maintaining the shareholders’ benefit program in the current fiscal year, in which it also granted shareholders
additional points as a special 15th anniversary benefit. In addition, it has newly introduced a system to accumulateshareholders’ benefit points as a permanent measure to improve the program’s usability.

We encourage readers to review our complete legal statement on “Disclaimer” page.

14 15

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

RIZAP GROUP, Inc.

21-Feb.-2019

2928 Sapporo Securities Exchange Ambitious

https://ir-english.rizapgroup.com/

Shareholder returns㻱 㼍 㼞㼚㼕㼚㼓㼟㻌㼜㼑㼞㻌㼟㼔㼍㼞㼑㻘㻌㼐㼕㼢㼕㼐㼑㼚㼐㻘㻌㼍㼚㼐㻌㼐㼕㼢㼕㼐㼑㼚㼐㻌㼜㼍㼥㼛㼡㼠㻌㼞㼍㼠㼕㼛（¥）

㻱㻼㻿㻌㼍㼒㼠㼑㼞㻌㼠㼔㼑㻌㼟㼠㼛㼏㼗㻌㼟㼜㼘㼕㼠㻌㻔㼘㼑㼒㼠㻕㻰㼕㼢㼕㼐㼑㼚㼐㻌㼜㼍㼥㼛㼡㼠㻌㼞㼍㼠㼕㼛㻌㻔㼞㼕㼓㼔㼠㻕㻰㼕㼢㼕㼐㼑㼚㼐㻌㼍㼒㼠㼑㼞㻌㼠㼔㼑㻌㼟㼠㼛㼏㼗㻌㼟㼜㼘㼕㼠㻌㻔㼘㼑㼒㼠㻕

㻟㻥㻚㻟㻑
㻞㻡㻚㻜㻜

㻠㻜㻚㻜㻑

㻞㻜㻚㻜㻜

㻟㻡㻚㻜㻑
㻝㻤㻚㻝㻡㻌

㻝㻡㻚㻜㻜
㻝㻜㻚㻜㻜
㻡㻚㻜㻜
㻜㻚㻜㻜

㻝㻡㻚㻜㻢㻌
㻞㻜㻚㻝㻑

㻝㻤㻚㻥㻑
㻜㻚㻢㻟
㻟㻚㻟㻞㻌
㻲㼅㻟㻛㻝㻡

㻟㻜㻚㻜㻑
㻞㻡㻚㻜㻑

㻞㻜㻚㻝㻑

㻟㻚㻝㻟㻌 㻝㻚㻥㻜

㻟㻚㻜㻟

㻟㻚㻢㻡

㻜㻚㻜㻜

㻲㼅㻟㻛㻝㻢

㻲㼅㻟㻛㻝㻣

㻲㼅㻟㻛㻝㻤

㻲㼅㻟㻛㻝㻥㻌㻱

㻙㻡㻚㻜㻜

㻞㻜㻚㻜㻑
㻝㻡㻚㻜㻑
㻝㻜㻚㻜㻑

㻙㻝㻜㻚㻜㻜

㻙㻝㻞㻚㻤㻝㻌

㻙㻝㻡㻚㻜㻜

㻡㻚㻜㻑㻜㻚㻜㻑

Source: Prepared by FISCO from the Company’s financial results

We encourage readers to review our complete legal statement on “Disclaimer” page.

15 15

Disclaimer
FISCO Ltd. (the terms “FISCO”, “we”, mean FISCO Ltd.) has legal agreements with theTokyo Stock Exchange, the Osaka Exchange,and Nikkei Inc. as to the usage of stock priceand index information. The trademark and value of the “JASDAQ INDEX” are the intellectual
properties of the Tokyo Stock Exchange, and therefore all rights to them belong to the Tokyo
Stock Exchange.
This report is based on information that we believe to be reliable, but we do not confirm or
guarantee its accuracy, timeliness,or completeness, or the value of the securities issued bycompanies cited in this report. Regardless of purpose,investors should decide how to use
this report and take full responsibility for such use. We shall not be liable for any result of its
use. We provide this report solely for the purpose of information, not to induce investment or
any other action.
This report was prepared at the request of its subject company using information provided
by the company in interviews, but the entire content of the report, including suppositions andconclusions, is the result of our analysis. The content of this report is based on informationthat was current at the time the report was produced, but this information and the content of
this report are subject to change without prior notice.
All intellectual property rights to this report, including copyrights to its text and data, areheld exclusively by FISCO. Any alteration or processing of the report or duplications of thereport, without the express written consent of FISCO, is strictly prohibited. Any transmission,
reproduction, distribution or transfer of the report or its duplications is also strictly prohibited.
The final selection of investments and determination of appropriate prices for investment
transactions are decisions for the recipients of this report.
FISCO Ltd.