Developing the Nomura Enterprise
Value Allocation Index
EQUITY QUANTITATIVE RESEARCH

Main features of and idea behind index
Focus on stakeholder returns

Global Markets Research
26 April 2016

Research analysts
Selecting companies that are proactive in improving stakeholder returns
Reflecting an increasingly heated debate about management's responsibilities toshareholders, much has been made in recent years of the need for companies to taketheir shareholders into account. However, attention has also been drawn to thenegative aspects of a short-term focus on shareholders. Examples of this include theloss of talented employees as a result of wage cuts and excessive restructuring,
reputational damage as a result of employee exploitation, and the loss of growth
opportunities as a result of excessive cuts in investment. This suggests to us that a
clear commitment to other stakeholders and appropriate policies on stakeholder returns
may enhance corporate value. The Nomura Enterprise Value Allocation Index has
been designed with this in mind in order to include highly profitable companies thathave taken proactive steps to improve returns to their various stakeholders.

Japan quantitative research
Yasuhiro Shimizu - NSC
yasuhiro.shimizu@nomura.com+81 3 6703 1748
Sayuri Otsuka - NSC
sayuri.otsuka@nomura.com+81 3 6703 1397
Kai Hattori - NSC
kai.hattori@nomura.com+81 3 6703 1744

Focus on stakeholder returns where management has considerable discretion
Some stakeholder returns leave management little scope for discretion. In contrast,
management has greater discretion in matters such as capex and R&D expenditure,investment in human capital in the form of employment and wages (personnel
expenses and labor costs), and dividends. In terms of returns, these items can be seen
as returns to business partners, employees, or shareholders, while investment andR&D can be seen as returns to all future stakeholders. We could even see them as
returns to the economy as a whole. The Nomura Enterprise Value Allocation Index
focuses on such returns. However, capex and R&D and investment in human capitalare expenses. We therefore need to ensure that returns are not excessive with respect
to profitability. Highly profitable companies with appropriate policies for these returns
can be expected to maintain good relations with their various stakeholders and to see
their corporate value and share prices rise in the longer term. Furthermore, one of theaims of the government's corporate governance reforms (as one of its growthstrategies) in recent years has been to increase corporate value over the longer termby means of "purposeful dialog" between companies and investors. We think we arelikely to see a growing number of attractive investment opportunities in the form ofcompanies that take proactive steps to improve returns to their various stakeholders
rather than pursuing short-term gains. We hope the index will help readers to invest insuch companies.

Japanese version published on April
18, 2016

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

Developing the Nomura Enterprise Value
Allocation Index
1. Introduction
We have developed an index (the Nomura Enterprise Value Allocation Index) thatreflects the performance of the stocks of Japanese companies that have taken proactive
steps to improve returns to their various stakeholders. The idea is to focus on thosestakeholder returns where a company's management has considerable discretion(especially, shareholder returns (profitability and dividends), employee returns(investment in human capital), and returns to future stakeholders and business partners(capex and R&D expenditure)) and to include companies that have taken proactive steps
to improve those returns (increase that investment). This report explains the idea behind
the index and its main features. We hope it will give readers a better understanding of
the index.
For further details please see the Nomura Enterprise Value Allocation Index
rulebook, published on 15 April 2016. Information about the index will be published fromtime to time on Nomura’s website, http://qr.nomura.co.jp/jp/neva/index.html (Japaneseonly).

2

Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

2. Idea behind the index
The Nomura Enterprise Value Allocation Index has been designed to include highly
profitable companies that have taken proactive steps to improve returns to their various
stakeholders. In this chapter we explain the idea behind the index.
2.1 Shift in management focus from shareholders to all stakeholders
Reflecting an increasingly heated debate about management's responsibilities toshareholders, much has been made in recent years of the need for companies to taketheir shareholders into account. We see developments such as demands from market
participants for dividend increases and share buybacks, the publication of the Ito
Review 1 , which referred to the need for Japanese-style ROE management, and thelaunch of the JPX-Nikkei Index 400, which factors ROE into its stock selection, as areflection of this.
One of the reasons for this focus on shareholders has been the view that if companies
take their shareholders into account, their other stakeholders will automatically benefit.
The idea is that because net profits attributable to shareholders are what is left after
other stakeholders have received their share of the profits, companies that take theirshareholders into account are likely to be profitable and their other stakeholders arelikely to benefit as a result.
Figure 1 lists the main items on an income statement and alongside them thestakeholders affected by them. Between sales and net profits there are a number of cost
items. One of them is COGS. If we think of that item in terms of returns to stakeholders,payment of raw material costs can be seen as a return to business partners, while
payment of labor costs can be seen as a return to employees. Similarly, interest payable(one of the main items under nonoperating expenses) can be seen as a return to acompany's banks and bondholders, while corporation tax can be seen as a return to thegovernment. The logic is that because what is left after these returns to various
stakeholders (net profits) is profits attributable to shareholders, shareholders will only
receive such residual profits if other stakeholders have already profited.

Fig. 1: Income statement and main stakeholders
Income statement

Main stakeholders

Sales

XXXX
△XXXX → Business partners and employees

COGS
Gross profits△XXXX → Business partners and employees

SG&A expenses
Operating profits
Nonoperating profits
Nonoperating expenses
Recurring profits
Extraordinary gains

XXXX
XXXX
△XXXX → Banks and bondholders
XXXX
XXXX

Extraordinary losses
Pretax profits
Corporation tax, etc
Net profits
Note:

XXXX

△XXXX
XXXX
△XXXX → Government
XXXX → Shareholders

indicates negative value. Only key stakeholders affected by each item are shown.

Source: Nomura

1
The final report, published by METI in August 2014, of the "Competitiveness and Incentives for Sustainable
Growth: Building Favorable Relationships between Companies and Investors Project" chaired by Professor Kunio
Ito of Hitotsubashi University

3

Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

This is one of the arguments that has been made as the debate about management's
responsibilities to shareholders has heated up. However, another is that this focus onshareholders has led to short-termism. This is because an excessive pursuit of shortterm profits and shareholder returns risks damaging relations with other stakeholders,
thereby impairing corporate value. Extreme examples of this are companies that carryout excessive restructuring, cut wages, or exploit their employees, a common complaint
in recent years. Such problems can impair corporate value by, for example, leading good
staff to leave a company, damaging a company's reputation, and posing regulatory orcompliance risks, while excessive cuts in investment or R&D in order to reduce
expenses in the short term may lead to the loss of growth opportunities in the longer
term.
One shareholder return that has attracted considerable interest in recent years isdividend increases. However, excessive restructuring and cost cutting are likely to impair
a company's growth prospects even if they enable dividend increases in the short term.
Figures 2 and 3 compare the sales growth rates over the following five years ofcompanies that increased their dividends with (1) the percentage change in the numberof their employees (Figure 2) and (2) capex plus R&D expenditure divided by total assets(Figure 3) for the same fiscal year. We can see that companies that expanded theirworkforces or undertook major capex as well as increasing their dividends experienced
strong sales growth while those that either reduced their workforces or undertook very
little capex subsequently experienced weak growth. While it would probably be mistaken
to attribute all of this to excessive restructuring or to cuts in investment, a short-term
focus on shareholders and excessive cuts in investment can lead to the loss of growth
opportunities in the longer term, thereby impairing corporate value.

Fig. 3: Sales growth over following five years at companies
that increased their dividend, by (capex + R&D
expenditure)/total assets

25

20

20

15

Sales growth overfollowing five years (%)

Sales growth overfollowing five years (%)

Fig. 2: Sales growth over following five years at companies
that increased their dividend, by change in no. of employees

15

10

5

10

5

0

-5

0
BottomMiddleTop

BottomNote: Using financial data released every July, we first selected from the companies in
the Russell/Nomura Prime Index those that had increased their dividend in theprevious fiscal year. We divided these into five groups according to the percentagechange in the number of their employees the previous fiscal year and then calculated
the median sales growth in each group over the following five years. Data shown are
average median sales growth for each group from 1992 to 2009. .
Source: Nomura

MiddleTop（Capex + R&D expenditure)/ total assets

Percentage change in number of employees

Note: Using financial data released every July, we first selected from the companies in
the Russell/Nomura Prime Index those that had increased their dividend in theprevious fiscal year. We divided these into five groups according to (capex + R&D
expenditure)/total assets in the previous fiscal year and then calculated the mediansales growth in each group over the following five years. Data shown are average
median sales growth for each group from 1992 to 2009.
Source: Nomura

This suggests to us that while a short-term focus on shareholders may impair corporate
value, a clear commitment to other stakeholders may enhance corporate (shareholder)
value.
This is why the Nomura Enterprise Value Allocation Index focuses on companies thattake proactive steps to improve returns to all stakeholders and not just shareholders.
However, not all of the stakeholder returns in Figure 1 involve considerable management
discretion. For example, management has almost no discretion when it comes to4Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

corporation tax, a return to the government. Similarly, raw material costs increase mainly
in tandem with sales, with little scope for management discretion. In contrast,
management has greater discretion in matters such as capex and R&D expenditure,investment in human capital in the form of employment opportunities and wages(personnel expenses and labor costs), and dividends (Figure 4). In terms of returns,
these items can be seen as returns to business partners, employees, or shareholders,
while investment and R&D can be seen as returns to all future stakeholders. We could
go one step further and see them as returns to the economy as a whole. The Nomura
Enterprise Value Allocation Index focuses on items where management has
considerable discretion, namely capex and R&D (returns to future stakeholders andbusiness partners), investment in human capital (returns to employees), and dividends(returns to shareholders). Companies with appropriate policies for these returns can be
expected to maintain good relations with their various stakeholders and to see theircorporate value and share prices rise in the longer term.

Fig. 4: Relations between a company and its stakeholders
Items with considerable scope for discretion
Futurestakeholders
andbusiness
partners

Business
partners

Government

Banks andbondholders

Taxes

Company

Wages and human
Employees
capital investment

Shareholders

Source: Nomura

That said, capex and R&D spending and investment in human capital are expenses.
Excessive investment and returns can therefore impair profits. Because the ultimate aim
and responsibility of companies and their managements is to make profits, we also needto take account of profitability. Similarly, we also need to consider net profits attributable
to shareholders in view of management's responsibilities and shareholder returns. Yetanother consideration has to be profitability at the operating level, where COGS andSG&A expenses are deducted, in view of our focus in this report on returns in the form ofinvestment in human capital (personnel expenses and labor costs) and capex and R&D
expenditure (Figure 5).

5Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

Fig. 5: Profit items to be considered
Income statement

Sales

XXXX

COGS

△XXXX
Gross profits

XXXX
△XXXX

SG&A expenses
Operating profits
Nonoperating profits

XXXX
△XXXX

Nonoperating expenses
Recurring profits

XXXX

Extraordinary gains

XXXX

Extraordinary losses△XXXX

Pretax profits

XXXX
△XXXX

Corporation tax, etc

 Management's aim and responsibility

Net profits
Note: Profits less personnel expenses,
capex, and R&D

indicates negative value

Source: Nomura

We take the view that companies that are profitable in terms of their net and operating
profits and make appropriate returns to (or investment in) their various stakeholders arelikely to maintain good relations with those stakeholders, thereby enhancing theircorporate value in the longer term. The Nomura Enterprise Value Allocation Index
consists of just such companies (Figure 6).

Fig. 6: Schematic of companies constituting the Nomura Enterprise Value Allocation
Index
High
High profitability and appropriate
policies for investment andreturns

No capacity to increase
investment and returns

Excessive investment and returns

Profitability

Inadequate investment and returns

Low
Low

High
Level of investment and returns

Source: Nomura

6Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

2.2 Index's main features and performance
We now explain the Nomura Enterprise Value Allocation Index's main features. The
Nomura Enterprise Value Allocation Index is a market cap-weighted Japanese equity
index (with individual stock weightings capped at 3%) comprising listed common stocks
with the highest total scores in terms of profitability and returns. It is reconfigured every
August. Figure 7 shows how the index is constructed. Three hundred stocks are selectedaccording to their total scores in terms of profitability and returns from those that meetthe market cap and creditworthiness (eg, no net liabilities) criteria (the score calculation
universe). These are then screened in terms of liquidity according to criteria such as
trading value. The number of constituent stocks therefore varies but is never more than300. The scores for profitability and returns are calculated in terms of (1) profitability andreturns to shareholders, (2) returns to employees, and (3) returns to future stakeholders
and business partners, using the nine factors listed in Figure 8 to appropriately reflect theidea behind the index, which is to select highly profitable companies that have beenproactive in investing and improving their stakeholder returns by choosing those with ahigh total score (ie, those with a low average ranking score for each factor).

Fig. 7: Process of constructing the Nomura Enterprise Value Allocation Index(overview)

All stocks listed on Japanese stock exchanges

Selection of score calculation universe(based on market cap and creditworthiness)

Selection of top 300 stocks in terms of total score(taking rebalancing band into account)

Final screening based on liquidity criteria

Construction of free float-adjusted market cap-weighted
index (weighting of individual stocks capped at 3%)

Note: The diagram focuses on the main parts of the process, omitting details of how, for example, creditworthiness criteria
are used to whittle down the universe or of special rules such as the rebalancing band. For further details of the rules forconstructing the index we refer readers to the next chapter and to the index rulebook published on 15 April 2016.
Source: Nomura

7Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

Fig. 8: List of factors used
Category
Profitability & shareholder
returns

Returns to employees

Returns to future
stakeholders and business
partners

FactorBasis

Total net profits

3-year total

Return on assets (ROA)

3-year average

Dividend on equity (DOE)

3-year total

Total personnel expenses

3-year total(Change in personnel expenses)/sales

3-year average

Percentage change in number of employees

3-year average

Capex + R&D expenditure

3-year total(Capex + R&D expenditure)/total assets

3-year average

Change in [(capex + R&D expenditure)/total assets]

3-year average

Note: For further details of how the scores are defined and calculated we refer readers to the next chapter and the index
rulebook published on 15 April 2016.
Source: Nomura

For further details of how the index is constructed and of the factors used we referreaders to the next chapter as well as the index rulebook published on 15 April 2016 andconfine ourselves in the rest of this chapter to a brief explanation of the index's mainfeatures and performance.
Figure 9 compares the averages of the nine factors used to calculate the total scores of
the index's constituents and the score calculation universe after the index wasreconfigured in August 2015. We find that in the case of each factor the average of theindex constituents is higher than that of the average of the score calculation universe.
We therefore think we can say that, on average, the companies selected reflect the idea
behind the index in that they are highly profitable and have been proactive in investingand improving their stakeholder returns.

Fig. 9: Factor averages of universe and constituent stocks
Profitability & shareholder returns
No. ofcompanies

Average factor value
Score calculation universe
Index constituents
Average ranking value
Score calculation universe
Index constituents

Total netprofits

Returns to employees

Return on Dividend on
assetsequity
(ROA)
(DOE)

Total
personnel
expenses

Returns to future stakeholders and business partners(Change in Percentage change
Capex +
(Capex + /R&D
personnel
in number of R&D expenditure expenditure)/total
expenses)/sales
employees
assets

(¥mn)

(%)

(%)

(¥mn)

(%)

(%)

(¥mn)

(%)

Change in [(capex +R&D
expenditure0/total
assets)
(ppt)

981
265

25,681
60,927

6.37
8.39

2.36
2.98

35,03875,436

0.33
0.63

4.75
7.04

52,737
133,642

5.79
8.48

-0.15
0.07

981
265

491.0
247.9

491.0
339.4

490.8
332.7

491.0
267.1

491.0
358.5

491.0
370.0

491.0
256.3

491.0
308.2

491.0
441.8

Note: Shows average values of factors used for rebalancing, for stocks in score calculation universe and index constituents at time of August 2015 rebalancing. For further detailsof each factor's definition we refer readers to chapter 3.2 ("Score definitions") and the index rulebook published on 15 April 2016.
Source: Nomura

Figure 10 plots the index's performance since 1992. Although the index was officiallylaunched on 17 August 2001, we have plotted it on a monthly return basis from endAugust 1992 and joined this up with the official index from end-August 2001 to show its
performance over a longer period 2 . Since September 1992, the Nomura Enterprise
Value Allocation Index has generated an average annual return of 4.87% on a total
return basis, steadily outperforming the TOPIX, which has generated an annual average
return of 2.92%. In addition, the standard deviation of returns for the index has beenslightly lower than that of the TOPIX, showing that anyone who invested in the index
would have achieved a higher return than that of the TOPIX and at lower risk. Figure 10
2

Official index rebalanced annually on 20 August, but data for 1992–2000 based on annual rebalancing at endAugust.

8Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

also shows that the index has achieved a stable performance vis-a-vis theRussell/Nomura style indices and at lower risk. It is probably fair to say that highly
profitable companies that have been proactive in investing and improving theirstakeholder returns have, slowly but surely, increased their corporate value. Furthermore,
one of the aims of the government's corporate governance reforms (as one of its growthstrategies) in recent years has been to increase corporate value over the longer term bymeans of a "purposeful dialog" between companies and investors. We think we are likely
to see a growing number of attractive investment opportunities in the form of companies
that take proactive steps to improve returns to their various stakeholders rather thanpursue short-term gains. We hope the index will help readers to invest in suchcompanies.

Fig. 10: Performance of Nomura Enterprise Value Allocation Index
300

Nomura Enterprise Value Allocation Index
TOPIX

250
Official data
200

150

100

50

Absolute return
NomuraEnterprise Value
Index
Allocation Index
Return (annualized, %)4.87
Standard deviation (annualized, %)17.48
Return / risk
0.28

TOPIX
2.92
18.33
0.16

15/8

13/8

12/8

11/8

10/8

09/8

08/8

07/8

06/8

05/8

04/8

03/8

02/8

01/8

00/8

99/8

98/8

97/8

96/8

95/8

94/8

93/8

92/8

Sep 1992–Mar 201614/8

(yy/m)

0

Excess returns
Nomura Enterprise
Russell/Nomura Russell/Nomura Russell/Nomura Russell/Nomura
Value Allocation
Large
Small
Value
GrowthIndex vs TOPIX
3.24
4.36
4.67
1.87
1.95
18.25
19.56
18.60
18.72
4.78
0.18
0.22
0.25
0.10
0.41

Average return (annualized, %)6.0
Nomura Enterprise Value Allocation Index

5.0

Russell/Nomura Value

Russell/Nomura Small

4.0
Russell/Nomura Large
3.0

TOPIX

2.0
Russell/Nomura Growth
1.0
0.0
16

17

18

19

20

21

22

23

Standard deviation (annualized, %)Note: Returns are total monthly returns, including dividends. Sample period is September 1992 to end-March 2016. Official index used for period from end-August 2001,
estimates based on monthly returns used for period through end-August 2001, rebased so that end-August 1992 = 100. Official index rebalanced annually on 20 August, data for
1992–2000 rebalanced annually as of end-August. Transaction costs have not been taken into account. Analysis is based on historical data and does not guarantee future
performance.
Source: Nomura

9Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

3. (Reference) Overview of index construction
We introduced the concept of the Nomura Enterprise Value Allocation Index in theprevious chapters. In this chapter, we provide an overview of the method by which theindex is built. For precise index construction rules, please see the Nomura Enterprise
Value Allocation Index rulebook, published on 15 April 2016.
3.1. Index construction procedure
Stocks are selected for the index based on the score related to returns, a central conceptof the index, in accordance with the following procedure: (1) selection of score
calculation universe, (2) selection of stocks on the basis of score, and (3) screening
based on liquidity criteria. The definition of the score is explained in the next section.
First, we look at the steps involved in building the index.
Stocks are added to/deleted from the index on 20 August (reconfiguration date) every
year based on data as of end-July (reconfiguration base date) according to the following
procedures 3 .
(1) Selection of score calculation universe
The top 1,000 stocks in terms of free float-adjusted market cap are selected from among
the top 2,000 stocks in terms of monthly average trading value in the past year, based on
all common stocks listed in Japan (excluding securities to be delisted, securities on alert,and securities under supervision 4 ). The score calculation universe consists of stocks
among these 1,000 selected stocks that have disclosed results data for the past three
years and meet creditworthiness criteria, including not having liabilities in excess ofassets and not having three straight years of losses 5 .
(2) Selecting stocks on the basis of score
The top 300 stocks are identified in terms of total score, calculated for all stocks in thescore calculation universe on the basis of profitability and returns. In regularreconfigurations in 2016 and beyond, the 300 stocks will be identified after applying arebalancing band to reduce turnover 6 .
(3) Screening based on liquidity criteria
Of the 300 stocks identified in step (2), those that were traded on 200 or more days overthe past year and had market turnover of ¥100bn or more over the past year are
included in the index.
Because stocks are selected based on the abovementioned procedures, the number ofstocks varies and is never more than 300. When market liquidity drops sharply, special
rules provide for the easing of scoring criteria to ensure the number of stocks in the index,
as selected according to the abovementioned procedures, does not fall below 100. As
such, the number of stocks in the index is never more than 300 and never less than 100.
As of the latest reconfiguration (August 2015), the special rules have never been applied
since the base date for the calculation of the index of 17 August 2001.
The stocks selected according to the procedures described above are put into an index
based on their free float-adjusted market cap weighting. The allocation of investment inlarge cap stocks is prevented from becoming excessive by capping index weighting as of
the reconfiguration base date at 3%.

3
The stock selection universe is the top 98% of stocks listed in Japan in terms of free float-adjusted market cap asof 15 October of the previous year.
4

Securities under supervision are included in the score calculation universe if they are in the index prior toreconfiguration.
5
Creditworthiness criteria are availability of financial data for the past three years, (a) liabilities not exceeding
assets in any of the past three years, and (b) operating losses or net losses not continuing for the past three years.
6

The rebalancing band rules are as follows:a. Stocks in the top 250 in terms of total score are included unconditionally.
b. Of stocks in the index prior to reconfiguration, those in the top 350 in terms of total score are selected in theorder of their total score ranking until 300 stocks are included in the list for liquidity screening.
c. If the number of stocks in the list for liquidity screening does not come to 300 following steps a and b, stocks areincluded in the list in order of total score until the list has 300 stocks.

10Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

Fig. 11: Process of constructing the Nomura Enterprise Value Allocation Index(overview) (restated)

All stocks listed on Japanese stock exchanges

Selection of score calculation universe(based on market cap and creditworthiness)

Selection of top 300 stocks in terms of total score(taking rebalancing band into account)

Final screening based on liquidity criteria

Construction of free float-adjusted market cap-weighted
index (weighting of individual stocks capped at 3%)

Note: The diagram focuses on the main parts of the process, omitting details of how, for example, creditworthiness criteria
are used to whittle down the universe or of special rules such as the rebalancing band. For further details of the rules forconstructing the index we refer readers to the next section and to the index rulebook published on 15 April 2016.
Source: Nomura

11Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

3.2 Score definitions
The scores used to select stocks are calculated using nine factors related to profitability
and returns. These factors can be broadly divided into three categories: (1) profitability
and shareholder returns, (2) returns to employees, and (3) returns to future stakeholders
and business partners (Figure 12).
(1) Profitability and shareholder returns
Because profits ultimately are attributed to shareholders, we have treated profitability
and shareholder returns as a single category consisting of three factors: net profits,
operating profits, and dividends.


Total net profits

Return on assets (operating ROA)Dividend on equity (DOE)

We gave our reasons for using net profits and operating profits (return on assets) tomeasure a company's profitability in chapter 2 ("Idea behind the index"). Also, because
capex, one of the features the index tries to capture, is generally considered to lead to anincrease in total assets, we have used return on assets to measure a company's
profitability relative to its assets in order to include companies whose capex is likely togenerate high returns. Finally, we have used dividend on equity (DOE) as an explicit
measure of shareholder returns. Because the factor value increases as a result ofdividend increases, via an increase in the numerator (dividends), and also as a result of
share buybacks, via a decrease in the denominator (shareholders' equity), the effect of
this factor is to include companies that raise dividends and carry out share buybacks.
(2) Returns to employees (investment in human capital)
The index uses total personnel expenses (personnel expenses + labor costs) and thenumber of employees to capture returns to employees. This category consists of thefollowing three factors.


Total personnel expenses(Change in personnel expenses)/salesPercentage change in number of employees

While total personnel expenses favors the inclusion of companies that already invest
heavily in human capital, the y-y change in total personnel expenses and the percentagechange in the number of employees capture companies that have been increasing theirinvestment in human capital.
(3) Returns to future stakeholders and business partners (capex)
This category focuses on capex and R&D expenditure and consists of the following threefactors.
Capex + R&D expenditure(Capex + R&D expenditure)/total assets

Change in [(capex + R&D expenditure)/total assets]

While total capex and R&D expenditure or their ratio to total assets favor the inclusion ofcompanies that already invest heavily in capex and R&D, the y-y change in the ratio
captures companies that have been increasing such investment. In the first case, thetotal for the past three years is used, while in the second and third cases, the average isused. However, a weighted average of 3:2:1 is used to reflect the greater importance ofthe most recent year.

12Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

Fig. 12: List of factors used (restated)
Category
Profitability & shareholder
returns

Returns to employees

Returns to future
stakeholders and business
partners

FactorBasis

Total net profits

3-year total

Return on assets (ROA)

3-year average

Dividend on equity (DOE)

3-year total

Total personnel expenses

3-year total(Change in personnel expenses)/sales

3-year average

Percentage change in number of employees

3-year average

Capex + R&D expenditure

3-year total(Capex + R&D expenditure)/total assets

3-year average

Change in [(capex + R&D expenditure)/total assets]

3-year average

Note: For further details of how the scores are defined and calculated we refer readers to the index rulebook published on
15 April 2016.
Source: Nomura

The final score (total score) is the average ranking score for the nine factors within thescore calculation universe. This means that the smaller a company's total score, themore proactive it has been in investing and improving its stakeholder returns. As we
explained in the previous chapter, the Nomura Enterprise Value Allocation Index
normally selects the top 300 stocks in terms of their total score (ie, those with the lowest
score) as potential constituents (Figure 13).

Fig. 13: Method of calculating total score

Calculate ranking score of each factor

Calculate total score

Calculate ranking score ofeach of the nine factors
Factor 1
Ranking
score

Factor 2
Ranking
score…

Factor 9
Rankingscore

Com pany 1

15

1

…

8

Com pany 1

205.9

Com pany 2

607

62

…

463

Com pany 2

362.3

Com pany 3

603

31

…

108

Com pany 3

425.0

…

…

…

…

…

Com pany 1000

72

623

…

944

Total
score

Calculate
averagerankingscore…
Com pany 1000

360.9

Select 300 com panies
w ith the lowest total score

Source: Nomura

13Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

Appendix A-1
Analyst Certification
We, Yasuhiro Shimizu, Sayuri Otsuka and Kai Hattori, hereby certify (1) that the views expressed in this Research reportaccurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2)no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed inthis Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Important Disclosures
The lists of issuers that are affiliates or subsidiaries of Nomura Holdings Inc., the parent company of Nomura Securities Co., Ltd., issuers thathave officers who concurrently serve as officers of Nomura Securities Co., Ltd., issuers in which the Nomura Group holds 1% or more of any
class of common equity securities and issuers for which Nomura Securities Co., Ltd. has lead managed a public offering of equity or equity
linked securities in the past 12 months are available at http://www.nomuraholdings.com/jp/report/. Please contact the Research ProductManagement Dept. of Nomura Securities Co., Ltd. for additional information.

Online availability of research and conflict-of-interest disclosures
Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne.
Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested
from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, pleaseemail grpsupport@nomura.com for help.
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are
not registered/qualified as research analysts under FINRA rules, may not be associated persons of NSI, and may not be subject to FINRA Rule
2241 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) areregistered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, andNIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.
Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura Internationalplc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they havecoverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear.

Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 38% of companies with thisrating are investment banking clients of the Nomura Group*.
42% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 53% of companies withthis rating are investment banking clients of the Nomura Group*.
9% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 17% of companies withthis rating are investment banking clients of the Nomura Group*.
As at 31 March 2016. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, andJapan and Asia ex-Japan from 21 October 2013
The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the statedtarget price, defined as (target price - current price)/current price.

STOCKSA rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates thatthe analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia exJapan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCIEmerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates thatthe analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as

14

Nomura | Developing the Nomura Enterprise Value Allocation Index

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'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that
potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target pricehave been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura isacting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled
as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should
not expect continuing or additional information from Nomura relating to such securities and/or companies.

SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks
under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average
recommendation of the stocks under coverage is) a negative absolute recommendation.

Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.

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Nomura | Developing the Nomura Enterprise Value Allocation Index

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------

Disclaimers required in Japan
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-----Transactions involving Japanese equities (including Japanese REITs, Japanese ETFs, and Japanese ETNs) are subject to a sales commissionof up to 1.404% of the transaction amount (or a commission of ¥2,808 for transactions of ¥200,000 or less). When Japanese equities arepurchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However,Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Japanese equities carry the risk of losses

16Nomura | Developing the Nomura Enterprise Value Allocation Index

26 April 2016

owing to price fluctuations. Japanese REITs carry the risk of losses owing to fluctuations in price and/or earnings of underlying real estate.
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shall differ. In principle, CDS transactions will be limited to financial instruments business operators and qualified institutional investors.
No account fee will be charged for marketable securities or monies deposited. Transfers of equities to another securities company via the Japan
Securities Depository Center are subject to a transfer fee of up to ¥10,800 per issue transferred depending on volume.

Nomura Securities Co., Ltd.
Financial instruments firm registered with the Kanto Local Finance Bureau (registration No. 142)
Member associations: Japan Securities Dealers Association; Japan Investment Advisers Association; The Financial Futures Association ofJapan; and Type II Financial Instruments Firms Association.
Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but notlimited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee
training.

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Nomura | Developing the Nomura Enterprise Value Allocation Index

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Additional information is available upon request and disclosure information is available at the Nomura Disclosure web
page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx
Copyright © 2016 Nomura Securities Co., Ltd. All rights reserved.

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