Japan Daily (First Edition) - Credit Suisse | PLUS

DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com /researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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Thursday, 02 May 2013

Japan Daily (First Edition)

Featured stocks

Rating Price

01 May TP TP Upside

8801 Mitsui Fudosan O 3365 4400 30.8%

8804 Tokyo Tatemono O 905 1400 54.7%

8815 Tokyu Land O 1216 1700 39.8%

8951 Nippon Building Fund O 1402000 1400000 -0.1%

4519 Chugai Pharmaceutical N 2420 2400 -0.8%

5310 Toyo Tanso N 2115 2100 -0.7%

4109 Stella Chemifa U 1922 1500 -22.0%

4042 Tosoh U 313 280 -10.5%

4063 Shin-Etsu Chemical O 6550 7820 19.4%

4183 Mitsui Chemicals U 226 210 -7.1%

4208 Ube Industries N 192 210 9.4%

3407 Asahi Kasei O 660 670 1.5%

4185 JSR O 2190 2320 5.9%

4205 Zeon O 1028 1260 22.6%

8601 Daiwa Securities Group N 869 640 -26.4%

4739 Itochu Techno-Solutions (CTC) O 4600 5200 13.0%

Top of the Pack Bank of Japan’s shock therapy Garthwaite / Richards Impact on flows across asset classes Connection Series

Japan Research Real estate (OVERWEIGHT) Mochizuki/Takemura Recommend adding to holdings with office rents now on the rise Sector Review

Chugai Pharmaceutical (4519) NEUTRAL, TP ¥1,850 -> ¥2,400 Sakai Shares high; maintain NEUTRAL, raise TP Company Update

Toyo Tanso (5310) NEUTRAL, TP ¥2,000 -> ¥2,100 Yamaguchi Inventory adjustments ongoing, but we see earnings finding bottom in 2H FY5/13 Increase Target Price

Stella Chemifa (4109) UNDERPERFORM, TP ¥1,550 -> ¥1,500 Yamaguchi Higher input costs, lower-than-forecast electrolyte growth are risks to FY3/14 guidance

Decrease Target Price

Chemical sector(MARKET WEIGHT) Sawato/Saito Market weakens on slowdown for China’s petrochemical demand Sector Review

Chemical sector (MARKET WEIGHT) Sawato/Saito Global petrochemical supply-demand outlook through 2017 Sector Review

Daiwa Securities Group (8601) NEUTRAL, TP ¥640 Yamanaka ROE up to 22.4% in 4Q; annual DPS hiked to ¥15 Results

Itochu Techno-Solutions (CTC) (4739) OUTPERFORM, TP ¥5,200 Nakayasu LTE investment starting to pick up again Results

Earnings Preview Presentation Slides Earnings Preview Presentation Slides – April 16: Telecommunications, Internet, IT Services, Consumer Electronics, Game Software, Precision Instruments, Industrial Electronics, Electronic Components, , Brokerage, Insurance, Other Financials, Real Estate, Housing, Construction

Earnings Preview Presentation Slides – April 17: Chemicals,Textiles,Steel,Nonferrous Metals, Cables, Glass & Ceramics, Paper, Batteries, Autos, Auto Parts, Pharmaceuticals, Food, Beverage, Tobacco, Quants

FX Sensitivity Forex Sensitivity- Japan Coverage Forex Sensitivity (yen vs. USD, euro), January 2013

Japan Economics – click report title to download Japan Economic Adviser: Upward revisions to our GDP forecasts

Japan Economic Adviser: A thought experiment: more risk-taking by middle-aged households could result in a decent money flow into risky asset markets

From Overseas – click report title to download Asia

Korea Economics: Industrial production continued weakening in March

Australian First Edition

…and more in Asian Daily

Americas Drug Retail: Real Easter Shift About to Be Unveiled; Underlying FE Trends Likely Still Unimpressive

Deep Dive Into SMID Energy: Less Of A Case For Gassy E&P’s, Prefer Hybrids & Oily E&P’s For The Long Run

U.S. Athletic Footwear: Revenue Growth Decelerated to -9.9% in Week Ending Apr 27 As ASPs Turned Negative Y/Y

US Focus List: Latest update

…and more in First Edition U.S. Alert

Thursday, 02 May2013

Japan Daily

Page 2 of 17

Europe European Week at a Glance: Latest update

…and more in First Edition Summary Europe

All Credit Suisse reports are available on Research and Analytics website

Thursday, 02 May2013

Japan Daily

Page 3 of 17

Bank of Japan’s shock therapy

Impact on flows across asset classes

■ It is common sense to take a method and try it. If it fails, admit it frankly and try

another. But above all, try something.

■ - Franklin Delano Roosevelt

■ For the past six months, Japanese markets have largely been driven by expectations

of what policy change might look like under a new BoJ governor. Now that we know

what BoJ Governor Kuroda is seeking to achieve, the focus turns to execution and the

reaction of a largely skeptical domestic Japanese investor base made cautious by the

failures of previous efforts to reflate, notably under PM Koizumi.

■ As Fed Chairman Bernanke has demonstrated, skepticism is one thing, but the

constraints of portfolio balance as the central bank crowds investors out of a core asset

are altogether more demanding.

■ In anticipation of the traditional start to the Japanese investment season following

Golden Week, we show that over time, the impact of the BoJ’s JGB purchases will

force Japanese investors to reallocate and the magnitudes of this investment flow are

likely to be substantial. Simulating flows for the impact of BoJ purchases, we suggest

that:

■ On existing allocations, cash from increased BoJ purchases would likely lead to inflows

into Japanese equities of ¥2tn annualized and into foreign assets of just under ¥3tn

annualized.

■ But as Japanese investors find that the BoJ prevents them from securing more JGBs,

either they must accumulate more cash and accept a decline in net interest margins /

portfolio yield or real economy credit demand must accelerate (roughly a doubling in

the pace of loan growth) or an outflow into Japanese equities and foreign assets

becomes inevitable. We estimate a ¥10tn and ¥20tn annualised pace of purchases as

plausible at the upper bound.

■ In some foreign markets, in the more bullish scenarios, the effects could be substantial.

For instance, in EUR rates, the flows could amount to over 25% of net issuance of the

largest eight issuers.

■ Most significant, we find that if households increase the share of their financial assets

in equities towards its ten-year average, this would imply equity buying worth around

4% of Japanese market cap. If households lift their equity holdings toward the share

reached under the Koizumi administration in 2005, that would imply additional equity

buying in excess of 20% of market cap.

Andrew Garthwaite

+44 20 7883 6477 [email protected]

Mark Richards

+44 20 7883 6484

[email protected]

Thursday, 02 May2013

Japan Daily

Page 4 of 17

Real estate OVERWEIGHT

Recommend adding to holdings with office rents now on the rise

■ Summary: Non-resident investors—potentially the prime movers of rising share prices

in the real estate sector—have shown a particular interest in market fundamentals.

Contracted rents for Central Tokyo Class A buildings and office buildings in the city’s

three central wards appear to be in the early stages of recovery. We believe investors

that have been underweighting Japan's real estate sector could benefit by investing

now in companies with properties in Tokyo that could see share price gains driven by

rent increases. We maintain our OVERWEIGHT stance on the real estate sector.

■ Focal points: Between 22 and 26 April, we met with several European investors,

fielding numerous enquiries as to whether there had been any improvement in sector

fundamentals. These investors are looking for indications that office rents will start

rising amid expectations of economic recovery.

■ According to 22 April data released by Sanko Estate, contracted rents for Central

Tokyo Class A buildings were up 27.2% YoY (for a fourth straight quarter of growth) as

of end-March 2013 (end-1Q). Rents for large-scale office buildings in the city’s three

central wards turned up for the first time in 18 quarters, registering a 10.4% increase.

Vacancy rates remain in decline across the entire Tokyo market, and we expect rents

to continue rising.

■ Stock calls: We recommend Tokyu Land (8815, OUTPERFORM, TP ¥1,700) and

Tokyo Tatemono (8804, OUTPERFORM, TP ¥1,400) in light of their highly leveraged

capital structures. We also recommend Mitsui Fudosan (8801, OUTPERFORM, TP

¥4,400), where we expect leasing segment OP to reach an all-time high in FY3/14.

Among J-REITs, we recommend Nippon Building Fund (8951, OUTPERFORM, TP

¥1,400,000).

Masahiro Mochizuki 81 3 4550 7389

[email protected]

Atsuro Takemura

81 3 4550 7372

[email protected]

Contracted office rents have started to rise

27.2

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

06Q

1

06Q

2

06Q

3

06Q

4

07Q

1

07Q

2

07Q

3

07Q

4

08Q

1

08Q

2

08Q

3

08Q

4

09Q

1

09Q

2

09Q

3

09Q

4

10Q

1

10Q

2

10Q

3

10Q

4

11Q

1

11Q

2

11Q

3

11Q

4

12Q

1

12Q

2

12Q

3

12Q

4

13Q

1

YoY growth of constructed rent of offices in Tokyo

3 wards all scale

3 wards large-scale

3 wards medium/large-scale

3 wards medium-scale or smaller

CBD class A buildings

(%)

Source: Sanko Estate, Credit Suisse

Thursday, 02 May2013

Japan Daily

Page 5 of 17

Chugai Pharmaceutical (4519) NEUTRAL

Shares high; maintain NEUTRAL, raise TP TP JPY (from 1,850) 2,400

■ Action: We raise our target price for Chugai from ¥1,850 to ¥2,400, which we derive by

applying a P/E of 26x, the average for the past 12 months (previously 20x), to our

FY12/13 EPS forecast of ¥92.8. We maintain our NEUTRAL rating.

■ Investment case: Chugai, which switched to IFRS in FY12/13, reported 1Q FY12/13

results on 25 April; sales were up 0.1% YoY, OP down 17.8%, and NP down 15.8%.

Sales trends for mainstay products were patchy as in 4Q FY12/12 and included strong

performances by Avastin and Edirol but lackluster results from Mircera and Xeloda.

Revenues from Actemra exports to Roche were down, but Chugai maintained its full-

year export target. On the cost side, sales and R&D spending rose by around ¥1.9bn

YoY, resulting in a greater decline in earnings at the operating level. Chugai tends to

set high sales targets for its mainstay products and, if sales fall short of expectations,

controls costs in an attempt to achieve its profit targets. We think the company is

sticking with this strategy in FY12/13. Based on 1Q earnings alone, we have concerns

that profits could fall below target, but we think the shares have limited downside

potential as long as the market recognizes management's commitment to profits.

■ Risks: Upside risks include Japanese approval of Roche's anticancers pertuzumab and

T-DM1, establishment of proprietary antibody manufacturing technologies, and

Actemra achieving blockbuster status overseas. Downside risks include growing

concerns over below-target profits.

■ Valuation: Our ¥2,400 TP equates to 2.5x P/B and a 1.87% dividend yield. We still

consider Chugai overvalued compared with pharmaceutical peers.

Fumiyoshi Sakai 81 3 4550 9737

[email protected]

Financial and valuation metrics Share price performance

Year 12/12A 12/13E 12/14E 12/15E

Revenue (¥ bn) 391.2 416.0 431.0 449.0

Operating profit (¥ bn) 76.4 77.5 81.0 87.0

Recurring profit (¥ bn) 75.4 78.5 82.0 88.0

Net income (¥ bn) 48.2 50.5 53.0 56.5

EPS (¥) 88.6 92.8 97.4 103.8

Change from previous EPS (%) n.a. 0 0 0

IBES Consensus EPS (¥) n.a. 92.3 100.6 114.5

EPS growth (%) 36.8 4.8 5.0 6.6

P/E (x) 18.6 26.2 24.9 23.4

Dividend yield (%) 2.4 1.9 2.0 2.2

EV/EBITDA(x) 7.5 12.1 11.4 10.6

P/B (x) 1.8 2.6 2.4 2.3

ROE(%) 10.2 10.1 10.0 10.2

Net debt/equity (%) net cash net cash net cash net cash

80100120140160

01000200030004000

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance

against the TOPIX which closed at 1165.13 on

30/04/13

On 30/04/13 the spot exchange rate was

¥97.72/US$1

Performance Over

1M 3M 12M Absolute (%) 13.8 33.5 68.1 Relative (%) 1.2 8.8 23.2

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Thursday, 02 May2013

Japan Daily

Page 6 of 17

Toyo Tanso (5310) NEUTRAL

Inventory adjustments ongoing, but we see earnings finding bottom in 2H FY5/13

TP JPY (from 2,000) 2,100

■ Action: We fine-tune our earnings estimates and raise our TP from ¥2,000 to ¥2,100

(1.3% potential downside). We maintain our NEUTRAL rating.

■ Investment case: Due to inventory adjustments in solar cell (PV) graphite materials, we

expect earnings to remain downbeat in FY5/14 (estimate OP of ¥3.3bn, EPS of ¥91.6).

That said, we think share price downside is limited, as 2H FY5/13 should mark a low in

earnings. Due to a difference in reporting period, the Jan–Mar contribution from Toyo

Tanso’s China unit (mainly PV – the largest swing factor for earnings) is to be reflected

in consolidated results for 4Q FY5/13. As it was around Dec 2012 that yen depreciation

really kicked in, the boost from forex should effectively be limited to 4Q. While OP

sensitivity to forex has diminished because of falling overseas sales (we now assume a

¥60mn impact on profit from every ¥1 shift against the USD, vs. ¥100mn previously),

we think yen weakness will partially offset the drain on profit from lower sales volume in

FY5/14 (we altered our forex assumption from ¥90/$ to ¥95/$). There is a risk of

demand for graphite products remaining lower than Toyo Tanso anticipates. Already

inflated inventories could rise, prolonging production cuts (which we assume will

continue through 1H FY5/14). From FY13 Toyo Tanso will switch to a December year-

end for a seven-month accounting period from June. For now, we continue to use May

fiscal year-ends for ease of YoY comparison.

■ Risks: Demand for solar cells and LEDs could strengthen or weaken; Chinese projects

requiring core materials for high-temperature gas reactors could be moved up or

postponed; global feed-in tariffs supporting solar power could change, as could

Japan’s energy policy; forex trends could be volatile. All these factors could work for or

against earnings and the share price.

■ Valuation: We base our ¥2,100 TP on FY5/14E BPS of ¥2,702 (previously, FY5/13-14E

average BPS of ¥2,624) and a fair-value P/B of 0.78x (average of the low end of

trading since 2009).

Jun Yamaguchi 81 3 4550 9789

[email protected]

Financial and valuation metrics Share price performance

Year 5/12A 5/13E 5/14E 5/15E

Revenue (¥ bn) 38.7 28.0 31.2 36.2

Operating profit (¥ bn) 6.1 0.6 3.3 5.6

Recurring profit (¥ bn) 6.1 0.6 3.1 5.4

Net income (¥ bn) 3.5 0.3 1.9 3.4

EPS (¥) 167.2 14.5 91.6 164.0

Change from previous EPS (%) n.a. -68.8 -9.5 0

IBES Consensus EPS (¥) n.a. 32.7 77.8 125.4

EPS growth (%) -6.3 -91.3 533.3 78.9

P/E (x) 13.3 147.1 23.2 13.0

Dividend yield (%) 1.1 0.9 0.9 0.9

EV/EBITDA(x) 3.7 11.2 5.9 4.2

P/B (x) 0.86 0.81 0.79 0.75

ROE(%) 6.7 0.6 3.4 5.9

Net debt/equity (%) net cash net cash net cash net cash

20

70

120

0

2000

4000

6000Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance

against the TOPIX which closed at 1165.13 on

30/04/13

On 30/04/13 the spot exchange rate was ¥97.4/US$1

Performance Over

1M 3M 12M Absolute (%) -4.5 -3.9 -25.6 Relative (%) -20.9 -27.8 -73.2

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Thursday, 02 May2013

Japan Daily

Page 7 of 17

Stella Chemifa (4109) UNDERPERFORM

Higher input costs, lower-than-forecast electrolyte growth are risks to FY3/14 guidance

TP JPY (from 1,550) 1,500

■ Action: We lower our forecasts for Stella Chemifa and reduce our target price from

¥1,550 to ¥1,500 (potential downside 20%). We maintain our UNDERPERFORM rating

and introduce our FY3/16 forecasts.

■ Investment case: Our basic view on Stella is unchanged. For FY3/14 we forecast a

steep decline in profit at the high-purity chemicals business, as depreciation will

increase and a weaker yen should inflate procurement costs for anhydrous hydrofluoric

acid (HF), the main feedstock. Reflecting guidance, we also lower our forecasts for

other businesses; as a result we now forecast OP of ¥1.5bn for FY3/14 (CoE ¥1.65bn,

our original estimate ¥2.3bn). In electrolyte salts, we think a push to lower COGS will

have some effect. However, Stella plans to cut prices by up to 20% to increase market

share, but in a sluggish demand environment we think it will fall short of its goal to

double sales volume. While we expect 1H OP to overshoot conservative guidance of

¥388mn (we forecast ¥670mn), we see risks to its 2H recovery scenario. Stella has

locked in a forex rate of ¥95/$ for FY3/14. However, it the yen moves significantly

higher than ¥100/$, the company loses this option and will need to procure materials

using the spot rate, which could lead to a jump in input costs.

■ Catalysts/risks: Catalysts include higher HF prices as well as stiffer competition and

lower-than-forecast electrolyte salt sales volume. Risks to our TP include: (1) lower HF

prices, (2) increased demand/milder price declines for electrolyte salts, and (3)

improving profitability at loss-making businesses.

■ Valuation: We base our ¥1,500 TP on a P/E of 13.9x (average since 2005 less one

standard deviation) applied to our ¥107.9 average EPS forecast for FY3/14–15 (we

previously used our FY3/14 EPS estimate).

Jun Yamaguchi 81 3 4550 9789

[email protected]

Financial and valuation metrics Share price performance

Year 3/13A 3/14E 3/15E 3/16E

Revenue (¥ bn) 28.1 29.1 30.9 33.1

Operating profit (¥ bn) 2.7 1.5 2.5 3.5

Recurring profit (¥ bn) 3.0 1.6 2.6 3.5

Net income (¥ bn) 1.9 1.0 1.6 2.2

EPS (¥) 160.0 81.7 134.2 186.7

Change from previous EPS (%) n.a. -24.6 -8.0 -2.6

IBES Consensus EPS (¥) n.a. 154.6 172.5 —

EPS growth (%) 108.7 -49.0 64.3 39.1

P/E (x) 11.0 23.6 14.4 10.3

Dividend yield (%) 2.2 2.0 2.0 2.0

EV/EBITDA(x) 5.8 7.3 5.5 4.4

P/B (x) 1.1 1.1 1.1 1.0

ROE(%) 10.0 4.8 7.6 9.9

Net debt/equity (%) 54.9 51.1 39.0 24.4

406080100120

01000200030004000

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance

against the TOPIX which closed at 1165.13 on

30/04/13

On 30/04/13 the spot exchange rate was ¥97.4/US$1

Performance Over

1M 3M 12M Absolute (%) 9.8 -0.1 9.8 Relative (%) -6.6 -24.0 -37.8

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Thursday, 02 May2013

Japan Daily

Page 8 of 17

Chemical sector MARKET WEIGHT

Market weakens on slowdown for China’s petrochemical demand

■ China’s petrochemical imports weak in Jan–Mar: Statistics for China’s imports of

petrochemicals products in Jan–Mar highlight a slowdown for petrochemical demand.

Looking at import volumes for general purpose plastics for the quarter, we see a 3.6%

YoY increase for LDPE, but slack production of consumer electronics products drove

declines of 10.9% for polystyrene and 14% for ABS. PVC demand dropped 14.1%.

Pipes are the main application area for PVC, and we attribute the decline to weak

domestic demand, including poor construction-related demand. Imports of inputs for

synthetics fiber fell by about half, with declines of 51.7% decline for PTA, a feedstock

for polyester, and 48.2% for caprolactam, an input for nylon.

■ Firm US demand lifting prices: The slowdown for China is in contrast to firm demand

for petrochemicals in the US, which is lifting prices. Increases for PVC prices in the US

found traction in both March and April (Figure 1). Prices in Asia have trended lower

since the start of March. Trends for other general purpose plastics such as

polyethylene and polypropylene have been about the same. Harsh market conditions

of inputs for synthetics fiber in Asia have driven contractions for margins on

caprolactam and PTA (Figure 2).

■ Long Shin-Etsu Chemical; short Mitsui Chemicals and Tosoh: We advocate Shin-Etsu

Chemical (4063, OUTPERFORM, TP ¥7,820) as the long. We believe firm demand in

the US and South America will mean upside in the form of higher US prices for PVC.

Mitsui Chemicals (4183, UNDERPERFORM, TP ¥210) and Tosoh (4042,

UNDERPERFORM, TP ¥280), which we expect to see downside because of weak

prices in Asia and lower sales volumes as a result of China’s demand slowdown, would

be the shorts. We also expect downbeat earnings over the near term at Ube Industries

(4208, NEUTRAL, TP ¥210) because caprolactam is a core business area.

Masami Sawato 81 3 4550 9729

[email protected]

Maiko Saito

81 3 4550 9936

[email protected]

Thursday, 02 May2013

Japan Daily

Page 9 of 17

Chemical sector MARKET WEIGHT

Global petrochemical supply-demand outlook through 2017

■ Oversupply in ethylene derivatives to reach 6.8mn tons in 2017: On 30 April, METI

completed a study in global supply-demand trends for petrochemical products. A look

at the supply–demand balance for ethylene derivatives shows a sustained supply glut.

The outlook also points to excess supply of more than 5mn tons from 2014 fueled by

the scale of oversupply in the Middle East as well as growth in ethylene production

capacity in the US driven by shale gas. The oversupply in ethylene derivatives is

expected to reach 6.8mn tons in 2017, with supply outpacing demand in Central and

South America and the Middle East by as much as 9mn tons and 15.9mn tons,

respectively (Figure 1). Excess demand of 10.7mn tons in Asia is unlikely to fully

absorb higher supplies in North America and the Middle East.

■ Capacity utilization rates likely below 90% through 2017: Global capacity utilization

rates for petrochemical products are likely to drop below 90% through 2017 leading to

a sustained deterioration in operating conditions. Capacity utilization rates for key

products in 2017 are likely to be limited to 89% for ethylene, 85% for PVC, 81% for

polystyrene, 81% for ethylene glycol, 73% for purified terephthalic acid, and 89% for

acrylonitrile (Figure 2). Based on capacity utilization trends, acrylonitrile capacity

utilization is expected to bottom out in 2013 when Asahi Kasei (3407) brings its

capacity in Thailand and South Korea online. As for terephthalic acid, 2014 is expected

to mark the bottom in capacity utilization due to a supply glut.

■ Focus on globally competitive synthetic rubber makers: While a supply glut is

anticipated in ethylene derivatives due to the emergence of shale gas, demand for

butadiene (99% of the global supplies of which hinge on crude-oil based naphtha

crackers) is expected to tighten in the medium-term. Given the fact that synthetic

rubber uses butadiene as a raw material and it is difficult to procure, supply growth in

synthetic rubber is likely to be constrained by limited capacity expansion. Amid such

conditions, demand for automotive fuel-efficient tires is expected to register a sharp

increase. Japanese makers such as JSR (4185) and Zeon (4205) not only produce

butadiene in-house, but have also moved in early to secure raw material sources. We

expect the two firms to benefit from volume growth for S-SBR, a rubber used in fuel-

efficient tires, as they step up overseas capacity expansion heading into 2013–15.

Masami Sawato 81 3 4550 9729

[email protected]

Maiko Saito

81 3 4550 9936

[email protected]

Thursday, 02 May2013

Japan Daily

Page 10 of 17

Daiwa Securities Group (8601) NEUTRAL

ROE up to 22.4% in 4Q; annual DPS hiked to ¥15 TP JPY 640

■ Impression of results: Positive

■ RP grew roughly 230% QoQ to ¥60.1bn and NP increased roughly 250% to ¥48.8bn.

Annualized ROE was high at 22.4%, and we estimate it would be around 14.4% even if

the tax rate were normalized. Trading revenue was higher than we expected in both

the equity and fixed income. Annual DPS was increased to ¥15 (vs. ¥6 last year),

which translates into a payout ratio of 34.9%.

■ Short-term share price impact: Positive

■ Daiwa secured high ROE, helped by a low tax burden. QoQ RP growth of around

230% is in line with other brokers, but the high ROE and dividend hike are positives.

■ Gains on securities sales offset write down of goodwill including business acquired

from KBC

■ Daiwa posted ¥3.2bn in restructuring-related costs (including for Europe and Asia) and

¥4.6bn in goodwill impairment in 4Q. These negatives were more-or-less offset by

¥3.2bn in gains on sale of marketable securities and ¥3.4bn in gains from negative

goodwill. We think the risk of further goodwill impairment has receded. In overseas

operations, the Asia business recorded another loss in 4Q (¥1bn), but we expect the

losses to start shrinking now that management has its sights on restructuring.

■ Daiwa treated as a company with limited impact from markets outside Japan

■ Although Asian operations continue to run at a loss, it should be noted that overseas

business has less impact at Daiwa than at Nomura. Daiwa’s share price has risen on a

belief that the firm can directly reap the benefits of Japanese stock market recovery.

Earnings are solid, but the market is already factoring in the value of carried-forward

losses, and the shares are trading on a P/B of around 1.4x. Accordingly, we think there

has been a relative increase in downside risk in the event of a stock market downturn.

Takehito Yamanaka 81 3 4550 9150

[email protected]

Daiwa Securities Group (8601) – consolidated earnings forecast summary DPS P/E

¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x)

Consolidated

Mar-12 A 336,010 5.5 -23,714 NM -12,200 NM -39,435 NM -23.3 NM 6.0 NM

Mar-13 A 417,308 24.2 83,812 NM 95,176 NM 72,909 NM 43.0 NM 15.0 20.2

Mar-13 CS E 384,400 14.4 56,800 NM 68,400 NM 52,800 NM 31.1 NM 9.0 27.9

IBES E - - 55,613 NM - - 49,581 NM 29.1 NM 8.6 29.9

Mar-14 CS E 402,000 -3.7 88,200 5.2 100,200 5.3 93,200 27.8 55.0 27.8 12.0 15.8

IBES E - - 95,043 13.4 - - 82,049 12.5 46.4 7.9 10.2 18.7

Mar-15 CS E 395,200 -1.7 80,700 -8.5 92,700 -7.5 86,000 -7.7 50.7 -7.7 12.0 17.1

IBES E - - 100,112 5.3 - - 84,038 2.4 48.3 4.2 11.2 18.0

Mar-16 CS E 400,700 1.4 84,900 5.2 98,500 6.3 62,200 -27.7 36.7 -27.7 12.0 23.7

EPSNet operating revenue Operating profit Recurring profit Net profit

Source: Company data, I/B/E/S, Credit Suisse estimates

Thursday, 02 May2013

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Itochu Techno-Solutions (CTC) (4739) OUTPERFORM

LTE investment starting to pick up again TP JPY 5,200

■ Impression of results: Neutral

■ 4Q results were in line with guidance. Full-year FY3/13 OP was ¥27.2bn (+10% YoY),

slightly below our estimate (¥27.5bn) and the consensus estimate (¥27.8bn). Sharp

yen depreciation is continuing to push up purchasing costs. Orders were firm again in

4Q, growing 12% YoY to ¥103.8bn. In the communications field, demand is in a fallow

period for some carriers, but demand from the financial and enterprise sectors is

buoyant. Orders grew 36% YoY to mark a new record high of ¥186.2bn (including

¥4.9bn from new consolidated subsidiaries). Unprofitable projects amounted to ¥1.7bn

(+¥0.2bn YoY), meaning the ratio relative to sales remained healthy at 0.5%.

■ Short-term share price impact: Potential for buying on dips as market factors in

conservative guidance

■ FY3/14 guidance is typically conservative. Communications work is expected to grow

only slightly YoY (we estimate ¥2-3bn), but we see substantial upside potential if

carriers who have held back on LTE investment get more fully involved. We also see

potential upside from system integration at financial institutions, public spending on

systems updates, and increased IT investment in the manufacturing sector, buoyed by

an improved economic outlook. We do not expect any drag on profits from new

overseas subsidiary consolidation (¥17bn in sales, several hundred million yen in OP,

and ¥0.5bn in goodwill amortization).

Yuki Nakayasu 81 3 4550 9966

[email protected]

Consolidated earnings summary DPS P/E

¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x)

Consolidated

11/3 A 283,068 -2.5 21,316 -1.2 21,574 -0.2 11,451 -8.1 180.5 -7.3 90.0

12/3 A 297,748 5.2 24,798 16.3 24,954 15.7 13,327 16.4 217.1 20.3 95.0

12/3 1Q 57,086 NA 1,977 NA 2,007 NA 962 NA 15.8 NA- - NM

2Q 73,340 NA 6,809 NA 6,826 NA 3,970 NA 65.3 NA- - NM

3Q 72,888 NA 5,735 NA 5,826 NA 2,576 NA 42.4 NA- - NM

4Q 94,434 NA 10,277 NA 10,295 NA 5,819 NA 95.7 NA- - NM

13/3 A 322,475 8.3 27,187 9.6 27,340 9.6 16,025 20.2 268.5 23.7 105.0 17.1

13/3 1Q A 65,651 15.0 2,618 32.4 2,653 32.2 1,253 30.2 20.8 31.6 - - NM

2Q A 80,654 10.0 7,433 9.2 7,387 8.2 4,293 8.1 71.9 10.0 - - NM

3Q A 73,614 1.0 4,664 -18.7 4,826 -17.2 2,870 11.4 48.0 13.4 - - NM

4Q A 102,556 8.6 12,472 21.4 12,474 21.2 7,609 30.8 127.8 33.6 - - NM

14/3 CS E 341,000 5.7 31,000 14.0 31,000 13.4 18,600 16.1 311.7 16.1 140.3 14.8

CoE (new) 345,000 7.0 28,000 3.0 28,000 2.4 16,500 3.0 277.3 3.3 110.0 16.6

IBES E 333,980 3.6 30,120 10.8 30,202 10.5 18,239 13.8 304.6 13.4 107.5 15.1

15/3 CS E 352,000 3.2 33,000 6.5 33,000 6.5 19,800 6.5 331.8 6.5 149.3 13.9

IBES E 340,867 0.0 31,670 2.2 31,302 1.0 18,881 1.5 317.2 1.8 105.0 14.5

Sales Operating profit Recurring profit Net profit EPS

Source: Company data, I/B/E/S, Credit Suisse estimates

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All headline prices are as of the previous day's close unless otherwise noted.

Companies Mentioned (Price as of 01-May-2013)

Mitsui Fudosan (8801.T, ¥3,365) Tokyo Tatemono (8804.T, ¥905) Tokyu Land (8815.T, ¥1,216) Nippon Building Fund (8951.T, ¥1,402,000) Chugai Pharmaceutical (4519.T, ¥2,420, NEUTRAL, TP ¥2,400) Roche (ROG.VX, SFr232.4) Toyo Tanso (5310.T, ¥2,115, NEUTRAL[V], TP ¥2,100) Stella Chemifa (4109.T, ¥1,922, UNDERPERFORM, TP ¥1,500) Tosoh (4042.T, ¥313) Shin-Etsu Chemical (4063.T, ¥6,550) Mitsui Chemicals (4183.T, ¥226) Ube Industries (4208.T, ¥192) Asahi Kasei (3407.T, ¥660) JSR (4185.T, ¥2,190) Zeon (4205.T, ¥1,028) Daiwa Securities Group (8601.T, ¥869, NEUTRAL, TP ¥640) Nomura Holdings (8604.T, ¥773) Itochu Techno-Solutions (CTC) (4739.T, ¥4,600, OUTPERFORM, TP ¥5,200)

Disclosure Appendix

Important Global Disclosures

The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Price and Rating History for Chugai Pharmaceutical (4519.T)

4519.T Closing Price Target Price

Date (¥) (¥) Rating

21-Jun-10 1,643 1,600 N

24-Sep-10 1,549 1,700

07-Feb-11 1,528 1,700 O

29-Aug-11 1,295 1,780

03-Oct-11 1,311 1,350 N

25-Oct-11 1,214 1,300

04-Jan-12 1,236 1,100 U

05-Jun-12 1,403 1,400 N

09-Oct-12 1,640 1,300 U

25-Oct-12 1,660 1,400

09-Nov-12 1,619 1,350

13-Feb-13 1,933 1,850 N

01-May-13 2,420 2,400

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

O U T PERFO RM

U N D ERPERFO RM

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Price and Rating History for Daiwa Securities Group (8601.T)

8601.T Closing Price Target Price

Date (¥) (¥) Rating

14-Jun-10 395 460 O

03-Sep-10 343 430

12-Jan-11 441 430 N

13-Apr-11 370 360

20-Jun-11 327 330

30-Aug-11 306 NR

30-Nov-11 252 230 U *

21-Feb-12 314 290

04-Apr-12 323 310

15-May-12 264 235

04-Jul-12 294 230

04-Oct-12 303 300

24-Jan-13 458 420 N

01-Feb-13 539 540

27-Mar-13 672 640

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

N O T RA T ED

U N D ERPERFO RM

Price and Rating History for Itochu Techno-Solutions (CTC) (4739.T)

4739.T Closing Price Target Price

Date (¥) (¥) Rating

27-May-10 3,150 3,840 O

08-Oct-10 2,473 0 O

20-Oct-11 3,420 3,680 N

12-Jan-12 3,470 4,100 O

05-Jun-12 3,510 *

31-Jul-12 4,050 4,700 O *

12-Apr-13 4,540 5,200

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

SU SPEN D ED

N EU T RA L

Price and Rating History for Stella Chemifa (4109.T)

4109.T Closing Price Target Price

Date (¥) (¥) Rating

25-Oct-10 3,150 4,100 O *

22-Apr-11 3,085 2,700 N

02-Jun-11 2,876 2,600

02-Sep-11 2,459 2,500

25-Nov-11 2,260 2,650 O

06-Feb-12 2,238 2,550

13-Mar-12 2,046 1,850 N

08-Jun-12 1,280 1,400

30-Oct-12 1,578 1,450

11-Mar-13 1,899 1,550 U

01-May-13 1,922 1,500

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

U N D ERPERFO RM

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Price and Rating History for Toyo Tanso (5310.T)

5310.T Closing Price Target Price

Date (¥) (¥) Rating

05-Jul-11 4,065 4,600 N *

02-Sep-11 3,365 3,900

27-Oct-11 3,805 4,000

27-Feb-12 3,360 3,000 U

06-Jun-12 2,299 2,000 N

28-Aug-12 2,062 1,900

04-Dec-12 1,577 1,330 U

14-Mar-13 2,127 2,000 N

01-May-13 2,115 2,100

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

U N D ERPERFO RM

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

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe wh ich consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating def inition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

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Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

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Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (53% banking clients)

Neutral/Hold* 40% (47% banking clients)

Underperform/Sell* 15% (39% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most c losely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other indivi dual factors.

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Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

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Price Target: (12 months) for Chugai Pharmaceutical (4519.T)

Method: Our ¥2,400 TP for Chugai Pharmaceutical is based on a FY13/12 estimate EPS of ¥92.8 and P/E of 26x, company's average P/E of the past 12 months.

Risk: Risks to our ¥2,400 TP for Chugai Pharma include earnings contribution of drugs such as renal anemia treatment Mircera, osteoporosis treatment Edirol, Anticancer Xeroda, and the hepatitis C treatment Pegasys,and Actemra. These factors may cause the share price to deviate from our TP.

Price Target: (12 months) for Daiwa Securities Group (8601.T)

Method: Our ¥640 target price for Daiwa Securities Group is based on a theoretical P/B of 1.13x our FY3/14 BPS estimate of ¥568.2, derived from ROE of 10.1% and discount rate of 9.0%.

Risk: Risks that may cause the share price to diverge from our ¥640 target price for Daiwa Securities Group include, Upside: Unexpectedly strong market conditions; Downside: (1) deterioration in the external environment and (2) a decision by investors not to price in the rise in ROE because they regard it as a temporary improvement caused by the lower tax burden.

Price Target: (12 months) for Itochu Techno-Solutions (CTC) (4739.T)

Method: We derive our ¥5,200 target price for Itochu Techno Solutions by applying to a P/E of 16x (the lower-end of the 15–25x range for 2003–07, a

period of earnings expansion) to our EPS estimate for FY3/15. On this basis, the stock does not appear overvalued, given the average P/E

range of 16–19x for major and second-tier SI vendors.

Risk: Risks to the target price of ¥5,200 are (1) a temporary spike in costs for dollar-denominated product purchases, owing to sharp forex movements; (2) an increased weighting of products with low gross margin at the telecommunications systems group; and (3) losses on systems integration projects for the public sector and in other new business fields.

Price Target: (12 months) for Stella Chemifa (4109.T)

Method: Our ¥1,500 target price for Stella Chemifa is based on a P/E of 13.9x (the average 12-month forward multiple since 2005 less one standard deviation) applied to our FY3/14-15 average EPS forecast of ¥107.9.

Risk: Risks that could impede achievement of our ¥1,500 target price for Stella Chemifa include: (1) a steeper-than-expected decline in HF prices, (2) increased demand/milder price declines for electrolyte salts, and (3) narrower losses at new businesses.

Price Target: (12 months) for Toyo Tanso (5310.T)

Method: We base our ¥2,100 TP for Toyo Tanso on our ¥2,702 BPS estimate for FY5/14, and a fair-value P/B of 0.78x (average of the lower end of trading since2009).

Risk: Potential risks to our ¥2,100 TP for Toyo Tanso include: Demand for solar cell products in China and LEDs could strengthen/weaken; Chinese projects requiring core materials for high-temperature gas reactors could be moved up/postponed; global feed-in tariffs supporting solar power could shift and Japan’s energy policy could change; forex trends could be volatile. These factors could work for or against earnings and the share price.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (4519.T, 8601.T, 4739.T, ROG.VX, 8604.T, 8951.T, 8801.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided non-investment banking services to the subject company (8601.T, ROG.VX, 8604.T) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (4519.T, 4739.T, 4109.T, 4208.T, 4185.T, 4205.T, 8604.T, 8815.T, 3407.T, 8951.T, 8801.T) within the next 3 months.

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Credit Suisse has received compensation for products and services other than investment banking services from the subject company (8601.T, ROG.VX, 8604.T) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (8604.T, 8801.T).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (4519.T, 8601.T, 4739.T, 4109.T, 5310.T, 4208.T, 4042.T, 4185.T, 4183.T, 4205.T, ROG.VX, 8604.T, 8815.T, 3407.T, 8804.T, 8951.T, 8801.T, 4063.T) within the past 12 months

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This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.