01 July 2013 Global Securities Research & Analytics

Yen and You

Connections Series

The competitive edge Figure 1: Yen 'normalisation'—only halfway there 160 USDJPY Average 1990-2008 Forecast 150 140 130 120 110

100 The Credit Suisse Connections Series 90 leverages our exceptional breadth of 80 macro and micro research to deliver 70 incisive cross-sector and cross-border 1990 1992 1994 1997 1999 2001 2004 2006 2008 2011 2013 thematic insights for our clients.

Source: Credit Suisse Commodities research, the BLOOMBERG PROFESSIONAL™ service

The impact on competitiveness: Our global Yen and You series has been SECURITIES RESEARCH & ANALYTICS examining themes stemming from the 'shock therapy' the Bank of Japan Please see inside for contributors to each section initiated earlier this year. In a parallel report published today (Global Equity Strategy - Japan: The sun is still rising), our Global Equity Strategy team revisit their overweight stance on Japanese equities. Here we focus on a key component of that view—a structurally weak yen (our FX team has a 12-month target of JPY120/USD1) and the resulting competitiveness issues. The significance of this theme is underlined by Japan's wide range of high value-add industry segments—starkly highlighted by Fukushima and the 2011 tsunami. Alongside the work of our analysts and strategists, we leverage our proprietary PEERs supply chain framework to highlight company-specific competition. The added topical relevance of this is the number of 'head-to- heads' with the current embattled emerging markets. This report analyses the relative sensitivity within key tradeable sectors such as technology, autos, steel and capital goods. A common theme that emerges is that markets (and consensus forecasts) may have moved to discount price effects but rarely potential market share shifts—we fear a degree of complacency. Few non-Japanese companies seem to think a price threat will emerge at all, but that is not how devaluations typically work. We also highlight airlines which, while not a pure competitiveness story, display leverage to the currency and also a read-through to the impact the currency is having from a trade perspective. The early evidence already suggests a material impact. 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.creditsuisse.com/researchdisclosures or call +1 (877) 291-2683 for Credit Suisse Equity Research disclosures and visit https://firesearchdisclosure.credit-suisse.com or call +1 (212) 538- 7625 for Credit Suisse Fixed Income Research disclosures. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

01 July 2013 Table of Contents

Related research 3 Key charts 4 Executive summary 5 Key stocks 7 Global competitors and suppliers 10 FX Strategy: The yen—the macro story 12 Japan Economics: Why we expect USDJPY to hit 120 in 12 months 13 Global Equity Strategy 15 Equity Research: Global Technology 24 Key global takeaways 24 Japan: A major player across the tech supply chain 25 Global semis: Revenue, cost, and competitive Implications 32 Yen move does not seem to be fully in consensus numbers 35 Impact on US tech hardware names—focus on printing 38 Impact on European tech hardware names 39 Equity Research: Global Autos 43 Key global takeaways 43 Japanese point of view: Weaker yen to trigger virtuous cycle 44 US: The weak yen is only one factor 46 The European story 50 Japan vs. Korea? 54 A closer look at India 55 Equity Research: Steel 59 Key global takeaways 59 Japan in the context of Global steel 62 Japan’s key products 65 Empirical evidence – a mixed picture 66 The Asia landscape 73 Equity Research: Global Industrials 84 Key global takeaways 84 Perspective on Japanese industrials 84 Implications outside Japan 88 What are the key end markets? 90 A focus on Chinese industrials 92 Equity Research: Airlines 97 Key global takeaways 97 Inbound vs Outbound drivers 97 Appendix 1 – PEERs Relationships 104 Appendix 2 – FX forecasts 110

Yen and You 2 01 July 2013 Related research

Cross-Asset Bank of Japan’s shock therapy: Impact on flows across asset classes, 1 May 2013

Economics New BOJ but old fashioned QE, 4 April 2013 The BOJ’s new measure: negative real interest rate shock therapy?, 5 April 2013 Bank of Japan widens its lead on innovation, 8 April 2013 Three years to go for CPI to rise +2%, but…, 11 April 2013 A monetary shock and the Japanese economy, 23 April 2013 Should we worry about rising long-term interest rates?, 16 May 2013 Zero-inflation output gap would turn positive around the middle of this year, 28 May 2013 Will the third arrow of Abenomics be encouraging?, 31 May 2013

Pulse of Global Industry: Further confirmation of tepid growth outlook, 26 June 2013

FX Strategy Bank of Japan "Shock And Awe ...", 4 April 2013 Japanese portfolio flow monitor, 16 May 2013 FX Compass: The Yen Trend is Still Your Friend, 5 June 2013

Equity Research Global Equity Strategy - Japan: add to overweight and implications, 16 April 2013 Global Equity Strategy - Only a mild slowdown: become more cyclical, 17 May 2013 Global Themes: Thematic Trade Ideas - Spring - Policy plays, 13 May 2013 Asia Technology Strategy: Yen and you: What JPY move means for the tech sector, 20 May 2013 Asia Steel Sector: Yen and you: How a falling Yen impacts Asian steel companies, 8 May 2013 Global Industrials: Push by Japan, China into 3D printing; more competition in industrial automation software, 3 June 2013 Global Industrials: More signs of Japanese manufacturing renaissance; rising competition in industrial automation, but bottoming demand, 28 May 2013 Global Automotive Sector: Weak Yen Is One Factor in Price/Share Equation; Nissan Looks Well Positioned, 25 February 2013 Japan Auto Sector; Weak Yen changing global outlook, 21 January 2013 Bridgestone: Yen weakness to boost competitiveness, also market share, 9 April 2013 Korea Auto Sector: JPYUSD – Where is the price war?, 3 May 2013

Yen and You 3 01 July 2013 Key charts

Figure 2: Yen 'normalisation'— We forecast a rate of ¥ / $ Figure 3: We believe the market is not fully building in the of 120, which would be nearer to the 20-year average. We impact of currency on earnings - OP for some tech stocks currently stand some way from that level. should have been revised up by 30-60% in our estimates 160 USDJPY Average 1990-2008 Forecast 10 150 8 6 140 4 130 2 120 0 -2 110 -4 100 -6 90 -8

80 -10

Jul-10 Jul-11 Jul-12

Oct-11 Apr-10 Oct-10 Apr-11 Apr-12 Oct-12 Apr-13

Jan-11 Jan-12 Jan-13 70 Jan-10 1990 1992 1994 1997 1999 2001 2004 2006 2008 2011 2013 MSCI Japan Tech:1M change (%) in 12M Fwd EPS

Source: Thomson Reuters, Credit Suisse Equity Research Source: Company data, Credit Suisse Equity Research estimates

Figure 4: Japanese OEMs have taken steps to mitigate Figure 5: The inverse relationship between currency and Yen exposure by increasing ‘local’ capacity & restricting travel demand has been intensifying for the past year – component sourcing - 66% of Honda’s N America sourced bad news for Japanese airlines, but good for foreign vehicles contain components from the region itself carriers with exposures to that market 80% 50% 25% 70% 70% 66% 20% 70% 62% 40% 59% 59% 15% 60% 30% 49% 10% 50% 20% 5%

40% 10% 0%

-5% 30% 0% 20% -10% 20% -10% -15% 10% -20% -20% 0% -30% -25% Honda Nissan Toyota FHI Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13

2007 2012 Japanese outbound passengers YoY% JPY/USD YoY%

Source: Company data, Credit Suisse Equity Research estimates Source: Thomson Reuters, Credit Suisse Equity Research estimates

Figure 6: Companies whose Japanese competitors have a Figure 7: Whether the impact of weaker currency is a high global market share and a substantial share of price or cost advantage, Japanese steel exporters should production domiciled in Japan are set to suffer the most see an improved position on the cost curve globally 60% 1000 THK 900 50% Nabtesco 90% 800 40% Fanuc 80% Tsubakimoto 700 Chain 30% SMC Amada 600 Komatsu HCM Yaskawa Global Market ShareMarket Global 20% Makita 500 Electric Mitsubishi Kubota Heavy NTN NSK 10% 400 Ebara JTEKT Okuma Mori Seiki 300 0% 0% 20% 40% 60% 80% 100% 120% 200 Domestic Production Ratio 1.0 6.3 11.3 18.4 22.8 32.0 39.2 44.5 48.1 54.1 59.9 63.8 67.9 71.7 78.8 84.5 91.9 96.4 99.3 Source: Company data, Credit Suisse Equity Research estimates Source: Company data, Credit Suisse Equity Research estimates

Yen and You 4 01 July 2013 Executive summary

A structurally weak yen is a core view of our Japanese Economics and Global Foreign Richard Kersley Exchange teams as the BoJ seeks to raise inflation expectations. As the previously highly Head of Global Research profitable long Nikkei/short yen trade became June’s pain trade, this view looked more Product and Thematic questionable. However, post the signalling of the direction of US money policy emerging Research from the latest FOMC, nearer term news provides added relevance to our structural story. richard.kersley@credit- Our team’s 12 month forecast is ¥/$120 with recent events skewing the risk lower. suisse.com The implications of the structural view are the focus of this report. With the support of our +44 20 7888 0313 global sector analysts, strategists and our proprietary PEERs supply chain database, we assess the implications of a sustained weakness in the yen on the most relevant global, Mujtaba Rana sectors—technology, autos, steel, industrials and airlines. We examine sensitivities to a Global Thematic Research ¥/$120 scenario that do not appear to be assumed in market earnings. mujtaba.rana@credit- Figure 8 to Figure 10 highlight the key stock sensitivities. To shortcut the potential winners suisse.com and losers, we flag our two Thematic Baskets CSERJPYS Index (Yen depreciation) and +44 207 883 3773 CSAPJTOP Index (Japanese top picks) that illustrate the two sides of the debate. Kiranjot Grewal Corporate earnings drivers (below) Global Thematic Research Japanese corporates have benefits to reap both from enhanced competitiveness and Kiranjot.grewal@credit- stronger domestic demand. In typical fashion, many analysts have been quick to price in suisse.com the obvious translational impact of currency moves but are, we believe, conservative in +44 20 7883 9247 assumptions of volume growth – positive or negative. Our strategists see 10-15% upside to current numbers. Some conservatism is perhaps understandable. However, if the yen were to head towards ¥120, earnings forecasts are lighter still with out-size gains for exporters.

However, Japan is potentially exporting a problem – something many analysts and companies appear in denial over. We flag the typical relationships and pair trades that Katie Iorio emerge around the fortunes of currency shifts. Despite protestations to the contrary, it has Securities Research Product not proved that different this time and it is a brave man who would stand in the way of the Marketing typical axes surrounding the manufacturing sectors and markets around which yen moves katheryn.iorio@credit- have traded in the past. There is a fundamental challenge for the embattled emerging suisse.com markets here. +1 212 538 6386 Global technology (below) Arbin Sherchan By itself, the fall in the value of the yen is not going to create blanket winners in the Securities Research Product Japanese tech industry, just as the appreciation below ¥/$80 did not kill the sector. Marketing Nevertheless, we do believe that the currency shift to date and further weakness from here arbin.sherchan@credit- are material considerations. suisse.com Given how weak OPM and ROEs have been for Japanese companies in recent years, it is +1 212 325 8967 reasonable to believe that companies are going to focus on improving profitability rather than going for share gains in the initial few quarters. Medium term though, it is likely that Brandon Vair there are going to be some competitive shifts. Securities Research Product We believe Japanese companies in substrates/PCBs, passives and semi wafers are likely Marketing to see market share gains. Shifts are also likely, though less so, in small batteries and in brandon.vair@credit- HDD components. Similarly, we think that there could be scope for Japanese TV brands to suisse.com regain some of their global shares if they can get their production and distribution strategy +44 20 7888 6381 right. Lastly, Asian TFT manufacturers stand to gain on their costs as LCD glass and some other key raw materials are priced in yen. Competitive risks exist in the printing space. Global autos (below) The dynamics of the auto industry and relative share price trends have typically proved highly sensitive to currency moves (e.g., US, Korea). We believe Japanese OEMs will use

Yen and You 5 01 July 2013 the weak yen to drive improved profitability and subsequently lead to enhanced product investment, improved balance sheets, and increased capital returned to shareholders. The typically exposed US OEMs are admittedly in a better competitive condition than when the yen was last at 100. The ‘Big 3’ are better able to ‘fight back’ with their own competitive products rather than cut prices. The move to localise sourcing and production has reduced the historical impact of a weak yen in Europe. The question is whether markets take account of these changes or just follow the historical share price relationships. The clearest illustration of pricing pressures so far in the autos space comes in the tyre sector, with an aggressive stance taken by Bridgestone. In India, Maruti should benefit from lower input costs. Global steel (below) A weak yen is a major issue for the APAC steel producers. It should let Japanese steel makers take market share. Exports have indeed picked up. Our Asia team believes a move in the yen to 120/US$ would give the Japanese makers a c.US$60 per tonne cost advantage relative to 2012Q3 when the yen was strongest and could move producers materially down the global cost curve. In a world of thin margins, this is very significant, particularly in specific product areas. Our analysts believe this is not fully discounted. Our global team would question the impact and longevity beyond the region. The global supply demand balance is the greatest single driver of earnings globally with the currency only one piece of a complex jigsaw. Meanwhile, the global steel market remains very weak. Any increase in exports from Japan would have to be met by production cuts elsewhere or price pressure would negate the benefit to the Japanese makers. Hence, it is puzzling to us why there has been less differentiation between the relatively insulated non- Asian ArcelorMittal and USX vs the non-Japanese steel producers in the Asian region. Global industrials (below) Given the extent of their export businesses and positioning high up the value chain, Japanese industrial companies have much to reap from a weak currency. In some cases, we estimate Japanese industrial companies could see upside risk of almost 30% to EPS. Improved cash flows can also enhance R&D, hence product pipeline and future growth. Not surprisingly, non-Japanese companies at risk include those whose Japanese competitors have a high global market share and a substantial share of production domiciled in Japan. We focus on end-markets where we see the most competitive advantages for Japanese industrials, including factory automation, construction machinery, air-conditioners, bearings, machine tools, and gas turbines. Some non-Japanese companies may benefit from cheaper sourcing of components from Japan, particularly within robot manufacturing, construction machinery, and power and rail equipment. We highlight Chinese industrial companies are sensitive to the theme but are also beneficiaries given their import of advanced components. Global airlines (below) In itself, a weaker yen bodes ill for Japanese airlines, hiking the cost of jet fuel, rotables, landing fees, over-flight costs and US$-denominated borrowings. It also stunts the growth of outbound demand, typically the cornerstone of Japanese airlines' international traffic. Recent traffic data bears this out. The extent to which economic stimulation translates into increased levels of (higher yielding) business travel has potential, albeit uncertain. However inbound traffic is a compelling story, with tangible evidence of the yen’s impact already apparent, with some markets having grown by 50% ytd given the reduction in costs: the benefits accrue to those with a high Japanese market focus and a low yen/cross. The gearing is greater in the Asia airlines than the global airlines in Europe and the US.

Yen and You 6

and You Yen Key stocks

Figure 8: Key auto and industrial stocks affected by yen depreciation (STOCKS HIGHLIGHTED IN BLUE ARE CS-RATED OUTPERFORM NAMES)

End Market Companies Analyst Impact of Weaker Yen

Autos (Positive Impact)

Mazda Motor (7261) Issei Takahashi Should benefit greatly, as it currently imports all units sold in NA following the termination of production at its Flat Rock JV

The main benefit for Maruti (50% owned by Suzuki) would be on the margin. ~5% of sales imported from Japan. Every 1% change in the Yen Suzuki (7269) / Maruti (MRTI.BO) Jatin Chawla Autos impacts EBITDA margins by 20bps: The >20% move we have seen since last Nov will have a >50% impact on its EPS.

Expect them to to continue with their practice of using FX-fuelled profits to fund increased product content, however the actions taken to Toyota Motor (7203) Issei Takahashi mitigate pressure from a strong currency (moving sourcing base ex-Japan) will blunt the benefit of a weak currency.

Bridgestone (5108) / Michelin Annual consolidated operating profit is estimated to fluctuate by ¥0.9bn for every one Yen change versus the Euro. Evidence of more Tyres Masahiro Akita (MICP.PA) / Continental (CONG.DE) aggressive pricing emerging and cross subsidising. Their cost advantage is a threat to Michelin and Continental.

Autos (Negative Impact)

Kia (000270.KS) / Hyundai Asia-Pac OEMs Henry Kwon Weak Yen shouldn’t automatically translate into Korean quantity weakness at the fundamental level , but the currency correlations are high. (005380.KS) Fiat (FIA.MI) , Renault (RENA.PA), European / US Japanese OEMs do have a long history of gaining market share at the expense of the 'big three' domestic US automakers. This risk exists, if Volkswagen (VOWG_p.F), Ford Chris Ceraso OEMs less than the past. Limited threat to European OEMs, as the latter has shifted to an almost fully locally-sourced model. (F.N), General Motors (GM.N) INDUSTRIALS (Positive Impact)

Air-Conditioner Daikin Industries (6367) Shinji Kuroda End-market may benefit from a falling Yen as it has a competitive advantage here and about 50% global VRV market share

JTEKT (6473) Shinji Kuroda Benefit from the translation effects of higher foreign earnings; possible 20-30% EPS boost Bearings NSK (6471) Shinji Kuroda With translation effects of higher foreign earnings we see a significant competitive advantages given a 70%+ market share in linear control

Hitachi Construction Machinery Benefit from the translation effects of higher foreign earnings, possibly a 10-20% EPS boost, have meaningful global market share (30%) Shinji Kuroda (6305) combined in products such as hydraulic excavators, with around 80% of sales coming from overseas

IHI (7013) Shinji Kuroda Benefit from a much weaker yen due to the translation effects of higher foreign earnings, possibly 10-19.9% EPS boost Construction Benefit from the translation effects of higher foreign earnings, possibly a 10-19.9% EPS boost, End-markets have 60%+ global share in Robots, Machinery Komatsu (6301) Shinji Kuroda have meaningful global market shares (30%) combined in products such as hydraulic excavators with around 80% of sales being overseas Lonking Holdings Ltd. (3339.HK) / Most impacted segments by depreciation are concrete machinery and excavators; If the average dollar / yen in 2013 depreciates to 120, EPS will Sany Heavy Industry (600031.SS) / Yang Song increase by 11.2%/3.4%/3.6% respectively, and there is a sourcing benefit from lower COGS Zoomlion Heavy Industry (1157.HK) Fanuc (6954) Shinji Kuroda End-markets where Japanese industrials may benefit from a falling Yen and have comp advantage. 60%+ global share in Robots

SMC (6273) Shinji Kuroda Significant competitive advantages, 32% market share in pneumatics Factory Potential benefit from a "manufacturing renaissance" with production pulled back to Japan; significant competitive advantages with a 70%+ Automation THK (6481) Shinji Kuroda market share in linear motion controls

Yaskawa Electric (6506) Shinji Kuroda Benefit from translation effects of higher foreign earnings, possibly a 10-19.9% EPS boost; End-markets may benefit with a 60% share in robots

01 July 2013 01 Heavy Electrical Dongfang Elec (600875.SS) Yang Song Purchasing components from Japan and could benefit from lower COGS if the Yen were to fall to 120 / $, 5-10% boost to EPS Source: Credit Suisse Equity Research

7

and You Yen Figure 9: Key industrial and steel stocks affected by yen depreciation (STOCKS HIGHLIGHTED IN BLUE ARE CS-RATED OUTPERFORM NAMES)

End Market Companies Analyst Impact of Weaker Yen

INDUSTRIALS (Positive Impact)

Amada (6113) Shinji Kuroda Benefit from translation effects of higher foreign earnings, possibly a 20-30% EPS boost

Currently upgrading its production facilities in North America and China, but its forex sensitivity is on a steady downtrend. Benefit from Machine Tools Mori Seiki (6141) Shinji Kuroda translation effects of higher foreign earnings, possibly a 20-30% EPS boost

Okuma Corporation (6103) Shinji Kuroda Benefit from a manufacturing renaissance if it pulls more production back to Japan

Gas turbines Mitsubishi Heavy (7011) Shinji Kuroda The ‘big-ticket’ nature of power plant equipment may increase the attractions for utilities of using a cheaper supplier.

Robotics Nabtesco (6268) Shinji Kuroda A global leaders in gears for robots, source certain key components from Japan which would become significantly cheaper

INDUSTRIALS (Negative Impact)

Heavy Electrical Alstom (ALSO.PA) Andre Kukhnin Low operating margins, and therefore at a high risk of negative operational leverage from top-line market share losses to the Japanese

Most at risk from Yen depreciation because it has three sizable and technologically comparable Japan-based competitors. 100bps of negative Bearings SKF (SKFb.ST) Andre Kukhnin pricing, dropping through to a 100bps margin reduction would decrease consensus SKF 2014E EPS by c10%.

Factory Hiwin (2049.TW) Jerry Su A weaker JPY will narrow the pricing gap. Every 10% of depreciation could negatively impact Hiwin’s 2014 EPS by 7%.

Low profit margins, therefore a high risk of negative operational leverage from top-line market share losses to the Japanese. At risk of weaker Caterpillar Inc. (CAT) Jamie Cook Construction competitive positioning with the Yen at 120/$, 2014 earnings could be negatively impacted by approximately 5% Machinery Deere & Co. (DE) Jamie Cook At risk of weaker competitive positioning with the Yen at 120/$, 2014 earnings could be negatively impacted by approximately 2%

Simon Toennessen Japanese companies compete in healthcare, power, automation and machine tools with these conglomerates, though EPS impacts are diluted Conglomerates Philips / Siemens / GE / ABB / Julian Mitchell by portfolio of businesses. Philips displays the more material risk through healthcare.

AIRLINES (Positive Impact)

Stock will be leveraged to improved traffic to Japan with limited threat to near term EPS. Revenues largely balanced, with an appreciating HK$, Cathay Pacific (0293.HK) Timothy Ross generally leading to a small reduction in earnings from the route. Translational earnings impact at 120 is -5.8%.

Airlines EVA Air (2618.TW) Timothy Ross Stock will be leveraged to improved traffic to Japan with limited threat to near term EPS. Costs and revenues are largely balanced.

Stock will be leveraged to improved traffic to Japan with limited threat to near term EPS. Most Japanese inbound are less price sensitive Thai Airways (THAI.BK) C. Techakumpuch businessmen, with impact on volumes expected to be low.

AIRLINES (Negative Impact)

Historically sourced a large proportion of their earnings from Japanese inbound passengers (accounting for up to 30% of normalised Korean Air (003490.KS) Timothy Ross earnings), so investor aversion is understandable in the context of their historic earnings patterns.

Significant orientation of international sales to Japanese market at ~30% of total international sales sourced there and only a fraction of cost. Garuda (GIAA.JK) Timothy Ross Airlines Less potential leverage from outbound traffic. Air France KLM / D. Lufthansa Neil Glynn Each 10% movement in the JPY has a €15-30m impact (IAG impact de minimus) before considering the effects of currency on demand.

Japan Airlines (9205.T) / Air A weaker yen bodes ill for Japanese airlines, hiking the cost of jet fuel, rotables, landing fees, over-flight costs and US$-denominated N/A Nippon (9202.T) borrowings. It should also stunt the growth of outbound demand, typically the cornerstone of Japanese airlines' international traffic.

STEEL / MINING (Positive Impact)

01 July 2013 01 We think JFE and NSSMC now enjoy a level of cost competitiveness comparable to, or greater than, that of POSCO. Conceivable that every ¥10 Steel JFE Holdings (5411) Shinya Yamada fall versus the dollar will buoy profit by roughly ¥80 bn

8 Source: Credit Suisse Equity Research

and You Yen

Figure 10: Key steel and technology stocks affected by yen depreciation (STOCKS HIGHLIGHTED IN BLUE ARE CS-RATED OUTPERFORM NAMES)

End Market Companies Analyst Impact of Weaker Yen

STEEL / MINING (Positive Impact)

Steel Nippon Steel & Sumitomo (5401) Shinya Yamada A move in the yen to 120/US$ could give around a US$60 per tonne cost advantage relative to Q3 last year when the yen was strongest.

STEEL / MINING (Negative Impact)

Angang Steel Company Ltd Our sensitivity analysis on the impact of more competitive Japanese supply on regional steel names, in the form of lower prices (around Trina Chen (0347.HK) $20/tonne price pressure) and lower sales volume (around 5%) would suggests 50-89% downside risk here.

Holds 50% of the market share in high-end market (auto sheets etc). Any increase in Japanese exports to the region could impose a “serious Baosteel (600019.SS) Trina Chen threat” to Chinese exports, in particular, given that the latter’s export margin is already very thin. Our analysis suggests 8-10% downside risk

China Steel (2002.TW) Jeremy Chen Most affected by Yen weakness. Our sensitivity analysis suggests 8-10% downside risk.

Steel 18-31% downside risk. Depreciation could be considerably negative for domestic steel demand outlook in the mid-to long term if it continues Hyundai Steel Co. (004020.KS) Minseok Sinn and meaningfully hurt Korean exporters’ cost competitiveness vs Japanese exporters (direct competition to Hyundai in most export markets)

JSW Steel Ltd (JSTL.BO) Neelkanth Mishra Our sensitivity analysis suggests 13-18% downside risk

Tata Steel Ltd (TISC.BO) Neelkanth Mishra Our sensitivity analysis suggests 13-18% downside risk

ArcelorMittal (MT.N) / United Mike Shillaker / Not beneficiaries but least affected and have underperformed. Should fare better against global sector than they have. States Steel Group (X.N) Rich Garchitorena

TECHNOLOGY (Positive Impact))

AU Optronics (2409.TW) Jerry Su 2-5% sensitivity in operating profit to ¥1 depreciation. Lower cost of raw materials (glass; polariser films, others)

LG Display (034220.KS) John Sung Lower cost of raw materials (glass; polariser films, others). 2-5% sensitivity in operating profit to ¥1 depreciation. Technology Micron Tech (MU) John Pitzer JPY Saves $500m (@ 100 JPY) less hedge offset for Elpida: Deal announced for 200bn JPY, or $2.5bn at 80 JPY/USD

Sharp (6753) Shunsuke Tsuchiya Around 24.5% earnings sensitivity for every ¥1 depreciation. Could improve its profitability and/or its market share

Components (4062) Akinori Kanemoto 5.5% sensitivity in operating profit to ¥1 depreciation. JPY translation gains + share gains + increasing utilisation rate

JPY translation gains; market share gain in TVs. 3.3% sensitivity in operating profit to ¥1 depreciation. a near 25% move in JPY/USD value since Consumer (6758) Shunsuke Tsuchiya 4Q12 means a 5-7% improvement in the cost structure, meaningful in the context of a very low margins business,

75-80% of Product COGS in Yen. 2.2% sensitivity in operating profit to ¥1 depreciation. The Company expects CY13 GM to increase 800-1000bps Storage Sandisk (SNDK) John Pitzer q/q partially on improved yen rates, and for roughly 5% of the expected 15-25% y/y cost/GB reduction to come from FX.

TECHNOLOGY (Negative Impact)

Printers / Decline in Yen affecting the competitive positioning and pricing of competitors (, Canon, Brother) biggest concern here, the direct risk Xerox / Lexmark / HP Kulbinder Garcha Copiers (i.e. translation that impacts revenues) not as much since the exposure to Japanese markets is minimal.

Technology Electro (009150.KS) Keon Han Likely share losses in substrates, MLCC though partly shielded by relationship with Samsung Elec.

Batteries Samsung SDI (006400.KS) Keon Han Likely share losses in Lithium batteries ( and Sony = 30% share), creating a medium-term opportunity for gains by Japanese competitors

Further 20% depreciation could have around 1.5% of positive impact on GM structure of D&S business and 2-3% of negative impact on EBIT

Tech Hardware Nokia (NOK1V.HE) Kulbinder Garcha July 2013 01 margins for NSN (assuming the Japanese cost exposure to be around 10% for D&S and the Japanese revenue exposure for NSN to be 16%)

9 Source: Credit Suisse Equity Research

01 July 2013

Global competitors and suppliers PEERs ® is the proprietary Credit Suisse supply-chain database, showing analyst-derived relationships between companies and their Customers, Suppliers, Competitors, Joint Ventures/other partners, and Equity Investments. CS analysts have classified each one of these ‘relationships’ as being of high, medium, or low relevance depending on the strength and significance of the relationship. The database and map also capture CS alpha scores and correlation between related companies. The interface gives the user the power to explore the relationship data quickly and easily by clicking through relationships, printing and exporting to Excel. Below we show an example of a stock (Komatsu) using the simple web-based tool.

Figure 11: PEERs example – Komatsu supply chain (6301.T)

01 July 2013 01

Source: Credit Suisse PEERs

Yen and You 10 01 July 2013

We list in Figure 12 the global stocks in our coverage alongside their Japanese competitors deemed of moderate or high (in relevance of their competitive positioning) and rated underperform or neutral. For full relationships using PEERs, please see Appendix 1.

Figure 12: Global underperform and neutral-rated stocks, alongside their Japanese competitors

Company Ticker Country Rating Sector Japanese Competitors (those in blue are 'highly' relevant)

Suzuki Motor Corp., Mazda Motor Corp., Toyota Motor Corp., BYD Company Limited 1211.HK China Neutral Auto Honda Motor Corp., Tokai Rika, Toyoda Gosei, Toyota Boshoku

Honda Motor Corp., Toyota Motor Corp., Mazda Motor Corp., Geely Automobile Holdings Ltd. 0175.HK China Neutral Auto Suzuki Motor Corp Mazda Motor Corp., Honda Motor Corp., Suzuki Motor Corp., Guangzhou Automobile Group 2238.HK China Underperform Auto Toyota Motor Corp Hero Motocorp Ltd. HROM.BO India Neutral Auto Mazda Motor Corp , Calsonic Kansei, Keihin, Takata Corp., Tokai Rika, Toyoda Mando Corp. 060980.KS South Korea Neutral Auto Gosei, Toyota Boshoku Guangxi Liugong Machinery 000528.SZ China Underperform Industrials Komatsu, Construction Machinery Lonking Holdings Ltd. 3339.HK China Underperform Industrials Hitachi Construction Machinery Sany Heavy Industry 600031.SS China Underperform Industrials Komatsu, Hitachi Construction Machinery Shanghai Electric Group Co., Ltd. 2727.HK China Neutral Industrials Mitsubishi Heavy Industries Daewoo E&C 047040.KS South Korea Underperform Industrials Kajima Corp., JGC, Obayashi Corp., Shimizu Corp., Taisei Daewoo Shipbuilding 042660.KS South Korea Neutral Industrials Mitsubishi Heavy Industries Doosan Heavy Industries & Cons. 034020.KS South Korea Neutral Industrials Mitsubishi Heavy Industries Hyundai Heavy Industries 009540.KS South Korea Neutral Industrials Mitsubishi Heavy Industries Samsung Engineering Co Ltd. 028050.KS South Korea Neutral Industrials JGC, Chiyoda, Sony LG Electronics, Inc. 066570.KS South Korea Neutral Consumer Sony, Sharp Corp Hyundai Steel Co. 004020.KS South Korea Underperform Steel Kobe Steel, JFE Holdings, Nippon Steel & Sumitomo Metal Baosteel 600019.SS China Neutral Steel Nippon Steel & Sumitomo Metal China Steel 2002.TW China Underperform Steel Nippon Steel & Sumitomo Metal Kobe Steel, Nippon Steel & Sumitomo Metal, JFE Holdings, Aichi POSCO 005490.KS South Korea Neutral Steel Steel Ford Otosan FROTO.IS Turkey Neutral Autos Suzuki Motor Corp. Alstom ALSO.PA France Neutral Capital Goods Mitsubishi Heavy Industries, Hitachi Nexans SA NEXS.PA France Neutral Capital Goods Sumitomo Electric Industries, Saint-Gobain SGOB.PA France Neutral Capital Goods NSG Group, Asahi Glass, Nippon Electric Glass, Central Glass Schneider SCHN.PA France Neutral Capital Goods Bouygues BOUY.PA France Underperform Capital Goods Shimizu Corp Philips PHG.AS Netherlands Neutral Capital Goods Corp., Sony, Hitachi Barloworld BAWJ.J South Africa Underperform Capital Goods Komatsu Sumitomo Metal Mining, , Hitachi, Mitsubishi Heavy Sandvik SAND.ST Sweden Underperform Capital Goods Industries NSK, THK, NTN, Calsonic Kansei, Denso, Keihin, Takata Corp., SKF SKFb.ST Sweden Underperform Capital Goods

Tokai Rika, Toyoda Gosei, Toyota Boshoku July 2013 01 Rieter Holding RIEN.S Switzerland Neutral Capital Goods Toyota Industries Corp Sulzer SUN.VX Switzerland Neutral Capital Goods Ebara Fenner FENR.L UK Neutral Capital Goods Bridgestone Corp

Morgan Advanced Materials MGAMM.L UK Underperform Capital Goods Calsonic Kansei, Keihin, Takata Corp., Toyoda Gosei, Toyota BorgWarner, Inc. BWA US Neutral Autos Boshoku, Tsubakimoto Chain Daihatsu Motor Co., Ltd., Honda Motor Corp., Nissan Motor Co., Ford Motor Co. F US Neutral Autos Toyota Motor Corp. Calsonic Kansei, Denso, Keihin, Takata Corp., Tokai Rika, Toyoda Magna International, Inc. MGA US Neutral Autos Gosei, Toyota Boshoku Danaher Corp. DHR US Neutral Capital Goods Sysmex Sumitomo Chemical, Teijin, Ube Industries, Hitachi, Daikin Honeywell International, Inc. HON US Neutral Capital Goods Industries, IHI Corp., Mitsubishi Heavy Industries Rockwell Automation, Inc. ROK US Neutral Capital Goods Mitsubishi Electric Accenture Plc. ACN US Neutral Software NTT Data Corp AGCO Corp. AGCO US Neutral Machinery Kubota Allison Transmission ALSN US Neutral Machinery Hino Motors, Ltd., Komatsu Paccar, Inc. PCAR US Neutral Machinery Hino Motors, Ltd., Isuzu Motors Ltd Source: Credit Suisse PEERs

Yen and You 11 01 July 2013

FX Strategy: The yen—the macro story Halftime in the game of the Yen Since the Japanese bubble began to burst in late 1989, the yen has generally traded in a Ric Deverell range between 100 and 130, with no clear trend. This pattern was disturbed as the US Head of Global subprime issues began to unfold, with Japanese investors increasing their home bias as Commodities Research, the external environment began to look more precarious. This tendency accelerated after GFX Strategy, and Asia Lehman fell, with repatriation flows pushing the yen above ¥/$120 in 2012. Fixed Income Research ric.deverell@credit- Following Mr Draghi’s July “we will save the Euro” speech, the intense period of global risk suisse.com aversion has slowly subsided (see The Slow Demise of the Fear Trade, 23 January 2013), +44 20 7883 2523 with the introduction of “Abenomics” changing the view of Japan from an international perspective, and more recently Kuroda’s shock and awe (see Bank of Japan “Shock and Awe…”, 04 April 2013) beginning to change domestic perceptions. In combination, these two factors have seen the yen return to the bottom of the “normal range”. While this movement has been significant, we believe that the correction in the yen is only around half complete, with the depreciation likely to run substantially further than many consider possible. We target 105 in 3 months, and 120 in 12 months, with a higher likelihood of further weakening.

Figure 13: Yen “normalisation” stage one complete 160 USDJPY Average 1990-2008 Forecast 150 140 130 120 110 100 90 80 70 1990 1992 1994 1997 1999 2001 2004 2006 2008 2011 2013 July 2013 01 Source: Credit Suisse Commodities Research, the BLOOMBERG PROFESSIONAL™ service

We also note that last time the yen fell to around 80, it subsequently rebounded to 147. While the circumstances are different this time around, it is clear that “game changing” policy is once again in play.  The pace of the rebound has to-date been very similar to that seen in the mid-1990s. To the extent the similarity continues, it suggests that once the yen moves below 100, its pace of depreciation will slow. Nonetheless, we think the general movement has a considerable distance to run.

PLEASE REFER TO THE MACRO DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT FOR ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS.

Yen and You 12 01 July 2013

Japan Economics: Why we expect USDJPY to hit 120 in 12 months The USDJPY exchange rate is supposed to reflect the relative position of expected Hiromichi Shirakawa inflation rates between the United States and Japan as long as the market believes in the Head of Japan Economics purchasing power parity principle. Assuming no material changes in expected inflation hiromichi.shirakawa@credit- rates in the US, to be simple, if the market anticipates Japan to beat deflation and enter a suisse.com new era of inflation, the USDJPY would rise or yen would depreciate. +81 3 4550 7117 We think that there are three main points for the market to anticipate Japan's inflation rates to rise in the future, which are summarised as follows. First, the announced strong commitment to achieve 2% CPI inflation in 2 years by both the BOJ and the government along with the introduction of an aggressive monetary base expansion scheme by the Bank. While the transmission mechanism from monetary expansion to demand growth or inflation can hardly be specified, a shock therapy type of policy action should lead to higher expected inflation rates. Actually, a break-even inflation rate has risen materially in the bond market (see Figure 14).

Figure 14: Break-even Japanese inflation rate (6 year) 2 1 0 -1 -2 -3 -4

-5

Oct 09 Oct Oct Oct 08 Oct 10 Oct 11 Oct 12

Apr Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13

Break-even inflation rate (6 year)

July 2013 01 Source: Credit Suisse Economics Research, the BLOOMBERG PROFESSIONAL™ service

Second, the continued low fiscal sustainability of Japan. The country will continue to suffer a large fiscal deficit and a rising public debt to GDP ratio (Figure 15) amid the on-going aging population or shrinkage of working-age population. There are essentially three ways to cut the deficit and lower the pace of increase in debt to GDP, namely spending reduction, tax hikes and achieving a faster inflation rate. The first two measures would not guarantee fiscal balance improvement as they could dampen demand. The third option should be more reliable, even taking into account the risk that higher inflation rates might lead to higher nominal debt cost (please refer to Should we worry about rising long-term interest rates?, Japan Economic Adviser, 16 May 2013). In this sense, financial markets have a rationale to price in higher future inflation rates unless they become confident that fiscal tightening measures would work in improving the fiscal balance materially.

Yen and You 13 01 July 2013

Figure 15: Japanese public debt to GDP 300%

250%

200%

150%

100%

50%

0%

FY80 FY92 FY04 FY82 FY84 FY86 FY88 FY90 FY94 FY96 FY98 FY00 FY02 FY06 FY08 FY10 FY12E

Public debt to GDP

Source: Japanese Cabinet Office and Credit Suisse Economics Research

Third, declining potential growth. Japan's main economic problem is contraction of supply capacity, due to rapid shrinkage of the working-age population, and the declining utilisation of capital stock amid the on-going hollowing out and limited improvement in productivity, rather than demand shortage. In our latest estimate, the output gap (the zero-inflation GDP gap) is likely to turn positive soon (please refer to Zero-inflation output gap would turn positive around the middle of this year, Japan Economic Adviser, 28 May 2013). Also, it remains hard for us to argue that unwanted upward cost pressures can be mitigated by the government’s reform initiatives (please refer to Will the third arrow of Abenomics be encouraging?, Japan Economic Adviser, 31 May 2013). Thus, in our view, the shrinking working-age population, the consequent weakening of the tax base, higher chances for the country to start suffering a twin deficit soon amid declining household savings and upward wage pressures all suggest that the value of the Japanese currency needs to decline. Importantly, the prospective devaluation of the currency would essentially be a reflection of deteriorating economic fundamentals of the country.

01 July 2013 01 In discussing the outlook for Japanese exporters’ competitiveness, meanwhile, a real value of the yen should be more relevant rather than a nominal value of the currency. In particular in the short run, we tend to think that the yen would devalue in real terms, which should improve exporters’ competitiveness. Yet, there are risks; the dynamics look more complicated over the medium-term as rising costs in domestic production may offset the positive impacts on competitiveness from a nominal devaluation. Finally, we believe that the main risk to prevent the yen from devaluing as we expect is fiscal tightening or the planned consumption tax rate hikes starting in April 2014. If the tightening materially dampens inflation expectations in the market, which may foresee a major slowdown in personal consumption, downward pressures on the yen would ease at least temporarily.

PLEASE REFER TO THE MACRO DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT FOR

ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS.

Yen and You 14 01 July 2013

Global Equity Strategy

Our Global Equity Strategy team publish today a detailed report on Japanese equities, revisiting the drivers behind their overweight stance. We highlight some of the key Andrew Garthwaite influences on corporate earnings that emerge from their analysis, influencing companies Global Equity Strategy andrew.garthwaite@credit- both inside and outside of Japan. We focus on four key macro themes from an ongoing suisse.com weakening of the yen: +44 20 7883 6477 1) The potential boost to Japanese corporate profitability and related analyst earnings estimates (a fact underpinning our positive stance on Japan). Robert Griffiths Global Equity Strategy 2) The potential scope for an increase in domestic sales growth has probably been robert.griffiths@credit- underestimated. Thus investors should be focusing on domestic cyclicality. suisse.com +44 20 7883 8885 3) The typical “pair trades” that emerge from the perceived competitive threat amongst global sectors; we screen the obvious candidates. 4) From an indirect perspective, a stronger euro/yen could pose problems for European companies by adding to deflationary pressures in the Euro-area. This could compound the competitiveness issues for companies.

1) EARNINGS: A clear positive for Japanese competitiveness, domestic growth and ultimately corporate profits Our FX team have a 12-month forecasts for ¥/$ of 120. Were this to occur, it would imply, on the OECD’s current estimate of purchasing power parity, that the yen would be trading around 12% below its fair value. As the chart below illustrates, this would be the first time that the yen has been cheap on a PPP basis since at least 1986 (having reached fair- value on PPP briefly at the height of the carry-trade in 2007). In other words, in recent history, Japan’s exporters have never had the benefit of a cheap currency. They do now.

Figure 16: If our FX team is right in their forecast, the yen would be cheap on a PPP basis for the first time in at least the past 30 years

105% JPY/USD, deviation from PPP, with our FX team yen

85%

01 July 2013 01 65%

45%

25%

5%

-15% 1986 1990 1995 1999 2004 2008 2013

Source: Thomson Reuters, Credit Suisse Equity Research

Yen and You 15 01 July 2013

Historically, there has been a reasonably close relationship between the value of the yen and Japanese corporate earnings. A weaker yen boosts profitability through both the transmission mechanism of a stronger domestic economy, and through the ability of Japanese corporates to win global market share through lower foreign selling prices at constant margins (or by increasing margins by keeping foreign selling prices unchanged). As Figure 17 below illustrates, forward EPS forecasts have been tracking higher as the yen has weakened. If our FX team are correct that the yen will weaken by a further 20% from current levels, the currency alone would imply a further 10% upgrade to 12-month forward Japanese earnings estimates from current levels, with the currency-sensitive sectors seeing increases far in excess of that. This also neglects to consider any dynamic to domestic growth or any structural change in the corporate sector. There is also a message for relative regional EPS momentum and price performance, particularly vs GEM, which have typically proved most sensitive. Japanese EPS have risen by 20% relative to GEM earnings on the back of yen weakening. Relative EPS growth has traditionally been a key driver of relative performance – and the same dynamic has driven GEM underperformance this year, in our view. Yen weakness would pose an ongoing issue.

Figure 17: The weakening of the yen is consistent with a Figure 18: GEM has underperformed Japan, as Japanese further upgrade to Japanese EPS EPS got upgraded on the back of a weaker yen 130 110 128 53 Japan relative to GEM 120 123 120 Japan 12 m fwd EPS (¥, 6 week lag) 51 EPS Yen TWI (rhs inv) 130 118 Price performance 49 Assuming 20% Yen depreciation 110 140 47 113 150 100 45 108 160 43 103 90 170 41 98 180 80 39 93 190 37 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 88 70 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Source: Thomson Reuters, Credit Suisse Equity Research Source: Thomson Reuters, Credit Suisse Equity Research

01 July 20 01

2) CYCLICALS: The boost to domestic Japanese sales

13

Since their trough at the start of this year, consensus forecasts for 2013 GDP growth in Japan has been revised up by just 0.7%. Aggregating the tailwinds provided to the Japanese economy by the weakening of the yen, the easing of fiscal policy and the fall in oil prices (with Japan a significant net oil importer) suggests, in our view, a 2% to 2½% boost to GDP, indicating GDP forecasts have further to rise. Currently, Japan scores second on our macro momentum scorecard (following a rise in composite new orders in the UK in May), supporting our ongoing overweight on Japanese equities.

Yen and You 16 01 July 2013

Figure 19: Japan scores second on our global macro momentum scorecard Composite PMI Macro surprises Rank Region Index, now Index, 3m ch Level 3m change Overall score Weight 33% 33% 17% 17% 1 UK 56.4 4.0 -9.1 33.6 1.0 2 Japan 54.4 3.7 17.7 45.3 0.9 3 GEM 51.3 -1.6 -47.0 -35.1 -0.4 4 US 52.4 -5.6 -29.0 -35.3 -0.5 5 Europe ex UK 47.5 -1.3 -53.2 -114.1 -1.0 Region having high PMIs and rank high on surprises are on top. Source: Markit, Thomson Reuters, Credit Suisse Equity Research

Figure 20: Since their trough at the start of this year, Figure 21: The reaction of Japanese earnings estimates consensus estimates for 2013 Japanese GDP growth have thus far has been relatively muted moved up by around 1% 1.8 85

1.6 Japanese consensus GDP forecast, 2013 Y/Y % chg 80

75 1.4 70 1.2 65

1.0 60 Japanese EPS - absolute 55 Mar-13 Mar-14 Mar-15 0.8 50

0.6 45 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Thomson Reuters, Credit Suisse Equity Research Equity Research

Since the low in the Japanese market relative to global markets last autumn, absolute sales forecasts for the current fiscal year have increased by only around 0.6%. Year on year sales growth forecasts for this fiscal year have been revised up by 2.5pp (from 2.4% to 4.9%). Another 1% upgrade to sales growth would in turn boost EPS by around 10% July 2013 01 given the very high operational leverage of Japanese companies. Compared to previous episodes of yen weakness, the reaction of Japanese earnings has so far been relatively muted. Since December last year, earnings estimates for both the fiscal year ending in March 2014 and March 2015 have moved higher by just over 10%.

3) GLOBAL PAIR TRADES: Companies competing against Japanese exporters will likely suffer There are four general points we would make when considering the competitive threat to non-Japanese companies: First, as Figure 22 shows, Japan has strong market share positions in a wide range of industrial products and, often, the high value end position of the value chain.

Yen and You 17 01 July 2013

Figure 22: Japan global market share in different product categories Japan's Market Category Share (% global) Protective polarizer film for LCD's 100% Automobile CVTs 92% Aluminum capacitors 89% Game software 87% Memory testers 83% Electrode materials for Li-ion batteries 78% MLCCs 78% DSCs 75% Car navigation systems 74% Silicon wafers 72% MFPs/MFCs 69% Polarizers 64% Wire harnesses 58% Small motors for automobiles 47% Li-ion batteries for mobile phones 46% LCD TVs 44% Semiconductor lithography equipment 43% Electronic components 43% DVD players/records 41% Mobile-phone camera modules 36% HDDs 34% Multilayer PCBs 32% Automobiles 32% Silicon-based solar cells 27% Display devices 25% Semiconductors 22% Electronic equipment 22% Computers and data terminals 16% Source: Thomson Reuters, Credit Suisse Equity Research estimates

Second, it is clear that exporters are extremely sensitive to moves in the yen. We can see this whether we look at European autos or the Korean equity market (which tends to be very export oriented). To a degree it ties back into the relative earnings momentum chart shown in Figure 17. Figure 23: The yen/euro exchange rate is closely related Figure 24: The relative performance of the Korean equity to the performance of Euro area autos relative to their market is closely correlated with the yen/won exchange Japanese peers rate

180 0.50 2.3

170 1600 July 2013 01 JPY / EUR 2.1 160 0.45 Japan autos / Euro area autos, rhs 1.9 1400 150 1.7 140 0.40 1200 1.5 130

120 1.3 0.35 Korea relative to World 1000 110 1.1 KRW/JPY (rhs) 100 0.9 0.30 800

90 0.7

80 0.5 0.25 600 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013

Source: Thomson Reuters, Credit Suisse Equity Research Source: Thomson Reuters, Credit Suisse Equity Research

Yen and You 18 01 July 2013

Third, we find that historically investors tend to quickly adjust to the price effect of a significant depreciation (the so-called translational impact), but a recognition of the positive volume impact tends to take 6 to 9 months – the so-called J curve effect in economics. Moreover, analysts tend to underestimate the impact of currency moves in third markets (for example, because the yen has depreciated, Japanese auto manufacturers are likely to win market share from German auto manufacturers in Brazil). Fourth, the key determinants of the extent to which Western companies are threatened by yen weakness depends, in our view, on the following factors: − Whether their product is homogenous (such as ball bearings or basic mechanical parts) or sufficiently differentiated to limit potential Japanese competition (i.e. if the product benefits from significant brand recognition). On the whole, the quality of Japanese brands has diminished in recent years, although Japanese corporates do tend to dominate in certain areas such as autos, consumer electronics, gas turbines, semis, ball bearings, industrial automation, auto components and solar, hence, higher up the value added area of manufacturing (unproved profitability can provide them the ability to rebuild their brand strength). − Whether there is spare Japanese capacity within a given industry in order to exploit the boost to competitiveness from a weaker yen (with the risk that Japan’s extended period of stagnation may have led to hysteresis within some industries, limiting the speed with which they can react to pricing signals). − The speed with which contracts are re-negotiated, with short-cycle products likely to benefit from a re-pricing more quickly than longer-cycle products. − The extent to which other countries attempt to devalue their own currency in response to the weakening of the yen (which is particularly relevant in the case of Korea). These factors are all explained by our analysts in the sector sections. Below, we summarise sectors and stocks where Western companies go head to head with Japanese companies alongside a number of ‘pair trades’ that display empirical evidence of sensitivity to yen movements. Standing in the way of these historical patterns have proved far from rewarding. We have excluded names from the tech space in these lists as our analysts go into this and the supply chain relationships in much more detail in the specific technology chapter (see page 24). We would also flag the competitor and supplier analysis carried out using our

PEERs supply chain framework in Appendix 1 (Page 104). July 2013 01

Yen and You 19 01 July 2013

Figure 25: European companies that compete against Japanese companies CS Rating European relative Sector European company Japanese competitor toJapanese company European Japanese price rel since 24 Jul ($) company competitor

Kongsberg Gruppen As Nabtesco Corporation(C) -8.5% Not Cov ered Neutral BESAM(Assa Abloy Ab) Nabtesco Corporation(C) 31% Outperform Neutral Industrials: IMI Plc SMC Corporation(C) 24% Outperform Neutral Factory Kuka Ag Yaskaw a Electric Corporation(C) 7% Not Cov ered Outperform Automation ABB Ltd Yaskaw a Electric Corporation(C) -26% Outperform Outperform Siemens Ag Yaskaw a Electric Corporation(C) -30% Outperform Outperform Volvo Ab Komatsu Ltd.(C) 6% Underperform Outperform Industrials: Volvo Ab Hitachi Construction Machinery Co., Ltd.(C) -7% Underperform Neutral Infrastructure Sulzer Ag Ebara Corporation(C) -11% Neutral Neutral Ksb Aktiengesellschaft Ebara Corporation(C) -20% Not Cov ered Neutral ABB Ltd Fanuc Corporation(C) 41% Outperform Outperform Industrials: Siemens Ag Fanuc Corporation(C) 34% Outperform Outperform Machine Tools Demag Cranes Okuma -1% Not Cov ered Neutral SKF Ab NSK Ltd.(C) -19% Underperform Outperform Industrials: Auto SKF Ab NTN Corporation(C) -4% Underperform Underperform consumable SKF Ab JTEKT Corporation(C) -4% Underperform Outperform Siemens Ag Mitsubishi Heav y Industries, Ltd.(C) -13% Outperform Outperform Alstom Sa Mitsubishi Heav y Industries, Ltd.(C) -26% Neutral Outperform Industrials: Siemens Ag Kaw asaki Heav y Industries, Ltd.(C) -10% Outperform Not Cov ered Pow er/Heav y Saipem Spa JGC Corporation(C) -66% Underperform Outperform Industry / E&C Technip JGC Corporation(C) -13% Outperform Outperform Saipem Spa Chiy oda Corporation(C) -57% Underperform Neutral Technip Chiy oda Corporation(C) 12% Outperform Neutral Siemens Ag Toshiba Corporation(C) -14% Outperform Outperform Industrials: Siemens Ag Hitachi, Ltd.(C) 8% Outperform Neutral Healthcare Philips Electronics N.V. Toshiba Corporation(C) -5% Neutral Outperform Philips Electronics N.V. Hitachi, Ltd.(C) 19% Neutral Neutral Industrials: ABB Ltd Yokogaw a Electric Corporation(C) 13% Outperform Not Cov ered Process aut. Invensys Plc Yokogaw a Electric Corporation(C) 39% Neutral Not Cov ered Alstom Mitsubishi Heav y -26% Neutral Outperform Gas turbines Siemens Mitsubishi Heav y -13% Outperform Outperform SKF NSK -19% Underperform Outperform Bearings SKF NTN -4% Underperform Underperform SKF JTEKT -4% Underperform Outperform Kone Mitsubishi Electric 11% Neutral Neutral Kone Hitachi 9% Neutral Neutral Kone Toshiba -6% Neutral Outperform Kone Fujitec -19% Neutral Not Cov ered Elev ators Schindler Mitsubishi Electric -3% Outperform Neutral July 2013 01 Schindler Hitachi -4% Outperform Neutral Schindler Toshiba -17% Outperform Outperform Schindler Fujitec -29% Outperform Not Cov ered

Sandvik Komatsu -14% Underperform Outperform Atlas Copco Komatsu 3% Outperform Outperform Mining & Metso Komatsu 1% Outperform Outperform construction Sandvik Furokaw a -22% Underperform Underperform equipment Atlas Copco Furokaw a -6% Outperform Underperform Metso Furokaw a -8% Outperform Underperform Renault Toy ota 5% Neutral Outperform Autos BMW Toy ota -21% Outperform Outperform Auto components Autoliv Takata 29% Underperform Neutral Chemicals Umicore Nichias -14% Neutral Not Cov ered Swatch Citizen 28% Outperform Not Cov ered Lux ury Swatch -13% Outperform Not Cov ered Philip Morris Japan Tobacco -13.2% Neutral Outperform Tobacco BAT Japan Tobacco -12.5% Outperform Outperform IMT Japan Tobacco -19.2% Outperform Outperform Source: Thomson Reuters, Credit Suisse Equity Research

Yen and You 20 01 July 2013

Figure 26: US companies that compete against Japanese companies CS Rating US relative toJapanese Sector US company Japanese competitor company price rel since Japanese US company 24 Jul ($) competitor

Parker-Hannifin Corp Nabtesco Corporation(C) 20% Outperform Neutral Industrials: Moog Inc -Cl A Nabtesco Corporation(C) 40% Neutral Neutral Factory Parker-Hannifin Corp SMC Corporation(C) 1% Outperform Neutral Automation Sauer-Danfoss Inc SMC Corporation(C) 39% Not Cov ered Neutral Caterpillar Inc Komatsu Ltd.(C) -8% Outperform Outperform Deere & Co Komatsu Ltd.(C) 0% Outperform Outperform United Technologies Corp Daikin Industries, Ltd.(C) -24% Outperform Neutral Industrials: Johnson Controls Inc Daikin Industries, Ltd.(C) -10% Outperform Neutral Infrastucture Ingersoll-Rand Plc Daikin Industries, Ltd.(C) -18% Outperform Neutral Flowserve Corp Ebara Corporation(C) -1% Outperform Neutral Stanley Black & Decker Inc Makita Corporation(C) -31% Outperform Neutral Timken Co NSK Ltd.(C) -13% Not Cov ered Outperform Timken Co NTN Corporation(C) 4% Not Cov ered Underperform Industrials: Auto Timken Co JTEKT Corporation(C) 3% Not Cov ered Outperform Borgwarner Inc Tsubakimoto Chain Co.(C) 17% Neutral Outperform Industrials: General Electric Co Mitsubishi Heav y Industries, Ltd.(C) -20% Outperform Outperform Pow er/Heav y KBR Inc Jgc Corporation(C) 16% Outperform Outperform Industry /E&C KBR Inc Chiy oda Corporation(C) 49% Outperform Neutral Industrials: General Electric Co Toshiba Corporation(C) -20% Outperform Outperform Healthcare General Electric Co Hitachi, Ltd.(C) 0% Outperform Neutral Industrials: Emerson Electric Co Yokogaw a Electric Corporation(C) 2% Outperform Not Cov ered Process Automation Honeywell International Inc Yokogaw a Electric Corporation(C) 17% Neutral Not Cov ered Ford Toy ota 2% Neutral Outperform Ford Honda 39% Neutral Neutral Ford Nissan 44% Neutral Outperform Autos General Motors Toy ota 4% Outperform Outperform General Motors Honda 43% Outperform Neutral General Motors Nissan 47% Outperform Outperform Aflac Dai-ichi -1% Outperform Outperform Life insurance Aflac Pru(Japan) -6% Outperform Not Cov ered Aflac Sony Financial Holdings 33% Outperform Underperform Nike Inc Asics Corporation(C) -8% Neutral Neutral Nike Inc Mizuno Corporation(C) 24% Neutral Not Cov ered Athletic Footw ear Under Armour Inc Asics Corporation(C) -24% Outperform Neutral July 2013 01 Under Armour Inc Mizuno Corporation(C) 2% Outperform Not Cov ered Ralph Lauren Corp Fast Retailing Co., Ltd.(C) -26% Outperform Underperform PVH Corp Fast Retailing Co., Ltd.(C) 1% Outperform Underperform

Fashion Apparel Abercrombie & Fitch -Cl A Fast Retailing Co., Ltd.(C) -16% Neutral Underperform Urban Outfitters Inc Fast Retailing Co., Ltd.(C) -16% Outperform Underperform Source: Thomson Reuters, Credit Suisse Equity Research

Yen and You 21 01 July 2013

Figure 27: Kone relative to Toshiba Figure 28: Schindler relative to Mitsubishi Electric

90 75

230 95 180 80 100 160 180 105 85 110 140 90 115 130 120 120 95 125 100 80 100 130 Schindler rel Mitsubishi Electric 80 CHF/Yen, rhs inv Kone rel Toshiba Eur/Yen, rhs, inv 135 105 30 140 60 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13

Source: Thomson Reuters, Credit Suisse Equity Research Source: Thomson Reuters, Credit Suisse Equity Research

Figure 29: Philips relative to Hitachi Figure 30: Ford Motor relative to Toyota Motor

80 130 90

110 100

90 110

70 120

50 130 Philips rel Hitachi Eur/Yen, rhs inv

30 140 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13

Source: Thomson Reuters, Credit Suisse Equity Research Source: Thomson Reuters, Credit Suisse Equity Research

Figure 31: Johnson Controls relative to Daikin Industries Figure 32: Stanley Black & Decker relative to Makita July 2013 01

Source: Thomson Reuters, Credit Suisse Equity Research Source: Thomson Reuters, Credit Suisse Equity Research

Yen and You 22 01 July 2013

4) EUROPE: A falling yen will aggravate the deflationary pressures in the Euro- area – and increase the pressure on the ECB to act The Euro-area offers positive 10-year real bond yields. Consequently, it should benefit from Japanese fund flows, as Japanese investors move funds out of the country in reaction to yen-denominated real bond yields turning negative.

Figure 33: The euro and GEM currencies offer positive Figure 34: The Euro-area current account balance is at a real 10-year bond yields 15-year high 1.5% 1.5% Euro area current account balance, % GDP 10-year real bond yield 1.0% 1.0% 0.5% 0.5% 0.0%

0.0% -0.5%

-0.5% -1.0%

-1.0% -1.5%

-1.5% -2.0% 1998 2000 2002 2004 2006 2008 2010 2012 UK Japan US Euro-area GEM Source: Thomson Reuters, Credit Suisse Equity Research Source: Thomson Reuters, Credit Suisse Equity Research

The euro trade-weighted index has already risen by 10% since August 2012, on the back of improving Euro-area sentiment, a current account balance at a 15-year high and the ECB balance sheet shrinking by 15% since July. Capital inflows from Japan are likely to add to euro strength. This would be a negative for Euro-area growth momentum and should put further downward pressure on Euro-area inflation, which is already running at 1.2%, considerably below the ECB’s target of “close to but below 2%”. Currently, the ECB is forecasting inflation of 1.3% next year and given weak growth, falling commodity prices and a stronger currency, this figure could come down further when the ECB publishes its new forecasts.

Thus, the new BoJ policy and the resulting yen weakness is adding to the likelihood that July 01 the ECB undershoots its inflation target – and hence is adding to the pressure on ECB to

ease monetary policy. This is the sense in which we have long argued that quantitative 2013 easing is potentially “contagious”: the more central banks are increasing the size of their balance sheets, the more those developed market central banks not participating in the easing efforts will be forced to join in (for more details on this argument, see our report Another step towards synchronized QE, December 2012). The slower they are in doing so, the greater the risks to growth and the fortunes of the corporate sector. For a discussion of possible moves by the ECB to ease monetary conditions in the Euro- area, see our economists' report, Supporting SMEs: ECB faces rocky road ahead, May 2013, with negative deposit rates apparently a policy move under consideration.

Yen and You 23 01 July 2013 Equity Research: Global Technology Key global takeaways By itself, the fall in the value of the yen is not going to create winners out of the Japanese Manish Nigam tech industry, the same way that the multi-year appreciation to less than ¥/$80 did not kill Asian-Pac Technology the sector. Nevertheless, we do believe that the change in the currency value is a material manish.nigam@credit- event with the following four main conclusions: suisse.com +852 2101 7067 (1) Most Japanese tech company earnings have a significant sensitivity to the value of the yen, thus helping their earnings on account of translation gains. This is the most John Pitzer obvious conclusion, and to some degree has already been reflected in stock prices Global Technology Sector and consensus earnings estimates. Head john.pitzer@credit- (2) Given how poor OPM and ROEs have been for Japanese companies in recent years, suisse.com it is reasonable to believe that companies are going to focus on improving their +1 212 538 4610 profitability rather than going for share gains at least in the initial few quarters. (3) Japan is either already quite dominant in certain areas or only has a marginal presence, thereby limiting the impact on global market share shifts on account of movements in yen. Nevertheless, given our house view that the yen could weaken to 120 in a year’s time, it is quite likely that there are going to be competitive shifts in some areas. We believe that Japanese companies in substrates/PCBs, passives and semi wafers are likely to see market share gains. Shifts are also likely, though less so, in small batteries and in HDD components. Similarly, we think that there could be Translation benefits for scope for Japanese TV brands to regain some of their global shares if they can get Japan tech companies are their production and distribution strategy right. Lastly, Asian TFT manufacturers stand obvious and reasonably well to gain on their costs as LCD glass and some other key raw materials are priced in understood yen. The potential impact on global semis is limited.

(4) Looking at how consensus has changed earnings estimates YTD, we believe that while a part of the yen-related translation benefits have been built into FY14 estimates, Less obvious is the impact the underlying poor demand fundamentals in 1Q13 have meant that most analysts on market shares, but we do have erred on the side of caution on that front. Secondly, at this stage, hardly anyone believe that over the next seems to be building in the medium-term impact of yen changes on market shares of 12-18 months, we should either the Japanese companies or their competitors. see shifts in some product categories

For further detail, please see Asia Technology Strategy: Yen and you: What JPY move means for the tech sector, 20 May 2013. Consensus estimates do not seem to be building that in

Yen and You 24 01 July 2013

Stock / company impact

Figure 35: Likely winners and losers over the next 12-18 months Name Ticker Key product exposure Sensitivity of OP Comments to 1 yen chg. Gainers Murata 6981 MLCC (32%); comm modules (32%) 2.4% JPY translation gains + potential share gains TDK 6762 HDD parts (27%); MLCC (14%) 3.4% JPY translation gains + potential share gains Ibiden 4062 Substrates (41%); PCB (15%) 5.5% JPY translation gains + share gains + increasing utilisation rate AUO/LGD 2409.TW/ TFT panels (100%) 2-5% Lower cost of raw materials (glass; polariser films, 034220.KS others) Sony 6758 TVs (15%); DSC/ camcorders (11%) 3.3% JPY translation gains; market share gain in TVs Sandisk SNDK NAND Product (93%) 2.20% 75-80% of Product COGS in yen JPY Saves $500m (@ 100 JPY) less hedge offset for Elpida: Deal announced for 200bn JPY, or Micron MU Elpida Acquisition (17%) TBD $2.5bn at 80 JPY/USD On Semiconductor ONNN Sanyo (10%) 0.20% COGS/OpEx impact from Sanyo Acquisition Losers SEMCO 009150.KS MLCC (22%); camera modules * Likely share losses in substrates, MLCC though (21%); substrates/PCB (26%) partly shielded by relationship with Samsung Elec. Unimicron 3037.TW IC carrier (45%); HDI (40%) * Likely share losses in PCB and substrates Samsung SDI 006400.KS Battery (58%); PDP (35%) * Likely share losses in small Li batteries LG Electronics 066570.KS TVs (38%); appliance (29%) * Negative margin impact or share in TVs * Potential market-share/ margin loss over 12-18 months. Source: Credit Suisse Equity Research estimates

Japan: A major player across the tech supply chain Our approach In an ideal world for analysts, companies would be single product companies with the split of their revenues, fixed costs and variable costs known in terms of key currencies, thereby helping an analyst work out various sensitivities. However, in practice, almost all of Japanese tech companies are multi-product companies with no split available by currency for costs, and revenue split available mainly for domestic versus export markets. Given these constraints, the logic we have used to conduct this exercise is as follows: we first consider market share for Japanese companies in all the major tech sub-sectors to figure out their degree of presence in various sectors. We then look at companies whose earnings are quite sensitive to the yen (a proxy for cost/revenue analysis). Combining the two, we narrow down to tech sub-sectors most vulnerable to share shifts on account of yen depreciation. We also look at OPM and ROE data to subjectively figure out if the companies would use the yen-related gains to improve their profitability or to go after share gains. Lastly, we tabulate how earnings for these Japanese stocks and the most likely to be impacted non-Japanese stocks have changed YTD to gauge to what extent these dynamics are already reflected in fundamentals (current forecast earnings). Japanese companies have presence across the tech supply chain—from upstream semiconductors and components to electrical machinery and equipment, to downstream consumer electronics products. Japan clearly has a strong position in three main areas of tech—components, everything Main areas of dominance: optics-related (cameras, laser printers, copiers), and semiconductor equipment and components, optics-related, wafers. It also has a strong position in some of the tech/electronics materials and semi equipment chemicals, but usually these materials are a small part of larger conglomerates, with glass being one of the exceptions. In Figure 36 we have listed out market share for various tech products held by Japanese and non-Japanese companies. One of the issues in looking across the supply chain is that the number of distinct tech components is quite high and one risks drowning under the

Yen and You 25 01 July 2013 weight of data. Hence, in the figure below, we have narrowed down to some of the main tech categories and have removed certain components from the components category where Japanese companies have over 90% share (as the aim here is to identify the likelihood of market share shifts as a result of the movements in yen). Globally, in aggregate, it is estimated that about 30% of tech components come from Japan. Components, however, comprise a wide variety of electronic parts and in some of these components (such as crystal components for handsets, Piezo-electric device, ceramic packages, inductors), Japan has over 90% share of the global market, as our analyst Akinori Kanemoto points out. In other areas such as capacitors (MLCC), HDD motors, Flip-chip BGA packaging and wireless-LAN modules for handsets, it has a 70-80% share, whereas it has a share of under 30% in HDD heads, HDD, flip-chip CSP, PCBs for smartphones and in small Lithium batteries. Among semi components, it has a very small share in DRAM, but a fairly significant (~40%) share in NAND. Outside of memory, Japan’s share in global semis is rather limited outside of certain customised products. Japan also has a relatively high global share in certain electrical chemicals and materials, but most of these products are small parts of larger conglomerates, making an analysis difficult. One area where Japan clearly has a strong share is TFT glass (~50%), and movement in yen value has implications here. In end-products, Japan dominates the cameras market as it does in the copier/laser printer market (Xerox and HPQ source their supplies/products from the Japanese). One area where Japan used to be a leading player but has been losing share is flat panel TVs—a trend that could potentially reverse over the coming quarters given the weakness in the yen. Japanese companies have a very small share in both PCs and smartphones. Japan has a strong presence in semi equipment manufacturing, with competition largely against the US-based companies and one prominent European company (ASML). However, as we discuss in the next section, there is very little sensitivity to yen for earnings of these companies. One exception would be in the area of semi wafers.

Yen and You 26 01 July 2013

Figure 36: Market share for various tech products held by Japan and non-Japan companies Products Japan Rest of the world Major player Share Major player Share Components MLCC Murata Mfg, , TDK, Kyocera 70% SEMCO, Yageo, Walsin 30% HDD-SPM , Minebea 80% SEMCO 20% HDD Head TDK 30% STX, WD, HGST 70% FC-PKG Ibiden, Shinko Elec., NGK Spark Plug, 70-80% Nanya PCB, Unimicron, SEMCO, Kinsus 20-30% Kyocera SLC Technology PCB for smartphones Ibiden 20% Unimicron, SEMCO, AT&S, etc. 60-70% FC-CSP Ibiden 30-35% Kinsus, SEMCO, Unimicron, Nanya PCB, 65-70 SEMCO WLAN module for handset Murata Mfg., Mitsumi Elec., TDK, Taiyo 70% USI, SEMCO 30% Yuden HDD Toshiba, Hitachi GST 20% Seagate, Western Digital 80% Battery - Small LiB Panasonic (incl. Sanyo), Sony, 30% Samsung SDI, LG Chem, BYD, ATL 70% Memory DRAM Elpida <15% Samsung, SK Hynix, Micro, Nanya Tech >85% NAND Toshiba/SanDisk 40% Samsung, Micro, SK Hynix 60% Display TFT LCD large size panel Sharp <5% LGD, Samsung, Innolux, AUO, BOE >95% LCD Glass AGC, NEG, AvanStrate 50% Corning Groups, LGC 50% End products TFT-LCD TV Sony, Toshiba, Panasonic, Sharp 20% Samsung, LGE, TCL 80% PC Toshiba, Sony, <10% HP, Lenovo, Dell, Acer, Asus >90% Camera - Interchangeable lens Canon, , Sony, Olympus, Panasonic >95% Samsung <5% Camera - Compact Sony, Canon, Nikon, Fujifilm, Panasonic 65% Samsung 35% Copier Standalone/Flatbed MFP Ricoh, Canon, , Sharp 75% Xerox 25% Laser Printers Canon, Ricoh, Brother, 30-35% HP, Xerox, Lexmark, Samsung 65-70% Smartphone Sony <5% Samsung, Apple, Nokia, Blackberry, HTC >95% Equipment/ wafer Lithography equipment Nikon, NuFlare, Canon 25% ASML 75% Etch, clean and planarisation , Mfg, 50% Lam Research, Applied Materials 50% equipment Hitachi hi-tech, Ebara Deposition equipment Tokyo Electron, Hitachi Kokusai, Canon 20% Applied Materials, Lam Research, ASMI 80% Anelva Total test equipment 55% Teradyne, LTX-Credence 45% Total die-level manufacturing Disco, Towa, Shinkawa, Hitachi hi-tech 20% Kulicke & Soffa, ASMI, Besi 80% equip. Semi wafer Shin-Etsu Handotai, Sumco 60% Siltronic, MEMC Electronic Materials, LG 40% Siltron Source: Gartner, IDC, Credit Suisse Equity Research estimates

Earnings sensitivity to the yen After using the market shares as a starting point, i.e., looking at sectors where Japanese companies have a meaningful presence, the next step is to identify in which areas Japanese companies gain out of the yen move. While a thorough analysis would need a split of revenues, variable costs and fixed costs by yen and non-yen, in practice, such data is just not available (except for a broader revenue split between the domestic and the export markets). In addition, most of these companies are multi-product companies and hence we also do not have the split of the cost base by various product lines. So to work around that problem, we have decided to use a proxy. We looked at every company’s sensitivity of operating profit to changes in the value of the yen—a number that is routinely communicated by these companies to the market. The higher the sensitivity of earnings to yen, theoretically speaking, the higher would be the change in the total profitability for the

Yen and You 27 01 July 2013 company with a depreciating yen, thereby leaving it with the option of improving its profitability or improving its market share or a combination of the two. In Figure 37, we have listed out the sensitivity of OP to 1 yen change in currency value for Components companies are some of the main tech companies in our coverage universe in Japan. As is obvious, most sensitive to yen moves component companies are the most sensitive to yen changes. In general, the sensitivity of earnings for semicap equipment companies is very low, though most of them do gain somewhat on account of simple translation gains. Advantest is one exception to the rule here. Toshiba’s sensitivity to the yen for its NAND business should be fairly high as most of its cost base is yen based, whereas its revenues (outside of its sales to Sandisk) are US dollar-based. However, for the company as a whole, total NAND revenues are only 8% of the total. Camera/printer and copier (precision) companies all have modestly high sensitivity to yen movement, as do the consumer electronics names. Glass companies should theoretically have a high sensitivity to yen movements, but the bulk of their overseas sales contracts are signed in yen terms and hence that is not the case—though that also means that their key customers (AUO, LGD, CMI) do gain on their raw material costs because of the yen depreciation. Figure 37: Sensitivity of operating profit to 1 yen change in currency value Consumer electronics Code Company Sensitivity of Code Company Sensitivity of OP to 1 yen OP to 1 yen companies are also quite change in JPY change in JPY sensitive to yen moves Electronic components Glass 6762 TDK 3.4% 5201 Asahi Glass 0.2% 6594 Nidec 1.5% 5214 Nippon Elec. Glass 0 4062 IBIDEN 5.5% Semi wafers/ chemicals 6981 Murata 2.4% 4063 Shin-Etsu Chemical 1% 6971 Kyocera 1.5% 3436 SUMCO 3% 6806 Hirose Electric 1.5% Consumer electronics 6976 Taiyo Yuden 4.7% 6752 Panasonic 1.9% 5334 NGK Spark Plug 4.3% 6952 1.0% Semis/ equipment/ elec machinery 6758 Sony 3.3% 6502 Toshiba 1% 6753 Sharp 24.5% 6503 Mitsubishi Electric 2% 7974 3.0% 6701 NEC 1% Precision 6702 Fujitsu 1% 6724 Seiko 3.6% 6501 Hitachi 2% 7752 Ricoh 1.8% 6754 1% 7751 Canon 2.3% 7735 Dainippon Screen 0% 6448 Brother Indus 1.8% 8035 Tokyo Electron 0% 7733 Olympus 1.2% 6146 DISCO 3% 4902 Konica Minolta 2.1% 6857 Advantest 12% 7731 Nikon 2.5% Source: Company data, Credit Suisse Equity Research estimates

Initial focus on margin improvement, but share shifts will happen eventually Speaking with various Japanese tech companies and listening to what they have been saying during their result briefings for this quarter, it appears the primary focus to begin with for these companies would be to improve their margins rather than to use the weakness in the yen to go after market share. In aggregate, operating margins for Japanese tech companies have declined steadily for the past six to seven years, and return on equity has fallen from 9.6% to 6.3% over that period. Falling ROE has been one of the key drivers behind the derating of Japan tech on a P/B basis, in our opinion.

Yen and You 28 01 July 2013

Figure 38: CS Japan tech—operating margin (%) Weak OPMs and ROEs 8.0% mean that the initial focus for Japanese companies 7.0% would be on improving their 6.0% profitability

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

Mar-11 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-12 Mar-13

OPM

Source: the BLOOMBERG PROFESSIONALTM service, Credit Suisse Equity Research estimates

Figure 39: CS Japan tech—ROE (%) Figure 40: MSCI Japan tech—trailing P/B (x)

12.0% Japan IT PB 3.0 10.0% 8.0% 6.0% 2.5 4.0% 2.0% 2.0 0.0% -2.0% 1.5 -4.0%

-6.0% 1.0 -8.0%

0.5

Mar-98 Mar-95 Mar-96 Mar-97 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

ROE

Jun-08 Jun-05 Jun-06 Jun-07 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-04 Source: the BLOOMBERG PROFESSIONALTM service, Credit Suisse Source: MSCI, Factset Equity Research estimates

Initial focus on profitability improvement Looking at the current OPM for most of these companies for FY13E and FY14E, one can understand as to why improving profitability is the first priority for these companies. Barring just a few names, most others generate a single digit type of margin, as well as ROE— note that FY3/14 numbers already, to some degree, account for the yen deprecation so far. While we believe that consensus is underestimating the full impact of the yen’s depreciation on these companies’ earnings, it does not take away from the fact that Japanese companies in general are going to be far more focused on improving their profitability.

Yen and You 29 01 July 2013

Figure 41: Japan tech—OPM and ROE for FY13E and FY14E (%) Code Company OPM (%) ROE (%) Code Company OPM (%) ROE (%) Mar-13 Mar-14 Mar-13 Mar-14 Mar-13 Mar-14 Mar-13 Mar-14 Electric components Glass 6762 TDK 2.3 5.4 0.9 5.6 5201 Asahi Glass 6.6 6.8 4.0 4.3 6594 Nidec 2.6 9.7 1.9 14.4 5214 Nippon Elec Glass 7.5 5.7 1.7 1.1 4062 IBIDEN 2.4 8.4 1.5 6.7 Semi wafers/ chemicals 6981 Murata 8.3 14.9 4.9 10.1 4063 Shin-Etsu Chem 15.3 17.0 6.7 8.2 6971 Kyocera 5.7 9.4 4.0 6.3 3436 SUMCO 6.4 17.1 2.2 11.5 6806 Hirose Electric 22.8 27.1 5.7 7.5 Consumer electronics 6976 Taiyo Yuden 2.3 8.3 3.4 8.4 6752 Panasonic 1.9 2.9 (62.8) 4.0 5334 NGK Spark Plug 7.8 11.4 7.8 8.8 6952 Casio 6.8 8.4 6.5 8.6 Semis/ equipment/ elec machinery 6758 Sony 2.9 2.5 2.5 2.2 6502 Toshiba 4.2 5.5 9.5 17.2 6753 Sharp Corp. (6.7) 2.0 (257.2) 2.6 6503 Mitsubishi Electric 4.3 5.9 5.8 10.4 7974 Nintendo 1.9 8.6 0.1 4.3 6701 NEC 3.7 4.5 4.3 7.0 Precision 6702 Fujitsu 2.2 3.5 (9.3) 9.6 6724 Seiko Epson 2.7 4.3 (4.6) 8.4 6501 Hitachi 4.8 5.8 8.8 12.2 7752 Ricoh 3.9 7.5 4.4 9.6 6754 Anritsu 17.8 18.9 17.6 17.2 7751 Canon 13.5 13.9 12.6 12.6 7735 Dainippon Screen (3.4) 1.3 (14.8) 1.8 6448 Brother 5.6 6.8 7.4 9.4 8035 Tokyo Electron 2.5 (1.5) 1.0 (0.2) 7733 Olympus 5.0 10.6 6.1 15.7 6146 DISCO 12.6 15.5 7.3 9.0 4902 Konica Minolta 5.4 6.6 4.3 6.2 6857 Advantest 0.1 1.4 (2.7) 0.4 7731 Nikon 4.8 6.7 8.2 10.8 Source: Company data, Credit Suisse Equity Research estimates

Market share shifts likely over 12–18 months Having said that, it is fair to assume that as we progress through this year and as the yen remains weak (or gets weaker as our economists are forecasting), there will be some temptation for Japanese companies to gain market share in select areas. In addition, customers in technology are always looking for cost-down solutions, given the The design-in cycles and constant pressure in the end-market for ASP reduction, and would probably gravitate sampling time means that towards Japan, where they can, to source cheaper solutions. The design cycle time and market share shifts will start component qualification time in tech is anywhere between six to 12 months (usually). In showing up over a 12-month addition, the yen move has been very sharp and recent and, hence, from a supply-chain period perspective, buyers and sellers would both need to see some stability in the currency value before making changes to their longer-term purchasing and production plans. Therefore, we believe that it would only be later in 2013 that we start to hear about market share gain stories in Japan tech. As we discussed in the first section here, the areas where we are likely to see most activity are in certain components and potentially in the consumer electronics space where companies still have a reasonable global brand presence and probably the right products too.

Components Given that in certain components, Japanese companies already have over 90% share, the Share shifts likely in impact of yen move on non-Japanese companies’ market share going forward is likely to MLCCs, substrates/ PCBs be limited. Nevertheless, we believe that there is some scope for companies like Murata, and HDD components Taiyo Yuden and TDK to gain some share over the medium term against their Korean (Semco) and Taiwanese (Yageo) competitors, though the size of that shift is likely to be limited. In some components, however, it has a share of less than 30%, leaving some room for potential share shifts, though customer requirements for risk diversification would

Yen and You 30 01 July 2013 mean that the degree of share shift in favour of Japan in these components too would not be very high. In HDD heads, the key competition for Japan comes from the in-house head- manufacturing capacity of HDD makers; though if Japanese-sourced HDD heads become meaningfully cheaper, some companies might be willing to revisit their HDD heads sourcing strategy (works in favour of TDK). In FC-CSP and PCBs, Japan has a 20-35% share (Ibiden being the main player) and we believe that over the coming year, if yen remains weak, Ibiden could gain share from its key customers in the next product design cycle (Taiwanese companies and Semco would be the losers, in that case). Small lithium batteries, where Japanese companies such as Panasonic (Sanyo) and Sony Share could shift in favour of have a combined share of about 30%, is another area where the yen weakness could Japanese companies in create a medium-term opportunity for share gains against the Korean names (Samsung batteries too, but technology SDI and LG Chemicals). Again, design cycles involved here mean that such shifts are only lead and customer likely over a 12-month period, and usually customer mix, technology lead and design play mix/designs play a bigger a bigger role than just the price. role than price In memory, Elpida has only a small DRAM capacity in Japan and hence the impact of the yen move on the DRAM market is limited; though clearly the currency will boost Elpida’s own profitability. However, Toshiba’s entire NAND production (including the foundry work that it does for SNDK) is based out of Japan and the move in yen would hence improve While yen depreciation the profitability of Toshiba/SNDK’s combined NAND business significantly. However, since helps NAND profitability for this is a commodity product with high fixed costs, most companies operate at near full Toshiba, we do not expect it utilisation, leaving little room for share shifts. However, the medium-term impact of a to respond by trying to raise persistently weaker yen could show up in these companies’ capex plans, i.e., given the capex and capture improved profitability—both from underlying margins improvement in NAND and from a incremental share weaker yen—Toshiba might look to step up its capex plans for the coming years. This is something worth keeping an eye out for, but the current management thinking at Toshiba is to hold the line on its NAND capacity and focus on other areas within the company. Our analyst, Hideyuki Maekawa, is also of the view that Toshiba is unlikely to be changing its plans about NAND capacity build. Japan has a strong share in LCD glass (~50%). Interestingly, the LCD glass industry LCD glass industry works on works on a yen pricing. So, in addition to the two major Japanese suppliers (Asahi and yen pricing, helping TFT NEG), even Corning (and its associate—Samsung Corning Precision Materials—for most panel makers such as LGD, of its supplies, as per our understanding) sells its products priced in yen. Thus, for AUO and CMI Japanese vendors, the sensitivity of their own earnings to movements in yen is limited. However, given the weakness of the yen, profitability for its non-Japanese competitors gets hurt. Thus, if Corning were to decide to ask for better pricing driven by its profitability reduction (we believe they have now hedged for ¥/$93 for the year) on further yen weakness, the Japanese players could either gain share (if they stick to their price—current utilisation rate for them is about 80% so there is room to increase volumes) or improve their profitability (if they follow Corning in raising prices). In any case, their customers, such as LG Display, AUO, CMI and Samsung, clearly gain by this dynamic on yen as their raw material costs do fall (unless the entire LCD glass industry were to raise prices). It will be interesting to watch how market shares move in End-products the ultra-competitive flat- One area where Japan used to be a leading player but has been losing share is flat panel panel TV industry over the TVs—a trend that could potentially reverse over the coming quarters, given the weakness coming year in the yen, as we argued in an earlier section. The challenge in regaining some of the lost market share comes from the fact that some of the Japanese brands such as Sharp now have a global share of less than 5% (their share outside Japan is likely much less than We think either share and/or 5%), and as a result, channel relationships and customer service setups have been margins could get hurt for eroded to a degree where reversing them within a short period is likely to be difficult. In companies like LGE, but addition, most of the Japanese companies have outsourced a large proportion of their TV there is no evidence of that production to the Taiwan (i.e. non-yen cost base). Having said that, it is also important to happening yet note that traditionally, the operating margins in this business are in low-single digits at the

Yen and You 31 01 July 2013 best of times and hence even if one were to assume that 20-25% of the total costs in the TV business for the Japanese firms is yen based, a near 25% move in JPY/USD value since 4Q12 means a 5-7% improvement in the cost structure, which is meaningful in the context of very low margins in this business. We believe that if the yen were to remain weak over the next 12-18 months, Japanese brands such as Sony and Panasonic could see improvement in their share against LG Electronics or maybe even the dominant player, . Conversely, margins for companies like LG Electronics might come under pressure. While on a headline basis, Japanese firms only have a 35-45% share in printers and Samsung Electronics could copiers, given that all of Xerox’s copiers and HPQ laser beam printers (actually the laser see its printer business engine for HPQs laser-based printers) are made by Japanese firms means that the impact getting hurt, though it only on final market share in both the categories is probably limited to likely share losses for accounts for 1% of its Samsung Electronics—though for the latter, the impact on its own revenues and earnings revenues from share losses in printers/MFP is going to be limited. As per our rough calculations, printers/copiers accounted for about 1% of total revenues at Samsung in 2012. On the flipside, HPQ does gain on margins on its printer business where it sources the laser engine for its products from Canon and shares the cost/benefits of swings in currency. While it is difficult to quantify the full impact, the latest quarter’s earnings from HPQ partially surprised positively on account of the margins in its printer business.

Equipment / others As mentioned earlier, while Japan has a strong presence in semi equipment manufacturing, currency sensitivity is low and hence the move in yen value has only a limited impact—technological lead, developments and breakthroughs have a bigger impact on share shifts. However, the same cannot be said about semi wafers, which are largely commoditised and where the two main Japanese companies, Sumco and Shin-Etsu, compete against the likes of MEMC in the US. We would expect market share to shift in favour of these firms over the medium term. In addition, over the medium term, as 450 mm wafers start to come into play, Japanese companies should have a stronger competitive position in any case.

Global semis: Revenue, cost, and competitive implications Our global head of semiconductors research, John Pitzer, argues that within our semi universe, the change in US dollar/yen has three material impacts for semis, like it has elsewhere in tech – (1) revenue for goods sold in yen, (2) costs paid in yen, and (3) companies who have costs in yen are able to use the lower cost base to more aggressively compete on price, a revenue/GM impact to non-yen competitors. From a revenue perspective in our US Semi universe, we estimate 7 of the 24 companies under CS coverage have in excess of 15% revenue exposure to the Japanese market: AVGO (15%), ALTR (14%), LLTC (14%), ONNN (14%), TXN (11%), ADI (10%), and XLNX (10%). Within the sub-group of names in our semi universe with >10% exposure to Japan, on a weighted average basis 23% of revenue came from Computing, 19% from non-handset Comms, 18% from Industrial, 16% from Handsets/Mobile, 13% from Consumer and 11% from Autos.

Yen and You 32 01 July 2013

Figure 42: End market exposure for semi universe with >10% revenue exposure to Japan Handsets/ Other Autos Consumer Computing Industrial Japan Mobile Comms AVGO 15% 5% 1% 1% 16% 46% 31% ALTR 14% 7% 10% 17% 21% 0% 45% LLTC 14% 17% 3% 12% 46% 1% 21% ONNN 14% 25% 24% 20% 18% 9% 4% TXN 11% 10% 13% 30% 15% 16% 16% ADI 10% 16% 16% 1% 44% 3% 20% XLNX 10% 9% 6% 6% 32% 0% 47% AVERAGE 12% 11% 13% 23% 18% 16% 19% Source: Company data, Credit Suisse Equity Research estimates

Clearly the impact for those companies who sell product into Japan and in yen would be lower USD revenue assuming pricing in yen is maintained. Alternatively, vendors with options to sell product outside of Japan, or those with competitors who source product from Japan (i.e., their costs also move with JPY/USD fluctuations), likely lose share in Japan either by choice or competition. We would note this trend at a macro level from total Semi sales. Historically the WW Semi revenue and Semi revenue from Japan have run at high correlation together. However, since the significant devaluation began in C3Q12, we have seen a disconnect between WW Semi revenue and Japan Semi revenue. Again, it is difficult to determine which dynamic is at play, but we would note that the three-year avg. for Semi revenue from Japan has been 15.5% of total Semi revenue – over the past 6 months that average has fallen to 12.4% of total Semi revenue.

Figure 43: Historically high correlation between WW semi Figure 44: However Japan semi rev distinctly lower since and Japan semi rev strong USD move vs. JPY 30,000,000 1.25 95.00

25,000,000 90.00

20,000,000 85.00 R² = 0.5861 1.00 15,000,000

80.00 JPY/USD Relative Dollars Relative 10,000,000 WW Semi Rev ('000 USD) ('000 Rev SemiWW 75.00

5,000,000 0.75 70.00

Japan Semi Rev ('000 USD) WW Semi Dollars Japan Semi Dollars JPY/USD

Source: Company data, Credit Suisse Equity Research estimates Source: Company data, Credit Suisse Equity Research estimates

Yen impact on costs for semi universe Within our Semi universe, three companies have or will have material manufacturing operations in Japan: SNDK, MU, and ONNN. For SNDK, the exposure comes through its joint venture with Toshiba and the shared cost of manufacturing paid in yen – while SNDK has not quantified the exact amount of cost improvement from the yen devaluation, the company expects CY13 GM to increase 800-1000bps q/q partially on improved yen rates, and for roughly 5% of the expected 15-25% y/y cost/GB reduction to come from FX. The impact on Toshiba and memory companies has also been discussed in an earlier section. For ONNN, the Japan manufacturing exposure comes via the acquisition of Sanyo in early CY11 for $475m. Negatively impacted by flooding in 2011, which destroyed $400m/yr of manufacturing, ONNN has been right-sizing the manufacturing footprint in Japan (reducing

Yen and You 33 01 July 2013 from 3 to 1 mfg facility) in an effort to reduce the breakeven point for their business which currently stands at $190m/qtr. – effectively lowering the tailwind exposure to the yen, which currently stands at roughly $55-60m in Sanyo COGS. Finally, MU is in the process of purchasing Elpida for cash and earnouts of roughly $2.5bn, of which $752m would be paid at closing and $1.8bn would be paid in annual installments through CY19 – but terms of the deal were negotiated in yen, providing a FX benefit for MU as the yen devalues. MU has previously indicated a 10% move (at ¥/$83) would have a $240m +/- impact to the $2.5bn purchase price, less hedging losses of $110-120m. MU also indicated that the prior hedge had been unwound, and that the new hedging strategy has changed from the prior strategy but was not clear on the nature of the change. We think the hedge may have been reduced to allow for a more favourable impact from a continued devaluing of the yen.

Competing with companies with costs in yen The less tangible impact to the semi market is the derivative impact of a change in the cost structure of some competitors in a given space. Indeed, the dynamic within multiple subsectors of semiconductors, most notably memory, is when one company realises a competitive advantage in cost of manufacturing of product (especially for commodity products), the ultimate result is a market price reset lower as the lower cost provider can offer a lower price with similar profitability. This change in market price has two negative consequences for those unable to keep pace with the cost leader(s): (1) gross margins decline for those who are forced to lower their ASP but cannot reduce costs, or (2) the lower margin is not an attractive business for the higher cost providers and the lower cost provider gains share. Although the driver was different in the case of memory (process advancement not FX was the cost driver), the dynamic of lower cost and the competitive disadvantage associated with lower cost was nonetheless a key driver of the market consolidation in the memory space. Depending on the nature of the product in question, NT dynamics have a varying level of impact for semi provides. In the above case of memory, which has spot pricing that can change daily, ASP changes in the market are felt very quickly and share shifts can happen very quickly to take advantage of marginal cost improvements – companies in this position would include , Renesas, ONNN (Sanyo), Toshiba, Elpida and others. In other areas where products can be multi-sourced (i.e., interchangeable parts like optical models or power supplies), changing vendors is simply a matter of placing new orders with the alternate vendor – companies in this position include Sony, Oki, TDK and others. For a large majority of Semis, however, the end product has designed in purpose built silicon that for a multitude of reasons may not be rapidly second sourced or interchangeable. In these instances, currency fluctuations are less meaningful given the timing for making a changeover (i.e., long), and the duration of the product in question – many systems need to be supported for 10 years, where more temporary pricing fluctuations are expected to normalise over time. Over a protected period of favourable ¥/$, beneficiaries to this would include Renesas, ONNN, Oki, NEC, Mitsubishi, and Sony.

Yen and You 34 01 July 2013

Yen move does not seem to be fully in consensus numbers Not surprisingly, Japan tech in aggregate has seen earnings upgrades over the past four Current published estimates months. However, the aggregate upgrades have been in the range of 2% per month, with do not even fully account for continuing soft underlying fundamentals neutralising the positive impact from yen the positive impact of yen on depreciation. earnings, in our view

Figure 45: MSCI Japan tech—1M change in 12M forward EPS (%)

10 Stock prices might already 8 be ahead of published EPS estimates, though 6 4 2 0 -2 -4 -6 -8

-10

Jul-10 Jul-11 Jul-12

Oct-11 Apr-10 Oct-10 Apr-11 Apr-12 Oct-12 Apr-13

Jan-10 Jan-11 Jan-12 Jan-13

MSCI Japan Tech:1M change (%) in 12M Fwd EPS

Source: MSCI, Factset However, looking at sensitivity of earnings to just the yen movement (Figure 45), we believe that the market is not fully building in the impact of currency on earnings, let alone the likely positive impact on market share—the sensitivity of OP to just one yen change against the USD and euro in some cases is between 2% and 4%, and we have had about a ¥15 move in yen value against the US dollar. Thus, all else being equal, OP for some of these companies should have been revised up by 30-60% and we clearly have not got that type of moves in consensus estimates. Broadly, the area where we have seen the most upgrades are in components (classified under hardware as per MSCI), and before the recent disappointment post-FY13 results, in consumer electronics. Our view has been that as we get into 2H13, overall tech demand dynamics will start to improve relative to a substantially sub-seasonal 1Q13 demand where both PCs and Apple-related demand surprised on the downside. With an improving demand backdrop, we believe that Japanese companies will see the full impact of yen on their profitability, thereby leading to further meaningful earnings upgrades. In addition, improving profitability would also encourage some of these to go after improving their market share.

Yen and You 35 01 July 2013

Figure 46: MSCI Japan semi—1M change in 12M forward Figure 47: MSCI Japan hardware—1M change in 12M EPS (%) forward EPS (%)

20 10 8 10 6 0 4 2 -10 0 -20 -2

-30 -4 -6 -40 -8

-50 -10

Jul-10 Jul-11 Jul-12

Jul-10 Jul-11 Jul-12

Oct-12 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Apr-13

Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

Jan-10 Jan-11 Jan-12 Jan-13

Jan-10 Jan-11 Jan-12 Jan-13

Source: MSCI, Factset Source: MSCI, Factset

Figure 48: MSCI Japan CE—1M change in 12M forward Figure 49: MSCI Japan software—1M change in 12M EPS (%) forward EPS (%)

10 5

0 0 -10

-5 -20

-30 -10

-40 -15 -50

-60 -20

Jul-10 Jul-11 Jul-12

Jul-11 Jul-10 Jul-12

Oct-12 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Apr-13

Jan-10 Jan-11 Jan-12 Jan-13

Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

Jan-10 Jan-11 Jan-12 Jan-13

Source: MSCI, Factset Source: MSCI, Factset

The stocks that have seen the biggest upgrades (over 3%) to their FY14 earnings over the past one month are listed below and they come from a range of sectors; though, in general, component names have seen more upgrades than elsewhere. Earnings upgrades have also started to broaden out with 23 out of the 35 US$2bn+ market cap Japanese tech stocks under our coverage seeing upgrades over the past month, with six out of those seeing upgrades to earnings for the first time in three months (i.e. three-month change in FY/14 forecast EPS is still negative whereas the one-month change is positive).

Yen and You 36 01 July 2013

Figure 50: Japanese tech stocks seeing upgrades to FY14 EPS over past one month P/E (x) CS EPS P/B Chg in 2013 growth (%) (x) IBES EPS (%) Name Ticker Price TP Rat 2013 2013 2013 1M 3M DISCO 6146.T 6590 6100 O 21.6 38.0 1.9 3.3 13.5 Murata Mfg 6981.OS 7130 9000 O 17.4 121.3 1.9 5.0 18.4 NEXON 3659.T 1016 1300 O 12.0 42.9 1.8 5.0 5.3 NGK Spark Plug 5334.T 1948 1370 U 18.0 23.0 1.6 9.0 35.7 Nikon 7731.T 2300 3000 N 12.6 75.0 1.7 9.3 10.5 Olympus 7733.T 2963 3300 N 41.8 152.2 5.4 10.1 25.1 Rakuten 4755.OS 1138 1400 O 30.3 181.9 5.4 4.8 8.8 Seiko Epson 6724.T 1367 1600 O 12.2 - to + 0.9 6.9 14.9 Yaskawa Electric 6506.T 1154 1800 O 17.9 150.0 2.5 5.7 22.7 Note: O = Outperform; N = Neutral; U = Underperform. Source: IBES, Credit Suisse Equity Research

Looking at stocks (discussed in the previous section) that could potentially see a negative impact over the next several quarters on their businesses because of the fall in yen value, we notice that consensus does not seem to be too focused on that dynamic yet—near- term issues of order flows and guidance are driving earnings estimates for 2013 more than the possible impact of yen on their medium term market share. Thus, if and when such a dynamic starts to play out, there could be a meaningful impact on earnings estimates for some of these companies.

Figure 51: Stocks seeing potential impact on their businesses due to fall in yen Focus on AxJ stocks is still P/E (x) EPS gwth P/B (x) Chg in 2013 IBES (%) EPS (%) on near-term fundamentals Name Ticker Price TP Rat 2013 2013 2013 1M 3M rather than on medium-term competitive dynamics AU Optronics 2409.TW 10.7 17 O 12.9 - to + 0.6 (0.8) - to + Corning* GLW 14.33 Not Rated NR 10.9 0.5 1.0 1.3 9.9 Innolux 3481.TW 14.9 23 O 10.6 - to + 0.7 20.4 197.8 Kinsus 3189.TW 114 128 N 13.8 23.7 1.8 1.2 6.2 LG Chem 051910.KS 242500 365000 O 8.6 (1.0) 1.3 (1.3) (12.1) LG Display 034220.KS 27350 45000 O 10.4 334.4 0.9 (1.8) (2.4) LG Elect. 066570.KS 72900 82000 N 15.5 1024.7 0.9 (1.0) (3.4) MEMC Elect. WFR.N 8.15 8 O 60.9 - to + (12.1) 2.7 (33.0) NYPCB 8046.TW 39.1 39 N 38.6 96.6 0.8 + to - + to - SEMCO 009150.KS 86800 114000 O 12.2 18.5 2.7 1.1 5.9 Samsung Elect. 005930.KS 1339000 1900000 O 5.7 31.4 1.2 (0.8) 8.3 Samsung SDI 006400.KS 136000 142000 N 15.1 (65.0) 0.9 (1.8) (6.9) Seagate* STX 42.7 Not Rated NR 7.8 3.6 4.9 (0.3) (0.1) SK Hynix 000660.KS 30650 47000 O 8.4 - to + 1.7 24.0 89.7 Teradyne TER.N 17.24 25 O 11.9 (17.5) 1.6 1.1 (3.8) Unimicron 3037.TW 28.65 33.5 N 10.3 13.1 0.8 0.0 1.6 Western Digital* WDC 60.71 Not Rated NR 7.7 (4.6) 1.4 (0.4) 0.9 Yageo* 2327.TW 10.1 Not Rated NR 14.7 20.8 NA (29.3) (27.5) * P/E, P/B and EPS growth based on Bloomberg consensus. Note: O = Outperform; N = Neutral; NR= not rated. Source: the BLOOMBERG PROFESSIONAL™ service, IBES, Credit Suisse Equity Research estimates

Yen and You 37 01 July 2013

Impact on US tech hardware names—focus on printing Changes in the yen FX rate vs. other currencies could have an impact on US technology hardware names in three primary ways: (1) Overall competitiveness of companies with printing exposure (Hewlett-Packard, Xerox and Lexmark) vs. its peers in Japan (Ricoh, Brother and Canon) (2) Translation exposure due to revenue exposure in Japan (Hewlett Packard, Xerox and Lexmark) (3) Impact on the cost base of a company for the portion of COGS which are sourced from Japanese suppliers The companies within the US hardware sector which we believe could be materially impacted are those with significant printing revenue/earnings exposure (Hewlett-Packard, Xerox and Lexmark), primarily due to the fact that Japanese competitors in the space (Canon, Ricoh, Brother) may benefit on account of more efficient cost structures and competitive pricing in international markets.

Figure 52: Printing revenue share - US vendors at risk 2009 YR 2010 YR 2011 YR 2012 YR 2013 YR YTD HP 18.4% 18.7% 18.6% 17.4% 16.4% Xerox 10.3% 11.1% 11.4% 10.7% 9.3% Lexmark 3.2% 3.4% 3.0% 2.8% 2.4% Canon 14.5% 14.4% 14.0% 15.7% 13.3% 4.6% 5.4% 6.0% 6.9% 7.9% Ricoh 11.9% 10.8% 11.2% 11.8% 13.9% Brother 2.7% 2.7% 2.9% 2.8% 2.9% Others 34.5% 33.4% 33.0% 32.1% 33.8% Source: Gartner Impact on Xerox – while costs are hedged, competitors are likely to be more price aggressive. While Xerox only generates ~36% of its revenues outside of the US, the majority is tied to Europe (~25%). As Services is 90% US dominated, the majority of international revenues come from the Technology segment. Given the recent macro concerns within Europe and currency exposure to the euro and yen, this could provide greater challenges for the Technology segment. While the company hedges its costs with rolling 12 month contracts, a major concern is the ability of Japanese vendors such as Canon, Ricoh and Brother to become increasingly aggressive with their pricing. Indeed, Xerox has steadily lost share in printing hardware as shown in Figure 52, though it is important to note that the biggest share gainer has been Xerox’s JV with Fuji. While the printing market has seen challenges with declining markets within consumer inkjet as well as lower B&W page growth, Xerox continues to invest in higher growth areas such as MFP (multi-function printers) and a services-led approach with Document Outsourcing, as well as enter faster growing geographies and towards colour pages. While the company currently has about 9% of the overall hardware market, it solely deals in laser with a focus on SMB and Enterprise. Over time we believe the company can stand to gain given its scale, expanding channel partnership, and R&D investment. Xerox believes the weakening of the yen may be a slight positive for the company. Given however the currency sharing agreement with Fuji Xerox and through hedging on a forward basis – the overall effect is likely to be closer to net neutral on a currency translation basis. The biggest risk continues to be price competition coming from Japanese printing vendors. Impact on Lexmark – competitive pricing environment. Lexmark has limited exposure to the yen, both from a revenue and a cost perspective, however printing does account for ~95% of the company’s revenues. As with Xerox, the biggest threat from a weakening yen

Yen and You 38 01 July 2013 is price competition from Japanese manufacturers as they pass through the currency benefit to customers. It is worth noting, however, that the company expects this impact to be contained as the environment is already extremely price competitive and they do not often run into competitors from Japan in large enterprise engagements. Impact on Hewlett-Packard – revenue headwinds from currency impact. The imaging and printing segment for HP accounts for about 20% of revenues and ~30% of profits. HP has steadily lost revenue share in the printing market from ~19% in 2010 to ~16% in 2013 YTD Figure 52, despite a renewed focus on the commercial/consumer printing segment as part of its new strategy outlined in 2012. The company noted on its last earnings call that the depreciating yen was a marginal benefit in Q2 for the company but that should be a more significant benefit in the fiscal second half of the year offset by increased price aggression from Japanese vendors. Broadly, across all currencies HP expects a 1 point headwind to revenue growth for the full fiscal 2013 over fiscal 2012. The company has maintained an alliance with Canon since 2009 which unites Canon’s copier-centric MFP devices with HP’s printer-centric enterprise printing and imaging assets. To some extent this puts some competitive pressure on the managed print service mega vendors such as Ricoh and Xerox. HP does gain on margins on its printer business where it sources the laser engine for its products from Canon and shares the cost/benefits of swings in currency. While it is difficult to quantify the full impact, margins in the printing business have been better than expected over the past several quarters.

Impact on European tech hardware names Changes in yen FX rate vs. other currencies could have an impact on European Kulbinder Garcha technology hardware names in 3 ways – translation exposure due to revenue exposure to Tech Hardware Japan; impact on the cost base of a company for the portion which sources its kulbinder.garcha@credit- components from Japanese suppliers; and overall competitiveness of a company vs. its suisse.com peers in Japan depending on the changes in the cost structure due to fluctuations in yen. +1 212 325 4795 Given that the companies in the European technology hardware sector which we cover Achal Sultania (i.e. Nokia / Nokia Siemens, Ericsson, Alcatel-Lucent) do not have Japanese competitors European Tech Hardware of any material significance, we focus on the impact from yen depreciation on the revenue achal.sultania@credit- and cost structure of these companies. suisse.com Impact on Nokia seems to be mixed – positive for D&S, negative for NSN. For Nokia, the +44 20 7883 6884 ongoing depreciation of yen vs. euro impacts in two ways – positive for D&S; and negative for NSN segment. Nokia does not any revenue exposure to Japan for its handset business, but it sourced 10% of its components from Japanese suppliers in 2012 (down from 12% in 2011). Given the yen has already depreciated 20% vs. the euro since Dec 2012, and there is a potential that it could depreciate a further 20% going forward, we believe this could have around 1.5% of positive impact on the GM structure of Nokia’s D&S business for 2014. However, for its NSN operations, the company has a high level of revenue exposure to Japanese operators (it was 16% in 2012, up from 11% in 2011). Assuming the cost exposure to be around 3-5%, we believe this could have 200bp to 300bp of negative impact on EBIT margins for NSN if yen were to depreciate a further 20% vs. EUR. Negative impact on Ericsson due to high revenue exposure. Ericsson has also seen an increase in revenue exposure to yen given high levels of LTE rollouts being carried out by carriers in Japan (DoCoMo, KDDI and Softbank). In fact, 8% of Ericsson’s group sales were accounted by Japan, up from 6% in 2011. In addition, the company has noted that only 2% of its cost base is yen denominated. This suggests that there could be around 150bp of negative translation impact on Ericsson’s top line for both 2013/2014, and around 100bp of negative impact on margins as well.

Yen and You 39 01 July 2013

Limited impact on Alcatel-Lucent. Alcatel-Lucent does not disclose details on the revenue and cost exposure to Japan. We estimate the revenue exposure to be <5% and cost exposure of around 2% (at the same level as Ericsson). As such, we see limited impact from yen depreciation on Alcatel-Lucent numbers.

Figure 53: Negative impact on NSN / Ericsson’s margins from ongoing yen depreciation Revenue / Cost exposure to JPY; Impact from JPY depreciation vs. SEK (for ERIC) & EUR (for NOK, ALU) Revenue (%) Cost (%) Exposure to Japan 2011 2012 2011 2012 Nokia D&S 0% 0% 9% 8% Nokia Siemens 11% 16% 4% 4% Ericsson 6% 8% 2% 2% Alcatel-Lucent 4% 4% 2% 2%

Revenue (pp) Cost (pp) Impact from JPY 2013E 2014E 2013E 2014E Nokia D&S 0.0% 0.0% 1.5% 1.5% Nokia Siemens -3.3% -3.3% 0.8% 0.8% Ericsson -1.6% -1.6% 0.4% 0.4% Alcatel-Lucent -0.8% -0.8% 0.4% 0.4% * Assuming JPY were to depreciate a further 20% from current rates by the end of 2013

EBIT margin (pp) Impact from JPY 2013E 2014E Nokia D&S 1.5% 1.5% Nokia Siemens -2.5% -2.5% Ericsson -1.2% -1.2% Alcatel-Lucent -0.4% -0.4% Source: Company data, Credit Suisse Equity Research estimates

Yen and You 40 01 July 2013

Figure 54: Global technology – Comparative valuations Share MktCap EV Target PE EV/EBITDA P/B Div Yld EPS Ticker Name Price USD USD Price 2013 2014 2013 2014 2013 2013 2013 (local) (US$mn) (US$mn) (local) x x x x x % (local) TECH 2018.HK AAC Technologies Holdings Inc 40.4 6,397 6,352 37.5 15.7 12.4 12.3 9.8 5.2 2.9 2.0 2353.TW Acer Group 21.5 2,025 915 21.0 24.8 15.3 5.5 4.0 0.7 2.4 0.9 AMD.N Advanced Micro Devices, Inc. 4.0 2,858 3,898 2.5 -14.4 -12883.4 15.4 8.4 7.2 0.0 -0.3 2311.TW Advanced Semicon. Engr. 24.6 6,215 8,290 31.0 11.7 9.8 5.4 5.1 1.6 4.5 2.1 6857.T Advantest 1646.0 2,905 2,686 1,100.0 -74.7 588.4 32.4 27.4 2.3 1.2 -22.0 600271.SS Aisino Co., Ltd 13.5 2,033 2,033 22.0 9.8 8.1 6.7 5.6 2.0 4.1 1.4 ALU.N Alcatel-Lucent 1.9 4,461 4,624 1.6 -9.8 -29.4 3.5 2.9 2.6 0.0 -0.2 ALUA.PA Alcatel-Lucent 1.5 4,461 4,624 1.3 -9.7 -29.0 3.5 2.9 2.5 0.0 -0.2 ALTR.OQ Altera Corp. 32.0 10,244 7,727 30.0 23.7 19.4 14.4 11.8 2.8 1.2 1.3 ADI.OQ Analog Devices Inc. 45.2 13,923 11,217 50.0 21.4 17.3 12.4 10.3 3.0 0.0 2.1 AAPL.OQ Apple Inc 413.7 388,300 359,171 525.0 10.4 8.5 6.5 5.6 2.8 0.0 39.8 AMAT.OQ Applied Materials Inc. 15.1 18,108 18,117 13.0 26.0 15.4 12.6 8.6 2.5 2.4 0.6 ARM.L ARM Holdings 772.5 16,593 16,518 11.3 36.6 29.0 28.0 22.4 7.6 0.8 0.2 ASML.AS ASML Holding N.V. 58.0 33,969 31,407 60.0 25.4 15.4 19.7 12.3 6.6 0.9 2.3 2357.TW Asustek 291.0 7,280 5,602 370.0 9.1 9.0 6.3 5.8 1.6 6.6 31.8 2409.TW AU Optronics 10.3 3,294 8,347 17.0 12.2 6.7 3.2 3.2 0.5 0.0 0.8 AVGO.OQ Avago Technologies Ltd. 37.4 9,222 8,140 42.0 15.6 13.3 10.4 8.9 3.3 0.0 2.4 BRCM.OQ Broadcom Corp. 33.2 17,318 17,394 45.0 11.6 10.7 12.4 11.4 2.0 1.3 2.9 6448.T 1094.0 2,974 2,516 1,450.0 16.4 11.3 4.6 3.5 1.1 2.2 66.7 7751.T Canon 3250.0 38,048 30,408 4,700.0 10.4 9.0 3.8 3.5 1.3 4.0 311.9 2474.TW Catcher Technology 152.0 3,792 3,275 184.0 8.9 9.2 5.3 4.9 1.6 3.9 17.0 2385.TW Chicony 82.0 1,842 1,983 85.0 12.6 11.6 9.1 8.0 2.7 5.6 6.5 6147.TWO Chipbond 71.8 1,423 1,464 70.0 12.6 11.5 7.1 5.8 2.2 5.2 5.7 2324.TW Compal Electronics 16.4 2,405 2,157 20.0 9.8 8.3 3.6 3.4 0.6 4.1 1.7 CYMI.OQ Cymer Inc. 116.1 3,671 3,561 99.0 74.1 37.0 34.3 20.7 4.2 0.9 1.6 CY.OQ Cypress Semiconductor Corp. 10.5 1,544 1,659 10.0 26.2 14.1 14.0 9.3 7.8 0.0 0.4 DELL.OQ Dell Inc. 13.4 23,444 19,752 RESTRICTED 7.8 12.7 3.9 5.0 2.0 0.0 1.7 2308.TW Delta Electronics 136.5 11,005 9,943 160.0 17.9 16.9 10.1 8.8 3.1 4.4 7.6 0861.HK Digital China Holdings Limited 8.8 1,234 1,405 15.0 6.9 6.2 7.5 6.3 1.2 4.4 1.3 6146.T DISCO 6620.0 2,265 2,139 6,100.0 29.9 21.6 12.0 10.1 2.1 0.8 221.8 ECM.L Electrocomponents 237.5 1,601 1,889 2.8 15.3 13.9 9.5 8.9 2.7 4.9 0.2 2448.TW Epistar Corporation 50.7 1,571 1,579 66.0 31.5 17.1 8.4 6.9 1.0 0.0 1.6 ERIC.OQ Ericsson 11.2 36,432 30,502 10.6 13.8 12.1 6.4 5.9 1.7 4.2 0.8 ERICb.ST Ericsson 75.4 36,443 30,513 70.0 14.5 12.6 6.7 6.1 1.7 4.0 5.2 FCS.N Fairchild Semiconductor International 13.4 1,844 1,688 10.0 33.2 14.0 8.1 5.9 1.2 0.0 0.4 2354.TW Foxconn Technology Corp 71.0 2,919 1,976 87.0 9.8 9.0 4.5 3.9 1.3 1.5 7.2 FSL.N Freescale Semiconductor Inc. 14.0 3,561 9,231 17.5 46.6 11.3 10.7 8.6 -0.8 0.0 0.3 4901.T Fujifilm Holdings 2107.0 10,311 9,347 2,400.0 18.7 14.8 4.3 3.9 0.5 1.9 112.7 6702.T Fujitsu 395.0 8,301 10,743 420.0 -11.2 21.0 4.9 4.3 1.0 2.5 -35.2 GTO.AS Gemalto 65.7 7,571 7,112 80.0 19.0 15.5 11.9 9.9 2.6 0.5 3.5 HPQ.N Hewlett Packard 24.2 46,575 63,710 25.0 6.7 6.4 4.4 4.5 1.8 2.4 3.6 6806.T Hirose Electric 12670.0 4,429 2,793 10,800.0 32.1 23.0 10.9 8.7 2.1 1.1 395.2 6501.T Hitachi 626.0 30,709 48,898 735.0 16.8 13.6 6.6 5.5 1.5 1.6 37.3 2049.TW Hiwin 183.0 1,499 1,845 167.0 23.5 17.5 16.0 12.0 4.2 1.4 7.8 2317.TW Hon Hai Precision 70.3 27,652 25,829 74.0 9.7 8.2 4.6 4.1 1.1 1.9 7.3 2498.TW HTC Corp 238.0 6,739 4,647 290.0 15.2 13.0 8.6 7.5 2.2 0.8 15.7 4062.T IBIDEN 1467.0 2,057 1,557 1,700.0 52.9 10.7 3.2 2.4 0.8 1.0 27.7 3481.TW Innolux Corporation 15.1 4,552 12,401 23.0 10.0 7.9 3.6 4.1 0.7 0.0 1.5 INTC.OQ Intel Corp. 24.2 120,298 111,160 28.0 12.1 11.0 5.1 4.6 2.0 3.6 2.0 IBM.N International Business Machines Corp. 195.5 216,725 239,582 200.0 11.7 10.6 8.6 7.9 10.5 1.7 16.7 3189.TW Kinsus Interconnect Tech 110.5 1,638 1,325 128.0 13.5 11.9 5.6 4.9 1.8 3.3 8.2 KLAC.OQ KLA-Tencor Corp. 54.8 9,086 7,473 59.0 17.1 16.3 9.0 8.5 2.6 2.9 3.2 4902.T Konica Minolta , INC. 733.0 3,947 4,064 850.0 25.7 12.9 4.6 3.5 0.8 2.0 28.5 6971.T Kyocera 9620.0 17,921 12,566 9,000.0 29.0 17.7 9.9 6.9 1.2 1.2 332.2 LRCX.OQ Lam Research Corp. 45.0 7,322 5,923 55.0 21.2 11.6 8.1 5.5 1.5 0.0 2.1 3008.TW Largan Precision 940.0 4,190 3,794 825.0 18.7 16.3 12.8 10.5 4.6 2.1 50.2 0992.HK Lenovo Group Ltd 7.1 9,586 6,491 - 15.1 12.6 8.1 6.7 3.6 2.3 0.1 LXK.N Lexmark International 30.5 1,919 1,663 24.0 8.1 8.2 2.6 2.6 1.4 0.0 3.7 034220.KS LG Display Co Ltd. 26450.0 8,150 10,243 45,000.0 10.0 9.8 2.1 2.1 0.9 1.9 2651.1 066570.KS LG Electronics Inc 70400.0 9,921 11,051 82,000.0 15.2 11.6 4.9 4.8 0.9 0.9 4618.2 011070.KS LG Innotek 86800.0 1,508 3,220 58,000.0 -356.8 124.0 7.3 7.0 1.4 0.6 -243.3 LLTC.OQ Linear Technology Corp. 36.4 8,479 8,081 40.0 20.3 18.2 12.9 11.4 7.8 2.8 1.8 2301.TW Lite-On Technology 49.5 3,788 3,289 60.0 12.8 11.3 7.5 6.9 1.6 5.6 3.9 Source: Credit Suisse Equity Research estimates, Thomson Reuters

Yen and You 41 01 July 2013

Figure 55: Global technology – Comparative valuations (Continued) Share MktCap EV Target PE EV/EBITDA P/B Div Yld EPS Ticker Name Price USD USD Price 2013 2014 2013 2014 2013 2013 2013 (local) (US$mn) (US$mn) (local) x x x x x % (local) TECH MRVL.OQ Marvell Technology Group Ltd. 11.2 5,507 4,755 12.0 13.0 13.9 9.3 10.9 1.4 0.0 0.9 MXIM.OQ Maxim Integrated Products 27.9 8,121 7,474 31.0 15.5 13.2 8.4 7.5 3.1 0.0 1.8 MLNX.OQ Mellanox Technologies Ltd. 45.2 1,950 1,530 40.0 355.8 52.5 36.1 17.2 2.9 0.0 0.1 MCHP.OQ Microchip Technology Inc. 36.8 7,245 6,650 42.5 19.4 16.0 10.0 8.1 3.9 0.0 1.9 MU.OQ Inc. 13.9 14,318 15,023 20.0 172.0 8.4 6.8 4.0 1.8 0.0 0.1 6503.T Mitsubishi Electric 877.0 19,121 21,687 1,030.0 27.1 14.7 7.5 5.7 1.4 1.3 32.4 MSI.N Motorola Solutions 55.8 15,164 13,424 65.0 11.7 12.3 7.3 6.6 6.5 2.1 4.8 3697.TW Mstar Semiconductor 199.0 3,522 2,659 - 14.3 15.4 8.5 10.8 2.9 4.5 14.0 6981.OS 7280.0 15,605 14,314 9,000.0 37.7 17.1 10.9 7.4 2.0 1.4 192.9 6701.T NEC 214.0 5,647 10,204 220.0 18.3 16.9 5.9 6.8 0.8 1.9 11.7 NTAP.OQ NetApp 38.0 13,711 12,907 40.0 16.7 13.1 9.8 8.5 3.0 0.0 2.3 5334.T NGK Spark Plug 1939.0 4,286 3,788 1,370.0 21.3 17.3 10.5 7.9 1.7 1.1 91.0 6594.OS Nidec 6520.0 8,934 9,637 6,200.0 146.4 17.1 17.5 7.9 2.7 1.5 44.5 7731.T Nikon 2315.0 9,323 9,016 3,000.0 21.6 12.4 10.2 6.6 1.9 1.3 107.0 NOK.N Nokia 3.9 14,721 8,968 2.9 -85.1 -70.2 5.5 3.2 1.5 0.0 0.0 NOK1V.HE Nokia 3.0 14,722 8,969 2.3 -84.5 -69.5 5.5 3.2 1.5 0.0 0.0 3034.TW Novatek Microelectronics Corp Ltd 130.0 2,621 2,250 157.0 13.4 11.6 9.6 8.2 3.1 5.7 9.7 NXPI.OQ NXP Semiconductors N.V. 30.9 7,779 10,654 38.0 11.1 8.5 8.8 7.4 5.1 0.0 2.8 7733.T 3050.0 9,037 12,215 3,300.0 102.0 40.4 15.1 9.6 6.0 0.0 29.0 ONNN.OQ ON Semiconductor Corp. 7.8 3,525 3,905 8.0 13.0 9.5 6.6 5.4 2.3 0.0 0.6 4938.TW Pegatron 48.8 3,714 3,728 57.0 11.0 9.0 7.9 7.1 1.1 4.6 4.5 QCOM.OQ QUALCOMM Inc. 60.7 104,845 78,008 85.0 13.2 12.0 8.6 7.6 3.0 1.3 4.6 2382.TW Quanta Computer 60.8 7,787 7,813 63.0 11.2 9.6 9.7 7.9 1.7 5.8 5.4 6176.TW Radiant Opto-Electronics 92.6 1,389 1,065 123.0 7.8 7.2 4.3 3.9 1.9 8.5 11.9 BBRY.OQ Research In Motion Limited 13.8 7,223 5,674 10.0 -21.6 55.0 202.6 7.5 0.8 0.0 -0.6 7752.T Ricoh 1178.0 8,674 14,857 1,500.0 26.3 11.2 9.6 6.7 1.0 2.5 44.8 009150.KS Samsung Electro-Mechanics 87300.0 5,615 6,570 114,000.0 12.1 9.5 5.2 4.3 2.6 1.4 7186.7 005930.KS Samsung Electronics 1313000.0 166,548 166,397 1,900,000.0 5.6 5.1 3.2 2.9 1.2 0.7 234502.3 006400.KS Samsung SDI 138000.0 5,414 5,417 142,000.0 14.9 14.2 5.7 5.4 0.9 1.2 9270.0 SNDK.OQ SanDisk Corp. 58.9 14,322 15,023 75.0 15.1 12.9 8.4 7.2 1.8 0.0 3.9 6724.T Seiko Epson 1297.0 2,356 4,846 1,600.0 -23.0 12.2 7.7 5.3 0.9 1.5 -56.4 0981.HK Semiconductor Manufacturing Intl 0.6 2,523 3,073 0.1 35.9 31.2 4.2 3.5 1.1 0.0 0.0 046890.KQ Seoul Semiconductor Co Ltd 32350.0 1,624 1,681 13,000.0 66.0 52.2 19.2 17.3 2.9 0.1 490.0 6967.T Shinko Electric Industries 1172.0 1,608 996 900.0 60.9 17.6 6.4 3.8 1.2 1.7 19.2 2325.TW Siliconware Precision 36.6 3,785 3,847 40.0 18.3 15.9 6.3 5.6 1.9 4.2 2.0 000660.KS SK Hynix Inc. 29750.0 17,791 21,885 47,000.0 8.1 7.1 4.0 3.7 1.7 0.0 3654.3 2347.TW Synnex Technology International Corp 40.6 2,139 2,940 37.0 12.0 11.1 18.4 16.2 1.4 4.5 3.4 2330.TW Taiwan Semiconductor Manufacturing 101.0 87,032 85,786 116.0 14.0 12.2 6.9 5.6 3.1 3.0 7.2 6976.T Taiyo Yuden 1478.0 1,765 2,134 1,400.0 45.5 16.9 8.5 5.8 1.6 0.7 32.5 6762.T TDK 3355.0 4,286 5,478 4,200.0 82.0 13.3 5.4 4.0 0.8 2.4 40.9 1504.TW Teco 28.7 1,806 1,837 32.5 14.8 13.1 8.5 7.4 1.3 4.1 1.9 TER.N Teradyne Inc. 16.9 3,229 2,928 25.0 11.9 9.5 6.2 5.2 1.6 0.0 1.4 TXN.OQ Texas Instruments Inc. 35.0 38,623 40,344 35.0 18.9 15.8 10.8 9.3 3.2 2.4 1.9 8035.T Tokyo Electron 4880.0 8,880 6,331 4,700.0 143.9 -710.1 15.6 31.7 1.5 1.0 33.9 6502.T Toshiba 466.0 20,041 33,444 610.0 25.5 12.0 7.9 5.7 1.9 1.7 18.3 6588.T Toshiba Tec 502.0 1,398 667 700.0 22.2 13.8 2.1 1.8 0.9 1.6 22.6 TPM.AX TPG Telecom 3.4 2,448 2,584 3.2 18.8 17.0 10.0 9.5 3.8 2.2 0.2 3673.TW TPK Holdings 488.5 5,312 5,794 710.0 8.9 8.0 5.3 4.4 2.8 2.9 54.8 0732.HK Truly International 4.0 1,446 1,627 1.0 20.9 8.0 9.0 na 2.3 1.9 0.2 3037.TW Unimicron Technology Corp 27.9 1,424 1,606 33.5 10.5 9.2 3.6 3.1 0.8 4.7 2.7 2303.TW United Microelectronics 12.8 5,383 3,743 12.0 12.2 18.2 2.5 2.2 0.7 3.8 1.1 5347.TWO Vanguard International Semiconductor 33.5 1,818 1,431 34.0 12.0 13.1 6.0 5.4 2.1 3.0 2.8 VENM.SI Venture Corporation 7.4 1,582 1,238 8.3 10.4 9.2 6.4 5.8 1.1 7.5 0.7 6727.T 1114.0 1,902 1,765 1,062.5 34.2 23.1 18.5 12.7 6.7 1.0 32.6 3231.TW Wistron 30.0 2,191 2,745 33.0 8.3 7.1 4.7 4.3 1.0 5.9 3.6 3702.TW WPG Holdings Ltd 34.5 1,896 3,052 39.0 11.3 10.1 13.0 11.6 1.4 7.0 3.0 XRX.N Xerox 9.3 11,395 18,638 9.0 8.5 8.2 5.6 5.4 0.9 0.0 1.1 XLNX.OQ Xilinx 39.0 10,285 10,417 42.0 22.4 19.9 15.7 14.2 3.4 0.0 1.7 6506.T Yaskawa Electric Corporation 1182.0 3,020 3,389 1,800.0 43.8 17.5 15.7 8.5 2.8 0.8 27.0 0763.HK ZTE Corporation 11.6 6,218 7,088 12.5 12.5 10.8 7.2 6.5 1.3 0.0 0.7 Source: Credit Suisse Equity Research estimates, Thomson Reuters

Yen and You 42 01 July 2013 Equity Research: Global Autos Key global takeaways Chris Ceraso Global Autos Sector Head The automotive sector is highly global, with most major manufacturers competing not only chris.ceraso@credit- in their home markets, but also in several other (if not all) international markets. The suisse.com Japanese OEMs have long been formidable players on the global stage, currently 212 538 4529 commanding roughly 25% of global market share. (For reference, the US Big 3 have a combined ~20% of the global market and the European OEMs have about 25%.). Thus, it Jatin Chawla is not surprising that the sharp (~30% drop) in the yen over the last ~6 months is one of Indian Autos the most important topics for investors in the auto sector right now. jatin.chawla@credit- Japan suisse.com The view from our Japanese team is that the weak yen will drive improved profitability, 91 22 6777 3719 which in turn will be used to accelerate or enhance product investment, repair balance sheets, and return capital to shareholders. Our team does not believe that the Japanese Henry Kwon OEMs will use the yen weakness to instigate price wars in global markets – although they Korean Autos do recognise that this is a potential risk. henry.kwon@credit- United States suisse.com The US is the largest (non-Japan) market for the Japanese OEMs, representing ~5.5 822 3707 3732 million annual units, or about 37% of the US market. And the Japanese OEMs have a long history of gaining market share at the expense of Issei Takahashi the domestic US automakers (The Big 3). As a result, US investors have been Japanese Autos understandably a little jumpy in recent months. Issei.takahashi@credit- suisse.com However, our US team makes a few key points: 81 3 4550 7884 (1) The Japanese OEMs are likely to add increasing levels of content to their vehicles without raising price. This is an alternative – and in our view less damaging – form of price competition. (2) If point number 1 is right, our team notes that it will take longer to have an effect on overall industry pricing levels, as added content will have to be worked-in over time, as new products are introduced and/or updated. (3) The team also notes that the domestic Big 3 are in a much better competitive condition today than they were 4-5 years ago when the yen last traded at ¥100/US$. Thus, bolstered by strong balance sheets, healthy margins, and robust free cash flow, the Big 3 are able to ‘fight back’ with their own competitive products, rather than resorting to price cuts, which was their only form of recourse in prior cycles. (4) This is not to say that the weak yen has no impact; on the contrary, we believe that it will ultimately weigh on margins. But it should be in a slower, more controlled fashion, as content levels escalate and product cycles shorten. (5) Lastly, while all of the focus for the US automakers has been on the US market, we note that yen-related P&L damage for the likes of GM and Ford has come from their Australian operations, where the Japanese OEMs have a highly import-driven model and have used price to gain share, hurting the ‘local’ players, such as GM’s Holden division.

Europe Our European team sees a limited threat from the Japanese OEMs as a result of a weaker yen. The team notes that after suffering for decades from a currency that steadily (if not linearly) grinded higher, the Japanese OEMs have shifted to an almost fully locally- sourced model. Indeed, the recent strengthening looks like a blip in the longer-term down- trend for the yen/euro.

Yen and You 43 01 July 2013

What’s more, the team notes that the Japanese OEMs are underutilised in their EU plants, a function of chronic market share struggles. Thus, we believe it is unlikely that the Japanese would seek to take advantage of the weak yen by importing vehicles from Japan, further eroding productivity levels in their EU factories. Risks do exist, though, within the tyre companies with recent evidence flagging Bridgestone emerging as the most aggressive company, pricing-wise, in Europe. Our Tyre Dealer Survey highlighted dealers expecting Bridgestone to be the single biggest winner of market share in 2013.

Korea Our Korean team notes that the Japanese OEMs have traditionally won most of their share gains from the US OEMs. Thus, to the extent that a weak yen drives Japanese share gains, we believe the Korean OEMs can still perform well. Yet, the Korean automaker stocks have underperformed the Japanese makers by a wide margin, suggesting a potential opportunity in shares of Hyundai Motor, for example.

India The largest player in the Indian automotive market is Maruti Suzuki, with a ~50% share of the market. Whilst almost all of the vehicles are locally produced/assembled (owing to hefty import tariffs), there is still a meaningful amount of content (10% to 15%) that is sourced from Japan, as the supply base in India is not yet mature enough to support full local sourcing. What’s more, Maruti pays royalties to Suzuki in yen, boosting the overall yen exposure to ~20% of sales. As a result, as the yen strengthened from 2007 to 2012, Maruti’s margins were slashed to 7% from 15%. Back of the envelope, every 1% move in the yen is worth about 20 bps of EBITDA margin for Maruti. Thus the >20% move in the yen since last November could drive a >50% boost to earnings at Maruti.

Japanese point of view: Weaker yen to trigger virtuous cycle As argued in Japan auto sector; Weak Yen changing global outlook, 21 January 2013, the weak yen is likely to bring Japanese automakers short-term earnings improvement and increased long-term volume growth potential, helping to shift each company’s financial strategy toward returning value to shareholders. Even as the yen weakens, however, we do not expect Japanese automakers to alter their directions on raising the share of overseas production and parts procurement. We also expect no fundamental change in pricing strategies, in which the weakening yen is viewed as a resource. Record operating margins The impact of the weaker yen is substantial. We forecast a combined lift to FY12–FY13 OP of over ¥2tn for the 10 automakers in our coverage, which would recover some 80% of the ¥3tn impact of the strong yen from FY07–FY11. We estimate FY3/14 operating margins for the J3 at about 8%, with a majority of medium-sized automakers also reporting record margins. We forecast record earnings in FY13 from Toyota, Fuji Heavy Industries, Mazda, Suzuki, Daihatsu, Hino, and Isuzu.

Yen and You 44 01 July 2013

Figure 56: OP FX sensitivity (Orange coloured names’ sensitivity represent only transaction part) FY13 Sensitivity (million yen) Company Ticker CSE FY13 OP USD (￥1) EUR(￥1) AUD(￥1) CAD(￥1) GBP(￥1) RUB(￥0.1) BRL(￥1) IDR(￥0.1) Toyota 7203 2,350,000 40,000 4,000 4,000 1,000 500 11,000 - - Honda 7267 842,000 14,000 1,000 - - - - 3,000 - Nissan 7201 800,000 15,000 - - 2,000 - 10,000 - - Mazda 7261 178,000 2,500 1,500 2,000 1,200 400 - - - FHI 7270 259,000 7,500 400 - 400 - - - - Suzuki 7269 193,000 350 700 - - - - - 6,500 Daihatsu 7262 149,000 1,300 ------Hino 7205 108,000 1,500 ------Isuzu 7202 197,000 600 - 400 - - - - - Yamaha 7272 56,868 1,600 500 ------CS JPN Auto Team Assumption Rate 100 130 100 100 150 3.2 50 1.85 Source: Company data, Credit Suisse Equity Research estimates, Nissan/Daihatsu ￥95/$

Figure 57: Yen appreciation/depreciation effect for 10 Figure 58: OP and OPM for 10 Japanese OEMs Japanese OEMs Y 0.1bn Ybn 30,000 Single year effect Accumulated Effect 6,000 9% 8% 20,000 5,000 7% 10,000 4,000 6% - 3,000 5% 4% (10,000) 2,000 3% (20,000) 1,000 2% 1% (30,000) - 0% (40,000) (1,000) -1% A A A A CSE CSE FY04FY05FY06FY07FY08FY09FY10FY11FY12FY13 E FY08 FY09 FY10 FY11 FY12 FY13

Source: Company data, Credit Suisse Equity Research estimates Source: Company data, Credit Suisse Equity Research estimates

Notable profitability improvement in areas with foreign-currency denominated trading and high yen-based costs Looking at the likely impact of the weaker yen on profitability by region, the higher a region’s ratio of finished vehicles from Japan to knock-down assembly module imports, the higher that region’s likely degree of profitability improvement on a product-destination basis. Thus, profitability in Middle Eastern units, which tend to import almost all of their vehicles from Japan, is likely to rise most. Profitability is also likely to rise more in North America and Europe due to the weaker yen than in areas such as China and the ASEAN countries, where shifts toward local production and local parts procurement practices are further along. That said, factoring in the impact of currency conversion, the amount of profit (assuming it is positive) is also likely to rise in absolute terms in China and the ASEAN countries. Increased long-term volume growth potential As argued in Global Automotive Sector: Weak Yen Is One Factor in Price/Share Equation; Nissan Looks Well Positioned, we do not, in principle, think Japanese automakers are likely to reach for short-term market share growth using aggressive pricing measures such as sticker price reductions or incentive increases. Rather, we expect them over the next two–three years to combine volume expansion with maintenance and improvement of brand value through measures such as enhancing vehicle specifications and features, strengthening marketing, and easing consumer financing terms.

Yen and You 45 01 July 2013

However, supply and demand will still ultimately determine pricing conditions. Barring particular supply limitations, supply will depend on each company’s decisions on the relationship between how many units it would like to produce and how many it has to produce. It appears that Nissan and some other OEMs have already hinted at or decided on what are effectively price-cutting campaigns aimed at expanding sales with measures such as lowering sticker prices, raising incentives, increasing fleet ratios, and expanding sales financing penetration to consumers with lower credit scores. Depending on the supply postures the Japanese automakers adopt, we see a risk of some OEMs making aggressive pricing moves and following each other in a downwardly spiralling game that results in industry-wide price declines. We plan to continue monitoring automaker volume targets for signs of such a scenario beginning to develop. Notable volume growth from regions with low Japanese car market shares and yen- denominated trading We expect the weaker yen to raise the volume growth potential for Japanese automakers, but to do so differentially by region along two main axes: 1) regions with yen-denominated trading versus regions with foreign-currency denominated trading and 2) regions with lower existing market shares for Japanese vehicles versus regions with higher existing shares. For companies such as truck OEMs, most of which deal in yen-denominated terms, the weaker yen comes effectively as a price discount from a local point of view. The weaker yen is therefore likely to catalyse an overall increase in demand by lowering prices. Japanese truck OEMs mainly compete against one another in their major overseas markets and are all positioned to benefit from a virtuous cycle of lower prices boosting real demand leading to increased sales. With only Japanese affiliates gaining from the weakening yen in local-currency terms, we expect regions to see increased potential for gains in Japanese-vehicle market shares in proportion to how low those shares are initially. Factoring in the above reasons for expecting profitability improvement (increased product competitiveness and price campaigns), we would tend to expect market shares to grow especially in Europe, North America, and the Middle East, barring any increase in protectionist trade measures. Enhanced returns to shareholders and improved ROE Japanese OEMs have been working to strengthen balance sheets and improve earnings since the collapse of Lehman Brothers. The automotive segments of most OEMs had already achieved a net cash position by 1H 2012. With the boost from current yen weakening, cash flows could improve further, accelerating balance sheet improvement. Such acceleration of balance-sheet improvement based on yen weakening could lead Japanese OEMs to shift their capital strategies from bolstering their financial positions to returning value to shareholders sooner than we had anticipated. Specifically, we expect several changes during FY3/13–15: stated dividend yields of 25%–30% from Toyota, Hino, Isuzu, and FHI; a higher dividend from Mazda; and, from Toyota, Nissan, Daihatsu, and others, measures to return value to shareholders (including resumption of share buybacks and large dividend increases) that go well beyond stated dividend yields. The disposal of surplus cash could also contribute to ROE improvements.

US: The weak yen is only one factor For more details, please see the full report, Global Automotive Sector: Weak Yen Is One Factor in Price/Share Equation; Nissan Looks Well Positioned. For US vehicle pricing and market share trends, fluctuations in the yen tend to be more relevant than fluctuations in the euro because the Japanese OEMs made up 37% of the US vehicle market in 2012 versus 10% by European and 9% by Korean brands.

Yen and You 46 01 July 2013

Our overall conclusion is that while macro issues such as the strength of the yen can have an influence on overall industry pricing, we believe that individual OEM product cycle strength is a more important determinant of pricing and share gains, and thus stock price performance.

The yen and US vehicle pricing Our analysis shows that $/¥ exchange rate is one among many factors that has influenced US industry pricing. Changes in consumer preferences, pass-throughs from rising regulatory costs, and raw material prices have all played major roles. A sustained weakness in $/Yen could be a headwind for US industry pricing but we do not expect it to have quite the same effect as prior cycles, given that other fundamental trends impacting the industry (i.e. low new dealer count, better inventory management, low new vehicle loan rates, and high used pricing) as well as Japanese OEMs’ actions to reduce their Yen exposure should largely act as offsets.

Figure 59: Consumer Price Index—new vehicles vs the $/¥ (1971-2012)

160.4 ¥0.00

140.4 ¥50.00

120.4 ¥100.00

100.4 ¥150.00

80.4 With the yen The yen began to ¥200.00 stabilizing in the mid- 1990s and trade re-strengthen in 60.4 restrictions on 2007, though ¥250.00 Japanese steel industry pricing did eased, new vehicle Following the 1985 Plaza pricing began to slide. not improve until 40.4 Accord, the yen jumped 2009 (as GM and ¥300.00 ~55%, putting pressure Chrysler emerged 20.4 on the newly emerging from bankruptcy). ¥350.00 Japanese carmakers. 0.4 ¥400.00

New Car CPI (left) $/Yen (right, inverse)

Source: DLX Haver, Factset

Market Share While the Japanese OEMs have been steadily gaining market share in the US since the mid-1970s, those gains accelerated through the 2000s, with total Japanese-brand share climbing from ~25% in 2000 to 36% by 2007. Among several factors contributing to these gains, relative weakness of the yen was an important one as it allowed the Japanese OEMs to improve their competitive positioning vis-à-vis the US automakers. From 1995 to 2007 $/¥ weakened to ~¥115 from ¥95. Instead of returning FX gains back to consumers in the form of lower transaction prices, the Japanese carmakers recycled them back into their respective products, essentially “up-contenting” models. Refreshed products during this period (such as the 2002 Toyota Camry and 2006 Honda Civic) were significantly redesigned, with more aggressive interior/exterior designs and standard engines that were far more fuel-efficient vs. their Big 3 competitors. If $/¥ weakens further, we expect the Japanese OEMs to continue with their practice of using FX-fueled profits to fund increased product content (without necessarily raising prices in kind) putting them in a stronger competitive position and supporting market share gains. This is a process that takes time, as the OEMs need to work new product into their cycle plans. Thus, we are not saying that the yen will threaten the Big 3 overnight; rather, we suggest that if yen weakness persists, we think it will strengthen the competitive position of the Japanese brands over time.

Yen and You 47 01 July 2013

Figure 60: Japanese Brand Market Share vs $/¥ Figure 61: J3 Incentives as % of Industry (Inflation-Adj) ¥65.00 45.0% 70% Jpn brand share began a 12-yr period of growth, helped in part by the yen (which 61% ¥75.00 42.0% weakened from ¥95 to ¥117) . 60% 56% 39.0% ¥85.00 49% 50% 36.0% 45% ¥95.00 43% 33.0% 40% 37% ¥105.00 Supply constraints 33% 33% plus further $/Yen 30.0% ¥115.00 strength caused 30% lower share. 27.0%

¥125.00 24.0% 20%

¥135.00 Despite yen strengthening , 21.0% 10% weakness amongst D3 suppported share growth ¥145.00 18.0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 0% $/yen (left, inverse) Jpn-Brank Mkt Share (right) 1999 2000 2001 2002 2003 2004 2005 2006

Source: Ward’s Auto, Factset Source: Autodata Japanese OEMs have taken steps to mitigate yen exposure Over the past few years when the yen was in the midst of an uncharacteristic strength, the Japanese OEMs made several changes to mitigate the FX-related pain including increasing capacity in North America and localising component sourcing. Several Japanese carmakers have announced major commitments to expand capacity in North America over the next 2 years (mainly in Mexico and the US), all in an effort to mitigate future FX risk. Honda plans to start production at its Celaya, MX facility in 2014, with Mazda and Nissan also launching new facilities in the region (note that in the short- term, Mazda should benefit greatly from weakening of the yen, as it currently imports all units sold in NA following the termination of production at its Flat Rock JV facility in 3Q12). It’s worth mentioning that Toyota has so far been the least aggressive in relocating assembly capacity, with the automaker not expected to open any new facilities in Mexico or the US over the next 3-5 years (indeed, Toyota’s most recent capacity announcement was for its US engines, where it expects to add ~100k annual units by 2013).

Figure 62: Recent North America Capacity Commitments from Japanese OEMs Est Increase 2012 NA Units Company Investment Country in Capacity Expected SOP Built Mazda $650 mln Mexico 230,000 2014 37,566 Honda $800 mln Mexico 200,000 2014 1,682,996 Nissan $2.0 bln Mexico 175,000 2013 1,195,971 Subaru $230 mln United States 30,000 2014 184,783 Toyota* $30 mln United States 100,000 2013 1,776,266 * Additional capacity for Toyota only on the engine side. No major plans to boost assembly capacity or relocate major Jpn prod to NA. Source: Company data, Autodata, Credit Suisse Equity Research estimates Honda has been the most aggressive in increasing its local content, with 66% of its 2012 North America sourced vehicles containing components procured in the region (namely in US and Canada), up from 62% in 2007. Nissan has essentially held flat at about 59%, as has Toyota at about 70%. FHI, meanwhile, actually lowered its NA content mix (to 20% in 2012 from 49% in 2007), driven by lower content on the Legacy and Tribeca. Given that the yen has been reversing its course, it seems reasonable to assume that, the actions taken in the past to mitigate pressure from a strong currency will blunt the benefit of a weaker currency. Therefore, we would not expect a weak yen to be quite the profit booster that it was, say, in the early 2000s.

Yen and You 48 01 July 2013

Figure 63: % of NA Sourced Content on NA Built Vehicles Figure 64: % NA Sourced Value (US Sales-Weighted) 80% 73% 66% 70% 70% 70% 62% 62% 59% 59% 64% 60% 49% 55% 50% 51% 50% 50% 45% 40% 46% 42% 30% 37% 20% 31% 20% 28% 10% 20% 19% 0% Honda Nissan Toyota FHI 10% Honda Nissan Toyota FHI 2007 2012 2007 2012

Source: Ward’s Auto, Factset Source: Autodata

Suppliers: US Supplier Competitiveness Not Likely to Be Affected in Near-Term Simply put, while individual suppliers are greatly impacted by fluctuations in FX rates (be it EUR/USD for US names or USD/JPY for Japanese), changes to overall competitiveness are fairly limited in the short-to-medium term, given that suppliers book new business multiple years before launch. Generally speaking, auto suppliers are awarded two types of contracts: 1) full-design responsibilities – where the supplier is responsible for the entire development and production process (i.e. including design, parts procurement, testing, quality control, manufacturing, etc); and 2) build-to-print – in which the supplier essentially handles assembly of a specific component (with product design done by the OEM or a third-party). For full-design contracts (which generally make up the bulk of supplier backlogs) lead times can typically range from ~2-3 years, with build-to-print contracts considerably shorter at about 6 months to 1 year. As such, fluctuations in the $/¥ will not impact US suppliers who have already signed contracts and scheduled launches for the next 2-3 yrs. And as shown in Figure 65, new business growth for several of our supplier names is expected to be quite robust for the next 3 years, which (with the exception of AXL) should support further margin expansion. Over the long-term, if the yen remains weak for multiple years, we think Japanese suppliers could look to get more aggressive in their bidding activity, largely through recycling potential FX gains back into the product while keeping prices competitive. At the same time, we would expect to see Japanese suppliers expand their production footprints outside of their home country, as their main OEM customers do the same.

Figure 65: Estimated 3 Year Net New Business Backlog (as % of 2013E Revs) 2013-2015 Net New % of Net New Business Backlog 2013E Cons Revs Biz AXL $1,115 $3,280 34% BWA $2,300 $7,484 31% HAR $1,200 $4,206 29% TEN $1,900 $7,753 25% DLPH $3,200 $16,325 20% LEA $1,800 $15,284 12% TRW $1,900 $16,774 11% SUP $75 $845 9% JCI $3,700 $43,020 9% MGA $2,200 $32,039 7% Source: Factset, Credit Suisse Equity Research estimates. 2013E revs based on IBES consensus.

Yen and You 49 01 July 2013

Product Cycle – The More Important Driver Automakers introducing more new or refreshed models over the next few years are more likely to take price and pick up market share compared to those with relatively older products. To help quantify the benefits of product redesigns, we analysed in detail recent model refreshes (from 2008-2012), looking at a sample of 15 changeovers across the car, utility, and pickup truck segments. Specifically, we compare average segment market share and average incentives/unit for each model in the 4 quarters preceding a refresh vs the four quarters post-refresh. The key takeaways are: 1.) Every model shown posted big reductions in average incentives post-refresh vs pre- refresh, with spending dropping by about ~30%-70%. 2.) Most of the models posted notable market share gains within their respective segments post-refresh, with increases anywhere from 100-800 bps. Not surprisingly, the more significant the product redesign, the greater the bump in market share, as evident by the Chevy Sonic, Hyundai Sonata, Dodge Durango, and the Ford Explorer. 3.) While not shown, average transaction prices also increased for every vehicle, generally climbing by about 5-20% post-refresh and ~3-10 percentage points in excess of average industry pricing gains. The two biggest gainers were the Ford Focus and Chevy Cruze, where transaction prices increased by almost 30%. While it’s impossible to say how every refreshed model will perform, it’s clear that the financial benefits can be quite significant. And while most vehicles eventually give back some market share and pricing gains as they mature, evidence from recent Big 3 refreshes suggest that automakers can maintain structurally higher levels of profitability compared to prior versions, either through lower incentives, higher market share, greater mix of trims / body styles, and/or higher base prices. Among the US Makers, GM Best Positioned While yen weakness could enable the Japanese makers to strengthen their competitive position in the US market, we remain confident that GM’s product cycle will drive pricing and volume strength – particularly in 2014 – making it an attractive investment at current levels.

The European story Within the European context, the Japanese automotive industry is more geographically integrated than in other parts of the world, with Japanese OEMs expected to produce >1.5m vehicles in Europe this year, against 12 month rolling sales of 1.4m units for Western and Central Europe. As a result, it should be harder for the Big 3 players to aggressively take share on the basis of pricing. At the Credit Suisse Geneva Motorshow Trip (feedback published 7th March 12, Fading Hope), Toyota’s head of sales for Europe noted that Japanese OEMs are now sourcing almost exclusively in Euros, as a result of constant FX headwinds from a strengthening yen over the past 20 years. In an industry where the majority of participants are barely break-even, having a large open yen exposure would have clearly rendered the operations of Japanese OEMs largely un-economical in such a harsh FX environment.

Yen and You 50 01 July 2013

Highly localised production and low utilisation levels are hallmarks of Japanese OEMs in Europe In keeping with the above, Japanese OEMs were facing constant pressures to localise more of their cost base and to move sourcing back into euro. This has led to a situation where all 3 large Japanese OEMs have built up sizable capacity in Europe, typically in the UK thanks to a more relaxed labour regime and no opposition from a strong domestic OEM base – a situation which would have made it difficult to build and operate a large manufacturing base in the typical markets such as Germany and France. Examples include large manufacturing plants in Swindon (Honda), Sunderland (Nissan) and Derby in the UK and, in France, Valenciennes (Toyota).

Figure 66: Japanese OEMs have a lot of installed capacity – but low plant utilisation 1,200,000 90%

78% 80% 1,000,000 70% 67% 800,000 62% 60%

50% 600,000 40%

400,000 30%

20% 200,000 10%

0 0% Honda Nissan Toyota

Capacity Production Plant Utlization (rhs)

Source: Company data, Credit Suisse Equity Research, IHS Global Insight - 2012

As shown in Figure 66, though, utilisation rates have now reached levels which are lower than they are for most of their mass market peers, with the exception of Fiat where we observe utilisation levels closer to 50%. The most likely reason behind this is the constant loss of market share which has recently been most pronounced at Toyota and Honda, a trend unlikely to be reversed without a significant improvement in the quality and quantity of product. Nissan has proven the exception, thanks to the success of the Qashqai, yet even for Nissan total sales levels in Europe have not grown since the early 1990s.

Yen and You 51 01 July 2013

Figure 67: Annual volumes of Japanese 3 in Europe – Figure 68: Market shares in Europe are very low versus little growth over 20 years other major car markets

1,000,000 7% 900,000 6% 800,000 700,000 5% 600,000 4% 500,000 3% 400,000

300,000 2% 200,000 1% 100,000

0 0%

1992 1995 1998 2012 1991 1993 1994 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Honda Nissan Toyota Honda Nissan Toyota

Source: ACEA Source: ACEA The common theme for the Japanese OEMs in Europe is that this market, when benchmarked against all global markets an OEM could sell into, was historically and still is the least profitable market. Hence product development efforts would have been focused elsewhere where OEMs face lower technology costs and better returns on an incremental $ spent on R&D and capex. With this in mind, it is unlikely that Japanese OEMs will seek to enter the market with discounted import vehicles from Japan assisted by FX tailwinds. As long as utilisation levels in domestic plants remain this low, we believe it makes little sense to accept the fixed-cost under-absorption and to fill up dealers with lower priced import vehicles. Such a strategy would damage brand perception in Europe and likely lead to further market share losses to the Korean OEMs. Though the impact on OEMs is likely to be negligible, we see risks for Europe’s tyre manufacturers Though the impact on OEMs is likely to be negligible, in our view, the same is not true for tyre makers where potential risks exist. In March’s Credit Suisse quarterly dealer tyre survey, over 35% of dealers saw Bridgestone as being the most price aggressive tyre maker in Europe. FX is a likely driver behind this.

Figure 69: European tyre dealers see Bridgestone as particularly price aggressive 60%

50%

40%

30%

20%

10%

0% Bridgestone Hankook Pirelli Michelin Goodyear Continental

Price aggressiveness Q1'13 Price aggressiveness Q4'12

Source: CS Tyre Dealer Survey 4Q12 & 1Q13

Yen and You 52 01 July 2013

Whilst it would be difficult to say that tyre dealers are not avid followers of FX movements, their perception of Bridgestone’s pricing actions seems to make sense given the depreciation of the yen and the associated cost advantage afforded to the Japanese OEM. Indeed, dealers expect Bridgestone to be the single biggest winner of market share in 2013 – a view which resonates with today’s exchange rates. The feedback from our dealer survey is consistent with Bridgestone’s guidance statement, built around growing sales in Europe via market share increases. Bridgestone has been reducing prices in Europe since H2’12 and looks set to continue to do so in 2013. Of course, such a strategy is easier to implement when budgeting in yen, despite the fact that Bridgestone produces most of its passenger car tyres in Europe. Overall, we estimate Bridgestone’s annual consolidated operating profit fluctuates by ¥0.9bn for every one yen change versus the euro. And we think Bridgestone’s plans to step up marketing and reinforce sales channels will also support an increase in tyre sales. It is steadily expanding its European network of First Stop tyre centres (1,973 in 2011 to 2,003 in 2012) and we see further growth as likely. The threat posed by Bridgestone is not confined to passenger car tyres, either. We see particular risks for ML’s earthmover business (c64% of the division SR 3). Not only is Bridgestone adding capacity which we believe will lead to the company pressing for higher volumes, using FX tailwinds to take share, but also indications from miners and mining exposed cap goods stocks suggest that demand is slowing and overproduction of light/medium equipment during 2012 means that the OE business should be off to a slow start in 2013.

Figure 70: Bridgestone will more than double its earthmover tyre capacity by 2014E with a further step up likely into 2020E 350

290 300 90 250

200 40 150 20

Bridgestone earthmover capacity (t) capacityearthmoverBridgestone 50 90 100

50

0 2012 Japan 2013 additions 2014 additions 2014 additions US 2020 additions US 2020 capacity Japan Japan

Source: Company data, Credit Suisse Equity Research estimates

It appears that currently all of Bridgestone’s specialty vehicle tyres are produced in Japan and sold in USD for overseas demand. For existing customers, contracts automatically adapt the latest FX rate which means that FX savings are passed straight through to the end-customer (i.e. the mining company). So while Bridgestone does not directly benefit from an FX tailwind in this business, their adjusted USD prices will become relatively cheaper compared to non-Japanese competitors. In the past Bridgestone has not indicated clearly whether the business will be using this yen weakness to obtain further new business. We do believe however that the incentives

Yen and You 53 01 July 2013 for a company to use pricing to win new business in earthmover increases in an industry as it adds more capacity and becomes less supply constrained. In its earthmover business the current capacity at Bridgestone is 90 tyres per day which will increase by a further 50t/day by mid-2013 and an additional 20t/day by mid-2014. In addition, Bridgestone is building a new plant in the US with capacity expected at 40t/day by mid-2014. This will increase by another 90t/day to 130t/day by mid-2020. As a result, in aggregate Bridgestone’s global capacity for specialty tyres as of mid-2020 will become 290t/day. Bridgestone is not the only OEM adding incremental capacity. Michelin itself intends to spend $750m on building a new SR 3 plant in Anderson SC while “marginally adding” more capacity at its existing site in Lexington. Of course, Bridgestone will look to fill its new capacity and we believe that the increasingly prevalent FX tailwind will enable the company to take market share amongst existing customers and win new business going forward. Bridgestone has the option to pass on FX advantages on Japan sourced tyres (where they are not contractually obliged to already) in order to take share and at the same time use profits made in other areas of the business to subsidise the US produced tyres in order to ensure that the new plants operate at volumes which cover fixed costs. A second option available would see Bridgestone offer a global price for earthmover tyres at an aggressive blended rate which would result in both US and Japanese sourced volumes benefiting from the yen’s depreciation. Japan vs. Korea? Hyundai and Kia are beginning to look oversold now For more details, please see the full report, Korea Auto Sector: JPYUSD – Where is the price war? As mentioned in previous sections, exchange rates comprise just one of many complex factors that impact market share dynamics. While Asian stock markets have taken to a Japan vs. Korea theme based on KRW:JPY moves in recent past, a longer look suggests a much more complex pattern. While it is true that a Korean gain in market share in the post 2005 period coincided with a KRW:JPY depreciation, it could also be argued that if not for the unintended acceleration issues and natural disasters which should be seen as unusual events, the share gain trend observed in both Japanese and Korean brands throughout the 2000s could have very well continued during the 2009-12 period. In other words, the strong 3-year correlation between Korean market share gains and KRW weakness against the yen could very well be spurious, in our view.

Figure 71: Market share trends in the US: Japanese, Korean and other brands, 1987-YTD 2013 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0%

0.0%

1994 2003 1987 1988 1989 1990 1991 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD13

US Big3 + European Japanese Korean

Source: Autodata

Yen and You 54 01 July 2013

While yen weakness makes potential earnings growth in the Japanese auto sector look attractive in the next 12 months, we do not believe the yen weakness automatically translates into Korean quantity weakness at the industry fundamental level, which is the dominant view that stock markets have taken. Because Korean OEM shares have underperformed on this assumption, we believe continued demonstration to the contrary could make the Korean auto sector a very attractive play in 2H13.

Figure 72: Incentive spending for Japanese and Korean brands vs. JPY:USD

$2,500 120.0

100.0 $2,000

80.0 $1,500

60.0

$1,000 40.0

$500 20.0

$0 0.0 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13

Japan Big3 Hyundai-Kia JPY:USD

Source: Autodata, Thomson Reuters

A closer look at India The Indian Auto industry is dominated by the Japanese (~50% share) and Korean (~15% share) players. Given the extremely high import duties in India, almost the entire car production at the mass end tends to be locally produced in India. And hence it would be very difficult for the Japanese to export cars out of Japan to India. However, given the fact that the Indian Auto component industry is still evolving and currently not equipped to produce the higher technology components, most of the MNC players in India have a reasonable share of imports from their respective home markets. Not only do the OEMs import components directly, their vendors in India also import a lot of components from abroad. This would mean that the Japanese OEMs will stand to benefit in the near term. The other currency exposure that all the MNC car makers have is a royalty payment to their respective parents where the terms of the trade are usually in the local currency of the foreign car maker and hence the Indian entities are exposed to the currency fluctuations. The key Japanese players in India are Maruti Suzuki (Suzuki Motor Corp holds a ~58% stake in the company), Toyota, Honda and Nissan. In the last few years, Maruti, which dominates the Indian market, has faced competition from foreign carmakers including Toyota, Honda, Ford, General Motors, Nissan, Volkswagen, Renault etc who have entered the small car segment where Maruti is so dominant. Despite the currency acting as a headwind in the last few years, Maruti has done a very good job in terms of defending its share on the back of new products in the segments where competition has come in. But the currency did take its toll on the company’s margins which came down from over 15% in FY07 to 7% in FY12. The main benefit from the yen depreciation in the next couple of years would be on the margin. Despite the large scale (over 1m units) that it has in India, Maruti continues to import certain critical components, largely electronics and higher grade steel from Japan and some diesel engine components from Europe. These direct imports by Maruti constitute ~8% of sales, out of which ~5% is imported from Japan. It also does not have

Yen and You 55 01 July 2013 the capability currently to build a model from scratch on its own and hence it is reliant on Suzuki for new models. In return, it pays Suzuki a royalty per car. Whilst the royalty varies for each car, the blended royalty as a % of sales currently is between 5 to 6%. Also, when Maruti was setting up shop in India, Suzuki brought its Japanese vendors also to India to either tie up with local partners or set up shop on their own in India. These vendors also import certain critical components from Japan; this is classified as indirect imports. The indirect imports today constitute ~12% of sales, ~10% of which is from Japan.

Figure 73: Maruti’s exposure to yen stands at ~21% of net sales Nature of import Part imported Currency of import Share Steel USD/JPY 2.0% Direct Components JPY 6.0% Royalty JPY 5.0% Sensors, ECUs, A/C parts JPY 10.0% Indirect Misc components USD 0.5% Turbochargers, fuel rail for diesel cylinders EUR 3.5% Source: Company data, Credit Suisse Equity Research estimates Inclusive of royalty payments to Suzuki and its direct and indirect imports, yen exposure forms ~20% of its sales. Its exports, which are typically USD-denominated, form ~10% of net sales. Hence unless Maruti hedges it the yen US dollar exposure is completely open. Thus every 1% change in the yen impacts EBITDA margins by 20bps, which for a 7.5% PAT margin company means a PAT impact of ~2% for every 1% change in yen. Hence the near term impact on Maruti’s earnings is very significant. The >20% move we have seen in the yen from last November will have a >50% impact on its EPS, on our numbers. In the medium term, Maruti continues to work with its vendors to increase localisation at their end and reduce their import exposure by ~5% over a three year period and hence this sensitivity to the currency should continue to reduce for the company. However, localisation of components results in a saving of ~10% with the yen at ¥100/US$ and hence even with a lower level of imports Maruti’s margins should improve from here.

Figure 74: Maruti has aggressive plans to bring down its net import exposure Currently 3-year plan (% of sales) Imports Exports Imports Exports JPY Denominated 22% 17% USD/Euro denominated 6% 11% 3% 15% Net import exposure 17% 5% Source: Company data, Credit Suisse Equity Research estimates

Yen and You 56 01 July 2013

Figure 75: Adjusting for currency and royalty, Maruti has been able to maintain margins despite competition, now with FX once again acting as tailwind margins should expand 18.0%

16.0%

14.0%

12.0%

10.0%

8.0%

6.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Reported margins Margins ex JPYUSD change Const JPYUSD and royalty at FY10 levels

Source: Company data, Credit Suisse Equity Research estimates, the BLOOMBERG PROFESSIONAL™ service

Figure 76: Assuming yen at 120 could result in Maruti’s EPS being 40% higher FY14 Volume growth (% YoY) -10% 0% 5% 10% 15% 80 70 77 81 86 92 85 85 95 100 106 112 90 99 110 116 123 130 JPYUSD rate 95 112 124 130 138 147 100 123 136 143 152 161 110 142 158 166 176 187 120 158 176 184 196 208 Source: Company data, Credit Suisse Equity Research estimates

The depreciation of the yen should also help the other three Japanese players, Honda, Toyota and Nissan, as for them the import content is even higher than Maruti given that their localisation efforts are still at early stages compared to Maruti which has been in India for the last 30 years. Among the three, Honda seems the most aggressive in the near term. It has had good success with its India-specific compact car Amaze which is also its first product in India with a diesel engine. At the outset it may seem that Nissan too may benefit in its efforts to launch the Datsun range of products in India however in order to get the pricing right at that lower price point, Nissan is looking at over 95% localisation for the Datsun brand.

Yen and You 57 01 July 2013

Figure 77: Global autos – Comparative valuations Share MktCap EV Target PE EV/EBITDA P/B Div Yld EPS Ticker Name Price USD USD Price 2013 2014 2013 2014 2013 2013 2013 (local) (US$mn) (US$mn) (local) x x x x x % (local) AUTOS 7259.T Aisin Seiki 3485.0 9,975 11,298 4500 12.7 10.8 3.8 3.3 1.1 2.2 275.0 ASII.JK Astra International 6350.0 25,888 30,634 9000 10.6 9.1 9.2 7.7 3.0 4.5 597.2 ALV.N Autoliv Inc 74.7 7,145 6,271 NOT COVERED 13.2 11.9 6.4 5.7 1.7 2.7 5.7 BAJA.BO Bajaj Auto Limited 1830.0 8,863 7,768 2126 16.9 15.0 13.0 11.0 6.9 2.5 108.1 BMWG.F BMW 64.9 54,772 134,199 NOT COVERED 8.3 8.1 3.7 3.0 1.2 4.2 7.8 BWA.N BorgWarner, Inc. 83.3 9,621 9,973 88 15.4 13.1 8.7 7.7 2.8 0.4 5.4 BOSH.BO Bosch Limited 8907.6 4,681 4,562 10020 24.4 18.7 17.2 13.6 4.4 0.7 364.8 5108.T Bridgestone 3290.0 26,150 29,522 4000 9.5 8.9 6.4 6.0 1.6 1.6 347.8 1114.HK Brilliance China Automotive Holding 8.3 5,398 5,444 9.1 10.5 8.4 203.8 192.6 2.5 0.0 0.6 1211.HK BYD Co Ltd 29.2 11,274 12,875 16.0 101.9 87.8 13.8 12.1 2.5 0.0 0.2 2105.TW Cheng Shin Rubber 91.0 8,524 10,558 105 13.1 11.1 9.3 8.1 3.3 1.6 6.9 CONG.DE Continental 96.2 25,203 32,976 NOT COVERED 9.6 8.3 5.2 4.6 2.0 2.6 10.0 7262.T Daihatsu Motor 1800.0 7,789 7,789 2640 9.4 7.3 3.9 3.3 1.5 3.1 191.0 DAIGn.DE Daimler 43.2 60,429 141,326 NOT COVERED 9.4 8.4 4.7 3.7 1.0 5.0 4.6 DLPH.N DELPHI Automotive PLC 49.7 15,535 16,886 56 11.5 10.1 7.1 6.4 4.4 0.0 4.3 6902.T Denso 4335.0 35,020 33,347 5350 19.1 13.4 7.4 5.8 1.5 1.5 226.6 0489.HK Dongfeng Motors Group Co Ltd 10.6 11,754 9,159 10.7 7.5 6.9 2.9 2.7 1.2 1.9 1.1 FIA.MI Fiat 5.1 8,866 23,210 NOT COVERED 16.5 9.1 2.6 2.4 0.7 0.3 0.3 FI.MI Fiat Industrial 8.4 14,701 38,094 NOT COVERED 10.1 8.5 4.6 4.1 1.8 3.1 0.8 F.N Ford Motor Co. 15.0 70,593 60,424 14 10.7 9.7 5.8 5.1 2.4 0.0 1.4 FROTO.IS Ford Otosan 22.5 4,064 4,598 23.4 13.0 11.5 9.8 8.7 3.5 5.7 1.7 7270.T Fuji Heavy Industries 2221.0 17,603 17,208 2710 14.5 8.5 9.3 5.3 2.9 0.7 153.4 0175.HK Geely Automobile Holdings Ltd 3.4 3,659 3,429 2.8 9.7 8.4 5.3 4.5 1.5 1.3 0.3 GM.N General Motors Corp. 32.2 44,277 23,902 44 11.1 7.9 2.0 1.6 1.0 0.0 2.9 2333.HK Great Wall Motor 32.5 15,432 14,055 36.6 10.4 9.1 9.0 7.8 2.9 1.5 2.5 2238.HK Guangzhou Automobile Group 7.4 7,557 7,177 4.5 13.3 12.1 -464.1 -1174.7 1.1 1.9 0.4 HAR.N Harman International Industries 49.6 3,370 2,946 56 16.4 12.6 7.4 5.3 2.0 1.2 3.0 HROM.BO Hero Motocorp Ltd 1624.9 5,430 4,769 1742 15.3 14.7 8.9 8.2 6.5 3.7 106.0 7205.T Hino Motors 1346.0 7,811 9,116 1830 16.1 10.5 7.9 5.9 2.9 1.7 83.7 7267.T Honda Motor 3500.0 64,061 103,217 4710 17.3 9.8 12.0 8.0 1.3 2.2 202.7 012330.KS Hyundai Mobis 252000.0 21,124 20,912 374000 6.7 5.9 7.0 6.3 1.2 0.8 37828.2 005380.KS Hyundai Motor 202500.0 36,493 61,007 254500 4.6 3.9 5.3 4.4 0.8 0.9 43753.4 011210.KS Hyundai Wia Corp. 160500.0 3,556 3,950 158000 9.4 9.1 6.7 6.4 1.8 0.3 17095.8 ICHB.MX Industrias CH S.A.B. de C.V. 78.5 2,553 2,120 82 30.3 21.1 8.3 6.2 1.3 0.0 2.6 7202.T Isuzu Motors 673.0 11,580 10,540 1100 11.8 9.4 6.3 4.4 2.3 1.5 57.0 JCI.N Johnson Controls 35.3 24,174 29,977 39 13.8 11.7 9.5 8.3 1.9 3.1 2.6 KAR.N KAR Auction Services, Inc. 22.1 3,097 4,795 25 18.5 15.8 9.5 8.5 2.0 0.0 1.2 000270.KS Kia Motors 56500.0 19,723 19,331 64900 5.4 4.8 4.6 4.1 1.1 0.0 10558.2 LEA.N Lear Corp 58.1 5,370 4,594 75 10.2 8.2 5.9 5.1 1.6 0.0 5.7 MGA.N Magna International 68.5 15,802 14,641 77 11.4 10.2 5.6 5.4 1.6 1.9 6.0 MAHM.BO Mahindra & Mahindra 942.1 9,680 9,947 950 17.8 16.8 12.5 11.7 4.0 1.6 53.0 MANG.DE MAN 84.0 16,179 21,178 NOT COVERED 29.6 18.9 11.6 8.5 2.1 2.4 2.8 MRTI.BO Maruti Suzuki India Ltd 1555.0 7,519 4,861 2163.2 19.0 11.9 7.3 4.8 2.5 0.5 81.7 7261.T Mazda Motor 375.0 16,026 18,896 390 32.7 11.3 16.2 7.6 2.3 0.0 11.5 MICP.PA Michelin 66.2 16,223 18,578 NOT COVERED 8.2 7.4 4.7 4.2 1.3 3.7 8.1 7201.T Nissan Motor 995.0 42,351 93,167 1380 12.2 8.6 10.7 7.7 1.1 2.5 81.7 PSHG_p.F Porsche 56.6 11,361 21,063 NOT COVERED 5.2 4.5 na 3.7 0.6 0.5 10.8 PEUP.PA PSA Peugeot Citroen 5.9 2,742 34,521 NOT COVERED na na 4.9 3.1 0.2 0.0 -2.4 RENA.PA Renault 51.7 20,035 43,246 NOT COVERED 6.9 5.4 1.9 1.4 0.6 3.4 7.5 SCVb.ST Scania 135.4 8,077 20,665 NOT COVERED 15.5 13.2 8.8 7.6 2.9 3.6 8.7 5110.T Sumitomo Rubber Industries 1526.0 4,065 6,859 2000 8.0 7.6 5.3 5.0 1.4 2.2 190.6 7269.T Suzuki Motor 2175.0 12,392 7,652 3060 15.2 11.3 3.2 2.6 1.1 0.8 143.3 TAMO.BO Tata Motors Ltd. 287.2 13,152 18,835 365 9.3 6.8 4.0 3.3 2.2 0.9 31.0 TEN.N Tenneco Inc. 44.3 2,692 3,649 46 12.5 9.9 5.6 4.8 5.3 0.0 3.5 TOASO.IS Tofas 12.6 3,230 3,580 12.8 14.1 12.2 8.5 7.7 2.9 6.4 0.9 7282.T Toyoda Gosei 2363.0 3,105 2,899 2700 14.3 11.4 3.8 3.4 1.2 1.9 165.6 3116.T Toyota Boshoku 1316.0 2,476 2,863 1300 15.4 13.1 4.8 4.0 1.3 1.4 85.2 6201.T Toyota Industries 3945.0 12,508 18,187 5200 23.2 13.7 10.5 8.5 0.8 1.4 170.4 7203.T Toyota Motor 5750.0 201,340 201,340 7690 18.9 10.9 9.7 6.4 1.5 1.6 303.8 TRW.N TRW Automotive Holdings Corp. 62.5 7,507 7,746 73 9.9 8.3 4.7 4.1 2.1 0.0 6.3 VOWG_p.F Volkswagen 150.4 89,607 222,048 NOT COVERED 7.1 6.2 3.9 2.9 0.9 2.7 21.1 VOLVb.ST Volvo 90.0 27,473 44,855 NOT COVERED 20.1 11.2 7.7 5.6 2.2 3.4 4.5 7272.T Yamaha Motor 1281.0 4,541 7,084 1050 14.7 9.7 7.3 6.2 1.2 1.3 87.3 0881.HK Zhongsheng Group Holdings 8.4 2,057 4,019 6.3 10.3 9.2 6.3 5.2 1.5 1.9 0.6 Source: Credit Suisse Equity Research estimates, Thomson Reuters for not covered stocks

Yen and You 58 01 July 2013 Equity Research: Steel Key global takeaways Michael Shillaker The weakness of the yen to date has already had a notable effect on Japanese steel Global Steel & European stocks. Here we consider the global backdrop provided by a projected weaker yen as well Miners as those within the APAC region. The immediate impact within Asia can be material, with Michael.shillaker@credit- suisse.com Japanese producers enjoying a significant regional competition shift in specific markets, +44 20 7888 1344 some of which they dominate. Our analysts would see it as far from played out. However, put globally, this impact is more contained. This section should be read in conjunction with Trina Chen a larger report published by our Asian team which is summarised in this chapter (Yen and China Metals & Mining You: How a falling Yen impacts Asian steel companies). We highlight the following: trina.chen@credit- suisse.com A cost advantage should see yen based steel makers more competitive under the +852 2101 7031 weaker yen and see relative production gains, market share gains and a stronger relative EBITDA to global peers. Shinya Yamada Empirically there does appear to be a relative market share benefit in the Asian region Japan Metals & Mining shinya.yamada@credit- for Japanese players under a weaker yen (and vice versa), and that would be suisse.com consistent with our team’s view in the current environment. However there appears +81 3 4550 9910 limited evidence to suggest that a material move in a specific currency alone such as the yen has had a meaningful impact on global steel markets historically, nor on the Minseok Sinn relative earnings of yen steelmakers on a margin or sustained basis. Korean Construction minseok.sinn@credit- However, we believe the global supply demand balance is clearly the greatest single suisse.com driver of earnings and as such looking at the impact of historic moves in for example +82 2 3707 8898 the yen is not in itself straightforward given the cycle often moves sharply from one year to the next. The currency is one piece of a complex jigsaw. Neelkanth Mishra Indian Metals & Mining The weak yen should let Japanese steel makers take market share in Asia and see neelkanth.mishra@credit- volume gains that compensate for their lost market share in the JKT region. However, suisse.com this seems likely to be considerably less than the level of spare capacity. (While our +91 22 6777 3716 Asian team stress test a scenario that considers gains equivalent to a 90% utilisation and double digit mt of production, a historical global analysis would suggest less.) The steel market remains very weak globally and hence any increase in Japanese market share would have to be offset by production cuts somewhere, otherwise steel prices globally will fall (in effect forcing higher cost producers to cut output and certainly to withdraw from export markets). The marginal benefit to Japanese steel makers would then be lost in a fall in the ASP across all production. The broad effect of the yen’s move is likely to be similar to throwing stones into a lake. At the centre the ripples are strongest but as we move away from the epicentre the impact lessens. As a consequence we expect relatively benign consequences as of now in the global market even if a regional Asian impact can be material. In reality steel is a global market, steel prices move together in USD terms, and if one region disrupts the rest of the world materially then the whole global sector ultimately suffers.

Global backdrop – Is there a spillover? Our approach: Theory and practice We see two likely key consequences of the weaker yen: 1) A greater competitiveness of Japanese steel makers (which our local Japanese analysts suggest could be as high as US$60/t if the yen moves to 120/US$ as CS

Yen and You 59 01 July 2013

predicts. This places potential pressures on export markets as Japanese steel companies could (relatively) profitably cut prices to take market share. 2) The stimulus/demand effect in the Japanese economy, and the extent to which this is a) accretive to global demand and b) simply a factor of relative competitiveness which leads to greater demand in Japan but no net effect globally. The former can be analysed using history as a guide. The latter is somewhat more tricky and on this point we will be driven by our global economists, whose forecasts are likely to move as the yen changes direction over time. Cost curve impact The relative competitive position of a currency move is simple to ascertain in principle but more complex in reality. Although there is often confusion in the market as to whether the impact is a price or cost advantage, the simple fact is, a weaker currency improves one's position on the cost curve globally. Steel prices are by definition effectively US$ denominated (even if priced in local currency in domestic markets) given that the marginal tonne is sold in the export market and this is a US$ priced market. It is the export market price that ultimately drives global pricing. On the cost side, raw materials are almost entirely US$ based. Local currency costs include labour and power and maintenance. In general therefore a weaker currency simply improves the relative position on the cost curve through the translation of local currency costs. Essentially, a steel company is effectively long the US$ (revenues less US$ costs) and short the local currency (local currency expenses), so a weaker local currency is beneficial on this basis. To complicate the issue factors such as contract prices (in local currency which do not move instantaneously with the export price) and raw material currency hedges (which lock in the local currency equivalent for a time) lead in general to a time lag between currency moves and the true relative competitive advantage.

Figure 78: Global cost curve ($/t) (HDG)

Source: MBR In Q4 2012 Japanese steel companies were sitting at around the 80th to 90th percentile on the global cost curve according to MBR and hence barely profitable in spot equivalent steel markets (given the spot HRC price is trading at around US$600/t). Under a weaker yen (120/USD) and all things equal the Japanese steel makers should likely move into the lower part of the second quartile on the cost curve.

Yen and You 60 01 July 2013

Scenario analysis

Figure 79: Scenario analysis: yen at 120=US$50-65/t Figure 80: Japan steel companies costs (all crude steel) incremental cost advantage for Japanese vs. Asian peers 889 535 900 531 832 817 104 500 473 800 767 113 129 423 412 700 132 398 402 402 390 400 600

500 300

400 785 454 438 719 688 200 300 635 276 276 276 238 261 255 254 200 100

100 0 0 JFE Steel Kobe Steel Nakayama Nippon Nisshin Tokyo Steel Japan Japan (Yen Japan (Yen NSSMC (Yen=95) NSSMC (Yen=120) JFE (Yen = 95) JFE (Yen = 120) Group Group Steel Works Steel Group Steel Group Group (Average) = 95) = 120)

Unit cash cost Unit EBITDA Raw Materials $/t Energy & Reductants $/t Labour & Overheads $/t Capital Charges $/t

Source: Company data, Credit Suisse Equity Research estimates Source: Company data, Credit Suisse Equity Research estimates

Figure 81: Japanese vs. Asian peers in seaborne market Figure 82: Japanese vs. Asian peers (all crude steel) 900 853 800 788 500 473 472 800 117 758 760 110 123 423 412 700 648 93 390 163 400 370 61 352 600 56 128 66 500 300 60 48 55 111 400 737 200 665 678 677 363 300 591 597 294 276 249 276 276 200 100 203

100 0 0 Japan (average)China (average) Skorea India (average) Taiwan Japan (Yen = Japan (Yen = Japan (Yen = 95) China (Average) Skorea (Average) Taiwan (Average) India (Average) Japan (Yen = 120) (average) (average) 95) 120)

Unit cash cost Unit EBITDA Raw Materials Energy & Reductants Labour & Overheads Capital Charges

Source: Company data, Credit Suisse Equity Research estimates Source: Company data, Credit Suisse Equity Research estimates

As we show in more detail later, our analyst in Japan, Shinya Yamada, believes a move in the yen to 120/US$ would give Japanese steelmakers around a US$60 per tonne cost advantage relative to Q3 last year when the yen was strongest and hence move the producers down the global cost curve. This seems intuitively right. The ASP in Japan is around US$1000/t, and around 30% of the cost should be local currency, the remainder US$. A c20% move in the yen on a cUS$300/t local currency cost base is around US$60/t. On skinny margins being earned in the steel market right now and a relatively flat global cost curve, this is a relatively material benefit in itself—but how disruptive is it?

Yen and You 61 01 July 2013

Japan in the context of Global steel

Figure 83: Global crude steel o/p vs. Japan as % of Global (rhs)

Source: WSA

While the position on the cost curve will clearly improve for the Japanese steel makers under the weaker yen, the global impact must be placed in the context of Japan’s relevance to global steel output. In this context, Japan’s share of global steel production was only 7% in 2012, and this has steadily fallen from 12% in the early 2000s. Essentially, Japan’s steel production is modest in a global context. What is perhaps even more important is the extent to which spare capacity in Japan can be utilised to ship more steel into global markets, and the net disruption this could cause.

Figure 84: Excess capacity by region vs. % of Total excess capacity (rhs)

200 60% 180 50% 160 50% 140 40% 120 100 30% 80 20% 60 16% 40 9%10% 20 6% 5% 2% 1% 1% 3% 3% 3% 2%

- 0%

India

ROW

Brazil

China

EU 27 EU

Japan

Russia Turkey

Taiwan

NAFTA

Ukraine S Korea S

Excess capacity % of Total excess capacity

Source: Company data, Credit Suisse Equity Research estimates

On our estimates there is some 400mt of global excess steel capacity, with the lion’s share sitting in China and the EU – China driven by rampant capacity growth and the EU from the crisis.

Yen and You 62 01 July 2013

Figure 85: Japan steel output peak versus current

Source: Company data, Credit Suisse Equity Research estimates

Japan we think has around 24mt of spare utilisable capacity based on the fact that we think it impossible, even with a weaker currency, for Japanese mills to profitably produce more than they were doing at the peak of mid 2008 (when just about every steel mill globally was deeply profitable). At that time at the absolute peak, Japanese steel output was just below 11,000 tonnes per month versus around 9,000 tonnes per month now. 24mt should therefore be placed in the context of current global steel output of around 1.6bn tonnes annualised which is about 1.5% of the global total. In reality, utilisable excess capacity is likely to be lower. Were Japanese steelmakers to export the full additional 24mt annualised steel production equivalent, the risk to prices from a sudden supply boost could have a far greater negative effect than the marginal benefit of increased output. Asian competitors will not automatically cut output one for one with increased Japanese output. What seems most likely is that Japanese producers increase market share slowly and modestly. More generally, we believe Japan will not run at full capacity when the rest of the world is running below 80%.

Yen and You 63 01 July 2013

Who exports to whom

Figure 86: Total exports (Mt) Figure 87: Total imports (Mt) Rank Total Exports Mt Rank Total Imports Mt 1 China 47.9 1 European Union* 35.9 2 Japan 40.7 2 United States 26.9 3 European Union* 38.0 3 Germany** 24.9 4 South Korea 28.9 4 South Korea 22.8 5 Germany** 26.4 5 Italy** 17.5 6 Ukraine 26.0 6 China 16.3 7 Russia 24.7 7 France** 14.7 8 Italy** 17.2 8 Belgium 13.3 9 Turkey 17.0 9 Thailand 12.5 10 Belgium 16.4 10 Turkey 10.3 11 France** 14.2 11 Vietnam 9.3 12 United States 13.3 12 Canada 9.2 13 Brazil 10.8 13 Indonesia 8.6 14 Taiw an ,China 10.6 14 Spain** 8.5 15 Netherlands** 10.4 15 Iran 8.4 16 India 10.2 16 Netherlands** 8.3 17 Spain** 9.9 17 India 8.2 18 Austria** 7.0 18 Taiw an ,China 7.7 19 Canada 6.4 19 Poland** 7.6 20 United Kingdom** 6.0 20 United Kingdom** 7.5 Source: WSA(* excl. intra-regional trade) Source: WSA (** data for individual EU countries incl. intra-EU trade)

Figure 88, Figure 89 and Figure 90 detail Japan’s significance in terms of net trade in global steel markets. Changes in relative competitiveness only matter if there is an impact on export markets. And as we have said, with spare capacity Japan may look for additional volumes in the export market under the weaker yen given the change in its cost competitiveness. Japan is already the second largest steel exporter globally, behind China, and is the largest net exporter globally so its familiarity with the export market suggests adding marginal tonnes would not be too difficult.

Yen and You 64 01 July 2013

Figure 88: Global steel trade by country (2011A)

Exporting (mn t)

Region

EuropeanUnion OtherEurope CIS NAFTA OtherAmerica China Japan OtherAsia Oceania TotalImports(mn t) which:of extra- regionalimports* Destination Middle Africa/ East EU (27) 108.0 6.3 15.9 0.7 2.1 1.0 5.1 0.5 4.2 0.1 144.0 35.9 Other Europe 9.5 0.9 7.7 0.1 0.0 0.2 0.4 0.5 0.4 0.0 19.8 19.0

CIS 3.0 0.6 8.2 0.0 0.0 0.0 1.7 0.3 0.5 0.0 14.3 6.1

NAF TA 6.1 1.1 1.9 19.0 3.8 0.3 2.4 3.1 6.5 0.5 44.7 25.7

Other America 1.5 1.1 0.6 3.0 3.9 0.1 4.3 1.0 1.3 0.2 17.0 13.0

Africa 6.5 3.2 2.2 0.4 0.3 1.6 2.7 0.6 1.2 0.0 18.8 17.2

Middle East 3.5 6.7 11.5 0.3 0.2 1.7 4.3 1.4 4.8 0.1 34.5 32.8

China 1.2 0.0 0.3 0.1 0.2 0.0 0.0 6.8 7.6 0.0 16.3 16.3

Japan 0.1 0.0 0.0 0.0 0.0 0.0 0.9 0.0 4.5 0.0 5.6 5.6

Other Asia 6.4 1.1 7.0 1.4 2.7 0.7 25.3 26.0 23.2 0.5 94.3 71.1

Oceania 0.2 0.0 0.0 0.1 0.0 0.0 0.9 0.4 2.2 0.3 4.1 3.8

Total Exports 146.1 21.1 55.3 25.1 13.3 5.8 47.9 40.7 56.3 1.9 413.4 246.5 (mn t) of which:extra- 38.0 20.2 47.1 6.1 9.4 2.4 47.9 40.7 33.2 1.6 246.5 regional exports* Net Exports * Ex intra-regional 2.1 1.2 41.0 (19.6) (3.6) (47.5) 31.6 35.1 (37.9) (2.2) trade marked Source: World Steel, Credit Suisse Equity Research estimates

In 2012 Japan exported c 40mt of steel, of which around 33mt (c.83%) went into the Asian region including China with relative dominance in some products even more pronounced (see below). On pages 73 to 81, our Asia analysts look at how the yen’s weakness can influence Japan’s potential ability to export more competitively in the current environment and conscious of the relevant product mix.

Japan’s key products To support the view that Japan is more prevalent in the high end of steel production we have produced analysis of Japanese product types. Areas where Japan produces materially above its relative crude steel output in the global market are: 1. Coated sheet 2. Electrical sheet & strip 3. Tinmill products Al of which are high end flat products as well as 4. Heavy & Light sections 5. Hot rolled bars

Yen and You 65 01 July 2013

Figure 89: Japan’s share as % Global by product type Japan as % of Global 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Crude steel production 12.2% 11.7% 10.8% 10.1% 9.5% 9.1% 9.1% 7.3% 7.9% 7.2% HR products 11.7% 11.0% 10.3% 9.3% 8.6% 8.1% 7.9% 6.1% 6.7% 6.0% HR Long products 10.4% 9.4% 8.7% 8.0% 7.4% 6.9% 6.5% 4.3% 4.9% 4.3% HR Flat products 15.7% 14.5% 13.1% 12.1% 11.0% 11.1% 10.7% 9.1% 9.5% 7.5% Railway track material 7.0% 6.4% 5.8% 5.2% 5.9% 6.0% 5.1% 5.0% 5.9% 5.4% Heavy Sections (>80mm) 15.0% 15.0% 13.2% 15.2% 12.0% Light Sections (>80mm) 12.2% 19.6% 23.1% 22.9% 20.7% 19.8% 18.9% 11.7% 11.3% 10.5% Concrete Reinforcing bars 21.2% 11.0% 9.0% 7.9% 7.4% 6.5% 5.8% 4.3% n/a n/a Hot Rolled Bars (other than 31.9% 22.7% 21.0% 19.7% 18.5% 17.4% 16.3% 12.6% 12.3% 12.0% concrete reinforcing bars) Wire rod 7.6% 7.0% 6.4% 5.8% 5.1% 4.7% 4.4% 2.8% 4.1% 3.1% Electrical sheet and strip 24.6% 26.9% 27.8% 23.8% 20.1% 18.2% 17.6% 15.3% 19.0% 17.3% Tinmill products 14.1% 13.1% 12.7% 12.2% 11.5% 11.9% 16.3% 16.4% 18.8% 19.0% Other Metal coated sheet 16.3% 16.0% 15.1% 14.9% 13.5% 14.4% 14.3% 21.8% n/a n/a and strip Tubes and Tube fittings 14.2% 12.7% 12.2% 10.6% 9.5% 10.1% 9.2% 6.7% 7.3% 7.3% Seamless tubes 9.7% 8.8% 9.9% 8.9% 7.6% 8.6% 7.4% 5.7% 5.7% 6.0% Welded tubes 16.5% 15.0% 15.7% 13.3% 12.2% 11.8% 11.0% 7.5% 7.4% 7.3% Source: WSA, Credit Suisse Equity Research estimates

What is true is that in steel “what goes around comes around” and greater exports of high end products would inevitably impact lower quality grades through product displacement (i.e. producers ex China would likely produce more lower quality product to keep utilisation rates up and fixed cost non dilution down). In areas such as welded and seamless pipe however the benefits may be more tangible, as pricing is often done on a tender basis, and project work not open to the same fluid pricing as the plain vanilla export market. What is clear is that at the “epicentre”, the direct effect on local markets (South Korea, Taiwan and China) can be material and we show more detail below. What is also clear is that Japan is stronger in higher quality product types than commodity grades so crude steel per se will be less relevant than perhaps some more specialty products. However, as for the question as to whether this causes materially enough ripple effects to affect the entire global market, this is less obvious.

Empirical evidence – a mixed picture Below we look at empirical evidence of how the yen correlates with related variables. The reality is some historic sensitivities and relationships emerge but it is a mixed picture. It underlines that plenty of other variables dictate output – regionally and globally – than currencies alone. The global supply/demand balance is still the key variable. Test 1: Japan steel exports If the theory is correct there should be a reasonably strong correlation between the strength/weakness of the yen and Japanese steel exports.

Yen and You 66 01 July 2013

Figure 90: Japanese exports of semi & finished steel products vs. JPY vs.USD (rhs) *2013 YTD annualised 50 140

130 45 120

110 40

100

35 90

80 30 70

25 60 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *

Exports of semi finished and finished steel products Japanese Yen vs USD (RHS)

Source: Company data, Credit Suisse Equity Research estimates Starting out with Japanese steel exports: historically there appears to be only a very weak correlation with the weakness/strength of the yen and the level of Japanese steel exports. YTD exports have risen relative to 2012 levels. Counter-intuitively, however, Japanese steel exports were materially stronger in 2010-12 when the yen was strengthening than they were in 2005 and 2006 under a much weaker yen. We see this as more of a response to low utilisation rates from weak global and domestic demand, and the need to export volumes to keep fixed cost dilution high. Test 2: Relative impact on Asian region In theory and most obviously, Japan should see its relative position in the Asian region improve and or deteriorate with a weaker (stronger) yen. We test a) Japanese market share in the JKT region and b) China’s net exports of steel relative to the yen. We test the yen versus Chinese exports, as most of China’s production growth in the last decade has gone to fulfill domestic demand needs, and hence export growth from China is the true competition with Japanese steel makers.

Figure 91: Japan production as % of JKT vs. JPY (rhs) Figure 92: Absolute Output japan S Korea Taiwan Jan 1995-Jan 2013

Source: Thomson Reuters, WSA Source: Thomson Reuters, Credit Suisse Equity Research estimates It does appear that Japan’s relative share of the local JKT market is influenced by the yen. As we show above, the Japanese share of this market has fallen from just over 60% in 2000- 2008 to below 55% in the last several years with the decline well correlated with the stronger yen. However, we believe this is only partly to do with the yen strengthening into

Yen and You 67 01 July 2013

2012, given we were seeing a time of new capacity additions, largely from Hyundai Hysco in South Korea which in effect increased competitive pressures in the Asian market.

Figure 93: China net steel exports vs. ¥ $ inv (rhs.) 6 month lead

Source: Thomson Reuters, Credit Suisse Equity Research estimates

China’s exports do appear empirically influenced by the yen. As the yen weakened in 2001 to 2002 Chinese net imports rose (though China’s own demand boom was commencing). Then as the yen strengthened from 2002 to 2005, China moved from net importer to net exporter. In the mid 2000s the relationship breaks down. We believe this again is largely because the steel market was so strong that currency moves became marginal with respect to profitability in export markets (and available spare capacity was more relevant, of which China had plenty). Since the crisis, the increasing net exports from China into a relatively weak global market appears to be correlated well with the yen though we do note that steel markets have been so weak that exports appear to have picked up from almost every country. Test 3: Japanese production Although there are clearly local consequences of the move in the currency, does this extend globally? If the theory is correct Japanese steel output should see a meaningful rise (and fall) under a weak (strong) yen as steel makers take advantage of (or lose) relative competitiveness with changes in local currency.

Yen and You 68 01 July 2013

Figure 94: Yen versus Japanese steel output

Source: Thomson Reuters, Credit Suisse Equity Research estimates

We see very little impact between the yen and Japanese steel output. While there was a reasonable increase in output between 2006-H1 2008 this was in line with an increase in Global steel output. In the period post the Lehman crisis from H2 1998 onwards, Japan steel output has remained relatively stable regardless of the yen move.

Figure 95: Japan as a % ex China versus US$ ¥ Figure 96: Japan, US and EC 15 as % ex China 16.0% 140 0.24 15.5% 130 15.0% 0.22 120 14.5% 0.2 110 14.0% 0.18 100 13.5% 0.16 90 13.0% 0.14 80 12.5% 0.12 12.0% 70 0.1

0.08

Jan-01 Dec-01 Nov-02 Oct-03 Sep-04 Aug-05 Jul-06 Jun-07 May-08 Apr-09 Mar-10 Feb-11 Jan-12 Dec-12

01-Jul-03 01-Jul-08

01-Apr-02 01-Oct-04 01-Apr-07 01-Oct-09 01-Apr-12

01-Jan-01 01-Jun-11 01-Jun-01 01-Jan-06 01-Jun-06 01-Jan-11

01-Feb-03 01-Mar-05 01-Feb-08 01-Mar-10 01-Feb-13

01-Nov-01 01-Sep-02 01-Dec-03 01-Aug-05 01-Nov-06 01-Sep-07 01-Dec-08 01-Aug-10 01-Nov-11 01-Sep-12

01-May-04 01-May-09 US Japan EU 15 Japan as % of ex-china JPY to USD y/y (12 months lead)

Source: Company data, Credit Suisse Equity Research estimates Source: Thomson Reuters, Credit Suisse Equity Research estimates

Above we plot Japan’s production relative to its share of ex China output (plotting versus global output would see an obvious decline given Chinas growth). There is a tentative correlation as Japan has fallen from 15.5% to c13% of ex China output as the yen strengthened between 2001 and 2011. But as in most of these charts, there are other factors at play rather than just the currency. Moreover, plotting the share of the ex-China market from the US and EC15 over the same time period, a similar result emerges simply because the developed world has seen a decline in production relative to output in the emerging markets over the last 10 years, implying Japan has not lost share simply because of the yen, it has lost share because other regions have grown faster in the last 13 years.

Yen and You 69 01 July 2013

Test 4: EU and US net steel imports versus yen In Test 4, we look at the history of EU and US steel imports to see whether the ripple effect of greater competitiveness in the Asian market under a weaker yen reaches the US and Europe.

Figure 97: US steel imports from Japan vs. yen (rhs)

280 140

230 130 120

180 110

100 130 90

80 80 70

30 60

Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

US imports from Japan Yen

Source: Thomson Reuters, Credit Suisse Equity Research estimates

Figure 98: Europe Net steel imports vs. yen Figure 99: US gross steel imports vs. yen 1900 145 3500 145 1400 135 3000 135

900 125 2500 125

400 115 2000 115

-100 105 1500 105

-600 95 1000 95

-1100 85 500 85

-1600 75 0 75

01-Jul-03 01-Jul-08

01-Jul-03 01-Jul-08

01-Apr-02 01-Oct-04 01-Apr-07 01-Oct-09 01-Apr-12

01-Apr-02 01-Oct-04 01-Apr-07 01-Oct-09 01-Apr-12

01-Jan-01 01-Jun-01 01-Jan-06 01-Jun-06 01-Jan-11 01-Jun-11

01-Jan-01 01-Jun-01 01-Jan-06 01-Jun-06 01-Jan-11 01-Jun-11

01-Feb-03 01-Mar-05 01-Feb-08 01-Mar-10 01-Feb-13

01-Feb-03 01-Mar-05 01-Feb-08 01-Mar-10 01-Feb-13

01-Nov-01 01-Dec-03 01-Nov-06 01-Dec-08 01-Nov-11

01-Nov-01 01-Dec-03 01-Nov-06 01-Dec-08 01-Nov-11 01-Sep-02 01-Aug-05 01-Sep-07 01-Aug-10 01-Sep-12

01-Sep-02 01-Aug-05 01-Sep-07 01-Aug-10 01-Sep-12

01-May-04 01-May-09

01-May-04 01-May-09

Europe Net Steel imports (lhs) JPY USD US net steel imports (lhs) JPY USD

Source: Thomson Reuters, Eurofer Source: Thomson Reuters, Credit Suisse Equity Research estimates

There does appear to be some relationship between both US and EU imports and a stronger/weaker yen, although again both the strength and weakness of the yen up until lately have been relatively correlated with the strength of global steel markets, prompting the following caveats. 1) 2001 to 2003: as the yen strengthened steel markets were in recession. 2) 2004-2006: steel markets were exceptionally strong, and currency moves were broadly irrelevant and as a consequence the likes of the US and EU were importing more steel to meet demand. 3) 2008-2011: as the yen strengthened steel markets went into crisis, and as such imports into the US and Europe weakened as a consequence even though exports from Japan / China etc increased.

Yen and You 70 01 July 2013

Test 5: Lessons from the EM devaluations (Russia/Korea) and US currency strength

Figure 100: S Korean Won and S Korean steel output Figure 101: Russian Ruble and Russian steel output

Source: Company data, Credit Suisse Equity Research estimates Source: Company data, Credit Suisse Equity Research estimates

In the Asian (taking S Korea above) and Russian devaluations of 1997 and 1998, the story is mixed. The aftershock of the Asian crisis was a steel market collapse in 1998 and 1999, and hence even with a weaker Won, South Korea was producing less steel in this period, suggesting a weaker currency did not provide an uplift in earnings to local players. Specifically POSCO did not see a material change to its margins, regardless of the weaker currency, or at least until 2001 onwards when the aftermath of the Asian crisis had cleared up.

Figure 102: POSCO margin versus Won

Source: Company data, Credit Suisse Equity Research estimates

The correlation of output with the ruble devaluation of 1998 is more striking, although this is part likely to be due to a recovery in domestic demand post the 1998 default and collapse in Russia. Moreover, note the scale of the ruble devaluation was close to 400%, setting it apart from any scenario we are considering. Data on margins for the Russians is scant given most mills in the late 1990s were still privately owned.

Yen and You 71 01 July 2013

Figure 103: US dollar against major currencies

Source: Company data, Credit Suisse Equity Research estimates

On the flipside, the strength of the US$ in 2000 and 2001 undoubtedly contributed to the bankruptcies seen in the market in that period (remembering 44% of the US steel industry was in Chapter 11 in 2001/02). This makes a good point and is in keeping with the global message. The benefits and costs of a strong or weak currency may accrue to the country where the currency move has taken place, but the global repercussions can still be limited. For example, a devaluation such as we are seeing in Japan can make a domestic steel industry more profitable, and have impact on the local or specific product markets, but can have limited global implications if the country is small enough not to be globally influential. Korea devalued its way out of trouble in 1997 as did Russia in 1998. The crisis that caused the devaluations were at the time more relevant to the steel market than the devaluations themselves. Ultimately, in the aftermath, domestic Russian and Korean steelmakers did become relatively more profitable. But all players had suffered in the 1998/98 collapse, and all benefited from the recovery of the global market in 2000. In the US case, the strength of the US$ in 2000 and 2001 made the US market very weak on a relative basis, and the US steel market was (and is) small enough to suffer from its relative weaker position on the cost curve at the time. However, there were no global ramifications from this. Test 6: Japanese steel margins relative to key global peers and currency If the tests above imply, in sum, that currency volatility is only one piece of a complex jigsaw, we would note that the trend in Japanese steel producer margins through time versus their global peers also makes the point. Periods of the yen above 120/US$ has not seen Japanese steel players earn a materially stronger EBITDA margin relative to key global peers than in periods under yen weakness. That does not mean there cannot be margin benefits in the current environment but history teaches us the picture is far from simple. Hence, and as our Asian analysts would stress, any sensitivity analysis is always and has to be a case of “all things being equal”. They rarely are, however.

Yen and You 72 01 July 2013

Figure 104: Sector EBITDA margins EBITDA margin (%) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 POSCO 24% 27% 31% 33% 34% 27% 27% 28% 19% 23% 11% 10% 9% JFE Holdings 9% 13% 18% 23% 22% 21% 21% 17% 12% 13% 9% 8% 8% Nippon Steel & Sumitomo Metal 11% 12% 14% 18% 19% 19% 18% 14% 9% 12% 10% 8% 8% ArcelorMittal N/A N/A N/A N/A 17% 17% 18% 20% 9% 11% 11% 8% 8% United States Steel Group -1% 7% 3% 13% 12% 14% 10% 14% -11% 3% 5% 5% 4% Evraz N/A N/A N/A N/A 29% 31% 34% 31% 7% 18% 18% 13% 11% China Steel 9% 20% 31% 34% 33% 21% 23% 15% 14% 22% 13% 10% 15%

Average Japanese margin 10% 13% 16% 21% 21% 20% 19% 16% 11% 13% 10% 8% 8% Average Other margin 10% 18% 22% 27% 25% 22% 22% 21% 8% 15% 11% 9% 9% Yen/US$ average 123 124 117 112 108 112 122 103 95 90 82 79 103 Source: Company data, Credit Suisse Equity Research estimates.

The Asia landscape Small volume, big impact Even if the global story is a diluted one, the intra-Asia story is potentially very significant. The continuing weakening of the yen will likely reshape the competitive landscape of the Asia steel sector, potentially making Japan the most competitive producer, particularly in the Asia export market and the high-end flat steel segment. We believe the negative impact of the incremental steel supply from Japan on Asia’s regional steel price could be higher than expected, especially in this weak demand environment. If the yen moves further towards ¥120/US$, we estimate Japan could gain an extra US$50-65/t cost advantage versus its peers in the Asia steel export market, all else being equal. We think the much-improved export profitability for Japan (which may nearly double if the yen goes to 120 assuming the same steel pricing in our estimates), means Japanese mills are likely to become more aggressive in selling incremental available volume to the export market. Incremental steel supply from Japan could be 11–22mt based on 90–98% capacity utilisation on our estimates—although it is just 1–2% of the total Asia market, it is equal to 11–23% of the intra-Asia steel trade, 22–45% of the north Asia exports to south Asia, and 50–100% of the Asia auto sheet segment. Clearly these numbers are dictated by what level of utilisation rates the Japanese mills can and choose to operate at. While exports to south Asia are where the competition would intensify, we believe the impact will ultimately feed through to the rest of the Asian steel market. We see further downward pressure on Asia flat steel pricing/margin, with Japan competing for market share against other top Asia exporters such as China, Korea and Taiwan. We believe Chinese exports face more challenges given their floored margin and appreciating currency outlook. A change has been apparent in the recent export data—in the form of Japan’s net exports rising (up 21% in 3M13A including semi products) and the falling premium of Japanese steel prices versus Chinese in the export market (from US$95/t in 3Q12A to US$60/t at present for HRC products). Below we analyse the sensitivities, country-by-country. Japan We expect upward revisions to earnings forecasts for the Japanese steel sector if the yen depreciates to the ¥120/US$ level. Apart from the direct benefits in higher export volumes and export margins, we see a decrease in imports and higher import prices, tightening supply-demand and rising domestic prices.

Yen and You 73 01 July 2013

Figure 105: Scenario analysis—yen at ¥120/US$ would impose a US$50-65/t incremental cost advantage for Japanese steel versus peers in Asia seaborne market Unit cash cost and unit EBITDA (US$/t) 900

800

700 785 785 719 719 600 688 688 635 635

500 NSSMC- NSSMC- NSSMC- NSSMC- JFE- JFE- JFE- JFE- domestic domestic export export domestic domestic export export (Yen=95) (Yen=120) (Yen=95) (Yen=120) (Yen=95) (Yen=120) (Yen=95) (Yen=120)

Unit cash cost Unit EBITDA

Source: Company data, Credit Suisse Equity Research estimates We estimate that yen-denominated costs make up roughly 50% of JFE’s steel production costs. As such, yen appreciation drives costs above those of international rivals, while yen devaluation pulls costs down. The weak won is seen to have benefitted POSCO, which is widely seen as the world’s most cost-competitive steelmaker. Recently, however, the yen has fallen sharply against the won, c16% versus the 2011 average. As a result, we think JFE and NSSMC now enjoy a level of cost competitiveness comparable to, or greater than, that of POSCO. We believe that the yen’s weakness and the attendant fall in yen- denominated costs will also buoy Japanese blast furnaces. While we believe JFE’s imports and exports are fairly evenly balanced on a dollar basis, if we assume domestic prices draw closer to international prices over the long term, it is conceivable that every ¥10 fall versus the dollar would buoy profit by roughly ¥80bn. In the near term, domestic prices are some 25% higher than export prices. As such, a 10% or so decline in the yen against the dollar would not eliminate the gap between domestic and export prices, and is unlikely to push domestic prices higher. Where is the competition? ■ Domestic market: Japan imported around 8 mt of steel in FY3/13, accounting for just 14% of domestic demand. The main countries of origin were South Korea (69%), Taiwan (19%) and China (10%). The domestic market is affected less by import volume than by low import prices (when the yen is strong), putting downward pressure on domestic prices. With import prices now rising as the yen weakens, we think this could conversely help drive up domestic prices. Japanese steelmakers’ primary competitors in the high-value-added product areas in which they excel (steel sheet for autos, consumer electronics and ship buildings) are POSCO, China Steel and Baosteel. These companies’ imports to Japan are essentially limited to galvanised steel sheets, base material for steel pipes, and steel used in construction, with imports to automakers virtually nil by our estimate amid an ongoing quality gap and the automakers’ preference for just-in-time delivery. There is very little pressure from imports in construction-use steel (steel shapes), where local makers are strong, and there is scant competition from overseas steelmakers. ■ Export market: Japan’s primary export destinations for steel are South Korea (19%), China (14%), Thailand (13%) and Taiwan (8%), along with more remote destinations, including North America (6%), the Middle East (5%) and Latin America (5%). We expect Southeast Asia to become an increasingly important export destination in view of Japanese automakers’ and consumer electronics companies’ presence there.

Yen and You 74 01 July 2013

China We believe the stagnant domestic Chinese demand and structural excess capacity will continue to keep margins depressed for Chinese mills. Potential additional supply from Japan would impose further negative pressure, to both the high-end sheet domestic market and the export market. We also believe Chinese exports are most vulnerable versus peers in the Asia export market, due to their inability to follow any further price cuts because of low export margins and potential further appreciation of RMB (5% in 12M forecast by CS global team).

Figure 106: Scenario analysis (continued) Unit cash cost and unit EBITDA (US$/t) 900

104 800 113 129 79 700 132

785 600 719 688 678 48 635 42 557 539 500 NSSMC NSSMC JFE JFE Baosteel Angang Magang (Yen=95) (Yen=120) (Yen=95) (Yen=120)

Unit cash cost Unit EBITDA

Source: Company data, Credit Suisse Equity Research estimates Where is the competition? ■ Domestic market: For the Chinese market, annual imported steel products have been relatively stable in recent years at around 15mt or 2–3% of the total domestic Chinese steel market. Of all the importers, Japan has remained the biggest importer into China, accounting for an average of 40% of total imports. This is followed by Korea (25–30% but rising) and Taiwan (15%). Imports are mostly high-end steel products such as thin-wide strips for auto and appliances, and silicon steel products including mostly oriented silicon steel. Despite the size of the Chinese steel market and supplies, imported Japanese steel competes in the high-end market mainly with limited producers such as Baosteel, and Korean importers such as POSCO, and to a lesser extent, a few other top Chinese steel producers such as Wuhan and Angang. The competition is tight in this niche market, especially with Baosteel and POSCO, which have limited pricing differences and qualities, based on feedback from domestic producers, traders and sourcing companies. Specifically, in the high-end auto sheet market, we estimate Baosteel holds 50% of the market share; other top Chinese producers take 25%, and imports (including Japan and Korea) take the remaining 25%. Japanese steel typically has no price premium for the same underlying product, according to traders and industry sourcing contacts. Nevertheless, on quality, there are subtle gaps as Japanese auto exterior panels tend to prevail in surface quality and appearances versus peers, while steel strength is similar among all the producers. Export market: In the export market, Chinese producers not only compete with Japan in the high-end market, but are also increasingly seeing competition from the broader mass market. Increases in Japanese exports to the region could pose a serious threat to Chinese exports, in particular, given that the latter’s export margin is already

Yen and You 75 01 July 2013

very thin. This limits Chinese producers from matching any further potential incentives to steel prices that could be offered by Japan. Supply-demand and pricing outlook We expect domestic Chinese steel demand to remain soft in the coming months, due to stagnant property construction and infrastructure construction activity, and a very weak industrial capex cycle, partly offset by moderate improvement in home appliances and autos. In the meantime, excess capacity and a flat cost curve will continue to cap earnings at a depressed level, and likely offset the potential benefit of easing iron ore supply (late 2013E). As a result, we expect industry capacity utilisation to remain at 79–80% and steel prices to soften with iron ore prices. Industry consolidation remains a disappointment, and we think effective measures would involve some painful decisions by government, and are likely to take place at a slower pace than the market expects. Korea We estimate limited immediate direct impact on Korean steelmakers’ pricing and profitability, both in the domestic market and the export market. We are concerned that the continuing depreciation of yen would eventually be considerably negative for the domestic steel demand outlook in the mid to long term, meaningfully hurting Korean exporters’ cost competitiveness against Japanese exporters, considering exporters are the biggest customers in the domestic steel market and Japanese exporters (which directly benefits from the depreciation of the yen) are Korean exporters’ core competition in most export markets. The plan to hike prices in the domestic market in 2Q13 is unlikely to be accepted, given: (1) the current weak sentiment in China’s spot market, (2) Japanese steelmakers’ enhanced cost competitiveness due to yen depreciation and (3) continued narrowing of domestic steel price premium over international steel prices.

Figure 107: Scenario analysis (continued) Unit cash cost and unit EBITDA (US$/t) 900

104 800 113 129 107 700 132 78 785 719 600 688 695 635 635

500 NSSMC NSSMC JFE JFE Posco Hyundai St (Yen=95) (Yen=120) (Yen=95) (Yen=120)

Unit cash cost Unit EBITDA

Source: Company data, Credit Suisse Equity Research estimates

Thanks to steel products’ commodity nature, we estimate limited immediate direct impact on Korean steelmakers’ pricing and profitability both in the domestic market and the export market through Japanese steelmakers’ enhanced cost competitiveness with a weaker yen. To begin with, we believe the depreciation of the yen could increase steel demand in Japan at least marginally by stimulating the country’s overall industrial production activities, implying the probability for a limited immediate rise in steel product export volume from Japan to Korea. Indeed, steel product import volumes from Japan to Korea decreased from 2.0mt in 1Q12 to 1.9mt in 1Q13 (-8.1% YoY) despite the sharp depreciation of the yen in recent months. Further, we think Japanese steelmakers may not have much of an incentive to aggressively cut their export prices due to the depreciation of the yen, given that a weak yen results in an increase in raw material input costs, which are fully imported

Yen and You 76 01 July 2013 and settled in US dollars for Japanese companies, although Korea’s Japanese peers seem to have enjoyed improved margins lately with the weaker yen effect. We are concerned that continuing depreciation of the yen would be considerably negative for the domestic steel demand outlook in the mid to long term and meaningfully hurt Korean exporters’ cost competitiveness against Japanese exporters, considering exporters (i.e., automakers, shipbuilders, machinery makers, home appliance makers, etc) are the biggest customers in the domestic steel market and Japanese exporters (which directly benefit from the depreciation of the yen) are Korean exporters’ core competitor in most export markets. On the other hand, while CS’s regional forex team forecasts depreciation of not only the yen but also the KRW, the indirect impact on domestic steel demand by a depreciating yen may not be that severe if the KRW rapidly depreciates. The Ministry of Strategy and Finance (MoSF) of Korea estimates that 10% depreciation of yen against KRW would reduce Korea’s gross exports by 1.9%. Whereas MoSF is concerned about a bigger impact on Korean exporters’ profitability by depreciation of yen, it believes Korean exporters’ improved non-price competitiveness and increase of overseas productions in recent years have reduced the impact on Korea’s gross export by the forex rate changes. While the magnitude of the impact of a further weakening yen on Korean steelmakers’ earnings is uncertain, it is clear that it would be negative. The impact on earnings would be clearly material, however, if it results in more than a US$10 cut in EBITDA/t or more than 10% decrease in sales volume for Korean steelmakers. Assuming no change in other variables (i.e., raw material prices, other costs, etc), we estimate a US$10 squeeze in EBITDA/t and 10% decrease in sales volume would reduce POSCO’s 2013E EPS by 16% and 26%, respectively. We think the impact would be even more marked for Hyundai Steel due to the company’s higher operating and financial leverages (i.e., relatively lower margin, higher debt gearing, sizeable forex debt effect). We estimate a US$10 squeeze in EBITDA/t and 10% decrease in sales volume would drastically reduce Hyundai Steel’s 2013E EPS by 49% and 50%, respectively. Where is the competition? Domestic market: While imported steel products constituted 23% of Korea’s apparent steel consumption of 56.4mt in 2011 (excluding semi-finished products), imports from Japan accounted for 39% of overall imported steel products in 2011 (including semi- finished products). Major imported items from Japan include HRC, semi-finished products (i.e., slab, billet, etc). There is no import and export tax for steel products in Korea. Export market: For POSCO and Hyundai Steel, the key competition against Japanese steelmakers takes place in Japan, SE Asia and China, which are the companies’ core export markets, accounting for 25% and 7% of POSCO and Hyundai Steel’s total sales volumes in 2012 on aggregate, respectively. While customers in the core export markets are very sensitive to price changes and therefore price competition in the market is severe, Korean steelmakers would have to cut their export prices to maintain export volumes, if Japanese steelmakers were to begin cutting their export prices aggressively. Supply-demand and pricing outlook We are sceptical about POSCO/ Hyundai Steel’s product price hike plan in 2Q13, which aims to pass on raw material contract price hikes in 2Q13. While the real impact of raw material contract price hikes in 2Q13 should mostly come in 3Q13 due to the raw material inventory carry-over effect, we are concerned about: (1) the current weak sentiment in China’s spot market (which is one of the more potentially impactful variables in Asian steel prices), (2) Japanese steelmakers’ enhanced export competitiveness due to the depreciation of the yen and (3) continued narrowing of the domestic steel price premium over international steel prices (which is likely to be accelerated by increasing capacities in Korea—e.g., Hyundai Steel’s #3 blast furnace; the construction of which will likely be

Yen and You 77 01 July 2013 completed by September 2013) would not allow Korean steelmakers’ price hike attempt in 2Q13. A notable improvement in the global/domestic macroeconomic outlook or a meaningful restructuring in the Chinese steel industry could solve the ongoing overcapacity issues in the global, Asian and domestic steel markets. However, both a macroeconomic improvement and the restructuring of the Chinese steel industry appear uncertain. The recent sharp depreciation of the yen is another key concern; this will not only enhance Japanese steelmakers’ export competitiveness but also eventually depress domestic steel demand—as the yen depreciation hurts the cost competitiveness of Korean exporters, the key customers in the domestic steel market, and directly/indirectly compete with their Japanese peers in the international market, if it continues.

Taiwan We see downside risk to our earnings forecast on China Steel should the yen depreciate to the ¥120/US$ level. In the domestic market, Japanese imported steel could gain market share as it becomes more pricing competitive in the high quality steel plate market used in construction and infrastructure. In the export market, vis-à-vis Japanese products, Taiwanese steel may also lose pricing competitiveness in the Chinese and Southeast Asia markets.

Figure 108: Scenario analysis (continued) Unit cash cost and unit EBITDA (US$/t) 900

104 800 113 129 110 700 132 785 719 600 688 678 635

500 NSSMC NSSMC JFE JFE China Steel (Yen=95) (Yen=120) (Yen=95) (Yen=120)

Unit cash cost Unit EBITDA

Source: Company data, Credit Suisse Equity Research estimates Where is the competition? Domestic market: Imported Japanese steel accounts for 30% of total imports for Taiwan (7.9mt) in 2012. Japanese steel is particularly competitive in steel plates which are used in construction, infrastructure, and local machinery industries. We estimate that Japanese steel plates account for 20% of the total plate market and are superior in quality to those of local producers. Pricing has also been 5-10% lower. With continuing depreciation of the yen, we would expect Japanese imports to become even more price competitive. Despite this, some end market users still prefer to buy from local producers, thanks to better sales service and just-in-time delivery. In Taiwan, the import tariff on steel products was eliminated in 2004. Export market: Taiwan also exports higher quality galvanised steel sheets to Japan, where it accounts for 15% of the total export volume. The depreciation of the yen may cause Japanese buyers to seek out domestic supply, unless Taiwanese steelmakers can lower their price. Taiwan and Japan compete in the regional seaborne steel market, notably in China and Southeast Asia, where both countries compete in steel sheet/plates and galvanised steel. With continuing depreciation of the yen, Japanese steel exports, which are often viewed as higher quality, could become even more

Yen and You 78 01 July 2013

pricing competitive. We believe pricing competition is expected to intensify. Taiwan steelmakers may be prompted to cut prices to protect market share. Supply-demand and pricing outlook We expect a mild improvement in Taiwan’s steel demand as weighed by the protracted global economic recovery. On the domestic front, given an overall decline in large-scale public infrastructure projects and a slowdown in private housing construction, we only look for 1% increase in total steel demand. A 2.5mt/yr of new capacity from Dragon Steel in 2Q13 should weigh on the oversupply situation in the domestic market. The government is planning to impose an anti-dumping duty on imported steel in 2H13. We believe this could bring some pricing discipline and help maintain, or even lift, pricing over the longer term. Nevertheless, if the yen depreciates to ¥120/US$, we expect more pressure on the supply- demand balance in view of more competition from imported steel.

India Even before the yen’s fall, Japanese steel imports to India had been rising sharply. Because of the Free Trade Agreement signed between India and Japan, Japanese imports invite a concessional duty of 2-3% versus the usual import duty of 7.5% on steel. However, while Japanese imports constitute a large 15% of steel imports to India, the total quantum is just 1.2mt. As a large proportion of costs for Japanese producers is in dollars, a falling yen is unlikely to improve competitiveness significantly. Meanwhile, it is the prevailing low interest environment globally that is making imports attractive to traders.

Figure 109: Scenario analysis—yen at ¥120/US$ would impose a US$50-65/t incremental cost advantage for Japanese steel versus peers in Asia seaborne market Unit cash cost and unit EBITDA (US$/t) 900

104 800 113 277 129 700 132 785 89 105 179 600 719 688 635 633 609 598 549 500 NSSMC NSSMC JFE JFE Steel Authority JSW Steel Tata Steel Jindal Steel (Yen=95) (Yen=120) (Yen=95) (Yen=120)

Unit cash cost Unit EBITDA

Source: Company data, Credit Suisse Equity Research estimates Where is the competition? Domestic market: Japanese imports form a little over 15% of total steel imports in India, this number having gone up from ~13% in FY12. India imposes 7.5% import duty on steel. However, due to an FTA signed with Japan (and Korea) in February 2011, Japanese imports are subject to a concessional duty of 2-3% versus the regular import duty of 7.5%. This provides Japanese producers with an advantage in terms of routing exports to India. Another factor promoting imports from Japan and elsewhere is the availability of low- cost trade financing (360-day credit at 2.5-3%) which yields an advantage to importers, as Indian manufacturers cannot meet those terms (90-day credit at 10-11% being the best possible). The inability to find a solution to this issue could force Indian steel prices to trend down further below import parity.

Yen and You 79 01 July 2013

Also, Japanese auto companies have invested heavily in setting up capacities in India. They are likely to continue importing high grade automotive steel from their traditional Japanese suppliers as the steel quality could be built into their models. Export market: Most steel producers in India export to nearby countries in SE Asia, with small contracted quantities, if any, to the Western geographies. Export is largely composed of value-added steel—galvanised, auto grade. There is little direct competition from Japanese exports to these countries as their target customer is very different. As Japan exports larger quantities of steel to large-buying customers, they rarely come into conflict with the small-quantity supply from Indian players. JSW Steel, for instance, exports ~1.5-2mt across 200 countries to dedicated customers in each geography. Supply-demand and pricing outlook Indian steel demand has failed to show any signs of an uptick (a mere 3.3% growth over FY13) leading to a slide in realisations. We believe that a near-term pick-up in steel end- use markets, viz. automobiles and construction, is unlikely, and thus steel demand growth is likely to be subdued as well. A lot of the steel capacity set up in the last year has not been able to contribute to production, partly due to reasons of iron ore supply and also because bleak realisations forced producers to keep their capacity idle. With major producers such as SAIL, JSPL and Tata Steel looking to commission additional capacity in the coming months, concerns on oversupply in the domestic market are increasing. Further imports from the likes of China, Japan and Korea have been on the rise. In this scenario, we see muted margins for steel producers in the medium term. Only a significant rise in demand allowing price increases could help profitability. Sensitivity analysis: Price cut, market share moves We performed a sensitivity analysis to assess the impact of more competitive Japanese supply on regional steel names, in the form of lower prices and lower sales volume. As the market share swing is “zero-sum” (the lost tonnage = gained tonnage), given Japan accounts for about one-third of Asia’s export market, thus each ton of market share swing would lead to sales growth ratio of 2:1 for Japan versus rest of Asia. On NJA steel names, this impact is only applied to the producer’s sales exposures of the export market, and/or its sales that compete directly with Japan, whichever is higher. We have performed two yen-120 scenarios: Scenario A: Moderate price cut and market share moves. At yen = 120, Japan puts US$20/t price pressure for the respective segment/market, and gains 5% growth in sales (or about 10% in export sales), whereas NJA producers lose 5% sales for the affected volume. Scenario B: Aggressive price cut and market share moves. At yen = 120, Japan puts US$40/t price pressure for the respective segment/market, and gains 10% market share (or about 20% in export sales), whereas NJA producers lose 10% market share for the affected volume. Our sensitivity analysis suggests a potential 5-18% earnings upside for Japanese stocks under a scenario assuming a moderate price cut/market share move. In the meantime, we see 18-31% downside risk for POSCO and Hyundai Steel, 13-18% for JSW and Tata Steel, 8-10% for China Steel and Baosteel.

Yen and You 80 01 July 2013

Figure 110: EPS sensitivity to ASP and volume changes due to weakening yen (with Japan puts US$20/t price pressure) 2013E EPS sensitivity to US$20/t cut in ASP and 5% in sales volume (on export sales or sales competing with Japan) (%) 30% 20% 10% 0% -10% -20% -30% -40%

-50%

JFE

Posco

Angang

NSSMC

Magang

Baosteel

Tata Steel Tata

JSW Steel JSW

Jindal Steel Jindal Steel China Hyundai Steel Hyundai Steel Authority Steel Source: Company data, Credit Suisse Equity Research estimates

Figure 111: EPS sensitivity to ASP and volume changes due to weakening yen (with Japan puts US$40/t price pressure)

30% 2013E EPS sensitivity to US $40/t cut in ASP and 5% in sales volume (on export sales competing with 20% Japan) (%) 10% 0% -10% -20% -30% -40%

-50%

JFE

Posco

Angang

NSSMC Magang

Baosteel

Tata Steel Tata

Steel Auth Steel

JSW Steel JSW

Jindal Steel Jindal China Steel China Hyundai Steel Hyundai Source: Company data, Credit Suisse estimates

Steel makers outside of Asia should outperform Against this backdrop of market share shifts and relative performance within Asia, there is something of a disconnect with the major stocks outside of the region. On a relative basis, while least affected by the yen weakness, ArcelorMittal and USX have been most affected in the context of weak share price performance. Conversely while arguably most impacted on the negative side, POSCO and China Steel have performed robustly relative to MTNA and USX. We think that as the yen creates greater competition in the Asian market, at a time when we believe the US is on the cusp of recovery, owning US Steel Group and Mittal (both Outperform) relative to POSCO (Neutral) and China Steel (Underperform) would make sense from a global perspective.

Yen and You 81 01 July 2013

Figure 112: Japanese steels relative to Global vs ¥/US$ Figure 113: JFE/Nippon versus Key Global Peers

Source: Thomson Reuters Credit Suisse Equity Research Source: Thomson Reuters, Credit Suisse Equity Research

Yen and You 82 01 July 2013

Figure 114: Global steel – Comparative valuations Share MktCap EV Target PE EV/EBITDA P/B Div Yld EPS Ticker Name Price USD USD Price 2013 2014 2013 2014 2013 2013 2013 (local) (US$mn) (US$mn) (local) x x x x x % (local) STEEL ACX.MC Acerinox 7.0 2,297 3,676 7.6 79.9 42.9 11.1 9.9 1.1 1.3 0.1 0347.HK Angang Steel Company Ltd 4.3 3,312 7,958 2.6 139.9 81.9 8.0 7.5 0.5 0.0 0.0 MT.N ArcelorMittal 11.5 20,497 44,948 17.0 485.8 8.7 6.9 5.1 0.3 1.7 0.0 600019.SS Baosteel 4.2 11,572 17,971 4.3 10.6 9.6 6.8 6.4 0.6 3.8 0.4 BSL.AX BlueScope Steel 4.5 2,285 2,678 6.5 121.2 18.2 7.2 4.8 0.6 0.0 0.0 2002.TW China Steel 23.5 11,902 20,067 22.4 29.1 20.2 9.8 9.2 1.4 1.7 0.8 CLF.N Cliffs Natural Resources 17.2 2,632 6,491 10.0 11.5 -6.6 6.3 24.6 0.4 3.5 1.5 CSNA3.SA Companhia Siderurgica Nacional 6.4 4,026 12,299 12.0 17.4 16.6 6.3 5.7 1.1 1.4 0.4 5471.T Daido Steel 487.0 2,145 2,145 570.0 19.2 13.2 6.1 4.5 1.0 0.9 25.3 EREGL.IS ERDEMIR 2.0 3,639 5,217 NOT COVERED 10.5 9.1 7.1 6.0 0.9 3.1 0.2 EVRE.L Evraz 109.3 2,481 8,387 3.6 -7.2 -18.5 5.2 5.2 0.5 0.0 -0.2 EXXJ.J Exxaro Resources 142.0 4,954 5,939 NOT COVERED 9.8 8.1 18.3 12.7 1.5 3.3 14.4 FMG.AX Fortescue Metals Group Ltd 2.9 8,346 14,504 4.8 5.8 6.1 4.5 3.5 1.6 1.5 0.5 GGBR4.SA Gerdau 12.5 9,115 13,790 22.1 14.1 10.3 5.7 4.8 0.8 2.3 0.9 5486.T Hitachi Metals 1106.0 4,104 5,346 1000.0 31.2 15.0 11.5 6.1 1.6 1.6 35.5 010520.KS Hyundai Hysco 32400.0 2,238 3,414 33000.0 11.1 9.9 7.2 6.3 1.2 0.8 2918.5 004020.KS Hyundai Steel Co. 61600.0 4,526 13,407 66000.0 19.1 8.9 9.8 7.9 0.5 0.8 3230.4 5411.T JFE Holdings 2106.0 12,350 28,614 3000.0 30.7 8.5 11.7 6.2 0.8 0.9 68.6 JNSP.BO Jindal Steel & Power Ltd 204.3 3,196 6,526 360.0 6.6 6.7 5.6 5.7 0.9 0.6 31.1 JSTL.BO JSW Steel Ltd 669.7 2,709 5,952 400.0 15.5 15.4 5.3 6.0 0.8 1.5 43.2 5406.T Kobe Steel 126.0 3,840 12,861 100.0 -14.0 11.5 10.4 7.8 0.7 0.0 -9.0 LIF.TO Labrador Iron Ore Royalty Corporation 29.8 1,814 1,787 NOT COVERED 14.6 14.8 13.8 13.6 3.6 5.5 2.0 0323.HK Maanshan Iron & Steel Co Ltd 1.9 1,847 4,978 1.3 -76.1 15.2 6.5 5.2 0.4 0.0 0.0 MAGNq.L Magnitogorsk Steel 2.9 2,445 5,057 5.2 188.6 41.0 4.3 4.1 0.3 3.8 0.0 5463.T Maruichi Steel Tube 2437.0 2,097 1,464 2700.0 19.4 16.4 7.4 5.8 1.0 2.5 125.3 MTL.N Mechel 2.9 1,211 9,967 4.0 -3.3 -8.4 10.1 8.2 0.3 0.0 -0.9 5401.T Nippon Steel & Sumitomo Metal 254.0 23,416 48,998 330.0 -18.5 10.5 15.3 7.0 1.0 0.4 -13.7 NUE.N Nucor 44.0 13,982 16,590 55.0 24.6 11.6 10.1 6.2 1.8 3.3 1.8 OUT1V.HE Outokumpu 0.5 1,355 5,373 0.5 -4.4 173.5 34.9 8.8 0.4 0.0 -0.1 005490.KS POSCO 292500.0 21,961 40,998 350000.0 10.7 9.1 8.0 7.2 0.5 2.6 27249.8 RS.N Reliance Steel & Aluminum 64.6 4,953 6,090 82.0 13.3 9.4 7.0 5.3 1.2 1.9 4.9 SZGG.DE Salzgitter 26.0 2,046 3,612 42.0 -2156.5 6.7 6.9 4.0 0.4 1.7 0.0 CHMFq.L Severstal 6.4 5,208 8,972 9.4 18.5 -510.7 5.5 6.8 0.7 1.3 0.3 SSABa.ST SSAB 40.8 1,465 3,846 52.0 107.5 7.5 8.4 5.0 0.5 2.7 0.4 SAIL.BO Steel Authority of India Ltd 52.4 3,619 5,722 40.0 10.0 9.0 8.2 6.2 0.5 3.8 5.3 TISC.BO Tata Steel Ltd 271.7 4,416 14,219 270.0 -3.7 9.4 6.9 5.7 0.8 2.9 -73.9 TENR.MI Tenaris 15.1 23,397 23,080 19.4 13.1 12.3 7.6 7.1 1.8 3.5 1.5 TX.N Ternium 21.1 4,236 5,132 28.8 8.7 7.3 3.5 3.1 0.7 0.0 2.4 TKAG.F Thyssen Krupp AG 14.5 9,790 27,097 23.8 -23.6 12.0 11.0 8.4 2.5 0.0 -0.6 TRMKq.L TMK 11.0 2,378 6,018 14.0 9.9 9.3 6.4 6.2 1.1 3.0 1.1 X.N United States Steel Group 17.1 2,467 5,835 24.0 -13.1 10.3 8.2 4.9 0.7 1.2 -1.3 USIM5.SA Usiminas 8.1 3,658 6,030 10.0 747.5 21.5 8.3 6.1 0.5 0.9 0.0 VLLP.PA Vallourec 38.6 6,313 8,392 47.7 21.6 11.6 7.1 5.5 1.0 1.7 1.8 VOES.VI Voestalpine 27.2 6,134 12,403 27.0 10.7 9.8 6.7 6.5 1.1 3.1 2.5 WOR.N Worthington Industries 32.7 2,326 2,819 30.0 15.6 13.9 9.3 8.3 2.7 2.4 2.1 5444.T Yamato Kogyo 2939.0 2,035 1,475 3500.0 26.1 20.0 13.1 10.5 1.0 1.0 112.6 Source: Credit Suisse Equity Research estimates, Thomson Reuters for non covered stocks

Yen and You 83 01 July 2013 Equity Research: Global Industrials Key global takeaways Julian Mitchell Given the extent of their export businesses, and the wide range of high value-add Global Industrials industrial segments in which they are present, Japanese industrial companies have much julian.mitchell@credit- to gain from the yen’s devaluation. They gain a valuable competitive edge which can either suisse.com boost margin, market share, or both. There is also a potential to boost the domestic 212 325 6668 Japanese industrial economy due to a manufacturing renaissance supported by a repatriation of production. In some cases, we estimate Japanese industrial companies Shinji Kuroda could see upside of almost 30% to EPS. Japan Industrials Not surprisingly, non-Japanese companies at risk include those whose Japanese shinji.kuroda@credit- competitors have a high global market share and a substantial share of production suisse.com domiciled in Japan. Some non-Japanese companies may benefit from cheaper sourcing of +81 3 4550 9994 components from Japan, particularly within robot manufacturing, construction machinery, and power and rail equipment: we note these would include Chinese industrial companies. Andre Kukhnin, CFA European Industrials We focus on end-markets where we see the most competitive advantages for Japanese andre.kukhnin@credit- industrials, including factory automation, construction machinery, air-conditioners, suisse.com bearings/auto consumables, machine tools, and gas turbines. This is where challenges +44 207 888 0350 emerge for European and US companies. Jamie Cook, CFA Perspective on Japanese industrials US Industrials End-markets where Japanese industrials may benefit from a falling yen jamie.cook@credit- suisse.com The markets where we see the most significant competitive advantages for Japanese 212 538 6098 industrials are: Factory automation: Japanese companies have leading global positions in product Simon Toennessen segments such as linear motion control (THK and NSK have 70%+ market share), European Industrials pneumatics (SMC has 32% share), CNCs (Fanuc has 60%+), Robots (Fanuc, Nachi- simon.toennessen@credit- Fujikoshi and Yaskawa have 60%+ global share); for most of these companies, suisse.com overseas markets account for >50% of sales. +44 207 883 6893

Construction machinery: Japanese players such as Komatsu and Hitachi Construction Yang Song Machinery have meaningful global market shares (30% combined) in products such as China Industrials hydraulic excavators, with around 80% of sales coming from overseas. yang.y.song@credit- Air-conditioners: Daikin has about 50% global VRV (Variable refrigerant volume) suisse.com market share +85 221 016 550

Bearings/auto consumables: NSK, NTN and JTEKT collectively have ~30-40% market Jerry Su share in bearings globally, with overseas markets accounting for ~50% of sales. Taiwan Industrials Machine tools: Japanese players (Amada, Okuma, Mori Seiki) account for ~30% [email protected] global market share, with overseas sales accounting for >50% of sales. +88 622 715 6361 Gas turbines: Mitsubishi Heavy Industries has 15% global market share; the ‘big-ticket’ nature of power plant equipment may increase the attraction for utilities to use a cheaper supplier. Four key characteristics of the winners We think there are four categories of stocks in Japan that should benefit most from a weaker yen: 1) Companies with low margins and high exposure to overseas sales: A fall in the yen will have a disproportionately large effect on the earnings outlook for names with lower margins; we show sensitivities for three of the most-exposed names below.

Yen and You 84 01 July 2013

Figure 115: Which Japanese companies should benefit from rising margins as the yen falls OPM declined approximately 12ppt due to yen appreication in the four years from FY3/08, when Komtasu recorded all-time high profits, through FY3/12. Yen decline is not only expected to boost Komatsu's profits but Komatsu (6301） also raise the firm's competitiveness versus global peers such as Caterpillar, Sany (China), and Doosan (Korea), thereby lifting prospects for market share gains. In its latest medium-term plan spanning three years, Komatsu has set itself record high OPM and ROE targets (18-20%). Although HCM's OPM is relatively low compared with that of Komatsu, it has a higher ratio of domestic production and exports from Japan than its rival. Due to this, HCM has a higher forex sensitivity than Komatsu. In addition to HCM (6305） bolstering HCM's competitive edge verus overseas rivals, yen decline is also likely to substantially boost the firm's profits. HCM's OPM in FY3/14 is likely to reach double digits after a gap of six years. Mori Seiki is a major machine tool maker, yet the firm's earnings have been weighed down by sluggish orders, forward-looking investments, and the cost burden stemming from a wider alliance with Germany's DMG. Mori Seiki (6141） The firm is currently upgrading its production facilities in North America and China, but its forex sensitivity is on a steady downtrend. However, Mori Seiki is expected to see relatively large benefit from a sustained yen decline. Depending on the pace of recovery for machine tools, the firm may announce upward revisions during FY3/14 Source: Company data, Credit Suisse Equity Research

We show below a scatter chart of Japanese industrials companies’ operating margins and overseas sales.

Figure 116: Japanese companies with high overseas sales and low profit margins [2013] %, unless otherwise stated 50%

45%

40% Fanuc

35%

30%

25% SMC

20% Operating Margin Operating Makita 15% Sumitomo Nabtesco Heavy THK Kubota JGC Komatsu 10% Daikin Tsubakimoto Okuma NSK Chain IHI Yaskawa HCM Amada Ebara 5% KawasakiJTEKTYokogawa Electric Mori Seiki Mitsubishi HeavyNTNToshiba 0% Heavy 0% 20% 40% 60% 80% 100%

% of sales from overseas Source: Company data, Credit Suisse Equity Research estimates 2) Companies with high share of domestic production and high overseas sales exposure: These companies should benefit from transaction costs, i.e., sourcing from and producing in a currency which is falling, but selling into currencies whose value is appreciating; we show sensitivities for three of the most-exposed names below.

Yen and You 85 01 July 2013

Figure 117: Which Japanese companies should benefit from market share gains as the yen falls Top global firm in FA. Overseas sales account for 80% even though Fanuc has 100% of its production in Japan. Despite the one-off decline in robodrill orders for iPhones, we still expect increased orders for robots and CNC Fanuc (6954） equipment for machine tools, which generates 70% of the firm's OP, driven by the boom in global auto capex. Fanuc's OP sensitivity, estimated at around ¥2.5bn for ¥1 move vs. other currencies, is relatively high. SMC is a global leader in pneumatic equipment.Overseas sales account for 63% of the total, but 90% of the firm's production is Japan-based. The firm's market share is rising steadily thanks to its short leadtimes and an extensive SMC (6273） product lineup. Yen decline is expected to boost SMC's competitiveness vs. Parker (US), Festo (EU), and Airtak (Taiwan) and speed-up its global market share gains. Yaskawa is an FA firm whose core products include servomotors, inverters, and robots. In addition to the growth in smartphone-related capex, we look for order recovery in SPE to drive future demand. The firm's robot business Yaskawa Electric is also likely to benefit substantially from the boom in auto capex. In addition to the uptrend in monthly orders, (6506） the decline in yen is likely to enhance the firm's competitiveness vs Delta (Taiwan), ABB and Siemens (EU)

and spur its global market share growth. Source: Company data, Credit Suisse Equity Research

We show below a scatter chart of the Japanese industrials, highlighting companies with high overseas sales exposure, and high domestic production content.

Figure 118: Which Japanese companies benefit most from a weaker yen? [2013]

100% Keyence Fanuc Mori Seiki 90% Mitsubishi Okuma SMC 80% Heavy Nabtesco THK Ebara Yaskawa 70% Amada Electric NSK 60% NTN Kubota JTEKT Komatsu 50% HCM Tsubakimoto 40% Chain 30% Daikin Domestic Production Ratio Production Domestic 20% 10% Makita 0% 30% 40% 50% 60% 70% 80% 90% Overseas Sales Exposure

Source: Company data, Credit Suisse Equity Research estimates 3) Companies with high share of domestic production, low margins and high overseas sales exposure: We highlight three of the most-exposed names below.

Yen and You 86 01 July 2013

Figure 119: Which Japanese companies should benefit from margin growth and market share gains as the yen falls Mitsubishi Heavy Industries constantly faced low margins and ROE under yen appreciation. However, in addition to improvement in the financing capability of domestic banks and the direct profit boost from yen decline, we look for Mitsubishi Heavy Ind. the firm to increase its share of the gas turbine market vs rivals such as GE (US), Siemens and ABB (EU). Shunichi (7011） Miyanaga, the firm's new president, aims to raise sales from ¥2.8tn plus in FY3/13 to ¥5tn in the longer term, ROE from 7.4% in FY3/13 to 8.9% in FY3/15 (and 12% in the longer term). Amada is a major sheet metal processing machinery maker boasting 25% global market share. The firm's rivals include Trumpf (Germany). Amada has seen a marked increase in its US market share and the firm aims to boost Amada (6113） its sales and market share in Europe and Asia on the back of a lower yen. Amada is likely to raise its FY3/14 projections around its 3Q results release. Top domestic bearing manufacturer. The firm's earnings prowess not only overwhelms that of rivals such as NTN and JTEKT, but the earnings gap between the firms is steadily widening. Along with postive FY3/14 guidance, NSK NSK (6471） announced its new medium-term management plan calling for record high OP of ¥86.0bn and OPM of 9.1% in FY3/16. The firm aims to raise ROE to 13%. We anticpate market share gains for NSK vs. European rivals such

as SKF and Schaeffler under a weaker yen. Source: Company data, Credit Suisse Equity Research

4) Japanese companies which may benefit from more localised production in Japan There has been much talk in recent years about a possible US manufacturing renaissance, driven by rising labour costs in emerging markets, cheap domestic energy (e.g. shale gas), and higher transport / logistics costs. While the evidence for this renaissance is mixed so far, we do think that reversals of the ‘offshoring’ trend apparent in recent decades by developed economies may be relevant in some sectors. We note a recent report in the Nikkei newspaper that Nissan has delayed the planned move of the production of two SUV models to the US from Japan, due to the improved prospects for export profitability. Kawasaki Heavy has also announced it will bring back production of mid-sized motorbikes from Thailand to Japan due to the falling yen. Many of KHI's motorbikes manufactured in Thailand are sold in the US; production will move gradually to Japan beginning this autumn. The benefits of increased factory investment in Japan would be felt, in particular, by: Factory capex related markets: In particular, we think robots, machine tool and factory automation products should benefit from any upgrade in domestic industrial output. Construction machinery: If we do see new factories, and/or extensions of existing plants and increase public spending under Abe-nomics, construction machinery demand should benefit. The companies that would benefit in Japan would be those that have a relatively high share of domestic production and revenues (see below).

Yen and You 87 01 July 2013

Figure 120: Japanese companies who should benefit from a domestic ‘manufacturing renaissance’ (2013) %, unless otherwise stated

100% Fanuc Keyence Mori Seiki SMC Okuma Mitsubishi 80% Nabtesco Heavy Amada THK Ebara Yaskawa Electric 60% Komatsu NTN NSK JTEKT Kubota HCM Tsubakimoto 40% Chain

Daikin

% of Production in Japan in Production of % 20%

Makita

0% 0% 20% 40% 60% 80% 100% % of Sales from Japan

Source: Company data, Credit Suisse Equity Research estimates Implications outside Japan We would summarise the implications for non-Japanese industrials along three lines: 1) If we consider end markets, companies that we think are more at risk of weaker competitive positioning (due to lower prices from Japanese global competitors) if the yen were to fall to 120/$ include: SKF – Among the European companies, we consider SKF as most at risk from yen depreciation because it has three sizable and technologically comparable Japan- based competitors, and because bearings manufacturing is highly vertically integrated while the product is shippable. As a sensitivity, 100bps of negative pricing, dropping through to a 100bps margin reduction would decrease SKF consensus 2014 EPS by c10%. Hiwin – Among the Taiwanese industrial automation makers, we think Hiwin is at most risk from yen depreciation because it prices its products at a 25% discount to Japanese peers with shorter delivery times. A weaker yen will narrow the pricing gap and Hiwin would need to cut its ASP to stay competitive; as a sensitivity, we estimate that every 10% of yen depreciation could negatively impact Hiwin’s 2014 EPS by 7%. Caterpillar and Deere – In US Machinery, we see CAT and DE as being the most adversely impacted. Assuming a 100bps hit to margin as a result of aggressive pricing, we believe 2014E earnings could be negatively impacted approximately 5% for CAT and 2% for Deere. There are other stocks where segments of their business can be exposed but which should be less material to the group as a whole (e.g., ABB, Alstom, Philips, GE, Parker Hannifin – see Figure 125).

Yen and You 88 01 July 2013

2) Companies that are purchasing components from Japan and could benefit from lower COGS if the yen were to fall to ¥120/US$—we would highlight in particular: 5-10% boost to EPS: Dongfang Electric, Sany Heavy, Shanghai Electric Group (in descending order) should see a material benefit. 3) Companies selling into Japan would suffer from a translation hit to revenues; however, the Japanese industrial economy tends to be predominantly supplied by local companies, and hence the key effect of a weaker yen on non-Japanese industrial companies revolves largely around the increased competitive threat that non-Japanese companies would face, rather than revenue / transaction cost related earnings weakness at the latter due to a falling yen, or the COGS savings for non- Japanese companies who are purchasing from Japan. Competitive positioning Relative cost base and market share A simple metric to judge for an existing competitive threat would be companies whose Japanese competitors have a high global market share and a substantial share of production domiciled in Japan (see the chart below). We would also look for companies that have low operating margins, and which are therefore at a high risk of negative operational leverage from top-line market share losses to the Japanese and / or price cuts hurting earnings.

Figure 121: Global market share v. Domestic Production Ratio %, unless otherwise stated 60% THK 50% Nabtesco Daikin 40% Fanuc Tsubakimoto Chain 30% SMC Amada Komatsu HCM Yaskawa Global Market ShareMarket Global 20% Makita Electric Mitsubishi Kubota Heavy NTN NSK 10% Ebara JTEKT Okuma Mori Seiki 0% 0% 20% 40% 60% 80% 100% 120% Domestic Production Ratio

Source: Company data, Credit Suisse Equity Research estimates Companies that compete against the names above, and whose profit margins are not particularly high include Caterpillar, Deere, SKF, and Alstom.

Yen and You 89 01 July 2013

What are the key end markets?

Bearings Japanese bearing makers are on par with their Western peers in terms of technology and quality and occupy a c30% share overall; Bearings are shippable; NSK already appears to export c15% of its sales from Japan; A large proportion of the bearings market is standard size bearings where customers can switch (e.g., C50% of SKF sales are standard size bearings); We believe aftermarket bearings revenue and in particular auto aftermarket bears risk as it is an area. Key risk: SKF. Should we see the Japanese players using their newly gained competitive advantage as a result of yen weakness, it would likely damage pricing of SKF products and drop directly through to company profitability (every 100bps change on product pricing equates 100bps margin). In the table below, we show SKF valuation (DCF) sensitivity to mid-cycle profitability and growth. Looking in the near term, a 100bps change in SKF gross / operating margin forecast would change our 2014 EPS estimate by c10%.

Figure 122: SKF: Valuation sensitivity to through-cycle profitability and growth EBITA NOPAT Growth rate margin margin 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 11.5% 8.1% 110 111 112 113 114 115 116 12.0% 8.4% 116 117 119 120 121 122 123 12.5% 8.8% 122 124 126 127 128 130 131 13.0% 9.1% 129 131 132 134 136 137 139 13.5% 9.5% 135 137 139 140 143 145 146 14.0% 9.8% 142 144 146 148 150 152 154 14.5% 10.2% 148 151 153 155 157 160 162 15.0% 10.5% 155 157 160 162 165 167 169 15.5% 10.9% 161 164 167 169 172 175 177 16.0% 11.2% 168 171 174 176 179 182 185 Source: Credit Suisse Equity Research estimates

Power generation – Gas turbines Mitsubishi Heavy has a meaningful global market share (16%), and this has been growing recently. Mitsubishi’s manufacturing is primarily in Japan (85%; although it has recently opened a new plant in the US – US share therefore may not increase sharply from the falling yen) and benefit directly from a weaker yen. Key risk: Alstom, Siemens, GE (however, these businesses are all conglomerates).

Construction Machinery In US Machinery, there is risk with the weaker yen as major Japanese construction OE's likely price more aggressively in the market, in particular with China construction and global mining weaker, which has been a major focus. We believe large market share players, CAT and DE, would be most adversely impacted. Assuming a 100 bps hit to margin as a result of aggressive pricing, we believe 2014E earnings could be negatively impacted approximately 5% for CAT and 2% for Deere.

Yen and You 90 01 July 2013

Factory Automation Fanuc is one of the key global Factory Automation players with substantial market shares (20–60%) and entirely Japan-based manufacturing footprint. The key risk would be for some of the European-based robot competitors such as ABB, and Kuka. Among the Taiwanese FA providers, our team believes that Hiwin will feel more pressure from yen depreciation, while Airtac should be less impacted as it prices its products at a 50% discount to SMC, and SMC also manufactures in China. We estimate that every 10% of yen depreciation could negatively impact Hiwin’s 2014E EPS by 7%.

Healthcare While we do not see the Healthcare market being at similar risk compared to end markets such as bearings or power generation, we note that Philips’ CEO recently highlighted at the EPG conference that Japanese players are competing more aggressively on price outside Japan. Given the significance of Healthcare for Philips’ business (66% group profit exposure) we have highlighted in Figure 123 the group earnings sensitivity for Philips driven by a change in organic growth and EBITA margins. We note that a combination of margin decline of 200bps due to elevated pricing pressure (from currently 3-4% in Healthcare) and a drop in organic top-line growth due to market share losses would result in a 10% earnings cut. We would stress, however, that is it quite difficult to derive a precise earnings impact given limited available data within Philips’ Healthcare EBIT bridge.

Figure 123: Philips – Earnings sensitivity on margins and organic growth in Healthcare in %, unless otherwise stated Healthcare Organic growth

1.81 3.0% 3.5% 4.0% 4.5% 5.0%

13.0% -10% -10% -9% -9% -9%

13.5% -8% -7% -7% -7% -7%

14.0% -6% -5% -5% -5% -4%

14.5% -3% -3% -3% -3% -2%

EBITA margin (CS) EBITA 15.0% -1% -1% -1% 0% 0% Source: Credit Suisse Equity Research estimates

Yen and You 91 01 July 2013

Non-Japanese companies that may benefit from cheaper sourcing of components from Japan If we look more specifically at industrial markets, we think there a couple of areas where global industrials source certain key components from Japan, that would become significantly cheaper if the yen devalued further: 1) Robot manufacturers: Nabtesco is one of the global leaders in gears for robots, which foreign robot manufacturers such as Kuka source from; Kuka may therefore see some COGS benefit from a weaker yen; Japanese robot demand tends to be dominated by local suppliers, so there should be minimal translation hit for Kuka. 2) Construction machinery: Chinese construction machinery manufacturers source much of their hydraulic components from Japanese suppliers. They should benefit from a transaction standpoint and see no translation hit as their operating margins are fairly low, and their sales into Japan are very low. 3) Power and Rail equipment: Chinese industrials purchase significant components (control systems, gas turbine parts etc) for infrastructure-related projects, from Japan. A focus on Chinese industrials Of the non-Japanese companies, Chinese industrial companies in particular have to buy-in many more-advanced components still, many of which are sourced from Japan (or Western Europe and the US). Our China Industrials Team estimates a 2-7% positive earnings impact for certain companies under from lowered COGS at ¥100/US$. The contracts for these components typically have a duration shorter than a year. It remains to be seen whether the Japanese manufacturers will adjust price upward to offset yen deprecation once the contracts expire. Construction machinery The segments most affected by yen depreciation are concrete machinery and excavators. For excavators, local manufacturers mostly import hydraulic systems from Japan. We assume hydraulics account for ~20% of the total COGS of excavator. For the concrete machinery segment, local manufacturers import the chassis of concrete pumps from either Europe or Japan. Manufacturers like Sany also have the ability to manufacture chassis in-house. In our calculation, we assume chassis accounts for ~10% of COGS of concrete pumps, and 20% of chassis are imported from Japan. With the above assumptions, we did a sensitivity analysis on the EPS impact of each company. We estimate that at an average 2013 ¥100/US$, the EPS of Sany, Zoomlion, and Lonking would be lifted by 6.6%/2.0%/2.1% respectively. At an average 2013 ¥120/US$, the EPS of Sany, Zoomlion, and Lonking would increase by 11.2%/3.4%/3.6% respectively. Power equipment Components imported from Japan are mostly for nuclear equipment. We estimate that SEG import parts from Japan amounting to Rmb700mn, while DEC import ~Rmb1bn from Japan in 2013. At an average 2013 ¥100/US$, SEG/DEC 2013E EPS increase by 4.4%/6.9% respectively. At an average 2013 ¥120/US$, the EPS of SEG/DEC rise by 7.4%/11.8%, respectively. Railway equipment According to the CNR, most of its imports are from Europe instead of Japan, so the impact of yen depreciation is negligible.

Yen and You 92 01 July 2013

For Times Electric, currently ~15% of its EMU components are imported from Japan, and we estimate that its EPS would increase by 3.0%/5.0% respectively with the yen at ¥100/US$ and ¥120/US$.

Figure 124: Sensitivity table on yen depreciation 2013 Gross 2013 EPS margin impact impact Parts imported from Japan % COGS USDJPY = USDJPY = 120 USDJPY = USDJPY = 120 imported 100 100 Lonking Hydraulic for mid and large excavators 0.5% 0.08% 0.13% 2.1% 3.6% Sany Hydraulic and diesel engine for excavators; 6.4% 0.85% 1.45% 6.6% 11.2% Chassis for concrete pumps Zoomlion Hydraulic for excavators; Chassis for concrete 2.1% 0.30% 0.50% 2.0% 3.4% pumps CNR N/A Very little Very little Very little Very little Very little Times Electric MU control system 3.9% 0.53% 0.91% 3.0% 5.0% HPEC Steel of nuclear plant Very little Very little Very little Very little Very little DEC Gas turbine, nuclear equipment components, 3.1% 0.48% 0.82% 6.9% 11.8% others SEG Components for Fanuc, nuclear equipment etc 1.1% 0.17% 0.30% 4.4% 7.4% Source: Company data, Credit Suisse Equity Research estimates

Yen and You 93

and You Yen We highlight below the key markets where the Japanese industrials have high market shares.

Figure 125: ‘Map’ of Japanese competition in Global Industrials

%, unless otherwise stated Global Overseas Domestic Competitors by region Sub-sector Company market share sales exposure production ratio North America Europe South Korea China Taiwan Domestic Nabtesco 40%-60% 45% 80% Parker Hannifin、MOOG KNOWR, KONGSBERG, BOSCH, BESAM SMC 31％ 60% 90% Parker Hannifin, Sauer Danfoss FESTO, IMI AIRTAC CKD THK 55% 40% 75% INA-Schaefller, Rexroth SBC Nanjing Technical Equipment HIWIN NSK, NIPPON THOMPSON FA Yaskawa Electric 20% 53% 70% KUKA, ABB, Siemens DELTA Fanuc, Mitsubishi Electric Keyence 90% 37% 100% , Mitsubishi Electric

Komatsu 20% 85% 55% Caterpillar、DEERE Volvo、Liebherr Doosan, Hyundai Sany, Lonking HCM, Kobelco HCM below 20% 75% below 50% Caterpillar Volvo、Liebherr Doosan, Hyundai Sany, Lonking Komatsu, Kobelco Daikin 40-50% 60% 25-30% Carrier (UTX), York (JCI, Trane (IR) Danfoss Samsung, LG Gree, Midea, Haier Panasonic, Mitsubishi Electric Infrastructure Ebara 5-10% 50% 70% Flowserve Sulzer, KSB Kubota 15% 50% 50-60% Duetz-Fahr Daedong tractor First tractor, Foton tractors Yanmar, Iseki Makita 20% 80% 10% SWK, TTI (HongKong) Bosch Dongcheng Hitachi Koki

Amada 23% 50% 70% TRUMPF HANS laser Mitsubishi Electric Okuma 3% 45% 90% DMG Doosan Shenyang machine tool Mori Seiki, Fanuc Machine tools Mori Seiki 3% 65% 95% Doosan Shenyang machine tool Dongtai Okuma Fanuc 20%-60% 75% 100% ABB, Siemens Okuma, SHI

NSK 13% 50% 65% Timken SKF, Schaeffler ILJIN Zhejiang Tianma, Wafangdian NTN、JTEKT Auto NTN 12% 60% 60% Timken SKF, Schaeffler NSK、JTEKT consumable JTEKT 9% 55% 50-60% Timken SKF, Schaeffler NSK、NTN Tsubakimoto Chain 35% 50% 50% Borgwarner IWIS, INA-Schaefller Gonghua Daido Kogyo

Mitsubishi Heavy 16% 40% 85% GE Alstom, Siemens Doosan Heavy Toshiba, Hitachi Kawasaki Heavy 55% Siemens MHI, IHI Power / IHI 40% MHI, KHI Heavy Industry / Sumitomo Heavy 53% E&C JGC 80% KBR, Bechtel Saipem, Technip Doosan Heavy, Samsung Chiyoda Chiyoda 60% KBR, Bechtel Saipem, Technip Doosan Heavy, Samsung JGC Toshiba 10% 50% GE Siemens, Philips Mindray Hitachi Healthcare Hitachi GE Siemens, Philips Mindray Toshiba Process Aut. Yokogawa 10% 50% EMR, HON ABB, Invensys Source: Company data, Credit Suisse Equity Research estimates

01 July 2013 01 July

94

01 July 2013

Figure 126: Global industrials – Comparative valuations Share MktCap EV Target PE EV/EBITDA P/B Div Yld EPS Ticker Name Price USD USD Price 2013 2014 2013 2014 2013 2013 2013 (local) (US$mn) (US$mn) (local) x x x x x % (local) INDUSTRIALS ABBN.VX ABB 22.1 51,057 51,444 26 13.9 12.1 8.3 7.2 2.8 3.6% 1.6 ADT.N ADT Corporation 41.1 8,981 11,642 55 23.5 19.4 7.1 6.2 1.8 1.4% 1.7 AGCO.N AGCO Corp 56.1 5,459 5,573 56 10.0 9.7 5.7 5.3 1.4 0.0% 5.6 ALFA.ST Alfa Laval 136.5 8,538 9,179 145 15.3 14.4 11.4 10.9 3.3 2.6% 8.9 ALSN.N Allison Transmission 22.5 4,184 6,925 22 28.0 18.1 11.8 10.0 na 0.0% 0.8 ALSO.PA Alstom 24.9 10,069 15,432 27 8.6 8.3 6.9 6.4 1.5 3.4% 2.9 6113.T Amada 652.0 2,528 1,940 700 60.3 18.3 15.8 6.9 0.7 1.8% 10.8 6754.T Anritsu 1296.0 1,854 1,973 1180 13.3 14.6 10.5 6.7 2.9 1.5% 97.4 ASSAb.ST Assa Abloy 258.4 14,517 16,600 300 17.5 15.5 12.3 11.1 3.2 2.1% 14.8 ATCOa.ST Atlas Copco 159.7 27,863 29,192 200 13.6 12.3 8.7 7.9 4.7 3.8% 11.8 BHEL.BO Bharat Heavy Electricals 197.1 8,518 6,344 164 7.7 9.9 4.4 4.7 1.6 3.0% 25.7 BOY.L Bodycote Plc 504.0 1,449 1,537 6 12.3 11.3 6.3 6.0 1.7 2.7% 0.4 BUCN.S Bucher Industries 220.2 2,411 2,648 230 11.5 10.9 7.8 7.4 2.1 2.4% 19.2 CAT.N Caterpillar Inc. 86.1 56,200 91,481 103 12.8 10.3 9.2 7.4 2.5 2.4% 6.8 CBI.N Chicago Bridge & Iron 62.6 6,699 6,012 60 15.6 12.4 8.6 6.7 3.7 0.0% 4.0 601299.SS China CNR Corporation Limited 4.2 7,025 9,005 4.3 11.7 10.9 7.8 7.2 1.2 2.6% 0.4 601179.SS China XD 3.9 2,766 1,700 4.8 - 54.2 12.2 10.4 1.2 0.0% 0.0 6366.T Chiyoda Corporation 1149.0 2,971 2,430 1000 18.5 18.6 8.4 10.1 1.6 1.5% 62.1 1766.HK CSR Corporation Limited 4.8 8,803 8,374 4.41 12.1 11.2 7.0 6.5 1.5 2.5% 0.3 CMI.N Cummins Inc. 111.1 21,084 20,182 134 14.0 10.5 7.5 6.3 2.6 1.8% 8.0 CUMM.BO Cummins India 458.2 2,126 2,034 481 19.0 18.6 16.2 16.0 5.3 2.8% 24.1 000210.KS Daelim Industrial 94300.0 2,924 3,269 120000 7.3 6.8 6.3 5.0 0.7 0.5% 12887.3 047040.KS Daewoo E&C 7720.0 2,859 5,498 7000 10.9 11.6 11.4 9.2 0.9 0.0% 705.4 6367.T Daikin Industries 3980.0 11,765 17,253 4800 26.6 17.0 13.1 9.8 2.1 0.9% 149.7 DHR.N Danaher Corporation 62.1 43,024 46,688 59 18.4 16.7 11.3 10.5 2.0 0.2% 3.4 DE.N Deere & Co. 88.4 34,284 36,302 102 10.5 9.9 6.1 5.6 3.7 2.3% 8.4 DCI.N Donaldson Company, Inc. 35.0 5,127 5,199 40 21.7 19.4 12.9 12.0 4.6 1.0% 1.6 1072.HK Dongfang Electric Corp 11.0 3,621 4,870 8.74 7.0 9.3 7.3 9.0 1.0 4.3% 1.3 034020.KS Doosan Heavy Industries & Construction 40050.0 3,651 6,197 49000 10.2 9.5 8.0 7.7 0.8 0.0% 3922.1 DOV.N Dover Corporation 77.4 13,238 15,238 77 14.9 13.6 8.8 8.4 2.7 1.9% 5.2 ETN.N Eaton Corporation 66.2 31,298 57,901 72 15.4 12.7 21.0 17.5 1.9 2.3% 4.3 6361.T Ebara 512.0 2,414 2,447 380 15.5 19.8 6.4 6.1 1.4 1.0% 32.9 EMR.N Emerson 57.8 41,514 42,124 64 16.4 14.8 8.5 7.8 3.8 2.8% 3.5 ICA.MX Empresas ICA 23.2 1,098 4,340 40 3.5 3.5 4.9 5.2 0.7 0.0% 6.7 ENKAI.IS Enka Insaat 4.9 8,136 6,439 2.96 13.9 13.6 7.8 7.9 1.5 1.7% 0.2 6954.T Fanuc 14270.0 28,362 20,636 20000 23.2 23.8 10.2 10.6 2.6 1.3% 615.6 FLS.N Flowserve Corp. 159.3 22,886 23,451 180 15.5 13.2 28.2 24.1 4.0 1.0% 10.3 FLR.N Fluor 63.1 10,277 7,910 80 15.0 12.4 6.1 4.9 2.6 1.0% 4.2 FWLT.OQ Foster Wheeler 23.1 2,311 2,038 29 17.4 12.3 7.4 5.1 2.7 0.0% 1.3 GAMU.KL Gamuda 4.9 3,516 3,228 5.82 18.7 13.8 16.9 12.5 2.3 2.3% 0.3 GDI.N Gardner Denver, Inc. 75.1 3,694 3,942 76 13.8 12.6 9.1 8.2 2.5 0.3% 5.4 GEBN.VX Geberit 229.4 9,094 8,688 185 19.8 18.4 13.5 12.7 5.7 3.2% 11.6 GE.N General Electric 23.6 245,169 348,448 25 14.1 13.0 5.9 5.3 2.0 3.3% 1.7 GKN.L GKN 290.0 7,295 8,417 3.55 10.3 9.1 6.0 5.5 2.7 2.8% 0.3 006360.KS GS E&C 33150.0 1,506 3,209 38000 - 11.4 - 7.7 0.5 0.7% -13809.6 6674.T GS Yuasa 448.0 1,846 2,330 360 19.1 16.4 9.2 7.6 1.5 1.8% 23.5 000528.SZ Guangxi Liugong Machinery 8.2 1,506 2,593 7.7 22.7 14.8 15.9 12.7 1.0 0.7% 0.4 HLMA.L Halma 5.1 2,967 3,073 560 19.3 17.8 13.7 12.4 5.0 2.0% 0.3 1808.T HASEKO Corporation 129.0 1,935 2,339 150 16.2 13.2 7.8 8.4 1.7 0.0% 8.0 6305.T Hitachi Construction Machinery 2357.0 4,985 8,201 2300 21.3 12.7 8.9 7.0 1.5 1.7% 110.8 012630.KS Hyundai Development 26500.0 1,780 3,204 26000 20.1 11.2 15.2 11.0 0.8 1.9% 1319.9 000720.KS Hyundai E&C 60400.0 5,992 6,533 72000 10.2 8.6 6.6 5.6 1.3 0.8% 5947.6 7013.T IHI 362.0 5,393 8,418 NOT COVERED 16.0 16.7 7.7 7.9 1.9 1.4% 22.6 IJMS.KL IJM Corporation Berhad 5.8 2,607 3,680 7.28 19.1 13.8 9.4 8.2 1.4 1.9% 0.3 ITW.N Illinois Tool Works, Inc. 68.4 30,894 33,163 62 16.1 14.9 9.4 8.9 2.8 2.2% 4.2 IMI.L IMI Plc 1224.0 5,958 6,192 14.6 14.0 13.1 9.1 8.7 5.9 2.9% 0.9 IR.N Ingersoll-Rand Plc 58.5 17,491 18,025 65 16.0 13.0 10.1 7.8 2.2 1.4% 3.7 ISYS.L Invensys 4.0 4,961 4,538 368 24.8 23.4 16.3 12.8 3.2 1.2% 0.2 JEC.N Jacobs Engineering 57.4 7,508 5,998 58 17.4 15.3 8.2 6.7 1.8 0.0% 3.3 1963.T JGC Corporation 3395.0 8,556 4,228 3500 18.6 15.9 4.9 6.8 2.6 1.3% 182.9 0179.HK Johnson Electric Hdg. 0.7 2,367 2,227 4.975 12.3 13.3 7.6 6.1 1.5 2.1% 0.1 6473.T JTEKT 1057.0 3,670 5,446 1300 26.1 15.8 7.2 5.5 1.1 1.5% 40.5 1812.T Kajima Corporation 296.0 3,068 6,609 240 14.8 19.3 18.8 13.4 1.1 1.7% 20.0

Source: Credit Suisse Equity Research estimates, Thomson Reuters for not rated stocks

Yen and You 95 01 July 2013

Figure 127: Global industrials – Comparative valuations (continued) Share MktCap EV Target PE EV/EBITDA P/B Div Yld EPS Ticker Name Price USD USD Price 2013 2014 2013 2014 2013 2013 2013 (local) (US$mn) (US$mn) (local) x x x x x % (local) INDUSTRIALS KBR.N KBR Inc. 35.7 5,272 3,764 40 13.4 11.3 6.7 4.9 1.8 0.0% 2.7 KMT.N Kennametal Inc. 38.9 3,063 3,512 43 15.3 12.0 8.3 7.2 1.7 1.6% 2.5 6861.T Keyence 31350.0 19,316 14,828 32000 28.2 24.1 14.5 12.0 2.7 0.2% 1111.4 6301.T Komatsu 2583.0 24,564 30,630 2700 19.5 11.9 9.6 7.0 2.2 1.9% 132.6 KNEBV.HE Kone Corporation 64.4 21,811 20,807 62 22.3 19.8 15.2 13.7 7.9 3.0% 2.9 6326.T Kubota 1539.0 19,292 21,499 1150 26.2 21.4 14.2 12.2 2.7 1.1% 58.7 LART.BO Larsen & Toubro 1409.2 15,333 23,142 1433 17.0 15.5 12.9 12.6 2.6 1.3% 82.7 LEGD.PA Legrand SA 37.8 13,054 13,514 30 18.5 17.9 10.8 10.2 2.9 2.7% 2.0 LEI.AX Leighton Holdings 17.7 5,775 5,880 19.2 10.3 10.3 2.8 2.8 1.9 6.7% 1.7 6586.T Makita 5330.0 7,348 6,160 5500 23.3 17.5 11.6 9.0 2.1 1.4% 228.9 POMO4.SA Marcopolo 13.4 2,815 2,883 14 16.8 15.5 10.7 9.6 4.0 3.0% 0.8 MDR.N McDermott International 9.3 2,206 2,037 13 22.1 9.8 7.4 4.4 1.1 0.0% 0.4 MEO1V.HE Metso 27.0 5,307 5,729 38 8.7 8.1 5.2 4.8 1.7 5.7% 3.1 MILS3.SA Mills 35.4 2,116 2,315 37 20.8 17.3 10.7 9.1 4.3 1.2% 1.7 7011.T Mitsubishi Heavy Industries 539.0 18,365 25,297 700 18.6 13.5 8.7 7.2 1.3 1.5% 29.0 6141.OS Mori Seiki 1102.0 1,224 1,730 900 23.3 15.3 15.1 10.4 1.2 1.8% 47.3 6268.T Nabtesco Corporation 2034.0 2,632 2,478 1650 19.5 18.1 10.7 8.7 2.4 1.7% 104.6 6471.T NSK 887.0 4,864 6,607 1300 30.5 14.0 9.6 7.6 1.6 1.2% 29.1 6472.T NTN 303.0 1,637 4,440 200 -11.4 35.0 10.1 7.3 0.8 0.0% -26.7 1802.T Obayashi Corporation 502.0 3,600 6,857 540 30.8 23.3 14.2 14.4 1.0 1.6% 16.3 OERL.S OC Oerlikon Corp AG 10.7 3,676 3,297 15 15.4 13.0 6.2 5.6 1.9 2.8% 0.7 6103.T Okuma Corporation 700.0 1,163 1,033 700 15.1 13.4 6.8 5.6 1.2 1.4% 46.2 OSK.N Oshkosh Corporation 35.3 3,106 3,520 41 11.4 10.5 6.1 5.7 1.5 0.0% 3.1 PCAR.OQ Paccar Inc 52.4 18,521 16,275 47 16.5 14.2 10.3 7.3 2.8 1.7% 3.2 PLL.N Pall Corporation 65.9 7,357 7,553 78 21.6 18.2 12.9 11.4 4.0 1.4% 3.1 PH.N Parker Hannifin Corporation 94.9 14,155 15,046 104 14.7 12.9 7.5 7.0 2.6 1.8% 6.5 PNR.N Pentair, Inc. 56.9 11,631 13,827 54 17.7 14.4 10.8 9.7 1.8 1.6% 3.2 PHG.AS Philips 20.9 24,964 27,464 23 13.7 11.6 6.5 5.7 1.6 3.7% 1.5 600312.SS Pinggao Electric 10.5 1,409 1,073 11.6 26.7 23.4 13.7 12.6 2.7 0.0% 0.4 PRY.MI Prysmian 14.5 4,073 5,633 19 11.2 9.6 6.7 6.0 2.3 2.7% 1.3 PWR.N Quanta Services 28.2 5,896 5,412 33 19.4 16.1 8.1 6.5 1.5 0.0% 1.5 RBC.N Regal Beloit 63.9 2,872 3,261 76 14.3 12.4 7.4 6.6 1.4 1.2% 4.5 RSW.L Renishaw 17.7 1,966 1,989 1985 17.2 15.1 12.8 11.8 4.6 2.3% 1.0 RXN.N Rexnord Corporation 17.1 1,665 3,316 20 17.5 15.1 10.8 9.5 4.5 0.0% 1.0 ROK.N Rockwell Automation 88.2 12,317 11,218 94 16.0 14.6 9.6 8.4 5.3 2.2% 5.5 ROR.L Rotork plc 2550.0 3,402 3,305 32.3 20.2 19.0 13.6 12.7 7.7 1.9% 1.3 028050.KS Samsung Engineering Co Ltd 94500.0 3,368 4,442 90000 12.2 6.3 7.5 3.6 2.0 3.2% 7769.5 SAND.ST Sandvik 83.1 15,545 18,796 80 13.3 11.6 7.1 6.5 2.9 4.5% 6.2 600031.SS Sany Heavy Industry 9.2 11,386 13,893 8.7 14.0 10.3 9.0 6.2 2.6 1.2% 0.7 SCHP.VX Schindler-Holding AG 129.7 16,081 13,848 155 19.4 17.7 10.5 9.6 4.8 1.9% 6.7 SCHN.PA Schneider 61.0 44,223 47,691 58 14.4 13.2 10.0 9.0 1.9 3.2% 4.2 2727.HK Shanghai Electric Group Co., Ltd. 2.6 6,803 8,035 2.54 9.6 10.9 7.3 7.6 0.8 3.1% 0.2 1803.T Shimizu Corporation 357.0 2,796 5,389 260 56.0 31.8 20.7 16.8 0.9 2.0% 6.4 SIEGn.DE Siemens 81.4 93,685 105,938 95 11.2 10.2 7.5 6.2 2.2 3.9% 7.3 SKFb.ST SKF 159.1 10,801 11,944 140 15.5 12.7 8.7 7.4 3.1 3.2% 10.3 6273.T SMC 19610.0 13,450 10,791 17000 20.9 20.4 12.0 10.0 2.0 0.7% 937.7 SMIN.L Smiths Group 1261.0 7,630 9,206 14.2 13.3 12.6 9.3 8.8 3.8 3.0% 0.9 SXS.L Spectris 20.8 3,769 4,131 2350 15.1 14.5 10.3 9.5 2.8 2.1% 1.4 SPX.L Spirax Sarco 2603.0 3,015 2,931 27.1 19.6 18.2 10.9 10.4 4.9 2.2% 1.3 SPW.N SPX 78.1 3,653 4,430 69 18.8 14.3 10.9 9.1 1.6 1.3% 4.2 SUN.VX Sulzer 148.3 5,427 5,532 160 14.4 12.9 8.8 7.9 2.0 2.4% 10.3 1801.T Taisei Corporation 358.0 4,142 5,338 420 20.3 27.0 12.3 11.9 1.2 1.4% 17.6 600089.SS TBEA Co Ltd 8.5 3,975 2,535 6.8 20.0 17.6 8.1 6.1 1.5 0.2% 0.4 TEX.N Terex Corporation 35.6 3,960 4,826 46 13.2 9.3 6.3 4.6 1.8 0.0% 2.7 TXT.N Textron 25.9 7,196 9,770 30 13.1 11.7 7.1 6.7 2.1 0.3% 2.0 6481.T THK 2033.0 2,614 1,807 2800 26.4 17.4 8.4 5.7 1.4 0.9% 76.9 600550.SS Tianwei Baobian 7.3 1,631 2,366 3.5 - - - 20.5 2.2 0.0% -0.5 TYC.N Tyco International, Ltd 33.8 15,697 15,676 31 18.3 15.8 10.4 9.1 3.2 2.0% 1.8 UNTR.JK United Tractors 16700.0 6,273 6,374 26000 9.6 7.6 4.5 3.6 1.8 3.9% 1745.0 URS.N URS Corporation 48.5 3,679 4,811 51 11.4 10.3 5.7 5.4 0.9 0.0% 4.2 VMI.N Valmont Industries 137.8 3,687 3,759 147 12.7 12.2 7.0 6.8 2.2 0.0% 10.9 VSVS.L Vesuvius 353.6 1,503 1,023 3.45 11.6 10.5 3.9 3.6 1.1 4.3% 0.3 WEGE3.SA WEG 28.2 8,218 8,485 30 21.7 18.0 14.0 11.6 4.0 2.5% 1.3 WEIR.L Weir Group 2096.0 6,865 8,091 25.2 13.9 12.8 9.6 9.0 3.1 2.0% 1.5 2208.HK Xinjiang Goldwind Science&Technology 4.4 2,631 1,948 3 29.8 29.2 10.0 9.2 0.9 1.3% 0.1 3898.HK Zhuzhou CSR Times Electric Co. Ltd. 19.1 2,673 2,305 16.14 13.0 12.7 10.2 10.0 2.2 2.4% 1.2 1157.HK Zoomlion Heavy Industry 5.4 1,271 8,692 7.4 7.2 5.5 4.2 3.1 0.9 3.7% 0.8 Source: Credit Suisse Equity Research estimates, Thomson Reuters

Yen and You 96 01 July 2013 Equity Research: Airlines Key global takeaways Timothy Ross Yen weakness is a two-edged sword. With the onset of "Abe-nomics" much has changed Head of Asia Pacific in the Japanese economic landscape and not least the direction that demand for air travel Transport Research is taking. Prima facie, a weaker yen bodes ill for Japanese airlines, hiking the cost of jet 65 6212 3337 fuel, rotables, landing fees, over-flight costs and US$-denominated borrowings. It should timothy.ross@credit- also stunt the growth of outbound demand, typically the cornerstone of Japanese airlines' suisse.com international traffic. Davin Wu (1) The extent to which economic stimulation will translate into increased levels of (higher 852 2101 6917 yielding) Japanese business travel remains to be seen. However, the benefit to Asia's davin.wu@credit- other airlines is becoming increasingly tangible: the yen has fallen around a third suisse.com against some Asian currencies and this is making Japan increasingly attractive to Leonard Huo, CFA tourists. 65 6212 3062 (2) Japan Airlines' 2010-12 restructuring and All Nippon's traditionally domestic focused leonard.huo@credit- network have shrunk their international presence over recent years and tangible suisse.com growth in inbound tourist activity is favouring non-Japanese airlines, which typically Neil Glynn control twice as much of the capacity in any single country pair with Japan. +44 20 7883 6929 (3) A sweet spot for airlines exists for those that can combine a robust fundamental story neil.glynn@credit- with a growing Japanese market focus against the background of a strong currency vs suisse.com the yen. The major global carriers such as IAG, Lufthansa and Air France would

benefit from a currency stimulus to traffic but the leverage to the bottom line is small. Cathay, EVA and Thai Airways look best placed to benefit, in our opinion. Inbound vs Outbound drivers Much has been written about how the yen and anticipated changes in the Japanese economy are going to change consumption patterns, but there appears to be little focus with respect to how these influences will impact Japanese travel. The country's airline stocks benefited during the strength in the Japanese equity market from the belief that a revived corporate sector will buoy airline load factors ... especially at the premium end of the aeroplane. While this may play out, the immediate impact of a weak Yen is an increase in US$-denominated costs and deteriorating demand for foreign travel, all to the probable short-term detriment of Japanese airlines' earnings.

Figure 128: Airline operating cost breakdown (FY12A) Figure 129: Japanese outbound as % of total Japanese pax 100% 24.5% 3% 6% 95% 24.0% 4% 90% 20% 23.5% 85% 80% 40% 23.0% 75% 22.5% 97% 70% 90% 22.0% 65% 80% 21.5% 60% 55% 60% 21.0%

50% 20.5% NH Revenue NH Opex JL Revenue JL Opex 20.0% $JPY $USD Others Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12

Source: Credit Suisse Equity Research estimates Source: Diio-Mi, Credit Suisse Equity Research estimates

Yen and You 97 01 July 2013

Japanese airlines are short US$ from an operating perspective and rely on their jet fuel … as operating costs go up hedges to provide most of their net US$ cost excess hedging. While Japan Airlines (JL) is and demand for outbound less forthcoming than All Nippon Airways (NH) in terms of its disclosure, the latter travel diminishes estimates that a yen movement against the US$ impacts profitability by ¥0.8bn, or 2% of its own projected FY13 NPAT. This analysis was done at ¥95: US$1 and does not include the impact of the currency on traffic volumes. While Japanese outbound passengers make up less than 30% of the carriers' totals, we fear that a weak currency will continue to impact demand negatively. We can see that there is a strong inverse correlation developing between currency strength and appetite for international travel, which has been exacerbated by Japan's sovereignty disputes with neighbouring countries.

Figure 130: Outbound Japanese travel vs. ¥:US$ The inverse relationship 50% 25% between currency and travel 20% 40% demand has been 15% intensifying in the last 12 30% 10% months 20% 5%

10% 0%

-5% 0% -10% -10% -15% -20% -20%

-30% -25% Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13

Japanese outbound passengers YoY% JPY/USD YoY%

Source: Japanese National Tourism Organisation While bad for Japanese However, if this is bad for Japanese airlines, it is a boon for foreign carriers with exposures airlines, this should be a to that market. This is not so much that Japanese travellers will change their allegiance to boon for foreign carriers non-Japanese airlines, but more that visitors will be encouraged by the falling cost of the total visit to Japan to make an extra trip on their national airline. Those airlines most likely to enjoy support from this source feature the combination of a significant orientation of their networks towards Japan and a home currency that has appreciated most against the yen. Cathay Pacific and EVA Airways combine these attributes with other factors, including valuation, to head our table of preferences, although Thai Airway's recent stock price performance could be in part explained by the strength of the baht vs. the yen and its … especially those where orientation towards the Japanese market. While we acknowledge the loss of inbound currency has strengthened revenues, we continue to rate Korean Air an Outperform, as it is also enjoying a significant most vs. the yen and where pick-up in outbound activity, a high gearing of its inventory towards Japan and the benefit airlines are oriented towards of more Korean visits to Japan. However, the impact on European carrier earnings of the Japanese market yen weakness is minimal. For Air France KLM and Lufthansa, each 10% movement in the yen has a €15m-30m impact (IAG impact de minimus) before considering the effects of currency development on demand.

Yen and You 98 01 July 2013

Figure 131: Currency strength vs. Japanese market exposure

FX chg vs. JPY (%) 35% TG 5J CZ MH MU CA KE OZ 30% SQ IAG CX LH AF BR CI QF 25%

AA UA DL 20% US and European Airlines GA

Japan as % seats 15% 0% 5% 10% 15% 20% 25% Source: the BLOOMBERG PROFESSIONAL™ service, Diio Mi, Credit Suisse Equity Research estimates

In Asia, all countries bar China (where political issues surrounding the Senkaku Islands A weak yen has stimulated have dominated personal travel decisions) have experienced a sharp tick up in activity, some markets by as much with visitor arrivals in Japan from most Asian destinations growing at double-digit rates as 50% YTD.

Figure 132: Visitor arrivals to Japan––April 2013 YTD % chg.

Thailand 49%

Indonesia* 44%

Taiwan 37%

Korea 36%

Hong Kong 28%

Malaysia* 14%

Singapore 10%

India* 6%

China -29%

-40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Source: Japanese National Tourism Organisation …and non-Japanese Non-Japanese carriers typically dominate the market share between Japan and most airlines typically control two- other countries, given the latter's historical focus on the high-yielding domestic market and thirds or more of the effect that Japan Airlines’ bankruptcy had on its international network (historically, the international routes larger of the two major airlines) in 2010. The Japanese airlines have their best showing on beginning or ending in Thai, Indonesian and Chinese routes, but still hover at around a third or less seat market Japan … share. The implication of this is that any significant change in volumes on international sectors between Japan and other countries should impact foreign players more profoundly. From a European perspective, given bilateral air service agreements, Japanese carriers have c50% of seats between the region and Japan. Including this would

Yen and You 99 01 July 2013 be misleading in the chart below as the importance of the Japanese market to the European carriers (and vice versa) is minimal.

Figure 133: Seat market share––Japanese carriers’ % of total seats … with routes between Japan, Hong Kong, Indonesia Malaysia and Korea Thailand positively dominated by their national carriers China

Philippines

Singapore

Taiwan

Australia

Korea

Malaysia

Hong Kong

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Source: Diio-Mi Fares on outbound routes to One of the previously enduring factors with respect to the Japanese market was that it Japan are now at a offered a distinct directional premium. That is, tickets on the same carrier on the same premium, reversing the route for travel at the same time were more expensive if booked outbound from Japan traditional relationship and rather than on the inbound leg. Our analysis suggests that this has changed significantly, further improving foreign with every major route except for Taipei now enjoying a significant premium relative to a players’ profitability Japan-originating fare. While some of this reflects the change in currency (at least the change versus the US$), it has shifted the balance of profitability away from the Japanese market and in favour of inbound passengers.

Figure 134: Inbound/outbound fare premium (outbound fare from Japan vs. inbound fare on same route) Carrier Tokyo to/from … Outbound (US$) Inbound (US$) Premium/(discount) (%) Qantas Sydney 482 1,432 -66 Singapore Airlines Singapore 492 950 -48 Thai Airways Bangkok 578 802 -28 Garuda Airlines Jakarta 871 1,207 -28 China Eastern Air. Shanghai 577 790 -27 China Southern Air. Beijing 556 741 -25 AirAsia Kuala Lumpur 268 346 -23 Cathay Pacific Hong Kong 378 465 -19 Malaysian Airlines Kuala Lumpur 695 790 -12 Air China Beijing 475 503 -6 Korean Air Seoul 372 378 -2 EVA Airways Taipei 484 467 4 China Airlines Taipei 425 347 22 Source: Company websites, Credit Suisse Equity Research estimates The impact of the changing The combination of high foreign airline market shares, growth in outbound demand and Japanese market structure improved relative pricing has––in our view––driven an increasing correlation between has been evident in stock stock price performance and the yen, with some stocks (such as Qantas) being as much price correlation YTD … as 95% correlated over the past six months.

Yen and You 100 01 July 2013

Figure 135: Asia-Pacific airline stocks vs. the yen––correlation over past six months

QF 0.95 … with this very apparent at TG 0.85 airlines like Qantas and Thai 5J 0.81 Airways CZ 0.66 MU 0.62 CA 0.59 SQ 0.53 BR 0.36 CI 0.09 CX -0.13 MH -0.62 OZ -0.64 KE -0.67 GA -0.83 -1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20

Source: the BLOOMBERG PROFESSIONAL™ service Korean, Asiana and Garuda Interestingly, despite the high seat market shares that it enjoys between Japan and Hong all lose inbound revenues … Kong, the strength of its currency vs. the yen and the large pick-up in visitor arrivals from but Cathay Pacific’s Hong Kong to Japan, Cathay Pacific's stock price has shown a negative correlation to the negative correlation is a yen. Japan (as can be seen in the Appendix below) comprises less than 5% of total sales, mystery and it remains the so we identify this stock as the one most likely to perform should the current ¥:HK$ rate standout thematic persist. Elsewhere, the other airlines with negative correlations (Korean Air, Asiana and opportunity Garuda) have historically sourced a large proportion of their earnings from Japanese inbound passengers, so investor aversion is understandable in the context of their historical earnings patterns. The growth in outbound tourism, though, may win back followers, although the absolute size of (particularly Indonesian) tourist outflows to Japan are less than the Japanese inbound market. The fare differentials are likely to bridge the gap in profitability. Our analysis below is exclusive of the stimulatory effect of a cheaper Japan on outbound Weaker yen, weaker passenger flows and merely looks at costs vs. revenues and how these change under earnings … assuming no different currency assumptions. Generally, this effect is negative; however, as we have stimulus on inbound leg seen from the data, volume and pricing growth momentum has now swung in favour of inbound passengers and the airlines that carry them. The Korean airlines, Garuda and China Airlines, have the largest sensitivity––given their large proportion of yen- denominated sales, as well as their relatively low anticipated earnings bases in 2013.

Yen and You 101 01 July 2013

Figure 136: Asian airlines’ earnings impact from changes in forex: yen Earnings Earnings % of % of yen impact impact Yen Company sales expense @110 @120 Comment Virgin Australia 0.5%< 0% <0.5% <0.5% No direct flights to JPN. Further depreciation of yen against A$ may have small negative translation impact on codeshare revenue with Singapore Airlines. China Southern 0.4% 0.1% -2.1% -2.5% Traffic growth depends more on the tension between the two countries and bilateral trade than movements in currency. Yen revenues exceed yen costs, driving a modest loss of profit. Air China 0.7% 0.1% -2.5% -3.0% Traffic growth depends more on the tension between the two countries and bilateral trade than movement in currency. Yen revenues exceed yen costs, driving a modest loss of profit. Qantas Airways ~1.5% ~0.8% -3.8% -5.7% Earnings impact due to low FY13 profit rather than high absolute yen exposure. Qantas seen having increasingly more exposure to yen, as Jetstar Japan ramps up operations to ~3-5% of group revenue over FY14E and FY15E. Cathay Pacific 3.0% 2.5% -4.7% -5.8% Largely balanced, with an appreciating HK$, generally leading to a small reduction in earnings from the route SIA 4.0% 3.5% -5.0% -6.2% Marginal impact with both sales and costs in Japan less than 5% of parent company total. EVA Air 5.0% 4.5% -5.5% -6.7% Less important to BR than CI, given its orientation towards the US. Costs and revenues are largely balanced. China Eastern 1.1% 0.2% -7.7% -9.4% MU is the largest carrier between China and Japan, but its impact on profits has fallen. Japan accounts for ~3% of FY13E revenues, with about one third of these sold in yen. Thai Airways 5.0% 1.0% -37.7% -46.0% Most Japanese inbound are less price sensitive businessmen, with impact on volumes expected to be low. Garuda 6.0% 1.0% -37.9% -46.3% Significant orientation of international sales to Japanese market at ~30% of total international sales sourced there and only a fraction of cost. China Airlines 13.0% 8.0% -43.5% -53.2% Important market and likely to increase given open skies relationship and status as alternative destination to China and Korea Asiana 16.0% 10.7% -51.9% -63.5% A little more diversified than Korean Airlines, but Japan is also Asiana’s largest single earnings contributor Korean Air 15.0% 10.1% -81.0% -99.0% Largest contributor to earnings, accounting for up to 30% of normalised earnings Source: Credit Suisse Equity Research estimates

The impact of any net improvement in traffic as a consequence of Japan’s increasing attractiveness is shown in Figure 137 below, with Quantas the most impacted, although that probably reflects its low earnings base rather than the absolute value of additional demand. Again, it does not make any judgement as to the price sensitivity of the respective regional traveller.

Yen and You 102 01 July 2013

Figure 137: NPAT sensitivity to 1% change In passenger traffic (2013E) Airline code Sensitivity QF - Qantas 57% VA – Virgin Australia 54% MH – Malaysia Airline 50% KE – Korean Air 24% TG – Thai Airways 20% MU – China Eastern 18% TR – Tiger Airways 16% CZ – China Southern 16% GA - Garuda 15% CX – Cathay Pacific 15% CI – China Airlines 14% OZ – Asiana Airlines 14% BR – EVA Airways 14% SQ - Singapore 10% CA – Air China 10% FD – Thai Air Asia 9% 5J – CEBU Pacific 6% AK – Air Asia 3% Source: Credit Suisse Equity Research estimates

Figure 138: Global airlines – Comparative valuations Share MktCap EV Target PE EV/EBITDA P/B Div Yld EPS Ticker Name Price USD USD Price 2013 2014 2013 2014 2013 2013 2013 (local) (US$mn) (US$mn) (local) x x x x x % (local) AUTOS AB1.DE Air Berlin 2.0 306 1,322 1.7 na na 21.8 8.8 12.6 0.0 -1.1 0753.HK Air China 5.3 8,767 23,189 6.2 7.6 5.3 6.5 5.6 1.0 2.6 0.6 AIRF.PA Air France-KLM 6.9 2,697 10,569 8.1 na 7.8 4.3 3.3 0.5 0.0 -0.8 AIRA.KL AirAsia 3.1 2,645 4,962 3.4 9.7 7.3 7.9 6.6 1.5 2.0 0.3 AAV.BK Asia Aviation 5.5 802 774 Restricted 16.5 13.3 6.3 4.7 2.5 0.0 0.3 020560.KS Asiana Airlines 5020.0 843 3,679 6,500.0 4.7 2.8 6.6 5.7 0.9 0.0 1071.0 0293.HK Cathay Pacific 13.0 6,594 12,229 16.7 15.2 7.0 9.2 6.9 0.9 2.0 0.9 CEB.PS Cebu Pacific 67.5 932 1,601 92.0 10.1 8.4 8.7 7.5 1.6 1.5 6.7 2610.TW China Airlines 11.1 1,918 6,419 10.0 13.0 8.5 11.1 9.2 1.0 0.5 0.9 0670.HK China Eastern Airlines 2.3 4,746 15,193 2.3 7.4 6.2 6.4 5.4 0.8 0.0 0.2 1055.HK China Southern Airlines 3.1 4,456 14,709 4.0 5.8 4.5 5.5 4.8 0.7 0.0 0.4 CPA.N Copa Holdings 133.7 5,829 6,749 136.0 13.0 11.3 11.4 9.8 3.2 2.3 10.3 LHAG.DE Deutsche Lufthansa 15.6 9,375 11,951 21.4 10.1 6.5 3.6 3.2 1.4 0.0 1.5 EZJ.L EasyJet 1245.0 7,586 7,495 Restricted 14.9 13.0 8.7 7.9 2.5 2.2 0.8 2618.TW EVA Air 16.9 1,830 5,222 24.0 15.2 12.8 9.7 9.3 1.4 0.0 1.1 GOLL4.SA Gol Linhas Aerea 7.3 438 4,796 10.0 na 36.8 18.2 10.7 1.4 0.0 -1.3 ICAG.L International Airlines Group 260.7 8,365 10,858 4.1 16.8 7.7 4.6 3.5 1.2 0.0 0.2 003490.KS Korean Air 29350.0 1,841 13,909 58,000.0 8.3 7.0 6.9 6.7 0.7 0.0 3552.7 LFL.N LATAM Airlines 15.8 7,809 18,788 28.0 22.4 11.5 9.6 7.0 1.4 0.9 0.7 MASM.KL Malaysia Airlines 0.3 1,532 7,271 0.3 34.4 19.0 18.7 15.7 0.9 0.0 0.0 GIAA.JK PT Garuda Indonesia Tbk 500.0 1,140 5,049 0.1 7.8 11.0 13.1 11.7 1.1 3.2 0.0 QAN.AX Qantas 1.3 2,644 5,869 1.9 16.2 7.2 3.2 2.7 0.5 0.0 0.1 RYA.I Ryanair 7.2 13,425 13,347 8.8 18.3 15.1 9.7 8.7 3.2 0.0 0.4 SIAL.SI Singapore Airlines 9.9 9,305 8,564 12.8 29.8 14.4 5.9 4.2 0.9 2.3 0.3 SMLE3.SA Smiles 26.0 1,415 na 41.0 17.8 14.4 20.2 14.8 2.9 5.6 1.5 THAI.BK Thai Airways International 24.0 1,675 5,930 22.5 7.6 7.1 4.4 4.0 0.7 3.3 3.2 TAHL.SI Tiger Airways 0.6 474 810 0.6 9.2 13.9 25.8 11.2 2.5 0.0 0.0 VAH.AX Virgin Australia 0.4 960 2,559 0.5 15.2 6.9 8.0 5.5 0.9 4.9 0.0 Source: Credit Suisse Equity Research estimates, Thomson Reuters

Yen and You 103 01 July 2013 Appendix 1 – PEERs Relationships Using our proprietary supply-chain database, PEERs ®, we list in Figure 139 to Figure 141 the Asia-Pacific, European and US stocks in our coverage alongside their Japanese competitors. In Figure 142 to Figure 144 we extend this by focusing on suppliers.

Figure 139: Japanese COMPETITORS to Asia-Pacific Stocks Japanese Competitors (those in blue are are 'highly' relevant Company Ticker Country Rating Sector to the Asia-Pac stocks) Honda Motor Corp., Fuji Heavy Industries, Mazda Motor Corp., Brilliance China Automotive 1114.HK China Outperform Auto Suzuki Motor Corp., Toyota Motor Corp.

Suzuki Motor Corp., Mazda Motor Corp., Toyota Motor Corp., BYD Company Limited 1211.HK China Neutral Auto Honda Motor Corp., Tokai Rika, Toyoda Gosei, Toyota Boshoku

Nissan Motor Co., Honda Motor Corp., Denso, Keihin, Dongfeng Motors Group Co Ltd. 0489.HK China Outperform Auto Sumitomo Rubber Industries, Takata Corp., Tokai Rika, Toyoda Gosei, Toyota Boshoku Honda Motor Corp., Toyota Motor Corp., Mazda Motor Corp., Geely Automobile Holdings Ltd. 0175.HK China Neutral Auto Suzuki Motor Corp Mazda Motor Corp., Honda Motor Corp., Suzuki Motor Corp., Great Wall Motor 2333.HK China Outperform Auto Toyota Motor Corp Mazda Motor Corp., Honda Motor Corp., Suzuki Motor Corp., Guangzhou Automobile Group 2238.HK China Underperform Auto Toyota Motor Corp Bajaj Auto Ltd. BAJA.BO India Outperform Auto Suzuki Motor Corp. Bosch Ltd. BOSH.BO India Outperform Auto Denso Hero Motocorp Ltd. HROM.BO India Neutral Auto Mazda Motor Corp Mazda Motor Corp., Honda Motor Corp., Toyota Motor Corp., Tata Motors Ltd. TAMO.BO India Outperform Auto Suzuki Motor Corp Denso, Calsonic Kansei, Keihin, Takata Corp., Tokai Rika, Hyundai Mobis 012330.KS South Korea Outperform Auto Toyota Boshoku Daihatsu Motor Co., Ltd., Toyota Motor Corp., Fuji Heavy Hyundai Motor 005380.KS South Korea Outperform Auto Industries, Honda Motor Corp., Mazda Motor Corp., Nissan Motor Co., Suzuki Motor Corp Honda Motor Corp., Fuji Heavy Industries, Mazda Motor Corp., Kia Motors 000270.KS South Korea Outperform Auto Nissan Motor Co., Suzuki Motor Corp., Toyota Motor Denso, Calsonic Kansei, Keihin, Takata Corp., Tokai Rika, Mando Corp. 060980.KS South Korea Neutral Auto Toyoda Gosei, Toyota Boshoku Calsonic Kansei, Bridgestone Corp., Denso, Keihin, Sumitomo Cheng Shin Rubber 2105.TW Taiwan Outperform Auto Rubber Industries, Takata Corp., Tokai Rika, Toyoda Gosei, Toyota Boshoku Bradken Ltd. BKN.AX Australia Outperform Industrials Komatsu Guangxi Liugong Machinery 000528.SZ China Underperform Industrials Komatsu, Hitachi Construction Machinery Lonking Holdings Ltd. 3339.HK China Underperform Industrials Hitachi Construction Machinery Sany Heavy Industry 600031.SS China Underperform Industrials Komatsu, Hitachi Construction Machinery Shanghai Electric Group Co., Ltd. 2727.HK China Neutral Industrials Mitsubishi Heavy Industries Obayashi Corp., JGC, Shimizu Corp., Taisei Corporation, Daelim Industrial 000210.KS South Korea Outperform Industrials Chiyoda Kajima Corp., JGC, Obayashi Corp., Shimizu Corp., Taisei Daewoo E&C 047040.KS South Korea Underperform Industrials Corporation Daewoo Shipbuilding 042660.KS South Korea Neutral Industrials Mitsubishi Heavy Industries Doosan Heavy Industries & Cons. 034020.KS South Korea Neutral Industrials Mitsubishi Heavy Industries Chiyoda, Shimizu Corp., JGC, Kajima Corp., Obayashi Corp., Hyundai E&C 000720.KS South Korea Outperform Industrials Taisei Corporation, Mitsubishi Heavy Industries Hyundai Heavy Industries 009540.KS South Korea Neutral Industrials Mitsubishi Heavy Industries Samsung Engineering Co Ltd. 028050.KS South Korea Neutral Industrials JGC, Chiyoda, Sony Skyworth Digital 0751.HK China Outperform Consumer Panasonic Corp., Sharp Corp., Sony TCL Multimedia 1070.HK China Outperform Consumer Panasonic Corp., Sharp Corp LG Electronics, Inc. 066570.KS South Korea Neutral Consumer Sony, Sharp Corp Hyundai Steel Co. 004020.KS South Korea Underperform Steel Kobe Steel, JFE Holdings, Nippon Steel & Sumitomo Metal Baosteel 600019.SS China Neutral Steel Nippon Steel & Sumitomo Metal BlueScope Steel BSL.AX Australia Outperform Steel Nippon Steel & Sumitomo Metal China Steel 2002.TW China Underperform Steel Nippon Steel & Sumitomo Metal Kobe Steel, Nippon Steel & Sumitomo Metal, JFE Holdings, POSCO 005490.KS South Korea Neutral Steel Aichi Steel Rio Tinto RIO.AX Australia Outperform Steel Nippon Steel & Sumitomo Metal Source: Credit Suisse PEERs, Credit Suisse Equity Research

Yen and You 104 01 July 2013

Figure 140: Japanese COMPETITORS to European Stocks Japanese Competitors (those in blue are are 'highly' relevant to Company Ticker Country Rating Sector the European stocks) Bridgestone, Kansei, Denso, Keihin, Tokai Rika, Toyoda Gosei, Michelin MICP.PA France Not Covered Autos Toyota Boshoku Renault RENA.PA France Not Covered Autos Daihatsu Motor Co., Ltd., Toyota Motor Corp Volkswagen VOWG_p.F Germany Not Covered Autos Nissan Motor Co., Toyota Motor Corp Continental CONG.DE Germany Not Covered Autos Bridgestone Corp., Takata Corp Daimler DAIGn.DE Germany Not Covered Autos Isuzu Motors Ltd., Hino Motors, Ltd Nissan Motor, Toyota Motor., Honda Motor, Hitachi Fiat FIA.MI Italy Not Covered Autos Construction, Isuzu , Mazda Kansei, Denso, Keihin, Takata, Tokai Rika, Toyoda Gosei, Toyota Autoliv, Inc. ALV.N Sweden Not Covered Autos Boshoku Ford Otosan FROTO.IS Turkey Neutral Autos Suzuki Motor Corp. GKN GKN.L United Kingdom Outperform Autos NTN, Keihin, Takata Corp., Toyoda Gosei, Toyota Boshoku Alstom ALSO.PA France Neutral Capital Goods Mitsubishi Heavy Industries, Hitachi Nexans SA NEXS.PA France Neutral Capital Goods Sumitomo Electric Industries, Furukawa Electric Saint-Gobain SGOB.PA France Neutral Capital Goods NSG Group, Asahi Glass, Nippon Electric Glass, Central Glass Schneider SCHN.PA France Neutral Capital Goods Mitsubishi Electric Bouygues BOUY.PA France Underperform Capital Goods Shimizu Corp Siemens SIEGn.DE Germany Outperform Capital Goods Fanuc, Mitsubishi Heavy Industries, Hitachi Philips PHG.AS Netherlands Neutral Capital Goods Panasonic Corp., Sony, Hitachi Barloworld BAWJ.J South Africa Underperform Capital Goods Komatsu Atlas Copco ATCOa.ST Sweden Outperform Capital Goods Hitachi, Toyota Industries Corp., Makita Sumitomo Metal Mining, Toshiba, Hitachi, Mitsubishi Heavy Sandvik SAND.ST Sweden Underperform Capital Goods Industries Scania SCVb.ST Sweden Not Covered Capital Goods Hino Motors, Ltd NSK, THK, NTN, Calsonic Kansei, Denso, Keihin, Takata Corp., SKF SKFb.ST Sweden Underperform Capital Goods Tokai Rika, Toyoda Gosei, Toyota Boshoku Isuzu Motors, Komatsu, Hino Motors, Hitachi Construction Volvo VOLVb.ST Sweden Not Covered Capital Goods Machinery, Toyota Motor, Nissan Motor, Suzuki Motor, Fuji Heavy Industries, Honda Motor Corp. ABB ABBN.VX Switzerland Outperform Capital Goods Fanuc, Nidec, Yaskawa Electric Corp Calsonic Kansei, Keihin, Takata Corp., Tokai Rika, Toyoda Gosei, Georg Fischer FIN.S Switzerland Outperform Capital Goods Toyota Boshoku, Hitachi Metals OC Oerlikon Corp AG OERL.S Switzerland Outperform Capital Goods Panasonic Corp., Nikon Schindler-Holding AG SCHP.VX Switzerland Outperform Capital Goods Hitachi, Toshiba Rieter Holding RIEN.S Switzerland Neutral Capital Goods Toyota Industries Corp Sulzer SUN.VX Switzerland Neutral Capital Goods Ebara Tekfen Holding TKFEN.IS Turkey Outperform Capital Goods JGC, Chiyoda IMI Plc. IMI.L United Kingdom Outperform Capital Goods SMC Fenner FENR.L United Kingdom Neutral Capital Goods Bridgestone Corp Morgan Advanced Materials MGAMM.L United Kingdom Underperform Capital Goods Kyocera Source: Credit Suisse PEERs, Credit Suisse Equity Research

Yen and You 105 01 July 2013

Figure 141: Japanese COMPETITORS to US Stocks Japanese Competitors (those in blue are are 'highly' relevant to Company Ticker Country Rating Sector the US stocks) Calsonic Kansei, Keihin, Takata Corp., Toyoda Gosei, Toyota BorgWarner, Inc. BWA US Neutral Autos Boshoku, Tsubakimoto Chain DELPHI AUTOMOTIVE Plc. DLPH US Outperform Autos Denso, Sumitomo Electric Industries Daihatsu Motor Co., Ltd., Honda Motor Corp., Nissan Motor Co., Ford Motor Co. F US Neutral Autos Toyota Motor Corp. Daihatsu Motor Co., Ltd., Honda Motor Corp., Nissan Motor Co., General Motors Co. GM US Outperform Autos Toyota Motor Corp. Calsonic Kansei, Keihin, Tokai Rika, Toyoda Gosei, Toyota Boshoku, Johnson Controls, Inc. JCI US Outperform Autos Daikin Industries Lear Corp. LEA US Outperform Autos Denso, Toyota Boshoku Calsonic Kansei, Denso, Keihin, Takata Corp., Tokai Rika, Toyoda Magna International, Inc. MGA US Neutral Autos Gosei, Toyota Boshoku Calsonic Kansei, Denso, Keihin, Takata Corp., Tokai Rika, Toyoda Tenneco, Inc. TEN US Outperform Autos Gosei Calsonic Kansei, Keihin, Takata Corp., Tokai Rika, Toyoda Gosei, TRW Automotive Holdings Corp. TRW US Outperform Autos Toyota Boshoku, Toyota Industries Corp., JTEKT Danaher Corp. DHR US Neutral Capital Goods Sysmex Eaton Corp. ETN US Outperform Capital Goods Takata Corp., Toyoda Gosei Emerson EMR US Outperform Capital Goods NEC Toray Industries, Inc., Panasonic Corp., Hitachi, Toshiba, Mitsubishi General Electric GE US Outperform Capital Goods Heavy Industries, Orix Sumitomo Chemical, Teijin, Ube Industries, Hitachi, Daikin Honeywell International, Inc. HON US Neutral Capital Goods Industries, IHI Corp., Mitsubishi Heavy Industries Regal Beloit RBC US Outperform Capital Goods Nidec Rockwell Automation, Inc. ROK US Neutral Capital Goods Mitsubishi Electric United Technologies Corp. UTX US Outperform Capital Goods Mitsubishi Electric, Daikin Industries Fluor FLR US Outperform Capital Goods Kajima Corp., Obayashi Corp., JGC KBR, Inc. KBR US Outperform Capital Goods Chiyoda, JGC Accenture Plc. ACN US Neutral Software & Services NTT Data Corp MetLife, Inc. MET US Outperform Life Insurance Sony Financial Holdings Inc., The Dai-ichi Life Insurance Prudential Financial, Inc. PRU US Outperform Life Insurance Sony Financial Holdings Inc., The Dai-ichi Life Insurance AGCO Corp. AGCO US Neutral Machinery Kubota Allison Transmission ALSN US Neutral Machinery Hino Motors, Ltd., Komatsu Caterpillar, Inc. CAT US Outperform Machinery Toyota Motor Corp., Hitachi Construction Machinery, Komatsu Deere & Co. DE US Outperform Machinery Komatsu, Kubota Paccar, Inc. PCAR US Neutral Machinery Hino Motors, Ltd., Isuzu Motors Ltd Parker Hannifin Corp. PH US Outperform Machinery SMC Terex Corp. TEX US Outperform Machinery Hitachi Construction Machinery, Komatsu United States Steel Group X US Outperform Steel Kobe Steel Source: Credit Suisse PEERs, Credit Suisse Equity Research

Yen and You 106 01 July 2013

Figure 142: Japanese SUPPLIERS to European Stocks Japanese SUPPLIERS (those in blue are are 'highly' relevant to the Company Ticker Country Rating Sector European stocks) Renault RENA.PA France Not Covered Autos Nissan Motor, NTN, Calsonic, Takata Corp, NGK Spark Plug, JTEKT PSA Peugeot Citroen PEUP.PA France Not Covered Autos NGK Spark Plug, JTEKT, NTN, Ibiden BMW BMWG.F Germany Not Covered Autos NGK Spark Plug, Volkswagen VOWG_p.F Germany Not Covered Autos NGK Insulators Daimler DAIGn.DE Germany Not Covered Autos NGK Insulators, Aisin Seiki, NGK Spark Plug, NSK, NTN Ford Otosan FROTO.IS Turkey Neutral Autos Takata Corp Philips PHG.AS Netherlands Neutral Capital Goods Disco Volvo VOLVb.ST Sweden Not Covered Capital Goods NGK Spark Plug IBIDEN, Kyocera, Hirose Electric, Murata Manufacturing, Mitsubishi Nokia NOK1V.HE Finland Underperform Hardware Gas Chemical, , Japan Aviation Electronics Industry, Nissha Printing Alcatel-Lucent ALUA.PA France Neutral Hardware Disco Source: Credit Suisse PEERs, Credit Suisse Equity Research

Figure 143: Japanese SUPPLIERS to US Stocks Japanese SUPPLIERS (those in blue are are 'highly' relevant to Company Ticker Country Rating Sector the European stocks)

General Motors Co. GM US Outperform Autos Tokai Rika, NGK Spark Plug, Toyota Boshoku, NSK, JTEKT, NTN

Johnson Controls, Inc. JCI US Outperform Autos Toyota Motor Corp. TRW Automotive TRW US Outperform Autos Nippon Kayaku NGK Insulators, Denso, NGK Spark Plug, Yamaha Motor Co, Ford Motor Co. F US Neutral Autos NSK, Tsubakimoto Chain, Central Glass, NTN Bombardier Inc (SVS) BBDb.TO Canada Outperform Capital Goods Mitsubishi Heavy Industries Fuji Heavy Industries, Mitsubishi Heavy Industries, Toray Boeing BA US Outperform Capital Goods Industries, Inc., Teijin Caterpillar, Inc. CAT US Outperform Capital Goods NTN Deere & Co. DE US Outperform Capital Goods Denso, NTN United Technologies Corp. UTX US Outperform Capital Goods Mitsubishi Heavy Industries Honeywell International HON US Neutral Capital Goods Disco Activision Blizzard, Inc ATVI US Outperform Internet Nintendo, Sony Advanced Micro Devices AMD US Neutral Semis Shinko Electric Industries, Ibiden, Disco Amkor Technology Inc. AMKR US Outperform Semis IBIDEN, Mitsubishi Gas Chemical, Disco Asahi Kasei, Mitsubishi Gas Chemical, Hitachi Chemical, Toshiba, Toyoda Gosei, Ibiden, Tatsuta Electric Wire & Cable, Apple Inc AAPL US Outperform Hardware Dai-Ichi Seiko, Sharp Corp, Murata Manufacturing, Nissha Printing Applied Materials Inc. AMAT US Neutral Semis Ngk Insulators, SMC Electronic Arts, Inc EA US Neutral Internet Nintendo First Solar FSLR US Neutral Clean Tech NSG Group Hewlett Packard HPQ US Neutral Hardware Canon, Nippon Kayaku, Wacom, Nissha Printing Nikon, IBIDEN, Shinko Electric Industries, Disco, Advantest, Intel Corp. INTC US Outperform Semis Tokyo Electron IBM IBM US Neutral Hardware Disco, Tokyo Electron, Kyocera Jinko Solar JKS US Neutral Clean Tech Komatsu Lexmark International LXK US Underperform Hardware Fujitsu Maxim Integrated Products MXIM US Neutral Semis Seiko Epson Micron Technology Inc. MU US Outperform Semis Advantest, Disco, Hitachi Kokusai Electric Oracle Corporation ORCL US Outperform Software Fujitsu Research In Motion Limited BBRY Canada Underperform Hardware Japan Aviation Electronics Industry, Nissha Printing SanDisk Corp. SNDK US Outperform Semis Toshiba, Disco Take-Two Interactive TTWO US Neutral Internet Sony Texas Instruments Inc. TXN US Neutral Semis Disco Xerox XRX US Neutral Hardware Disco Xilinx XLNX US Outperform Semis Seiko Epson Source: Credit Suisse PEERs, Credit Suisse Equity Research

Yen and You 107 01 July 2013

Figure 144: Japanese SUPPLIERS to Asia-Pacific Stocks Japanese SUPPLIERS (those in blue are are 'highly' relevant Company Ticker Country Rating Sector to the European stocks) Brilliance China Automotive 1114.HK China Outperform Autos Takata Corp. Dongfeng Motors Group Co 0489.HK China Outperform Autos Takata Corp., Calsonic Kansei Great Wall Motor 2333.HK China Outperform Autos Takata Corp. BYD Company Limited 1211.HK China Neutral Autos Takata Corp., Stella Chemifa Geely Automobile Holdings 0175.HK China Neutral Autos Takata Corp. Honda Motor Corp, Calsonic Kansei, Toyota Motor Corp, Guangzhou Automobile 2238.HK China Underperform Autos Takata Maruti Suzuki India Ltd. MRTI.BO India Outperform Autos Calsonic Kansei, Suzuki Motor Corp, Takata Hero Motocorp Ltd. HROM.BO India Neutral Autos Honda Motor Corp. Astra International ASII.JK Indonesia Outperform Autos Toyota Motor Corp. Tan Chong Motor Holding TNCS.KL Malaysia Underperform Autos Nissan Motor Co. Hyundai Motor 005380.KS South Korea Outperform Autos Takata Corp., Calsonic Kansei, NGK Insulators Kia Motors 000270.KS South Korea Outperform Autos Takata Corp., Calsonic Kansei Ashok Leyland Ltd. ASOK.BO India Neutral Capital Goods Takata Corp. LG Electronics, Inc. 066570.KS South Korea Neutral Consumer Nissha Printing, Hirose Electric Evergreen Marine 2603.TW Taiwan Underperform Transportation Mitsubishi Heavy Industries Acer Group 2353.TW Taiwan Underperform Hardware Wacom Advanced Semicon. Engr. 2311.TW Taiwan Outperform Semis Shinko Electric Industries AU Optronics 2409.TW Taiwan Outperform Hardware Nippon Electric Glass, Sumitomo Chemical Catcher Technology 2474.TW Taiwan Outperform Hardware Brother Industries G-Tech 3149.TW Taiwan Neutral Hardware Asahi Glass Innolux Corporation 3481.TW Taiwan Outperform Hardware Mitsubishi Electric Lg Display Co Ltd. 034220.KS South Korea Outperform Hardware Zeon Samsung Electronics 005930.KS South Korea Outperform Semis Jsr, Asahi Glass, Tatsuta Electric Wire & Cable Seoul Semiconductor Co Ltd 046890.KQ South Korea Underperform Semis Toyoda Gosei Siliconware Precision 2325.TW Taiwan Outperform Semis Shinko Electric Industries Taiwan Semi 2330.TW Taiwan Outperform Semis Tokyo Electron, Dainippon Screen Mfg. TPK Holdings 3673.TW Taiwan Outperform Hardware Asahi Glass Unimicron Technology Corp 3037.TW Taiwan Neutral Hardware Mitsubishi Gas Chemical United Microelectronics 2303.TW Taiwan Neutral Semis Shin-Etsu Chemical, Tokyo Electron WPG Holdings Ltd 3702.TW Taiwan Neutral Hardware Sharp Corp. Source: Credit Suisse PEERs, Credit Suisse Equity Research

Yen and You 108 01 July 2013

Figure 145: Japanese stocks and their global Underperform-rated COMPETITORS Japanese company Non-Japanese competitor

Ticker Name Recommendation Coverage Ticker Name Recommendation Coverage Relevance

6448.T Brother Industries Outperform Precision LXK Lexmark International Underperform IT / Telecom Equipment Moderate 7248 Calsonic Kansei Neutral Auto SKFb.ST SKF Underperform Capital Goods Moderate 7751.T Canon Outperform Precision LXK Lexmark International Underperform IT / Telecom Equipment High 6902 Denso Outperform Auto SKFb.ST SKF Underperform Capital Goods Moderate 7205 Hino Motors, Ltd. Neutral Capital Goods VOLVb.ST Volvo Underperform Capital Goods High 6501 Hitachi Neutral Tech Hardware SAND.ST Sandvik Underperform Capital Goods Moderate 6305 Hitachi Construction Neutral Industrials 000528.SZ Guangxi Liugong Underperform Industrials Moderate 6305 Hitachi Construction Neutral Industrials 3339.HK Lonking Holdings Ltd. Underperform Industrials Moderate 6305 Hitachi Construction Neutral Industrials 600031.SS Sany Heavy Industry Underperform Industrials Moderate 6305 Hitachi Construction Neutral Capital Goods VOLVb.ST Volvo Underperform Capital Goods High 7267 Honda Motor Corp. Neutral Auto 2238.HK Guangzhou Auto Underperform Auto Moderate 7202 Isuzu Motors Ltd. Outperform Autos VOLVb.ST Volvo Underperform Capital Goods High 5411 JFE Holdings Outperform Materials 004020.KS Hyundai Steel Co. Underperform Steel Moderate 1963 JGC Outperform Industrials 047040.KS Daewoo E&C Underperform Industrials Moderate 1812 Kajima Corp. Underperform Industrials 047040.KS Daewoo E&C Underperform Industrials Moderate 7251 Keihin Neutral Auto SKFb.ST SKF Underperform Capital Goods Moderate 5406 Kobe Steel Underperform Materials 004020.KS Hyundai Steel Co. Underperform Steel Moderate 6301 Komatsu Outperform Industrials 000528.SZ Guangxi Liugong Underperform Industrials Moderate 6301 Komatsu Outperform Capital Goods VOLVb.ST Volvo Underperform Capital Goods High 4902 Konica Minolta , INC. Neutral Tech Hardware LXK Lexmark International Underperform Tech Hardware Moderate 7261 Mazda Motor Corp. Neutral Auto 2238.HK Guangzhou Auto Underperform Auto Moderate 6503.T Mitsubishi Electric Neutral Machinery FCS Fairchild Semi Underperform Semiconductors High 6701 NEC Neutral Tech Hardware NOK1V.HE Nokia Underperform Tech Hardware Moderate 5401 Nippon Steel & Sumitomo Outperform Materials 004020.KS Hyundai Steel Co. Underperform Steel Moderate 5401 Nippon Steel & Sumitomo Outperform Materials 2002.TW China Steel Underperform Steel Moderate 7201 Nissan Motor Co. Outperform Autops FIA.MI Fiat Underperform Autos High 6471 NSK Outperform Capital Goods SKFb.ST SKF Underperform Capital Goods High 6472 NTN Underperform Capital Goods SKFb.ST SKF Underperform Capital Goods High 1802 Obayashi Corp. Neutral Industrials 047040.KS Daewoo E&C Underperform Industrials Moderate 7752.T Ricoh Outperform Precision LXK Lexmark International Underperform IT / Telecom Equipment Moderate 6724 Seiko Epson Outperform Tech Hardware LXK Lexmark International Underperform Tech Hardware High 6724.T Seiko Epson Corp. Outperform Precision LXK Lexmark International Underperform IT / Telecom Equipment High 1803 Shimizu Corp. Neutral Capital Goods BOUY.PA Bouygues Underperform Capital Goods Moderate 1803 Shimizu Corp. Neutral Industrials 047040.KS Daewoo E&C Underperform Industrials Moderate 5713 Sumitomo Metal Mining Neutral Materials SAND.ST Sandvik Underperform Capital Goods High 7269 Suzuki Motor Corp. Neutral Auto 2238.HK Guangzhou Auto Underperform Auto Moderate 1801 Taisei Corporation Outperform Industrials 047040.KS Daewoo E&C Underperform Industrials Moderate 7312 Takata Corp. Neutral Auto SKFb.ST SKF Underperform Capital Goods Moderate 6481 THK Outperform Capital Goods SKFb.ST SKF Underperform Capital Goods High 6995 Tokai Rika Neutral Auto SKFb.ST SKF Underperform Capital Goods Moderate 6502 Toshiba Outperform Tech Hardware SAND.ST Sandvik Underperform Capital Goods Moderate 6502 Toshiba Outperform Tech Hardware 2353.TW Acer Group Underperform Tech Hardware Moderate 7282 Toyoda Gosei Neutral Auto SKFb.ST SKF Underperform Capital Goods Moderate 3116 Toyota Boshoku Underperform Auto SKFb.ST SKF Underperform Capital Goods Moderate 7203 Toyota Motor Corp. Outperform Auto 2238.HK Guangzhou Auto Underperform Auto Moderate Source: Credit Suisse PEERs, Credit Suisse Equity Research

Yen and You 109 01 July 2013 Appendix 2 – FX forecasts

Figure 146: FX Strategy Forecasts Major Currencies vs. USD EURUSD USDJPY GBPUSD USDCHF USDCAD AUDUSD NZDUSD USDSEK USDNOK 3m 1.33 105 1.494 0.925 1.015 0.980 0.784 6.165 5.489 12m 1.40 120 1.538 0.907 1.000 0.920 0.754 5.857 5.138 vs. EUR EURJPY EURGBP EURCHF EURCAD EURAUD EURNZD EURSEK EURNOK 3m 139.65 0.890 1.230 1.350 1.357 1.696 8.200 7.300 12m 168.00 0.910 1.270 1.400 1.522 1.857 8.200 7.193 Source: Credit Suisse FX Strategy Research estimates

Figure 147: FX Strategy Forecasts Emerging Currencies vs. USD USDCNY USDHKD USDINR USDIDR USDKRW USDMYR USDPHP USDSGD USDTHB 3m 6.14 7.75 54.30 10200 1130 2.970 41.70 1.260 29.40 12m 6.05 7.75 55.50 10350 1200 2.950 40.80 1.265 30.00 vs. USD USDTWD USDTRY USDBRL USDMXN USDHUF USDPLN 3m 30.30 1.777 1.930 11.90 233.1 3.045 12m 30.80 1.750 2.000 11.50 214.3 2.857 Source: Credit Suisse FX Strategy Research estimates

Yen and You 110 01 July 2013

Macro Research Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify that with respect to companies or securities that the individual analyst covers the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and 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.

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- andanalytics/disclaimer/managing_conflicts_disclaimer.html.

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

Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report.

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.

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that.

Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.creditsuisse.com/researchdisclosures or call +1 (877) 291-2683 for Credit Suisse Equity Research disclosures and visit the website at https://firesearchdisclosure.credit-suisse.com or call +1 (212) 538-7625 for Credit Suisse Fixed Income Research disclosures..

Disclosures and disclaimers continue on next page.

Yen and You 111 01 July 2013

Companies Mentioned (Price as of 27-Jun-2013) China Airlines (2610.TW, NT$11.2) China CNR Corporation Limited (601299.SS, Rmb3.89) AAC Technologies Holdings Inc (2018.HK, HK$42.05) China Eastern Airlines (0670.HK, HK$2.36) ABB (ABB.ST, Skr146.1) China Southern Airlines (1055.HK, HK$3.04) Abercrombie & Fitch Co. (ANF.N, $45.26) China Steel (2002.TW, NT$23.8) Accenture Plc (ACN.N, $80.22) China XD (601179.SS, Rmb3.14) Acer Group (2353.TW, NT$21.4) Chipbond (6147.TWO, NT$73.5) Acerinox (ACX.MC, €7.1) Chiyoda Corporation (6366.T, ¥1,133) Activision Blizzard, Inc (ATVI.OQ, $14.04) Citizen Holdings (7762.T, ¥537) Adidas AG (ADSGn.F, €83.7) Cliffs Natural Resources (CLF.N, $16.25) ADT Corporation (ADT.N, $40.35) Compal Electronics (2324.TW, NT$16.6) Advanced Micro Devices, Inc. (AMD.N, $4.08) Companhia Siderurgica Nacional (CSNA3.SA, R$6.18) Advanced Semicon. Engr. (2311.TW, NT$25.0) Continental (CONG.DE, €102.85) Advantest (6857.T, ¥1,643) Copa Holdings (CPA.N, $133.51) Aflac Inc (AFL.N, $58.2) CSR Corporation Limited (1766.HK, HK$4.5) AGCO Corp (AGCO.N, $51.31) Cummins Inc. (CMI.N, $108.51) Aggreko (AGGK.L, 1660.0p) Cummins India (CUMM.BO, Rs447.7) Air Berlin (AB1.DE, €1.9) Cypress Semiconductor Corp. (CY.OQ, $10.58) Air China (0753.HK, HK$5.4) Daelim Industrial (000210.KS, W84,000) Air France-KLM (AIRF.PA, €7.09) Daewoo E&C (047040.KS, W6,970) AirAsia (AIRA.KL, RM3.08) Daewoo Shipbuilding & Marine Engineering (042660.KS, W24,350) Aisin Seiki (7259.T, ¥3,640) Daido Steel (5471.T, ¥482) Aisino Co., Ltd (600271.SS, Rmb12.89) Daihatsu Motor (7262.T, ¥1,859) Alcatel-Lucent (ALU.N, $1.85) Dai-ichi Seiko (6640.T, ¥1,265) Alfa Laval (ALFA.ST, Skr138.0) Daikin Industries (6367.T, ¥3,895) Allianz SE (ALVG.DE, €112.35) Daimler (DAIGn.DE, €46.54) Allison Transmission (ALSN.N, $23.24) Dainippon Screen Mfg. (7735.T, ¥503) Alstom (ALSO.PA, €25.53) Danaher Corporation (DHR.N, $63.64) Altera Corp. (ALTR.OQ, $33.03) Deere & Co. (DE.N, $82.95) Amada (6113.T, ¥644) Dell Inc. (DELL.OQ, $13.34) American Axle & Manufacturing Holdings Inc. (AXL.N, $18.41) DELPHI Automotive PLC (DLPH.N, $51.0) Amkor Technology Inc. (AMKR.OQ, $4.18) Delta Electronics (2308.TW, NT$135.5) Analog Devices Inc. (ADI.OQ, $45.37) Demag Cranes (D9CGn.DE^F12, €51.2) Angang Steel Company Ltd (0347.HK, HK$3.9) Demag Cranes (D9CGn.DE^F12, €51.2) Anritsu (6754.T, ¥1,155) Demag Cranes (D9CGn.DE^F12, €51.2) Apple Inc (AAPL.OQ, $393.78) Denso (6902.T, ¥4,505) Applied Materials Inc. (AMAT.OQ, $14.91) Deutsche Lufthansa (LHAG.DE, €15.58) ArcelorMittal (MT.N, $11.35) Digital China Holdings Limited (0861.HK, HK$9.19) ARM Holdings (ARM.L, 803.5p) DISCO (6146.T, ¥6,590) Asahi Glass (5201.T, ¥634) Donaldson Company, Inc. (DCI.N, $35.8) Ashok Leyland Ltd (ASOK.BO, Rs19.8) Dongfang Elec (600875.SS, Rmb10.24) Asia Aviation (AAV.BK, Bt5.3) Dongfang Electric Corp (1072.HK, HK$10.3) Asiana Airlines (020560.KS, W5,080) Dongfeng Motors Group Co Ltd (0489.HK, HK$10.26) Asics (7936.T, ¥1,513) Doosan Heavy Industries & Construction (034020.KS, W41,000) ASML Holding N.V. (ASML.AS, €60.0) Dover Corporation (DOV.N, $78.04) Assa Abloy (ASSAb.ST, Skr265.7) EasyJet (EZJ.L, 1295.0p) Astra International (ASII.JK, Rp6,700) Eaton Corporation (ETN.N, $65.22) Asustek (2357.TW, NT$272.5) Ebara (6361.T, ¥516) Atlas Copco (ATCOa.ST, Skr162.7) Electrocomponents (ECM.L, 245.6p) AU Optronics (2409.TW, NT$10.7) Electrolux (ELUXb.ST, Skr169.7) Autoliv Inc (ALV.N, $76.77) Electronic Arts, Inc (EA.OQ, $22.21) Avago Technologies Ltd. (AVGO.OQ, $37.32) Elpida Memory (6665.T^C12, ¥1) AXA (AXAF.PA, €15.16) Elpida Memory (6665.T^C12, ¥1) Bajaj Auto Limited (BAJA.BO, Rs1836.9) Elpida Memory (6665.T^C12, ¥1) Baosteel (600019.SS, Rmb3.92) Emerson (EMR.N, $55.39) Barloworld (BAWJ.J, R79.0) Empresas ICA (ICA.MX, $24.12) Bharat Heavy Electricals (BHEL.BO, Rs163.05) Enka Insaat (ENKAI.IS, TL4.72) BlueScope Steel (BSL.AX, A$4.67) Epistar Corporation (2448.TW, NT$51.9) BMW (BMWG.F, €67.46) ERDEMIR (EREGL.IS, TL1.98) Bodycote Plc (BOY.L, 525.5p) Ericsson (ERICb.ST, Skr77.15) Boeing (BA.N, $103.15) EVA Air (2618.TW, NT$16.95) Bombardier Inc (SVS) (BBDb.TO, C$4.66) Evergreen Marine (2603.TW, NT$16.5) BorgWarner, Inc. (BWA.N, $86.43) Evraz (EVRE.L, 97.05p) Bosch Limited (BOSH.BO, Rs8663.05) Exxaro Resources (EXXJ.J, R141.57) Bouygues (BOUY.PA, €19.85) Fairchild Semiconductor International Inc. (FCS.N, $13.79) Bradken Limited (BKN.AX, A$4.38) Fanuc (6954.T, ¥14,000) Bridgestone (5108.T, ¥3,260) Fast Retailing (9983.T, ¥31,500) Brilliance China Automotive Holding (1114.HK, HK$8.4) Fenner (FENR.L, 316.6p) British American Tobacco (BATS.L, 3439.0p) Fiat (FIA.MI, €5.52) Broadcom Corp. (BRCM.OQ, $33.61) Fiat Industrial (FI.MI, €8.72) Brother Industries (6448.T, ¥1,089) First Solar (FSLR.OQ, $44.5) Bucher Industries (BUCN.S, SFr226.9) Flowserve Corp. (FLS.N, $54.52) BYD Co Ltd (1211.HK, HK$25.45) Fluor (FLR.N, $59.73) Calsonic Kansei (7248.T, ¥383) Ford Motor Co. (F.N, $15.65) Canon (7751.T, ¥3,220) Ford Otosan (FROTO.IS, TL25.5) Casio (6952.T, ¥838) Fortescue Metals Group Ltd (FMG.AX, A$3.1) Catcher Technology (2474.TW, NT$154.0) Foster Wheeler (FWLT.OQ, $22.36) Caterpillar Inc. (CAT.N, $82.96) Foxconn Technology Corp (2354.TW, NT$71.4) Cathay Pacific (0293.HK, HK$13.22) Freescale Semiconductor Inc. (FSL.N, $14.0) Cebu Pacific (CEB.PS, P67.3) Fuji Heavy Industries (7270.T, ¥2,329) Central Glass (4044.T, ¥302) Fujifilm Holdings (4901.T, ¥2,127) Cheng Shin Rubber (2105.TW, NT$91.1) Fujitsu (6702.T, ¥401) Chicago Bridge & Iron (CBI.N, $59.72) Gamuda (GAMU.KL, RM4.56) Chicony (2385.TW, NT$82.3) Gardner Denver, Inc. (GDI.N, $75.2)

Yen and You 112 01 July 2013

Geberit (GEBN.VX, SFr231.2) Lam Research Corp. (LRCX.OQ, $44.84) Geely Automobile Holdings Ltd (0175.HK, HK$3.3) Largan Precision (3008.TW, NT$932.0) Gemalto (GTO.AS, €70.05) Larsen & Toubro (LART.BO, Rs1350.35) General Electric (GE.N, $23.32) LATAM Airlines (LFL.N, $16.37) General Motors Corp. (GM.N, $33.1) Lear Corp (LEA.N, $59.45) Georg Fischer (FIN.S, SFr417.75) Legrand SA (LEGD.PA, €35.52) Gerdau (GGBR4.SA, R$12.71) Leighton Holdings (LEI.AX, A$15.8) GKN (GKN.L, 302.7p) Lenovo Group Ltd (0992.HK, HK$7.02) Gol Linhas Aerea (GOLL4.SA, R$7.41) Lexmark International (LXK.N, $30.54) Great Wall Motor (2333.HK, HK$33.0) LG Chem Ltd. (051910.KS, W242,500) GS E&C (006360.KS, W27,450) LG Display Co Ltd. (034220.KS, W27,350) GS Yuasa (6674.T, ¥396) LG Electronics Inc (066570.KS, W72,900) G-Tech (3149.TW, NT$54.7) LG Innotek (011070.KS, W90,600) Guangxi Liugong Machinery (000528.SZ, Rmb6.44) Linear Technology Corp. (LLTC.OQ, $36.78) Guangzhou Automobile Group (2238.HK, HK$7.21) Lite-On Technology (2301.TW, NT$51.4) Halma (HLMA.L, 512.5p) Lonking Holdings Ltd. (3339.HK, HK$1.53) Harman International Industries (HAR.N, $53.62) Lonmin Plc (LMI.L, 256.9p) HASEKO Corporation (1808.T, ¥116) Maanshan Iron & Steel Co Ltd (0323.HK, HK$1.75) Hero Motocorp Ltd (HROM.BO, Rs1652.65) Magna International (MGA.N, $70.58) Hewlett Packard (HPQ.N, $24.77) Magnitogorsk Steel (MAGNq.L, $2.97) Hino Motors (7205.T, ¥1,420) Mahindra & Mahindra (MAHM.BO, Rs934.25) Hirose Electric (6806.T, ¥12,740) Makita (6586.T, ¥5,320) Hitachi (6501.T, ¥621) Malaysia Airlines (MASM.KL, RM0.3) Hitachi Construction Machinery (6305.T, ¥1,981) MAN (MANG.DE, €84.2) Hitachi Metals (5486.T, ¥1,089) Mando Corp (060980.KS, W102,500) Hiwin (2049.TW, NT$180.0) Marcopolo (POMO4.SA, R$12.65) Hon Hai Precision (2317.TW, NT$73.0) Maruichi Steel Tube (5463.T, ¥2,477) Honda Motor (7267.T, ¥3,605) Maruti Suzuki India Ltd (MRTI.BO, Rs1521.6) Honeywell International Inc. (HON.N, $80.2) Marvell Technology Group Ltd. (MRVL.OQ, $11.83) HTC Corp (2498.TW, NT$240.5) Maxim Integrated Products (MXIM.OQ, $27.97) Hyundai Development (012630.KS, W24,150) Mazda Motor (7261.T, ¥374) Hyundai E&C (000720.KS, W55,000) McDermott International (MDR.N, $8.4) Hyundai Heavy Industries (009540.KS, W179,500) Mechel (MTL.N, $2.9) Hyundai Hysco (010520.KS, W33,000) Mellanox Technologies Ltd. (MLNX.OQ, $49.12) Hyundai Mobis (012330.KS, W275,000) MetLife, Inc. (MET.N, $46.1) Hyundai Motor (005380.KS, W218,000) Metso (MEO1V.HE, €26.71) Hyundai Steel Co. (004020.KS, W63,800) Michael Hill (MHI.NZ, NZ$1.3) Hyundai Wia Corp. (011210.KS, W164,000) Michelin (MICP.PA, €70.14) IBIDEN (4062.T, ¥1,489) Microchip Technology Inc. (MCHP.OQ, $37.09) IHI (7013.T, ¥368) Micron Technology Inc. (MU.OQ, $14.34) IJM Corporation Berhad (IJMS.KL, RM5.56) Mills (MILS3.SA, R$30.25) Illinois Tool Works, Inc. (ITW.N, $69.79) Mitsubishi Electric (6503.T, ¥928) IMI Plc (IMI.L, 1262.0p) Mitsubishi Heavy Industries (7011.T, ¥534) Imperial Tobacco (IMT.L, 2308.0p) (6767.T, ¥664) Industrias CH S.A.B. de C.V. (ICHB.MX, $79.3) Moby Oil & Gas (MOG.AX, A$0.0050) Ingersoll-Rand Plc (IR.N, $55.49) Moog (MOGa.N, $51.43) Innolux Corporation (3481.TW, NT$14.9) Morgan Advanced Materials (MGAMM.L, 265.9p) Intel Corp. (INTC.OQ, $24.05) Mori Seiki (6141.OS, ¥1,080) International Airlines Group (ICAG.L, 263.7p) Motorola Solutions (MSI.N, $57.84) International Business Machines Corp. (IBM.N, $195.65) Mstar Semiconductor (3697.TW, NT$213.5) Invensys (ISYS.L, 418.0p) Murata Manufacturing (6981.OS, ¥7,130) Isuzu Motors (7202.T, ¥667) Nabtesco Corporation (6268.T, ¥2,064) Jacobs Engineering (JEC.N, $55.7) Nachi-Fujikoshi (6474.T, ¥429) Japan Tobacco (2914.T, ¥3,430) Nan Ya Printed Circuit Board (8046.TW, NT$39.1) JFE Holdings (5411.T, ¥2,110) Nanya Technology (2408.TW, NT$6.0) JGC Corporation (1963.T, ¥3,430) NEC (6701.T, ¥206) Jindal Steel & Power Ltd (JNSP.BO, Rs201.4) NetApp (NTAP.OQ, $37.96) Jinko Solar (JKS.N, $9.12) Nexans (NEXS.PA, €37.5) Johnson Controls (JCI.N, $36.03) NEXON (3659.T, ¥1,016) Johnson Electric Hdg. (0179.HK, HK$4.81) NGK Spark Plug (5334.T, ¥1,948) JSW Steel Ltd (JSTL.BO, Rs643.1) Nichias (5393.T, ¥612) JTEKT (6473.T, ¥1,090) Nidec (6594.OS, ¥6,670) Kajima Corporation (1812.T, ¥323) Nike Inc. (NKE.N, $62.32) KAR Auction Services, Inc. (KAR.N, $23.25) Nikon (7731.T, ¥2,300) Kawasaki Heavy Industries (7012.T, ¥295) Nintendo (7974.OS, ¥10,940) KBR Inc. (KBR.N, $32.65) Nippon Electric Glass (5214.T, ¥471) KDDI (9433.T, ¥4,940) Nippon Steel & Sumitomo Metal (5401.T, ¥257) Keihin (7251.T, ¥1,448) Nissan Motor (7201.T, ¥971) Kennametal Inc. (KMT.N, $39.52) Nokia (NOK1V.HE, €2.96) KeYence (6861.T, ¥31,150) Novatek Microelectronics Corp Ltd (3034.TW, NT$139.5) Kia Motors (000270.KS, W61,100) NSK (6471.T, ¥924) Kinsus Interconnect Tech (3189.TW, NT$114.0) NTN (6472.T, ¥298) KLA-Tencor Corp. (KLAC.OQ, $55.57) NTT DoCoMo (9437.T, ¥145,800) Kobe Steel (5406.T, ¥120) Nucor (NUE.N, $44.08) Komatsu (6301.T, ¥2,225) NXP Semiconductors N.V. (NXPI.OQ, $31.12) Kone Corporation (KNEBV.HE, €60.75) Obayashi Corporation (1802.T, ¥509) Kongsberg Grupp (KOG.OL, Nkr111.0) OC Oerlikon Corp AG (OERL.S, SFr11.25) Konica Minolta , INC. (4902.T, ¥735) Okuma Corporation (6103.T, ¥720) Korean Air (003490.KS, W29,850) Olympus Corporation (7733.T, ¥2,963) Kubota (6326.T, ¥1,385) ON Semiconductor Corp. (ONNN.OQ, $7.98) Kuku (KU2G.DE, €33.35) Oracle Corporation (ORCL.OQ, $30.45) Kulicke & Soffa (KLIC.OQ, $11.02) Oshkosh Corporation (OSK.N, $37.84) Kyocera (6971.T, ¥9,760) Outokumpu (OUT1V.HE, €0.51) Labrador Iron Ore Royalty Corporation (LIF.TO, C$28.83) Paccar Inc (PCAR.OQ, $53.63)

Yen and You 113 01 July 2013

Pall Corporation (PLL.N, $66.19) Stanley Black & Decker, Inc. (SWK.N, $78.12) Panasonic Corporation (6752.T, ¥747) Steel Authority of India Ltd (SAIL.BO, Rs48.55) Parker Hannifin Corporation (PH.N, $96.37) STX (011810.KS, W1,545) Pegatron (4938.TW, NT$49.75) Sulzer (SUN.VX, SFr151.5) Pentair, Inc. (PNR.N, $58.45) SUMCO (3436.T, ¥1,075) Philip Morris International (PM.N, $87.78) Sumitomo Metal Mining (5713.T, ¥1,098) Philips (PHG.AS, €21.2) Sumitomo Rubber Industries (5110.T, ¥1,569) Phillips-Van Heusen (PVH.N, $125.01) Superior Industries, Intl. (SUP.N, $17.57) Pinggao Electric (600312.SS, Rmb9.12) Suzuki Motor (7269.T, ¥2,214) Porsche (PSHG_p.F, €59.14) Swatch Group (UHR.VX, SFr511.5) POSCO (005490.KS, W294,000) Synnex Technology International Corp (2347.TW, NT$38.8) Prudential (PRU.L, 1088.0p) Taisei Corporation (1801.T, ¥354) Prysmian (PRY.MI, €14.8) Taiwan Semiconductor Manufacturing (2330.TW, NT$104.5) PSA Peugeot Citroen (PEUP.PA, €6.5) Taiyo Yuden (6976.T, ¥1,433) PT Garuda Indonesia Tbk (GIAA.JK, Rp500) Takata Corporation (7312.T, ¥2,066) Qantas (QAN.AX, A$1.34) Take-Two Interactive Software Inc. (TTWO.OQ, $14.57) QUALCOMM Inc. (QCOM.OQ, $61.08) Tan Chong Motor Holding (TNCS.KL, RM6.42) Quanta Computer (2382.TW, NT$64.3) Tata Motors Ltd. (TAMO.BO, Rs269.5) Quanta Services (PWR.N, $26.7) Tata Steel Ltd (TISC.BO, Rs264.25) Radiant Opto-Electronics (6176.TW, NT$96.8) TBEA Co Ltd (600089.SS, Rmb8.0) Rakuten (4755.OS, ¥1,138) TCL Multimedia (1070.HK, HK$4.69) Ralph Lauren (RL.N, $173.65) TDK (6762.T, ¥3,340) Regal Beloit (RBC.N, $65.59) Technip (TECF.PA, €79.0) Reliance Steel & Aluminum (RS.N, $65.66) Teco (1504.TW, NT$28.45) Renault (RENA.PA, €52.92) Tekfen Holding (TKFEN.IS, TL6.6) Renishaw (RSW.L, 1598.0p) Tenaris (TENR.MI, €15.52) Research In Motion Limited (BBRY.OQ, $14.48) Teradyne Inc. (TER.N, $17.43) Rexnord Corporation (RXN.N, $17.47) Terex Corporation (TEX.N, $26.93) Ricoh (7752.T, ¥1,160) Ternium (TX.N, $22.05) Rieter Holding (RIEN.S, SFr146.0) Texas Instruments Inc. (TXN.OQ, $34.85) Robinsons Land Corporation (RLC.PS, P21.35) Textron (TXT.N, $26.38) Rockwell Automation (ROK.N, $84.21) Thai Airways International (THAI.BK, Bt25.25) Rotork plc (ROR.L, 2709.0p) THK (6481.T, ¥1,979) Ryanair (RYA.I, €7.12) Thyssen Krupp AG (TKAG.F, €14.59) Saint-Gobain (SGOB.PA, €31.43) Tianwei Baobian (600550.SS, Rmb5.55) Saipem (SPMI.MI, €12.7) Tiger Airways (TAHL.SI, S$0.62) Salzgitter (SZGG.DE, €25.58) Timken (TKR.N, $56.52) Samsung Electro-Mechanics (009150.KS, W86,800) TMK (TRMKq.L, $11.5) Samsung Electronics (005930.KS, W1,339,000) Tofas (TOASO.IS, TL12.15) Samsung Engineering Co Ltd (028050.KS, W74,700) Tokyo Electron (8035.T, ¥4,840) Samsung SDI (006400.KS, W136,000) Toshiba (6502.T, ¥468) SanDisk Corp. (SNDK.OQ, $60.47) Toshiba Tec (6588.T, ¥522) Sandvik (SAND.ST, Skr81.95) Toyoda Gosei (7282.T, ¥2,347) Sany Heavy Industry (600031.SS, Rmb7.45) Toyota Boshoku (3116.T, ¥1,369) Scania (SCVb.ST, Skr137.1) Toyota Industries (6201.T, ¥4,020) Schindler-Holding AG (SCHP.VX, SFr130.9) Toyota Motor (7203.T, ¥5,900) Schneider (SCHN.PA, €56.89) TPG Telecom (TPM.AX, A$3.55) Seagate Technology, Inc. (STX.OQ, $44.69) TPK Holdings (3673.TW, NT$492.0) Seiko Epson (6724.T, ¥1,367) Truly International (0732.HK, HK$3.76) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.56) TRW Automotive Holdings Corp. (TRW.N, $66.01) Seoul Semiconductor Co Ltd (046890.KQ, W33,450) Tsubakimoto Chain (6371.T, ¥566) Severstal (CHMFq.L, $6.25) Tyco International, Ltd (TYC.N, $32.88) Shanghai Electric Group Co., Ltd. (2727.HK, HK$2.57) Umicore (UMI.BR, €32.66) Sharp Corp. (6753.T, ¥370) Under Armour, Inc. (UA.N, $58.46) Shimizu Corporation (1803.T, ¥387) Unicharm (8113.T, ¥5,560) Shin-Etsu Chemical (4063.T, ¥6,420) Unimicron Technology Corp (3037.TW, NT$28.65) Shinko Electric Industries (6967.T, ¥1,145) United Microelectronics (2303.TW, NT$14.45) Siemens (SIEGn.DE, €77.57) United States Steel Group (X.N, $18.06) Siliconware Precision (2325.TW, NT$37.5) United Technologies Corp (UTX.N, $93.51) Singapore Airlines (SIAL.SI, S$9.9) United Tractors (UNTR.JK, Rp17,200) SK Hynix Inc. (000660.KS, W30,650) Urban Outfitters (URBN.OQ, $40.34) SKF (SKFb.ST, Skr160.2) Urban Outfitters (URBN.OQ, $40.34) Skyworth Digital (0751.HK, HK$3.89) URS Corporation (URS.N, $47.49) SMC (6273.T, ¥19,130) USI Corp (1304.TW, NT$21.3) Smiles (SMLE3.SA, R$25.0) Usiminas (USIM5.SA, R$7.96) Smiths Group (SMIN.L, 1319.0p) Vallourec (VLLP.PA, €39.76) Sony (6758.T, ¥2,035) Valmont Industries (VMI.N, $142.7) Sony Financial Holdings (8729.T, ¥1,535) Vanguard International Semiconductor (5347.TWO, NT$33.95) Spectris (SXS.L, 1958.0p) Venture Corporation (VENM.SI, S$7.23) Spirax Sarco (SPX.L, 2703.0p) Vesuvius (VSVS.L, 366.6p) SPX (SPW.N, $73.6) Virgin Australia (VAH.AX, A$0.41) SSAB (SSABa.ST, Skr40.79) Voestalpine (VOES.VI, €27.35) Volkswagen (VOWG_p.F, €155.99) Volvo (VOLVb.ST, Skr91.3) Wacom (6727.T, ¥1,070) Walsin Tech (2492.TW, NT$7.6) WEG (WEGE3.SA, R$28.0) Weir Group (WEIR.L, 2202.0p) Wistron (3231.TW, NT$30.0) Worthington Industries (WOR.N, $32.36) WPG Holdings Ltd (3702.TW, NT$35.0) Xerox (XRX.N, $9.18) Xilinx (XLNX.OQ, $39.61)

Yen and You 114 01 July 2013

Xinjiang Goldwind Science&Technology (2208.HK, HK$5.29) Yageo (2327.TW, NT$10.1) Yamaha Motor (7272.T, ¥1,279) Yamato Kogyo (5444.T, ¥2,976) Yaskawa Electric Corporation (6506.T, ¥1,154) Yokogawa Elec (6841.T, ¥1,133) Zhongsheng Group Holdings (0881.HK, HK$8.26) Zhuzhou CSR Times Electric Co. Ltd. (3898.HK, HK$18.78) Zoomlion Heavy Industry (1157.HK, HK$5.36) ZTE Corporation (0763.HK, HK$12.56)

Equity Research 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. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all 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. 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 repre senting 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 definition, 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. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

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

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

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

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (53% banking clients) Neutral/Hold* 40% (50% banking clients) Underperform/Sell* 15% (38% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, 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 individual factors.

Yen and You 115 01 July 2013

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

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 (VMI.N, 2914.T, ASSAb.ST, GGBR4.SA, CSNA3.SA, URBN.OQ, FLR.N, 3037.TW, SUN.VX, 5486.T, AXL.N, TX.N, DOV.N, MLNX.OQ, DHR.N, VOLVb.ST, AAPL.OQ, HPQ.N, EXXJ.J, ALVG.DE, MXIM.OQ, BBRY.OQ, PCAR.OQ, 047040.KS, VOWG_p.F, PEUP.PA, RS.N, EMR.N, 6753.T, IR.N, VENM.SI, FIA.MI, ATCOa.ST, BATS.L, NXPI.OQ, NTAP.OQ, 2303.TW, 005930.KS, 012330.KS, 051910.KS, BMWG.F, FMG.AX, ADT.N, GDI.N, 000720.KS, ERICb.ST, HLMA.L, 6305.T, 6301.T, TAMO.BO, 009540.KS, 1157.HK, HON.N, 034020.KS, TRW.N, URS.N, 7262.T, 7267.T, BRCM.OQ, TENR.MI, 2357.TW, 0763.HK, IMT.L, 0489.HK, RIEN.S, 3481.TW, JEC.N, MCHP.OQ, SWK.N, 5401.T, 2330.TW, KBR.N, 2002.TW, ALSN.N, 012630.KS, SAIL.BO, VOES.VI, 7733.T, 7203.T, 2311.TW, FLS.N, 2324.TW, CLF.N, TXN.OQ, WEIR.L, FSL.N, AMD.N, 009150.KS, CAT.N, CBI.N, TISC.BO, 6502.T, 2238.HK, STX.OQ, SPW.N, LEA.N, 3339.HK, PSHG_p.F, 6501.T, UTX.N, 6762.T, 6861.T, AMAT.OQ, AXAF.PA, KAR.N, 042660.KS, TKAG.F, 7270.T, 7205.T, RXN.N, INTC.OQ, 066570.KS, CONG.DE, SAND.ST, 2727.HK, DAIGn.DE, KLAC.OQ, SCHN.PA, 6701.T, CHMFq.L, FIN.S, OUT1V.HE, RENA.PA, MANG.DE, 2498.TW, MRVL.OQ, 1766.HK, LART.BO, SIEGn.DE, 006400.KS, SPMI.MI, JNSP.BO, 600031.SS, 0347.HK, 2317.TW, TEX.N, PRU.L, XRX.N, MAHM.BO, SGOB.PA, WOR.N, TXT.N, ADSGn.F, 005380.KS, NUE.N, LXK.N, PWR.N, ICA.MX, 6758.T, RBC.N, 2354.TW, 011070.KS, USIM5.SA, JCI.N, 6201.T, IJMS.KL, 1801.T, 5471.T, 028050.KS, 1070.HK, 2603.TW, 060980.KS, ADI.OQ, 4938.TW, AFL.N, RLC.PS, FI.MI, 4755.OS, ALFA.ST, 000210.KS, LRCX.OQ, MU.OQ, ALU.N, XLNX.OQ, IMI.L, 000270.KS, 005490.KS, MEO1V.HE, ALSO.PA, PVH.N, 046890.KQ, BSL.AX, X.N, SKFb.ST, 2353.TW, DLPH.N, 1114.HK, 6588.T, 000660.KS, 0861.HK, NOK1V.HE, 6273.T, 3231.TW, 2448.TW, CY.OQ, 3034.TW, ONNN.OQ, PHG.AS, LLTC.OQ, SMIN.L, 8729.T, ITW.N, IBM.N, 0992.HK, 6326.T, 601179.SS, 034220.KS, EVRE.L, GIAA.JK, RYA.I, QAN.AX, CPA.N, 0293.HK, LHAG.DE, MASM.KL, AAV.BK, AIRA.KL, EZJ.L, 2610.TW, CEB.PS, AB1.DE, 003490.KS, LFL.N, SIAL.SI, 020560.KS, AIRF.PA, SMLE3.SA, TAHL.SI, 0753.HK, F.N, GM.N, DE.N, GE.N, THAI.BK, PM.N, EA.OQ, 9433.T, JKS.N, ORCL.OQ, URBN.OQ, 9437.T, MGA.N, AMKR.OQ, MOGa.N, 3149.TW, MET.N, DELL.OQ, BA.N, FSLR.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2914.T, ASSAb.ST, FLR.N, AXL.N, HPQ.N, EXXJ.J, ALVG.DE, VOWG_p.F, PEUP.PA, RS.N, 6753.T, IR.N, FIA.MI, NXPI.OQ, 2303.TW, 005930.KS, BMWG.F, FMG.AX, ADT.N, 000720.KS, SCHP.VX, 009540.KS, 1157.HK, 7262.T, 7267.T, TENR.MI, IMT.L, 0489.HK, 3481.TW, SWK.N, 5401.T, KBR.N, 012630.KS, 7203.T, AMD.N, 6502.T, 2238.HK, SPW.N, PSHG_p.F, UTX.N, AXAF.PA, KAR.N, 7205.T, RXN.N, INTC.OQ, CONG.DE, SAND.ST, 2727.HK, SCHN.PA, 6701.T, MANG.DE, MRVL.OQ, SIEGn.DE, 0347.HK, 2317.TW, TEX.N, PRU.L, XRX.N, SGOB.PA, WOR.N, ICA.MX, RBC.N, 6201.T, 5471.T, ADI.OQ, AFL.N, RLC.PS, FI.MI, MU.OQ, ALU.N, MEO1V.HE, PVH.N, BSL.AX, DLPH.N, 1114.HK, 6588.T, 0861.HK, NOK1V.HE, CY.OQ, 3034.TW, PHG.AS, 8729.T, IBM.N, 0992.HK, 601179.SS, 034220.KS, GIAA.JK, QAN.AX, MASM.KL, AAV.BK, AIRA.KL, CEB.PS, AB1.DE, SIAL.SI, AIRF.PA, SMLE3.SA, F.N, DE.N, GE.N, PM.N, ORCL.OQ, 9437.T, AMKR.OQ, 3149.TW, MET.N, DELL.OQ, BA.N, FSLR.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (VMI.N, 2914.T, GGBR4.SA, CSNA3.SA, SUN.VX, VOLVb.ST, AAPL.OQ, HPQ.N, ALVG.DE, VOWG_p.F, PEUP.PA, EMR.N, IR.N, FIA.MI, ATCOa.ST, BATS.L, 005930.KS, BMWG.F, ERICb.ST, 6301.T, TAMO.BO, 009540.KS, HON.N, 034020.KS, 7267.T, BRCM.OQ, 0763.HK, IMT.L, RIEN.S, SWK.N, 7733.T, 7203.T, TXN.OQ, FSL.N, TISC.BO, STX.OQ, LEA.N, PSHG_p.F, 6501.T, 6762.T, 6861.T, AXAF.PA, 042660.KS, TKAG.F, 7270.T, INTC.OQ, 066570.KS, CONG.DE, DAIGn.DE, CHMFq.L, RENA.PA, MANG.DE, LART.BO, SIEGn.DE, 2317.TW, TEX.N, PRU.L, WOR.N, TXT.N, ADSGn.F, 005380.KS, 6758.T, 1801.T, 2603.TW, 060980.KS, ADI.OQ, AFL.N, 4755.OS, 000210.KS, LRCX.OQ, MU.OQ, XLNX.OQ, IMI.L, 000270.KS, ALSO.PA, BSL.AX, X.N, SKFb.ST, DLPH.N, 0861.HK, NOK1V.HE, 6273.T, CY.OQ, SMIN.L, IBM.N, 0992.HK, EVRE.L, RYA.I, QAN.AX, 0293.HK, LHAG.DE, EZJ.L, 2610.TW, AB1.DE, 003490.KS, LFL.N, SIAL.SI, 020560.KS, AIRF.PA, F.N, GM.N, DE.N, GE.N, PM.N, MGA.N, MET.N, DELL.OQ, BA.N, FSLR.OQ) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (2914.T, AXL.N, VOWG_p.F, RS.N, IR.N, FIA.MI, NXPI.OQ, BMWG.F, 000720.KS, SCHP.VX, 009540.KS, 7262.T, 7267.T, 3481.TW, SWK.N, 012630.KS, 7203.T, 2238.HK, PSHG_p.F, AXAF.PA, KAR.N, 7205.T, CONG.DE, 2727.HK, MANG.DE, TEX.N, PRU.L, ICA.MX, RBC.N, ADI.OQ, RLC.PS, FI.MI, PVH.N, BSL.AX, DLPH.N, 0861.HK, NOK1V.HE, 3034.TW, IBM.N, 0992.HK, 034220.KS, QAN.AX, MASM.KL, AAV.BK, CEB.PS, AB1.DE, SMLE3.SA, F.N, GE.N, PM.N, ORCL.OQ, 9437.T, AMKR.OQ, MET.N, BA.N, FSLR.OQ, GIAA.JK, QAN.AX, CPA.N, 0293.HK, LHAG.DE, MASM.KL, AAV.BK, AIRA.KL, 2610.TW, CEB.PS, AB1.DE, SIAL.SI, 020560.KS, AIRF.PA, SMLE3.SA, TAHL.SI, 0753.HK, F.N, DE.N, GE.N, THAI.BK, PM.N, EA.OQ, 9433.T, JKS.N, PH.N, UA.N, 9983.T, ATVI.OQ, ORCL.OQ, CMI.N, URBN.OQ, 9437.T, MGA.N, AMKR.OQ, MOGa.N, 3149.TW, MET.N, DELL.OQ, NKE.N, BA.N, FSLR.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2914.T, ASSAb.ST, FLR.N, AXL.N, HPQ.N, EXXJ.J, ALVG.DE, VOWG_p.F, PEUP.PA, RS.N, 6753.T, IR.N, FIA.MI, NXPI.OQ, 2303.TW, 005930.KS, BMWG.F, FMG.AX, ADT.N, 000720.KS, SCHP.VX, 009540.KS, 1157.HK, 7262.T, 7267.T, TENR.MI, IMT.L, 0489.HK, 3481.TW, SWK.N, 5401.T, KBR.N, 012630.KS, 7203.T, AMD.N, 6502.T, 2238.HK, SPW.N, PSHG_p.F, UTX.N, AXAF.PA, KAR.N, 7205.T, RXN.N, INTC.OQ, CONG.DE, SAND.ST, 2727.HK, SCHN.PA, 6701.T,

Yen and You 116 01 July 2013

MANG.DE, MRVL.OQ, SIEGn.DE, 0347.HK, 2317.TW, TEX.N, PRU.L, XRX.N, SGOB.PA, WOR.N, ICA.MX, RBC.N, 6201.T, 5471.T, ADI.OQ, AFL.N, RLC.PS, FI.MI, MU.OQ, ALU.N, MEO1V.HE, PVH.N, BSL.AX, DLPH.N, 1114.HK, 6588.T, 0861.HK, NOK1V.HE, CY.OQ, 3034.TW, PHG.AS, 8729.T, IBM.N, 0992.HK, 601179.SS, 034220.KS, CPA.N, LFL.N, F.N, GM.N, DE.N, GE.N, PM.N, EA.OQ, JKS.N, PH.N, RL.N, UA.N, ATVI.OQ, ORCL.OQ, CMI.N, URBN.OQ, TTWO.OQ, MGA.N, AMKR.OQ, MOGa.N, MET.N, DELL.OQ, NKE.N, BA.N, FSLR.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (KLIC.OQ, VMI.N, 7259.T, 2914.T, ASSAb.ST, 5406.T, GGBR4.SA, CSNA3.SA, URBN.OQ, FLR.N, 2474.TW, 3037.TW, SUN.VX, NEXS.PA, 5486.T, AXL.N, DOV.N, MLNX.OQ, 6724.T, DHR.N, MTL.N, AAPL.OQ, KMT.N, HPQ.N, EXXJ.J, ALVG.DE, AGCO.N, MXIM.OQ, 4062.T, BBRY.OQ, 1211.HK, PCAR.OQ, 5713.T, 047040.KS, 6752.T, VOWG_p.F, PEUP.PA, 6981.OS, RS.N, EMR.N, 6753.T, IR.N, VENM.SI, FIA.MI, 7936.T, 006360.KS, 7201.T, BATS.L, 2301.TW, NXPI.OQ, 2385.TW, NTAP.OQ, 2303.TW, GKN.L, 005930.KS, 012330.KS, 000528.SZ, 6594.OS, 5201.T, 051910.KS, 7261.T, BMWG.F, MDR.N, 1072.HK, FMG.AX, 8113.T, ADT.N, GDI.N, 000720.KS, 7974.OS, ERICb.ST, HLMA.L, 6305.T, PLL.N, 6301.T, 7272.T, 009540.KS, 1157.HK, TECF.PA, 7202.T, HON.N, 034020.KS, TRW.N, URS.N, 7262.T, UNTR.JK, 7269.T, 7267.T, 6806.T, BRCM.OQ, TENR.MI, 6503.T, 2357.TW, MRTI.BO, 6674.T, IMT.L, 0981.HK, LEI.AX, 5110.T, 7011.T, 0489.HK, RIEN.S, 3481.TW, OERL.S, 8046.TW, JEC.N, MCHP.OQ, SWK.N, 5401.T, 2330.TW, 7731.T, KBR.N, 2002.TW, SNDK.OQ, ALSN.N, 012630.KS, SAIL.BO, VOES.VI, 7733.T, 7203.T, 2311.TW, FLS.N, 2324.TW, CLF.N, 7735.T, TXN.OQ, WEIR.L, 7012.T, AMD.N, 009150.KS, 3673.TW, 8035.T, CAT.N, 3008.TW, CBI.N, 6502.T, 2238.HK, ICHB.MX, UMI.BR, SPW.N, 3339.HK, 2308.TW, 5108.T, PSHG_p.F, 6501.T, UTX.N, 6762.T, BWA.N, AMAT.OQ, AXAF.PA, 4902.T, KAR.N, 042660.KS, ANF.N, 6952.T, 010520.KS, TKAG.F, 7270.T, 7205.T, RXN.N, INTC.OQ, 066570.KS, CONG.DE, DCI.N, SAND.ST, 2727.HK, 7013.T, 6361.T, KLAC.OQ, WEGE3.SA, SCHN.PA, 6701.T, 7312.T, FIN.S, OUT1V.HE, MANG.DE, 2498.TW, MRVL.OQ, 1766.HK, LART.BO, SIEGn.DE, 006400.KS, SPMI.MI, JNSP.BO, 600031.SS, 0347.HK, 2317.TW, 4901.T, TEX.N, 6367.T, BOUY.PA, PRU.L, XRX.N, MAHM.BO, SGOB.PA, WOR.N, SUP.N, ADSGn.F, NUE.N, OSK.N, PWR.N, ICA.MX, 7752.T, RBC.N, 011070.KS, USIM5.SA, JCI.N, 6201.T, IJMS.KL, 1504.TW, 5471.T, 028050.KS, QCOM.OQ, 1070.HK, 2603.TW, 060980.KS, 6702.T, ADI.OQ, 4938.TW, AFL.N, 5347.TWO, 6902.T, 5463.T, RLC.PS, FI.MI, 4755.OS, ALFA.ST, 000210.KS, 7751.T, 6971.T, LRCX.OQ, MU.OQ, ALU.N, XLNX.OQ, HAR.N, IMI.L, 000270.KS, 005490.KS, MEO1V.HE, 6586.T, PVH.N, 046890.KQ, 5214.T, BSL.AX, X.N, 2353.TW, DLPH.N, 1114.HK, ALTR.OQ, 0751.HK, 6588.T, 000660.KS, 0861.HK, NOK1V.HE, 6273.T, 3231.TW, 2448.TW, CY.OQ, 3034.TW, 6976.T, ONNN.OQ, PHG.AS, LLTC.OQ, 1808.T, 8729.T, ITW.N, IBM.N, 0992.HK, 6326.T, 601179.SS, 034220.KS) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (VMI.N, 2914.T, GGBR4.SA, CSNA3.SA, SUN.VX, VOLVb.ST, AAPL.OQ, HPQ.N, ALVG.DE, VOWG_p.F, PEUP.PA, EMR.N, IR.N, FIA.MI, ATCOa.ST, BATS.L, 005930.KS, BMWG.F, ERICb.ST, 6301.T, TAMO.BO, 009540.KS, HON.N, 034020.KS, 7267.T, BRCM.OQ, 0763.HK, IMT.L, RIEN.S, SWK.N, 7733.T, 7203.T, TXN.OQ, FSL.N, TISC.BO, STX.OQ, LEA.N, PSHG_p.F, 6501.T, 6762.T, 6861.T, AXAF.PA, 042660.KS, TKAG.F, 7270.T, INTC.OQ, 066570.KS, CONG.DE, DAIGn.DE, CHMFq.L, RENA.PA, MANG.DE, LART.BO, SIEGn.DE, 2317.TW, TEX.N, PRU.L, WOR.N, TXT.N, ADSGn.F, 005380.KS, 6758.T, 1801.T, 2603.TW, 060980.KS, ADI.OQ, AFL.N, 4755.OS, 000210.KS, LRCX.OQ, MU.OQ, XLNX.OQ, IMI.L, 000270.KS, ALSO.PA, BSL.AX, X.N, SKFb.ST, DLPH.N, 0861.HK, NOK1V.HE, 6273.T, CY.OQ, SMIN.L, IBM.N, 0992.HK, EVRE.L) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (KLIC.OQ, VMI.N, URBN.OQ, FLR.N, AXL.N, TX.N, DOV.N, MLNX.OQ, DHR.N, MTL.N, AAPL.OQ, KMT.N, HPQ.N, AGCO.N, MXIM.OQ, BBRY.OQ, PCAR.OQ, 6752.T, RS.N, EMR.N, 6753.T, IR.N, TYC.N, 7201.T, NXPI.OQ, NTAP.OQ, MDR.N, ADT.N, FWLT.OQ, GDI.N, PLL.N, HON.N, TRW.N, URS.N, 7267.T, BRCM.OQ, JEC.N, MCHP.OQ, SWK.N, KBR.N, SNDK.OQ, ALSN.N, 7203.T, FLS.N, CLF.N, TXN.OQ, FSL.N, ACN.N, AMD.N, CAT.N, CBI.N, 6502.T, STX.OQ, TER.N, SPW.N, LEA.N, PNR.N, UTX.N, BWA.N, AMAT.OQ, KAR.N, FCS.N, ANF.N, RXN.N, INTC.OQ, DCI.N, KLAC.OQ, 6701.T, MRVL.OQ, ETN.N, AVGO.OQ, TEX.N, XRX.N, WOR.N, ROK.N, TXT.N, SUP.N, NUE.N, OSK.N, LXK.N, PWR.N, 6758.T, RBC.N, JCI.N, QCOM.OQ, 6702.T, ADI.OQ, MT.N, AFL.N, 7751.T, 6971.T, LRCX.OQ, MU.OQ, ALU.N, XLNX.OQ, HAR.N, ALV.N, PVH.N, X.N, DLPH.N, MSI.N, ALTR.OQ, CY.OQ, ONNN.OQ, LLTC.OQ, ITW.N, IBM.N). Credit Suisse may have interest in (TNCS.KL, IJMS.KL, GAMU.KL, GIAA.JK) Credit Suisse may have interest in (MASM.KL, AIRA.KL) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2474.TW, 3037.TW, SUN.VX, MTL.N, ALVG.DE, PEUP.PA, 2301.TW, 2385.TW, 2303.TW, GKN.L, 2333.HK, ISYS.L, 051910.KS, PRY.MI, 1157.HK, TECF.PA, 6176.TW, 2357.TW, MRTI.BO, IMT.L, 0489.HK, RIEN.S, 3481.TW, OERL.S, 2208.HK, 2324.TW, 2105.TW, 009150.KS, 3673.TW, 8035.T, 3008.TW, 2409.TW, 6767.T, 2308.TW, 6762.T, AXAF.PA, TKAG.F, 6857.T, FIN.S, 2498.TW, MRVL.OQ, SIEGn.DE, 0347.HK, PRU.L, MAHM.BO, ICA.MX, 6758.T, 2049.TW, 011070.KS, 2325.TW, 1504.TW, 3697.TW, 4938.TW, 5347.TWO, 3702.TW, X.N, 2353.TW, 3231.TW, 2448.TW, ARM.L, 3034.TW, 6976.T, PHG.AS, RYA.I, LHAG.DE, ICAG.L, SMLE3.SA, 9433.T, JKS.N, 9983.T). Credit Suisse has a material conflict of interest with the subject company (GGBR4.SA). The analyst Ivano Westin has a relationship with a natural person who may provide remunerated services to one or more of the companies covered in this report Credit Suisse has a material conflict of interest with the subject company (0293.HK). Jack So, a Senior Advisor of Credit Suisse, is an Independent Non-Executive Director of Cathay Pacific Airways Limited. Credit Suisse has a material conflict of interest with the subject company (CSNA3.SA). The analyst Ivano Westin has a relationship with a natural person who may provide remunerated services to one or more of the companies covered in this report. I, Ivano Westin, hold directly or indirectly, securities referenced in the research reports I prepare [VALE, CSNA3]. Credit Suisse has a material conflict of interest with the subject company (TX.N). The analyst Ivano Westin has a relationship with a natural person who may provide remunerated services to one or more of the companies covered in this report

Yen and You 117 01 July 2013

Credit Suisse has a material conflict of interest with the subject company (DELL.OQ). Credit Suisse Securities (USA) LLC is acting as a financial advisor to Silver Lake Partners in connection with the announced proposed acquisition of Dell Inc. Credit Suisse has a material conflict of interest with the subject company (VOWG_p.F). Credit Suisse is co-advisor to Volkswagen AG in the announced DOMINATION and profit and loss transfer agreement between Volkswagen AG and MAN SE Credit Suisse has a material conflict of interest with the subject company (URS.N). Credit Suisse Securities (Canada), Inc provided a Fairness Opinion and acted as financial advisor to Flint Energy Services Ltd. on the announced acquisition by URS Corporation. Credit Suisse has a material conflict of interest with the subject company (0981.HK). Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor. Credit Suisse has a material conflict of interest with the subject company (2330.TW). Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd. Credit Suisse has a material conflict of interest with the subject company (6502.T). Credit Suisse Securities (USA) LLC is acting as an advisor to Landis+Gyr on the announced acquisition by Toshiba Corporation. This acquisition remains subject to regulatory approvals and other customary closing conditions. Credit Suisse has a material conflict of interest with the subject company (SPW.N). Credit Suisse Securities USA LLC acted as financial advisor to SPX Corp in the sale of its Service Solutions business to Robert Bosch GmbBH. Credit Suisse has a material conflict of interest with the subject company (UTX.N). Credit Suisse Securities (USA) LLC is acting as an advisor to Goodrich (GR) in a potential transaction with United Technologies Corp. Credit Suisse has a material conflict of interest with the subject company (AMAT.OQ). A member of the analyst's team received compensation from the subject company (AMAT) within the past 12 months. Credit Suisse Securities (USA) LLC is acting as an advisor to Varian Semiconductor Equipment Associates (VSEA) in a potential transaction with Applied Materials, Inc. (AMAT) Credit Suisse has a material conflict of interest with the subject company (RXN.N). Credit Suisse served as co-managing bookrunner of Rexnord's Initial Public Offering Credit Suisse has a material conflict of interest with the subject company (2727.HK). Credit Suisse is acting as financial advisor to Shanghai Electric Group Limited regarding an acquisition of Shanghai Electric Insurance Co Brokerage Co Ltd and Shanghai Electric Leasing Co Ltd from its parent company, Shanghai Electric (Group) Corp. Credit Suisse has a material conflict of interest with the subject company (7013.T). Credit Suisse AG is acting as an advisor to the shareholders of Ionbond AG in the potential acquisition by IHI Corporation and is also a shareholder of Ionbond AG. Credit Suisse has a material conflict of interest with the subject company (MANG.DE). Credit Suisse is co-advisor to Volkswagen AG in the announced DOMINATION and profit and loss transfer agreement between Volkswagen AG and MAN SE. Credit Suisse has a material conflict of interest with the subject company (USIM5.SA). The analyst Ivano Westin has a relationship with a natural person who may provide remunerated services to one or more of the companies covered in this report Credit Suisse has a material conflict of interest with the subject company (3697.TW). Credit Suisse is acting as the Joint non-exclusive financial advisor and facilitator to Mediatek on their announced tender offer for Mstar Semiconductor Inc. Credit Suisse has a material conflict of interest with the subject company (BSL.AX). Credit Suisse is the financial advisor to BlueScope Steel Limited in relation to the proposed formation of a 50-50 joint venture with Nippon Steel Corporation. Credit Suisse has a material conflict of interest with the subject company (PHG.AS). Credit Suisse is financial advisor to Philips Electronics NV in the sale of its Lifestyle Entertainment business to Electric Co. As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL. 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 (EREGL.IS, VMI.N, 7259.T, 2914.T, ASSAb.ST, 5406.T, GGBR4.SA, CSNA3.SA, URBN.OQ, FLR.N, 2474.TW, 6727.T, 3037.TW, SUN.VX, NEXS.PA, LEGD.PA, 0323.HK, AXL.N, TX.N, DOV.N, MLNX.OQ, 6724.T, DHR.N, MTL.N, VOLVb.ST, ASML.AS, AAPL.OQ, KMT.N, HPQ.N, EXXJ.J, ECM.L, LMI.L, ALVG.DE, AGCO.N, MXIM.OQ, TNCS.KL, 6640.T, 4062.T, BBRY.OQ, 1211.HK, PCAR.OQ, 047040.KS, 6752.T, VOWG_p.F, PEUP.PA, 6981.OS, RS.N, EMR.N, 6753.T, IR.N, 6754.T, VENM.SI, FIA.MI, 7936.T, 6141.OS, TYC.N, POMO4.SA, 006360.KS, 5334.T, ATCOa.ST, 7201.T, BATS.L, 2301.TW, NXPI.OQ, 2385.TW, NTAP.OQ, 2303.TW, VSVS.L, GKN.L, 005930.KS, 012330.KS, 000528.SZ, 2333.HK, MHI.NZ, 3436.T, 5201.T, ISYS.L, 051910.KS, 7261.T, BMWG.F, MDR.N, 1072.HK, 601299.SS, FMG.AX, 8113.T, FROTO.IS, ADT.N, FWLT.OQ, GDI.N, 000720.KS, PRY.MI, 7974.OS, SCHP.VX, 6448.T, ERICb.ST, HLMA.L, 6305.T, 1803.T, PLL.N, 6301.T, 7272.T, AGGK.L, TAMO.BO, 009540.KS, BOY.L, BKN.AX, GEBN.VX, 1157.HK, TECF.PA, 6481.T, 7202.T, 6176.TW, HON.N, 034020.KS, TRW.N, URS.N, 7262.T, UNTR.JK, 7269.T, 7267.T, 6806.T, 5411.T, BRCM.OQ, TENR.MI, 6503.T, 2357.TW, 0763.HK, MRTI.BO, 6674.T, IMT.L, 0981.HK, LEI.AX, KNEBV.HE, CUMM.BO, 7011.T, 0489.HK, RIEN.S, 3481.TW, OERL.S, 0881.HK, 8046.TW, JEC.N, MCHP.OQ, 5401.T, 2208.HK, 2330.TW, 7731.T, KBR.N, 2002.TW, SNDK.OQ, ALSN.N, 012630.KS, SAIL.BO, VOES.VI, 7733.T, 0175.HK, 6146.T, 7203.T, TPM.AX, 2311.TW, FLS.N, 2324.TW, CLF.N, 2105.TW, RSW.L, 7735.T, 2382.TW, TXN.OQ, WEIR.L, 6366.T, 7012.T, FSL.N, ACN.N, AMD.N, 009150.KS, 3673.TW, 8035.T, CAT.N, 3008.TW, CBI.N, TISC.BO, ENKAI.IS, 6502.T, 2238.HK,

Yen and You 118 01 July 2013

FENR.L, SPX.L, TER.N, ICHB.MX, UMI.BR, 2409.TW, SPW.N, 7282.T, 5444.T, LEA.N, PNR.N, 6371.T, 3339.HK, 6767.T, 6268.T, 2308.TW, PSHG_p.F, 6501.T, UTX.N, 6762.T, BWA.N, 6861.T, AMAT.OQ, AXAF.PA, 4902.T, MILS3.SA, KAR.N, 0732.HK, 042660.KS, 6954.T, FCS.N, ANF.N, 6952.T, 010520.KS, TKAG.F, 6471.T, 7270.T, 7205.T, RXN.N, INTC.OQ, 066570.KS, CONG.DE, DCI.N, SAND.ST, SZGG.DE, VLLP.PA, 3659.T, 6857.T, 600019.SS, 2727.HK, DAIGn.DE, 7013.T, 6361.T, ASII.JK, MICP.PA, KLAC.OQ, WEGE3.SA, SCHN.PA, 6701.T, 0179.HK, 3189.TW, 7312.T, CHMFq.L, 3116.T, FIN.S, OUT1V.HE, RENA.PA, MANG.DE, BAJA.BO, 2498.TW, MRVL.OQ, 1766.HK, LART.BO, SIEGn.DE, BUCN.S, 006400.KS, ETN.N, SPMI.MI, JNSP.BO, AVGO.OQ, 600031.SS, 1812.T, 0347.HK, 2317.TW, 4901.T, 6473.T, TEX.N, 6367.T, 600312.SS, 2018.HK, BOUY.PA, PRU.L, XRX.N, MAHM.BO, 6472.T, SGOB.PA, WOR.N, ROK.N, TXT.N, SUP.N, ADSGn.F, 005380.KS, NUE.N, OSK.N, LXK.N, PWR.N, ICA.MX, 7752.T, 6758.T, RBC.N, 6967.T, 2049.TW, 2354.TW, 011070.KS, BOSH.BO, ASOK.BO, SSABa.ST, USIM5.SA, JCI.N, 2325.TW, 6201.T, 1802.T, 3898.HK, IJMS.KL, LIF.TO, 1504.TW, 6113.T, 1801.T, 028050.KS, MAGNq.L, TOASO.IS, 6103.T, QCOM.OQ, 3697.TW, 1070.HK, 1963.T, 2603.TW, 060980.KS, 6702.T, 004020.KS, ADI.OQ, 4938.TW, MT.N, ELUXb.ST, UHR.VX, AFL.N, 5347.TWO, BHEL.BO, 6902.T, 5463.T, RLC.PS, FI.MI, SXS.L, 4755.OS, 6147.TWO, 4063.T, ALFA.ST, ROR.L, 000210.KS, 7751.T, 3702.TW, 6971.T, LRCX.OQ, GAMU.KL, MU.OQ, ALU.N, XLNX.OQ, HAR.N, IMI.L, 000270.KS, ALV.N, HROM.BO, 005490.KS, MEO1V.HE, ALSO.PA, 6586.T, 600271.SS, PVH.N, 046890.KQ, 011210.KS, 5214.T, BSL.AX, X.N, SKFb.ST, 2353.TW, DLPH.N, MSI.N, 1114.HK, ALTR.OQ, 0751.HK, 6588.T, 000660.KS, 0861.HK, ACX.MC, SCVb.ST, 600550.SS, 600089.SS, NOK1V.HE, 6273.T, 3231.TW, 6506.T, 2448.TW, ARM.L, CY.OQ, 3034.TW, 6976.T, ONNN.OQ, PHG.AS, LLTC.OQ, SMIN.L, TKFEN.IS, 1808.T, 8729.T, ITW.N, IBM.N, TRMKq.L, 0992.HK, 2347.TW, 6326.T, 601179.SS, 034220.KS, EVRE.L, BAWJ.J, GIAA.JK, RYA.I, QAN.AX, CPA.N, 0293.HK, LHAG.DE, 0670.HK, GOLL4.SA, MASM.KL, AAV.BK, AIRA.KL, 2618.TW, 1055.HK, EZJ.L, 2610.TW, CEB.PS, AB1.DE, 003490.KS, LFL.N, VAH.AX, SIAL.SI, 020560.KS, ICAG.L, AIRF.PA, SMLE3.SA, TAHL.SI, 0753.HK, F.N, GM.N, DE.N, GE.N, THAI.BK, PM.N, EA.OQ, 7248.T, 9433.T, JKS.N, BBDb.TO, PH.N, RL.N, UA.N, 9983.T, ATVI.OQ, 7251.T, ORCL.OQ, CMI.N, URBN.OQ, 9437.T, TTWO.OQ, MGA.N, AMKR.OQ, MOGa.N, 4044.T, 3149.TW, DELL.OQ, NKE.N, BA.N, GTO.AS, FSLR.OQ, MGAMM.L) within the past 12 months An analyst involved in the preparation of this report has visited certain material operations of the subject company (5486.T, AAPL.OQ, 5713.T, 6594.OS, SWK.N, JSTL.BO) within the past 12 months The travel expenses of the analyst in connection with such visits were paid or reimbursed by the subject company Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (HLMA.L, BOY.L, IMT.L, FENR.L, SMIN.L, EVRE.L, EZJ.L). The following disclosed European company/ies have estimates that comply with IFRS: (ASSAb.ST, SUN.VX, LEGD.PA, MTL.N, VOLVb.ST, ASML.AS, ECM.L, LMI.L, ALVG.DE, VOWG_p.F, PEUP.PA, FIA.MI, 6141.OS, ATCOa.ST, 7201.T, BATS.L, GKN.L, ISYS.L, BMWG.F, ERICb.ST, HLMA.L, BOY.L, TECF.PA, 6806.T, TENR.MI, IMT.L, RIEN.S, VOES.VI, WEIR.L, SPX.L, PSHG_p.F, AXAF.PA, TKAG.F, CONG.DE, SAND.ST, SZGG.DE, VLLP.PA, DAIGn.DE, MICP.PA, SCHN.PA, 6701.T, FIN.S, OUT1V.HE, RENA.PA, MANG.DE, SIEGn.DE, SPMI.MI, BOUY.PA, PRU.L, SGOB.PA, ADSGn.F, SSABa.ST, MT.N, ELUXb.ST, ALFA.ST, IMI.L, ALV.N, MEO1V.HE, ALSO.PA, SKFb.ST, ACX.MC, SCVb.ST, NOK1V.HE, PHG.AS, SMIN.L, TRMKq.L, EVRE.L, RYA.I, QAN.AX, LHAG.DE, EZJ.L, AIRF.PA, F.N, MGAMM.L). As of the end of the preceding month, the subject company (SWK.N) beneficially owned 5% or more of the total issued share capital of Credit Suisse Group. An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (HPQ.N, JSTL.BO) Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (SCHP.VX) within the past 3 years. As of the end of the preceding month, Credit Suisse beneficially owned the following percentages of the voting rights of the subject companies: 1.0% of UHR.VX As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Thai listed companies mentioned in this report, the independent 2012 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Asia Aviation () , Thai Airways International (Excellent) Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

Yen and You 119 01 July 2013

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Issei Takahashi ; Shinya Yamada ; Shinji Kuroda Credit Suisse (Hong Kong) Limited ...... Manish Nigam ; Trina Chen ; Yang Y. Song ; Davin Wu Credit Suisse Securities (Europe) Limited, Seoul Branch ...... Henry Kwon Credit Suisse AG, Singapore Branch ...... Timothy Ross ; Leonard Huo, CFA Credit Suisse Securities (India) Private Limited ...... Jatin Chawla ; Neelkanth Mishra Credit Suisse Securities (Europe) Limited...... Mujtaba Rana ; Kiranjot Grewal ; Andrew Garthwaite ; Robert Griffiths ; Achal Sultania ; Michael Shillaker ; Andre Kukhnin CFA ; Simon Toennessen ; Neil Glynn, CFA ; Richard Kersley Credit Suisse AG, Taipei Securities Branch ...... Jerry Su

Important MSCI Disclosures The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse. Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-part data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit- suisse.com/researchdisclosures or call +1 (877) 291-2683.

Yen and You 120 01 July 2013

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/.This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority ("FCA") and the PRA. This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, having registered address at 990 Abdulrahim Place, 27 Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the PRA and regulated by the FCA and the PRA or in respect of which the protections of the PRA and FCA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. 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. Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. All rights reserved. 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.

XX5837EU.doc Yen and You 121