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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 10 8 6 4 2 0 -2 -4 160 USDJPY-6 Average 1990-2008 Forecast 150 -8 140 -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-13 130 Jan-10 120 MSCI Japan Tech:1M change (%) in 12M Fwd EPS Source: Thomson Reuters, Credit Suisse Equity Research110 Source: Company data, Credit Suisse Equity Research estimates 100 Figure 4: Japanese OEMs have taken steps to mitigate Figure 5: The inverse relationship between currency and 90 Yen exposure by increasing ‘local’ capacity & restricting travel demand has been intensifying for the past year – 80 component sourcing - 66% of Honda’s N America sourced bad news for Japanese airlines, but good for foreign 70 vehicles contain components from the region1990 itself 1992 1994carriers1997 with1999 exposures2001 to2004 that market2006 2008 2011 2013 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% Daikin 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.

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