11 September 2015 Asia Pacific/ Equity Research Glass & Ceramics / Cement / Paper Products / Electrical Equipment (Glass & Ceramics (Japan)/Pulp & Paper (Japan)/Electrical Equipment (Japan)/Trading

Basic materials/Trading cos Research Analysts SECTOR REVIEW Jun Yamaguchi 81 3 4550 9789 (Japan)) / MARKET WEIGHT/MARKET WEIGHT/MARKET WEIGHT/MARKET [email protected] A comprehensive in-depth look at shareholdingsWEIGHT Go Tanaka 81 3 4550 7266 Figure 1: Market value of shareholdings for 18 coverage companies: market [email protected] value and as % of total balance sheet

(¥ bn) (¥ bn) 300 Current market value of 16% 1000 18% shareholdings 900 16% 250 13% Vs total balance sheet (RHS) 800 14% 12% 700 200 12% 9% 600 8% 10% 150 7% 7% 500 8% 6% 5% 5% 400 100 3% 6% 4% 3% 300 3% 4% 2% 4% 50 200 0% 0% 100 2%

0 0 0%

NEG

Mitsui

Rengo

Marubeni

GS GS Yuasa

Mitsubishi

Sumitomo

NSGGroup

ToyoTanso

Asahi Glass

OjiHoldings

TokaiCarbon

NipponPaper

NipponCarbon

NGKInsulators

TaiheiyoCement

Itochu SumitomoOsaka Glass Cement/Ceramics Carbon Paper/pulp Battery Trading co

Notes: (1) Market value of shareholdings include specific investment stocks and de facto holdings; (2) based on share prices for 9 September. Source: Company data, Credit Suisse ■ Shareholdings drawing increased attention: The introduction of the Corporate Governance Code this past June has investors increasingly interested in the details of publicly traded companies’ shareholdings and their reasons for holding them. Companies are being called upon to explain and address these holdings. The 18 companies we cover have a total of ¥2.9 trillion in shareholdings, including around ¥1.3 trillion in cross-shareholdings (44% of the total) and around ¥720 billion in shares in companies within their own Zaibatsu, or supracorporate group (25%; including overlap with cross-shareholdings). In this report, we examine companies’ shareholdings in terms of type (cross- shareholdings, Zaibatsu shares) and scale (e.g. percentage of total assets). We also look at how the sales of these shares would impact the companies in terms of interest-bearing debt, annual dividends, and investment, taking into account the financial health of the companies (net D/E). ■ Material companies have surprisingly strong Zaibatsu ties: An especially interesting finding is the fact that, of the 12 materials companies we cover, 5 are part of a corporate Zaibatsu and have correspondingly high levels of cross- shareholdings and Zaibatsu shares. We focus in particular on Sumitomo Cement (5232, OUTPERFORM, TP ¥610), Asahi Glass (5201, NEUTRAL, TP ¥810), and (5301, OUTPERFORM, ¥360) in view of the large market value of their shareholdings as a percentage of their total assets and comparatively sound finances. ■ Long shelf life: Companies’ shareholdings and the potential impact of their sales will continue to be a topic frequently revisited by market participants. We hope this report will have a long shelf life in enabling an understanding of the big picture.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. 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.

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11 September 2015 Focus charts *Shareholding values used in this report are based on the number of shares held as of end-FY14 (ended March 2015 or December 2014) and closing share prices for 9 September.

Figure 2: Overview of shareholdings for 18 covered Figure 3: Market value of 18 coverage companies’ companies shareholdings and % of cross-shareholdings/Zaibatsu shares Shareholdings: 2.9 trillion yen (¥ trn) 3.0 2.9 Percentage share of total 60% 52.2% shareholdings Cross- Zaibatsu-related 2.5 50% shareholding: stocks: 43.6% 1.3 trillion yen 720 billion yen 2.0 40% 1.5 1.5 1.3 25.2% 30%

Both: 1.0 20% 480 0.7 billion 0.5 10% yen 0.0 0% Total market Cross- Cross- Zaibatsu value shareholding shareholding + Zaibatsu

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 4: Market value of shareholdings/total assets and Figure 5: Market value of shareholdings/total assets and net D/E ratios (materials) net D/E ratios (trading companies) (Market value of stocks/total asset) (Market value of stocks/total asset) 18% 6% Glass Paper/pulp Mitsubishi 16% Sumitomo Cement/Ceramics Battery Osaka Cement Carbon 14% 5% Asahi Glass Holds large amounts of listed stocks and have 12% Tokai Carbon the capacity to return 4% cash to shareholders 10% Holds large amounts of Nippon Carbon 8% Rengo listed stocks and have the capacity to return NEG 3% Sumitomo NGK Insulators cash to shareholders 6% Nippon Paper GS Yuasa 4% 2% 2% Oji Holdings Toyo Tanso NSG Group 0% 1% -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 (Net D/E ratio) (Net D/E ratio) Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 6: List of coverage companies belonging to a Zaibatsu (8 out of 18) Mitsui Sumitomo Mitsubishi Morimura Trading Co Mitsui & Co. Sumitomo Corp Mitsubishi Corp Glass NSG Group Asahi Glass Cement/Ceramics Sumitomo Osaka Cement NGK Insulators Paper/pulp Oji Holdings Source: MITSUI Public Affairs Committee, Public Affairs Committee, Mitsubishi Public Affairs Committee, Credit Suisse

Basic materials/Trading cos 2 11 September 2015 Table of contents

Focus charts 2 Summary: Total shareholdings are at ¥2.9tn 4 Corporate Governance Code drawing attention to shareholdings 4 Shareholdings for our 18 coverage companies have a total market value of ¥2.9tn 4 Cross-shareholdings account for over half of material sector’s shareholdings 4 Zaibatsu shares account for ¥240bn for 5 materials companies and ¥480bn for 3 trading companies 4 Sumitomo Osaka Cement, Asahi Glass, and Tokai Carbon well positioned for shareholding sales 4 All three have scope for higher shareholder returns 4 (1) Cross-shareholdings and Zaibatsu shares 5 Cross-shareholdings total ¥1.3tn for 18 companies 5 Our coverage stocks and Zaibatsu go way back 6 8 companies hold roughly ¥720bn in Zaibatsu shares 7 8 companies’ Zaibatsu shareholdings total ¥724.8bn 7 Top holdings of Zaibatsu companies often tend to be other Zaibatsu companies 7 Cases where a single holding takes up the majority of the shareholdings 9 and Nipro: Scale of cross-shareholding out of proportion to their partnership 9 Tokai Carbon and MUFG: MUFG is the company’s main bank, but…. 9 NGK Insulators and Seiko Epson: Holdings high despite decreased business 10 Corporate Governance Code requires justifications for shareholdings 10 (2) Calculating the market value of shareholdings 11 Totals of ¥738bn for materials sector, ¥2,142bn for trading company sector 11 Market value of shareholdings amounts to at least 10% of total assets for some companies 11 Impact likely significant, whether used for special dividends or share buybacks 12 Shareholdings also substantial when stacked up against interest-bearing debt and capex 13 Sumitomo Osaka Cement, Asahi Glass, and Tokai Carbon, have the ability to return sales proceeds 14 (3) Potential impact on earnings from the sales of shareholdings 15 Likely to boost income statement profits 15 Reference materials 16 Definition of terms 16 Definition of shareholdings 16 Number of shares held and market cap 16 Data on cross-shareholdings 16 Definition of the Morimura Zaibatsu 16 Time series data 17 Amount of shareholdings largely unchanged over the past 15 years 17 Reference data 18

Basic materials/Trading cos 3 11 September 2015 Summary: Total shareholdings are at ¥2.9tn Corporate Governance Code drawing attention to shareholdings Shareholdings for our 18 coverage companies have a total market value of ¥2.9tn The introduction of the Corporate Governance Code this June has publicly traded Our 18 coverage companies companies being called upon to explain the purpose and the justification for holding the have ¥2.9tn in total shares of other companies. This report analyzes the most recent data on these shareholdings shareholdings for the 18 companies we cover (12 materials companies, 5 trading companies, and 1 battery maker). The Code requires companies to have a valid reason for holding these shares, but we found numerous instances of companies having substantial cross-shareholdings and Zaibatsu shares for which the contribution to the enterprise value is unclear, for trading companies as well as material companies. Based on the data for end-FY14, the 18 companies’ shareholdings have a current market value of ¥2.9tn (as of 9 September) and are highly skewed toward cross-shareholdings and Zaibatsu shares. Cross-shareholdings account for over half of material sector’s shareholdings Of the ¥2.9tn of shareholdings, cross-shareholdings account for ¥1.3tn or 44% (Figure 3). Around 70% of material Even if we exclude the 5 trading companies and look at just the 12 material companies , sector’s shareholdings are cross-shareholdings amount to roughly ¥530bn, or 72% of their total shareholdings. In cross-shareholdings other words, the majority of shares held by the material sector are cross-shareholdings with other companies. Zaibatsu shares account for ¥240bn for 5 materials companies and ¥480bn for 3 trading companies Zaibatsu shares—defined as shares in a company belonging to the same Zaibatsu Cross-shareholdings/Zaibatsu (supracorporate group of companies that have historical relationships lasting centuries, shares account for around half dating back to the Edo era, including Mitsui and Sumitomo) as the holder (e.g., Sumitomo- of total shareholdings for our related Sumitomo Osaka Cement’s holding shares of other Sumitomo-related coverage companies companies)—draw less attention than cross-shareholdings, but nonetheless account for a substantial portion of the shareholdings of Zaibatsu members. 8 of the 18 companies we cover belong to a Zaibatsu, and their holdings of Zaibatsu shares total to around ¥720bn, or 25% of their total holdings. Even after accounting for shares that are both cross- shareholdings and Zaibatsu-related shared, these two combines account for 53% of Zaibatsu members’ total shareholdings. Sumitomo Osaka Cement, Asahi Glass, and Tokai Carbon well positioned for shareholding sales All three have scope for higher shareholder returns Sumitomo Osaka Cement, Asahi Glass, and Tokai Carbon all have substantial amounts of Selling all shareholdings shareholdings (as a percentage of total assets), as well as comparatively solid finances could generate cash (i.e., a low net D/E ratio), which in our view puts them in a position where they can sell equivalent to around 20 shares that are becoming less meaningful and use the proceeds to fund better years’ worth of dividends or shareholder returns (Figure 4). We estimate that if they sell off all of their shares, this 30% of market cap would generate cash equivalent to 26.0 years’ worth of dividends for Sumitomo Osaka Cement, 17.3 years for Asahi Glass, and 18.1 years for Tokai Carbon (all based on current DPS), or if they were to use those proceeds to buy back shares, this would amount to 28.1% of current market cap for Sumitomo Osaka Cement, 32.8% for Asahi Glass, and 37.6% for Tokai Carbon. In short, sales of shareholdings could have a major impact.

Basic materials/Trading cos 4 11 September 2015 (1) Cross-shareholdings and Zaibatsu shares Cross-shareholdings total ¥1.3tn for 18 companies Investors are becoming increasingly interested in the unwinding of cross-shareholdings, following the introduction of the new Corporate Governance Code in June. The 18 companies we cover (materials, trading companies, batteries) have a total ¥1.26tn in cross-shareholdings, which accounts for 44% of their total shareholdings. For the 12 material companies, the figure is even higher at 72% (Figure 7 and 8). Within the materials sector, the share of cross-shareholdings varies by subsector. Glass (2 companies; excluding ) is at 83%, while the 3 carbon companies are at 57% and the 3 paper and pulp companies at 61%. In Nippon Electric Glass’s case, 17 of the 30 holdings listed in its securities filings as specific investment shares are cross- shareholdings, which accounts for 89% of the total value of its shareholdings. As for the trading companies, results vary by company. Marubeni and Sumitomo are at the high end, while the other three are lower as their top holdings are not cross-held. For clarification: We defined shareholdings in this report as holdings declared in the companies’ securities filings as either specific investment shares or de facto holdings. For further information, please see the reference materials at the end of this report

Figure 7: Market value of cross-shareholdings value and Figure 8: Market value of cross-shareholdings value and as percentage of total shareholdings (materials) as percentage of total shareholdings (trading companies)

(¥ bn) Market value of cross-holdings (¥ bn) Market value of cross-holdings 89% 100% Percentage share of total shareholdings 250 Percentage share of total 74% 80% 81% 81% 79% 90% 200 76% shareholdings 74% 80% 64% 70% 70% 61% 58% 150 56% 200 52% 60% 60% 44% 42% 50% 100 40% 50% 150 30% 28% 50 20% 40% 10% 100 0 0% 24% 30% 18% NEG 20%

Rengo 50

GS GS Yuasa

NSGGroup

ToyoTanso Asahi Glass

OjiHoldings 10%

TokaiCarbon

NipponPaper

NipponCarbon

NGKInsulators

TaiheiyoCement SumitomoOsaka Glass Cement/Ceramics Carbon Paper/pulp Battery 0 0% Itochu Marubeni Mitsui Sumitomo Mitsubishi

Source: Company data, Bloomberg, Credit Suisse Source: Company data, Bloomberg, Credit Suisse

Basic materials/Trading cos 5 11 September 2015

Our coverage stocks and Zaibatsu go way back Of the 18 material, trading, and battery companies we cover, 8 belong to a Zaibatsu (Figure 9). This is obvious for three of the 3 trading companies along with Sumitomo Osaka Cement, as the name of their Zaibatsu is part of their corporate name. For the other 5, however, it is not as self-evident. As Figure 9 shows, many companies belong to Zaibatsu without the Zaibatsu name being part of their corporate name. Camaraderie among Zaibatsu member companies remain robust. Information about the Zaibatsu such as the details of their presidents clubs (including the Nimokukai and the Hakusuikai) remain private, but Mitsui, Sumitomo, and Mitsubishi Zaibatsu have public affairs committees that provide information about their Zaibatsu and their member companies on their websites. Another interesting aspect of the complex and long relationship between basic material companies and Zaibatsu is that, even among the companies that we have not included in the below list, there are those that (a) belonged to a Zaibatsu in the past but have moved away or otherwise resolved their relationships as they go through restructurings and M&As, and (b) do not officially belong to a Zaibatsu, but have historical relationships with Zaibatsu.

Figure 9: List of coverage companies belonging to a Zaibatsu (8 out of 18) Mitsui Sumitomo Mitsubishi Morimura Trading Co Mitsui & Co. Sumitomo Corp Mitsubishi Corp Glass NSG Group Asahi Glass Cement/Ceramics Sumitomo Osaka Cement NGK Insulators Paper/pulp Oji Holdings Source: MITSUI Public Affairs Committee, Sumitomo Group Public Affairs Committee, Mitsubishi Public Affairs Committee, Credit Suisse

Basic materials/Trading cos 6 11 September 2015

8 companies hold roughly ¥720bn in Zaibatsu shares 8 companies’ Zaibatsu shareholdings total ¥724.8bn If we define Zaibatsu shares as shares in one Zaibatsu-affiliated company held by another company in the same Zaibatsu, such as Sumitomo Osaka Cement’s holdings in other Sumitomo companies, 8 companies in our coverage hold ¥724.8bn in Zaibatsu shares. However, NSG Group is part of the Sumitomo group but its shareholdings are extremely small, so in effect 7 companies hold about ¥720bn in Zaibatsu shares. The overall percentage of Zaibatsu shares is 25%, but the individual percentages vary significantly from company to company. Asahi Glass has the highest percentage of Zaibatsu shares (66%), followed by Sumitomo Osaka Cement (46%). Mitsubishi leads the three Zaibatsu trading companies with a weighting of 32% for Zaibatsu shares, while Mitsui’s is only 17%. Tokai Carbon does not belong to the Mitsubishi Zaibatsu, but historically it had had a strong relationship with Mitsubishi group companies, especially Mitsubishi Bank (now Bank of -Mitsubishi UFJ, part of Mitsubishi UFJ Financial Group). This may or may not be the reason, but 52% of the shares Tokai Carbon owns is Mitsubishi-related. For clarification: In this report, we define Zaibatsu companies as companies listed as member corporations in each group’s public affairs committees (Mitsui’s 25 member companies, Sumitomo’s 33, and Mitsubishi’s 39). Besides the public affairs committees, Zaibatsu also have other organizations such as the Presidents and Board members clubs and research institutes. Membership varies from organization to organization, so the actual number and size of Zaibatsu-affiliated companies differs depending on the scope.

Figure 10: Zaibatsu shares’ market value and as Figure 11: Zaibatsu shares’ market value and as percentage of total shareholdings (materials) percentage of total shareholdings (trading companies)

(¥ bn) (¥ bn) Market value of Zaibatsu stocks 200 Market value of Zaibatsu stocks 100% 350 Percentage share of total shareholdings 32% 35% 180 Percentage share of total shareholdings 90% 160 80% 29% 66% 300 30% 140 70% 120 60% 46% 250 25% 100 50% 80 29% 40% 200 20% 60 24% 30% 17% 40 20% 20 10% 150 15% 0 0%

100 10%

NEG Rengo

GS GS Yuasa 50 5%

NSGGroup

ToyoTanso

Asahi Glass

OjiHoldings

TokaiCarbon

NipponPaper

NipponCarbon

NGKInsulators TaiheiyoCement SumitomoOsaka 0 0% Glass Cement/Ceramics Carbon Paper/pulp Battery Mitsui Sumitomo Mitsubishi

Source: Company data, respective Zaibatsu Public Affairs Source: Company data, respective Zaibatsu Public Affairs Committees, Credit Suisse Committees, Credit Suisse Top holdings of Zaibatsu companies often tend to be other Zaibatsu companies Companies’ shareholdings also continue to reflect Zaibatsu influence. Looking at the top 20 shareholdings of Asahi Glass and Sumitomo Osaka Cement, we see many names from the companies’ own Zaibatsu (Figures 12-17). Tokai Carbon as we mentioned before is not a Mitsubishi Zaibatsu member, but it still has a large amount of Mitsubishi-related stocks. It is difficult to think all of these holdings are based on close business relationships between these companies, and even if there is some relationship between the companies in question, it is slightly unusual to see such a heavy bias towards any one particular Zaibatsu. This could be the result of Zaibatsu companies maintaining ties within their Zaibatsu (or because the companies have not revised their shareholding strategies).

Basic materials/Trading cos 7 11 September 2015

Figure 12: Sumitomo Osaka Cement’s top 20 Figure 13: Asahi Glass’ top 20 shareholdings (market shareholdings (market value) value) Sumitomo Osaka Cement Market value (¥ bn) Asahi Glass Market value (¥ bn) Holcim Philippines,Inc. 20.6 57.2 Sumitomo Corporationoration 4.9 Motor Corporation 52.4 Sumitomo Metal Mining 3.4 Holdings 33.8 Sumitomo Mitsui Financial Group 2.8 Mitsubishi Corporationoration 32.3 2.7 Mitsubishi UFJ Financial Group 23.7 Sumitomo Realty & Development 2.2 Motor 13.1 Sumitomo Heavy Industries 2.0 Motor Corporation 12.1 Sumitomo Mitsui Trust Holdings 1.8 Kirin Holdings 8.8 Mitani Sekisan 1.8 Mitsubishi Heavy Industries 7.1 MS&AD Insurance Group Holdings 1.3 Mitsubishi Gas Chemical 5.5 Yotai Refractories 1.2 Corporation 5.2 Mitani Corporation 1.2 Corporation 3.7 Sumitomo Electric Industries 1.1 Industry 3.2 Sho-bond Holdings 1.0 2.9 Corporation 0.9 Corporation 2.3 Sumitomo Forestry 0.7 NGK Insulators 2.2 Nittetsu Mining 0.7 Corporation 2.0 Nichiha 0.5 Mitsubishi Research Institute 1.9 Denki Kagaku Kogyo Kabushiki Kaisha 0.5 Murakami Corporation 1.6 Sumitomo Bakelite 0.5 Nippon Carbide Industries 1.5 Percentage share of Sumitomo-related Percentage share of Mitsubishi-related 46.2% 66.1% to total holdings to total holdings Note: Blue shading indicates companies belonging to the Sumitomo Note: Blue shading indicates companies belonging to the Mitsubishi Group Public Affairs Committee. Public Affairs Committee. Source: Company data, Credit Suisse Source: Company data, Credit Suisse Figure 14: Tokai Carbon’s top 20 shareholdings (market Figure 15: Mitsui & Co.’s top 20 shareholdings (market value) value) Tokai Carbon Market value (¥ bn) Mitsui & Co. Market value (¥ bn) Mitsubishi UFJ Financial Group 9.5 Seven & i Holdings 82.8 Corporation 2.9 Recruit Holdings 43.6 Mitsubishi Corporationoration 1.1 TonenGeneral Sekiyu K.K. 43.0 Mitsubishi Logistics Corporation 1.0 Toyota Motor Corporation 28.1 Higo Bank 1.0 Yamaha Motor 20.5 NGK Insulators 1.0 19.1 Toyo Tire & Rubber 1.0 MS&AD Insurance Group Holdings 16.1 NOK Corporation 0.9 14.2 Mitsubishi Estate 0.7 14.0 Daido Steel 0.7 & Sumikin Bussan 13.5 Financial Group 0.7 Corporation Toagosei 0.4 MODEC 13.0 Yamaguchi Financial Group 0.3 Tokyo Broadcasting System Holdings 12.9 K.C.Tech Co.,Ltd. 0.3 Yamato Kogyo 12.8 Air Water 0.3 Nihon Unisys 12.0 Sumitomo Rubber Industries 0.3 Coca-Cola East Japan 10.5 Tokio Marine Holdings 0.2 Kato Sangyo 8.2 Yokohama Rubber 0.2 TPV Technology 8.0 Shiga Bank 0.2 J-Oil Mills 7.7 Nippon Steel & Sumitomo Metal SKY Perfect JSAT Holdings 7.4 0.2 Corporation Dai-Ichi Life Insurance 6.7 Percentage share of Mitsubishi-related Percentage share of Mitsui-related 52.4% 17.1% stocks to total holdings stocks to total holdings Note: Blue shading indicates companies belonging to the Mitsubishi Note: Blue shading indicates companies belonging to the MITSUI Public Affairs Committee. Public Relations Committee Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Basic materials/Trading cos 8 11 September 2015

Figure 16: ’s top 20 shareholdings Figure 17: ’s top 20 shareholdings (market value) (market value) Sumitomo Corporation Market value (¥ bn) Mitsubishi Corporation Market value (¥ bn) Nippon Steel & Sumitomo Metal AYALA 120.2 46.2 Corporation Motors 106.0 Toyota Motor Corporation 25.1 Corporation 96.8 Sumitomo Realty & Development 20.1 Aeon 70.6 Yamazaki Baking 16.7 Central Japan Railway Company 58.7 MS&AD Insurance Group Holdings 15.8 Tokio Marine Holdings 52.2 Asahi Group Holdings 14.9 Nissin Foods Holdings 42.2 SKY Perfect JSAT Holdings 12.4 Mitsubishi Heavy Industries 30.8 Motor Corporation 11.9 Mitsubishi Estate 26.4 Sumitomo Metal Mining 10.6 Hokuetsu Kishu Paper 26.0 9.7 Ryohin Keikaku 25.6 Kato Sangyo 8.5 T-GAIA Corp. 24.0 Sumitomo Electric Industries 8.5 JX Holdings 23.3 Sumitomo Rubber Industries 8.2 Mitsubishi Electric Corporation 22.9 Industries 7.9 THAI UNION FROZEN PRODUCTS 21.6 Dai-Ichi Life Insurance 7.8 Yamazaki Baking 17.6 Yamato Kogyo 6.9 Corporation 17.5 Sumitomo Forestry 5.9 Mitsubishi UFJ Financial Group 14.3 DaikyoNishikawa 5.2 Nisshin Seifun Group 13.5 Sawai Pharmaceutical 4.8 Kirin Holdings 11.4 Honda Motor 4.6 Percentage share of Mitsubishi-related 32.2% Percentage share of Sumitomo-related stocks to total holdings 29.0% stocks to total holdings Note: Blue shading indicates companies belonging to the Sumitomo Note: Blue shading indicates companies belonging to the Mitsubishi Group Public Affairs Committee. Public Affairs Committee.. Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse Cases where a single holding takes up the majority of the shareholdings Looking at individual holdings, we see cases where single holdings have prominently high value. Examples include the cross-shareholding between Nippon Electric Glass and Nipro, and Tokai Carbon’s stake in Mitsubishi UFJ Financial Group. Nippon Electric Glass and Nipro: Scale of cross-shareholding out of proportion to their partnership Nippon Electric Glass (NEG) and Nipro each have stakes of around 15% in each other and are their lead shareholders. NEG says Nipro serves as an agent for its glass medical tubes and that they are strengthening their relationship, with an eye on increased sales in Japan and overseas. However our view is that the scale of their cross-shareholding is excessive relative to the size of their businesses and the synergies from working together. There would gradually be more pressure from the market to unwind their cross- shareholding. Tokai Carbon and MUFG: MUFG is the company’s main bank, but…. Tokai Carbon says it has a large stake in Mitsubishi UFJ Financial Group (MUFG) to “maintain and strengthen its business ties” with the group. We believe this has to do with its history, including the fact that Mitsubishi Bank (MUFG’s predecessor) was Tokai Carbon’s main bank, or that in the past bank employees have served as president of Tokai Carbon. Even so, it is difficult to justify why MUFG alone accounts for about 40% of the market cap of its total holdings.

Basic materials/Trading cos 9 11 September 2015

NGK Insulators and Seiko Epson: Holdings high despite decreased business NGK Insulators holds a stake in Seiko Epson and in the past there were strong business ties between the two companies’ electronics businesses. However, the scale of the business has declined over the last few years, and it is unclear how the stake can be warranted given the current level of transactions between the two. Seiko Epson does hold a stake in NGK Insulators, but it is only 1% of NGK Insulators’ shares outstanding, so there would be little impact if Seiko Epson were to liquidate their position.

Figure 18: Examples of single holdings taking up a high percentage of total shareholdings Market Percentage Percent of outstanding shares of Shareholder → Investment value share of total the shareholder company that the (¥ bn) stock holdings invested company owns Nippon Electric Glass → Nipro 34.2 63% 14% Tokai Carbon → Mitsubishi UFJ Financial Group 9.5 39% － NGK Insulators → Seiko Epson Corporation 13.2 26% 1% Mitsui & Co. → Recruit Holdings 43.6 9% － → Recruit Holdings 3.6 5% － Source: Company data, Credit Suisse Corporate Governance Code requires justifications for shareholdings Japan’s Corporate Governance Code, which went into effect in June, addresses shares held in companies for non-investment purposes. The code says that when companies hold shares of other listed companies for strategic (non-investment) purposes, they should explain the rationale and policy behind their holdings. (. “Principle 1.4: Cross-Shareholdings.” Japan’s Corporate Governance Code: Seeking Sustainable Corporate Growth and Increased Corporate Value over the Mid- to Long-Term. 1 June 2015.) However, many companies use the same explanation for all shares held for investment purposes (along the lines of “to strengthen our business relations with the company”). This cookie-cutter explanation is inadequate. For cross-shareholdings and cases where stakes in Zaibatsu affiliates make up the lion’s share of a company’s holdings, a more detailed explanation is needed. If a company holds shares for reasons that fail to satisfy its own shareholders (such as pure cross-shareholdings and stakes in Zaibatsu affiliates) or if a company still has substantial shareholdings acquired in the past that are passively left over on its balance sheet, it should adhere to the Corporate Governance Code and sell off its positions at the right timing.

Basic materials/Trading cos 10 11 September 2015 (2) Calculating the market value of shareholdings Totals of ¥738bn for materials sector, ¥2,142bn for trading company sector Market value of shareholdings amounts to at least 10% of total assets for some companies So far in this report, we have looked at shares that companies might hold for dubious reasons—e.g. cross-shareholdings and Zaibatsu shares. We now look at the potential proceeds from selling off all such shareholdings, including cross-shareholdings and Zaibatsu shares. Figures 19–20 show the market value of shareholdings as a percentage of total assets. This percentage is largest at Sumitomo Osaka Cement (16%), followed by Asahi Glass (13%) and Tokai Carbon (12%).

Figure 19: Market value of shareholdings as a percentage Figure 20: Market value of shareholdings as a percentage of total assets (materials/ battery sector) of total assets (trading companies)

(¥ bn) (¥ bn) Current market value of Current market value of 300 18% 16% shareholdings 1,000 shareholdings 7% Vs total balance sheet 16% 250 13% Vs total balance sheet (RHS) (RHS) 900 6% 14% 6% 12% 200 12% 800 9% 8% 10% 700 5% 150 7% 7% 8% 4% 5% 5% 600 100 4% 6% 4% 3% 4% 500 3% 50 3% 3% 0% 0% 2% 400 0 0% 2%

300 2% NEG

Rengo 200

GS GS Yuasa 1%

NSGGroup

ToyoTanso

Asahi Glass OjiHoldings

TokaiCarbon 100

NipponPaper

NipponCarbon

NGKInsulators TaiheiyoCement SumitomoOsaka 0 0% Glass Cement/Ceramics Carbon Paper/pulp Battery Itochu Marubeni Mitsui Sumitomo Mitsubishi

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Basic materials/Trading cos 11 11 September 2015

Impact likely significant, whether used for special dividends or share buybacks We compared the market value of shareholdings with each company’s annual dividend payout (Figure 21), and found that for some companies, the value of shareholdings amounts to 10% or more of that company’s annual dividend payout. If proceeds from the sale of shareholdings were put toward a special dividend, the size of such dividends would be substantial. Similarly, if the shareholdings were sold off in their entirety and the proceeds were put toward share repurchases, we calculate that for some companies (those for which the market value of shareholdings is high relative to market cap) would have the wherewithal to buy back more than a third of outstanding shares.

Figure 21: Market value of shareholdings (as percentage Figure 22: Market value of shareholdings (as percentage of annual dividend payout) of market cap)

(years) 20 50% 45% 40% 35% 30% 25% 10 20% 15% 10% 5% 0%

0

NEG

Mitsui

Itochu

Rengo

Marubeni

NEG

Mitsubishi

Sumitomo

GS GS Yuasa

Mitsui

Itochu

Rengo

NSGGroup

ToyoTanso

Asahi Glass

OjiHoldings

TokaiCarbon

NipponPaper

Marubeni

Mitsubishi

Sumitomo

NipponCarbon

GS Yuasa

NGKInsulators

NSGGroup

ToyoTanso

Asahi Glass

TaiheiyoCement

OjiHoldings

SumitomoOsaka

TokaiCarbon

NipponPaper NipponCarbon

NGKInsulators Glass Cement/Ceramics Carbon Paper/pulpBattery Trading co

TaiheiyoCement SumitomoOsaka Glass Cement/Ceramics Carbon Paper/pulpBattery Trading co

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Basic materials/Trading cos 12 11 September 2015

Shareholdings also substantial when stacked up against interest-bearing debt and capex We believe there would also be a sizable impact if proceeds from the sale of shareholdings were put toward improving the company's finances (i.e., paying down interest-bearing debt), or ramping up capex (Figures 25–26). Again, even if the companies were to sell off just a portion of their shareholdings (the cross-shareholdings and the Zaibatsu shares), they would still stand to create a substantial amount of cash.

Figure 23: Market value of shareholdings versus Figure 24: Market value of shareholdings versus operating cash flow (materials/battery sector) operating cash flow (trading companies) (years) (years) 3 1.5

2

1.0

1

0.5

0

NEG

Rengo

GS GS Yuasa

NSGGroup

ToyoTanso

Asahi Glass

OjiHoldings

TokaiCarbon

NipponPaper

NipponCarbon

NGKInsulators TaiheiyoCement SumitomoOsaka 0.0 Glass Cement/Ceramics Carbon Paper/pulp Battery Itochu Marubeni Mitsui Sumitomo Mitsubishi

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 25: Market value of shareholdings versus net Figure 26: Market value of shareholdings versus capex interest-bearing debt (years) 100% 4 90% 80% 3 70% 60% 50% 2 40%

30% 1 20% 10% 0

0%

NEG

Mitsui

Itochu

Rengo

NEG

Mitsui

Itochu

Rengo

Marubeni

Mitsubishi

Sumitomo

GS GS Yuasa

Marubeni

NSGGroup

ToyoTanso

Mitsubishi

Asahi Glass

Sumitomo

OjiHoldings

GS GS Yuasa

TokaiCarbon

NSGGroup

NipponPaper

ToyoTanso

Asahi Glass

OjiHoldings

NipponCarbon

NGKInsulators

TokaiCarbon

NipponPaper

TaiheiyoCement

NipponCarbon

NGKInsulators

SumitomoOsaka TaiheiyoCement SumitomoOsaka Glass Cement/Ceramics Carbon Paper/pulpBattery Trading co Glass Cement/Ceramics Carbon Paper/pulpBattery Trading co

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Basic materials/Trading cos 13 11 September 2015

Sumitomo Osaka Cement, Asahi Glass, and Tokai Carbon, have the ability to return sales proceeds We have considered shareholder returns, debt repayment, and capex as potential means of utilizing proceeds from the sale of shareholdings. However, companies with fragile finances are most likely to put those proceeds toward paying down debt. Thus the companies best placed to bolster shareholder returns are those that (1) have substantial shareholdings; (2) have a high percentage of shareholdings that they cannot adequately justify, including cross-shareholdings and Zaibatsu shares; and (3) have sound finances. In Figures 27–28 we plot the market value of the shareholdings (as a percentage of total assets) against a financial indicator (net D/E), for both the materials sector and the trading company sector. The higher the company is on the graph, the greater the size of its shareholdings, and the closer it is to the left, the healthier the company’s finances. We highlight Sumitomo Osaka Cement, Asahi Glass, and Tokai Carbon as companies that have healthy finances and also have significant shareholdings as a percentage of total assets. Among the trading companies, Mitsubishi and Mitsui meet these criteria relatively well. All five companies have high percentage of the aforementioned cross-shareholdings and Zaibatsu shares. We therefore think that stocks that have lost meaning from a business perspective and are held primarily to sustain cross-shareholdings with business partners or Zaibatsu relationships could be potential candidates for a share sale. These companies could use the cash raised from the sale of such shares to fund better shareholder returns.

Figure 27: Size of shareholdings (as a percentage of total Figure 28: Size of shareholdings (as a percentage of total assets) against net D/E (battery/materials sector) assets) against net D/E (trading companies) (Market value of stocks/total asset) (Market value of stocks/total asset) 18% 6% Glass Paper/pulp Mitsubishi 16% Sumitomo Cement/Ceramics Battery Osaka Cement Carbon 14% 5% Asahi Glass Holds large amounts of listed stocks and have 12% Tokai Carbon the capacity to return 4% cash to shareholders 10% Mitsui Holds large amounts of Nippon Carbon 8% Rengo listed stocks and have the capacity to return NEG 3% Sumitomo NGK Insulators cash to shareholders 6% Taiheiyo Cement Nippon Paper Itochu GS Yuasa 4% 2% Marubeni 2% Oji Holdings Toyo Tanso NSG Group 0% 1% -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 (Net D/E ratio) (Net D/E ratio) Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Basic materials/Trading cos 14 11 September 2015 (3) Potential impact on earnings from the sales of shareholdings Likely to boost income statement profits Stock prices have fallen in the past month, but even if we look at the period since since end-FY14, many companies still have unrealized gains (Figure 29). In fact if we define “unrealized gains/losses on other securities,” (on their income statements) as cumulative unrealized gains, all companies have unrealized gains. (even though it could also include unrealized gains on items other than specific investment shares and de facto holdings. Therefore for the 11 companies employing J-GAAP, we believe the sales of shareholdings could provide a boost to their income statement profits. Selling off nearly ¥3tn worth of shares is like “kill three birds with one stone” (improves corporate governance, generates cash, and realizes capital gains).

Figure 29: Unrealized gains since end-FY14 (only for Figure 30: Breakdown of unrealized gains (only for companies employing J-GAAP) companies employing J-GAAP) (¥ bn) (¥ bn) Unrealized gains since the end of last Unrealized gains since the end of last fiscal year 10 1.0% 60 7% Vs total balance sheet (RHS) Unrealized gains at the end of last fiscal year 8 0.8% 50 Vs total balance sheet (RHS) 6% 6 0.6% 5% 40 4 0.4% 4% 30 2 0.2% 3% 20 0 0.0% 2% 10 -2 -0.2% 1%

-4 -0.4% 0 0%

-6 -0.6% -10 -1%

NEG

NEG

Rengo

Rengo

GS Yuasa

GS GS Yuasa

NSGGroup

ToyoTanso

NSGGroup

Asahi Glass

ToyoTanso

OjiHoldings

Asahi Glass

OjiHoldings

TokaiCarbon

TokaiCarbon

NipponPaper

NipponPaper

NipponCarbon

NGKInsulators

NipponCarbon

NGKInsulators

TaiheiyoCement

TaiheiyoCement

SumitomoOsaka SumitomoOsaka Glass Cement/Ceramics Carbon Paper/pulp Battery Glass Cement/Ceramics Carbon Paper/pulp Battery

Note: Asahi Glass and Nippon Sheet Glass use IFRS and therefore Note: (1) Asahi Glass and Nippon Sheet Glass use IFRS and the concept of unrealized gains does not apply therefore the concept of unrealized gains does not apply. (2) We Source: Company data, Credit Suisse assume that “unrealized gains/losses on other securities” is the cumulative unrealized gains as of the end of the previous fiscal year. Source: Company data, Credit Suisse

Basic materials/Trading cos 15 11 September 2015 Reference materials Definition of terms Definition of shareholdings We have defined “shareholdings” in this report as individually listed specific investment shares and de facto holdings in each company's financial statements. For smaller holdings, information such as individual company names and number of shares are not disclosed. However, for materials sector companies it is possible to estimate the combined value of specific investment shares and de facto holdings fairly accurately from just the individually listed holdings (Figure 31). Even for the trading company sector, individually listed holdings account for around 70–80% of all shareholdings.

Figure 31: Percentage of total specific investment shares and de facto holdings that individually listed shareholdings cover (book value basis)

100% 95% 90% 85% 80% 75% 70% 65% 60% 55%

50%

NEG

Mitsui

Itochu

Rengo

Marubeni

Mitsubishi

Sumitomo

GS GS Yuasa

NSGGroup

ToyoTanso

Asahi Glass

OjiHoldings

TokaiCarbon

NipponPaper

NipponCarbon

NGKInsulators

TaiheiyoCement SumitomoOsaka Glass Cement/Ceramics Carbon Paper/pulpBattery Trading co

Source: Company data, Credit Suisse For both cross-shareholdings and Zaibatsu shares, we only cover those individually listed in financial statements. Thus the actual figures may be slightly higher than those mentioned in this report. However, the value of holdings too small to be individually mentioned are small, and therefore we believe those shares would have little impact on the results of our analysis. Number of shares held and market cap We calculated the market value of shareholdings based on the number of shares held at end-March 2015 for companies closing their books in March, and end-December 2014 for companies closing their books in December. For time series data though, we have used the book values. Data on cross-shareholdings Bloomberg L.P. has supplied us with the list of companies that are cross-held. We thank them for their contribution and support. Definition of the Morimura Zaibatsu For the main 3 Zaibatsu (Mitsui, Sumitomo, and Mitsubishi) we define Zaibatsu affiliates as member companies of the corresponding public affairs committees, jointly operated by group companies within each Zaibatsu. However for the sake of convenience, we defined the Morimura Group as companies identified in NGK Insulators’ financial statement-- namely TOTO, NGK Spark Plug, Noritake, and NGK Insulators itself.

Basic materials/Trading cos 16 11 September 2015

Time series data Amount of shareholdings largely unchanged over the past 15 years Time series data of the amount of shareholdings (book values as of the end of each fiscal year, as declared on the companies’ financial statement) show that for each company, the amounts roughly move in the same ways as that of TOPIX (Figure 32). This suggests that companies' shareholdings have a high correlation with the broader market (beta close to 1). For the materials sector companies, the number of companies held has remained fairly stable over the years. This is likely because these shares are held for long-term reasons, such as maintaining relationships with business partners and banks. By contrast, in the trading company sector the number of companies held has steadily declined over the years. We attribute this to trading companies practicing greater selectivity and concentrating their investments (Figure 34). For clarification: From 2010 onward, we have included the book values for specific investment shares and de facto holdings, and for 2009 and earlier, we have included the equity portion of investment securities, as well as the equity portions of available-for-sale and other marketable securities (these amounts are negligible) in shareholdings.

Figure 32: Book value of shareholdings Taiheiyo Cement (¥ bn) (¥ bn) (¥ bn) NEG (¥ bn) Itochu Marubeni (¥ bn) Oji Holdings 200 300 70 Nippon Paper NGK Insulators 800 Mitsui Sumitomo 1,800 180 Rengo Sumitomo Osaka Mitsubishi (RHS) 700 1,600 250 60 160 Asahi Glass (RHS) Tokai Carbon 1,400 Nippon Carbon 600 140 50 200 Toyo Tanso 1,200 120 500 40 GS Yuasa 1,000 100 150 400 30 800 80 300 100 600 60 20 200 40 400 50 10 100 20 200 0 0 0 0 0 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 Source: Company data, Credit Suisse

Figure 33: Book value of shareholdings, divided by TOPIX (materials sector FY2006 = 100)

400 Asahi Glass 180 140 350 NEG 160 NGK Insulators 300 140 Toyo Tanso 120 120 250 Oji Holdings Rengo 100 100 200 80 150 80 Taiheiyo Cement 60 100 Sumitomo Osaka Itochu Marubeni Mitsui 40 60 Tokai Carbon 50 Sumitomo Mitsubishi Nippon Carbon 20 0 40 0 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 Source: Company data, Credit Suisse

Figure 34: Number of companies held (Number of holdings) (Number of holdings) (Number of holdings) NEG 400 140 Tokai Carbon 1,400 Itochu Marubeni 350 120 Nippon Carbon Mitsui Sumitomo Toyo Tanso 1,200 Mitsubishi 300 100 GS Yuasa 1,000 250 80 200 800 60 150 600 40 100 Asahi Glass NGK Insulators 400 50 Taiheiyo Cement Sumitomo Osaka 20 Oji Holdings Nippon Paper 0 0 200 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 Source: Company data, Credit Suisse

Basic materials/Trading cos 17 11 September 2015 Reference data

Figure 35: Market value of shareholdings at 18 companies Figure 36: Market value of shareholdings at 18 companies in our coverage (in descending order of value) in our coverage (in descending order of the percentage versus total assets) (¥ bn) Total shareholdings vs balance sheet (¥ bn) vs balance sheet Total shareholdings Trading co Mitsubishi Corp 980.4 5.8% Cement/Ceramics Sumitomo Osaka Cement 16.1% 54.0 Trading co Mitsui & Co. 494.9 4.1% Glass Asahi Glass 13.5% 279.7 Trading co Sumitomo Corp 283.7 3.1% Carbon Tokai Carbon 11.5% 24.3 Glass Asahi Glass 279.7 13.5% Paper/pulp Rengo 8.9% 58.2 Trading co Itochu Corp 228.1 2.7% Carbon Nippon Carbon 8.0% 4.6 Trading co Marubeni Corp 155.3 2.0% Glass Nippon Electric Glass 7.4% 54.3 Paper/pulp Nippon Paper Industries 79.5 5.3% Cement/Ceramics NGK Insulators 7.2% 50.8 Paper/pulp Oji Holdings 69.7 3.2% Trading co Mitsubishi Corp 5.8% 980.4 Paper/pulp Rengo 58.2 8.9% Paper/pulp Nippon Paper Industries 5.3% 79.5 Glass Nippon Electric Glass 54.3 7.4% Battery GS Yuasa 5.2% 18.7 Cement/Ceramics Sumitomo Osaka Cement 54.0 16.1% Cement/Ceramics Taiheiyo Cement 4.3% 44.5 Cement/Ceramics NGK Insulators 50.8 7.2% Trading co Mitsui & Co. 4.1% 494.9 Cement/Ceramics Taiheiyo Cement 44.5 4.3% Paper/pulp Oji Holdings 3.2% 69.7 Carbon Tokai Carbon 24.3 11.5% Trading co Sumitomo Corp 3.1% 283.7 Battery GS Yuasa 18.7 5.2% Trading co Itochu Corp 2.7% 228.1 Carbon Nippon Carbon 4.6 8.0% Trading co Marubeni Corp 2.0% 155.3 Carbon Toyo Tanso 0.3 0.4% Carbon Toyo Tanso 0.4% 0.3 Glass NSG Group － － Glass NSG Group － － Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 37: Market value of cross-shareholdings at 18 Figure 38: Market value of cross-shareholdings at 18 companies in our coverage (in descending order of value) companies in our coverage (in descending order of the percentage versus total shareholdings) (¥ bn) Cross-shareholding total vs total shareholdings (¥ bn) vs total shareholdings Cross-shareholding total Trading co Mitsubishi Corp 234.4 23.9% Glass Nippon Electric Glass 89.3% 48.5 Glass Asahi Glass 226.3 80.9% Glass Asahi Glass 80.9% 226.3 Trading co Sumitomo Corp 210.5 74.2% Cement/Ceramics NGK Insulators 80.7% 41.0 Trading co Mitsui & Co. 140.5 28.4% Cement/Ceramics Taiheiyo Cement 78.8% 35.0 Trading co Marubeni Corp 99.9 64.3% Paper/pulp Rengo 76.0% 44.2 Glass Nippon Electric Glass 48.5 89.3% Trading co Sumitomo Corp 74.2% 210.5 Paper/pulp Rengo 44.2 76.0% Battery GS Yuasa 73.6% 13.8 Paper/pulp Nippon Paper Industries 41.0 51.6% Trading co Marubeni Corp 64.3% 99.9 Cement/Ceramics NGK Insulators 41.0 80.7% Carbon Tokai Carbon 60.7% 14.7 Trading co Itochu Corp 40.2 17.6% Paper/pulp Oji Holdings 57.7% 40.2 Paper/pulp Oji Holdings 40.2 57.7% Carbon Toyo Tanso 56.1% 0.2 Cement/Ceramics Taiheiyo Cement 35.0 78.8% Paper/pulp Nippon Paper Industries 51.6% 41.0 Cement/Ceramics Sumitomo Osaka Cement 24.0 44.4% Cement/Ceramics Sumitomo Osaka Cement 44.4% 24.0 Carbon Tokai Carbon 14.7 60.7% Carbon Nippon Carbon 42.2% 1.9 Battery GS Yuasa 13.8 73.6% Trading co Mitsui & Co. 28.4% 140.5 Carbon Nippon Carbon 1.9 42.2% Trading co Mitsubishi Corp 23.9% 234.4 Carbon Toyo Tanso 0.2 56.1% Trading co Itochu Corp 17.6% 40.2 Glass NSG Group － － Glass NSG Group － － Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 39: Market value of Zaibatsu shares at the 8 Figure 40: Market value of Zaibatsu shares at the 8 Zaibatsu companies in our coverage (in descending order Zaibatsu companies in our coverage (in descending order of value) of the percentage versus total shareholdings) (¥ bn) Zaibatsu total vs total shareholdings (¥ bn) vs total shareholdings Zaibatsu total Trading co Mitsubishi Corp 315.6 32.2% Glass Asahi Glass 66.1% 185.0 Glass Asahi Glass 185.0 66.1% Cement/Ceramics Sumitomo Osaka Cement 46.2% 24.9 Trading co Mitsui & Co. 84.6 17.1% Trading co Mitsubishi Corp 32.2% 315.6 Trading co Sumitomo Corp 82.1 29.0% Paper/pulp Oji Holdings 26.6% 18.9 Cement/Ceramics Sumitomo Osaka Cement 24.9 46.2% Trading co Sumitomo Corp 23.3% 67.5 Paper/pulp Oji Holdings 20.4 29.2% Cement/Ceramics NGK Insulators 24.0% 12.4 Cement/Ceramics NGK Insulators 12.1 23.8% Trading co Mitsui & Co. 13.9% 70.4 Glass NSG Group － － Glass NSG Group － － Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Basic materials/Trading cos 18 11 September 2015

Figure 41: Asahi Glass’s top 20 shareholdings (market Figure 42: Nippon Electric Glass’ top 20 shareholdings value) (market value) Asahi Glass Market value Market value Nippon Electric Glass (Mitsubishi) (¥ bn) (¥ bn) Mitsubishi Estate 57194.0 Nipro 34179.2 Toyota Motor Corporation 52437.0 Noritz Corporation 1980.6 Tokio Marine Holdings 33791.3 Air Water 1844.0 Mitsubishi Corporation 32267.1 Computer 1805.1 Mitsubishi UFJ Financial Group 23652.8 1745.0 Honda Motor 13113.8 Rohm Semiconductor Suzuki Motor Corporation 12126.5 1720.9 Kirin Holdings 8790.9 Daikin Industries 1574.8 Mitsubishi Heavy Industries 7052.8 Bank of Kyoto 810.2 Mitsubishi Gas Chemical 5463.6 Shiga Bank 747.1 Mitsubishi Logistics Corporation 5188.2 Sumitomo Mitsui Trust Holdings 685.2 Nikon Corporation 3742.1 NEC Corporation 673.5 Daiwa House Industry 3166.3 DIC Corporation 671.4 Mizuho Financial Group 2886.9 Mitsubishi Electric Corporation 603.3 Mitsubishi Electric Corporation 2262.2 Sumitomo Realty & Development 560.9 NGK Insulators 2238.1 Sumitomo Mitsui Financial Group 557.5 Mitsubishi Materials Corporation 2048.0 Corporation 537.7 Mitsubishi Research Institute 1868.6 Nissin Electric 514.8 Murakami Corporation 1640.6 Ono Pharmaceutical Nippon Carbide Industries 1476.5 400.9 Percentage share of "Zaibatsu" stocks to 380.8 66.1% Kansai Electric Power 278.4 total holdings Note: Blue shading indicates companies belonging to the Mitsubishi Source: Company data, Credit Suisse Public Affairs Committee Source: Company data, Mitsubishi Public Affairs Committee, Credit Suisse

Figure 43: NGK Insulator’s top 20 shareholdings (market Figure 44: Taiheiyo Cement’s top 20 shareholdings value) (market value) NGK Insulators Market value Market value Taiheiyo Cement (Morimura) (¥ bn) (¥ bn) Seiko Epson Corporation 13192.8 Mizuho Financial Group 13549.3 TOTO 7865.2 Corporation 3350.3 Central Japan Railway Company 5866.5 Toa Corporation 2821.1 Mitsubishi UFJ Financial Group 4923.2 Yamaguchi Financial Group 2724.0 NGK Spark Plug 3672.1 Nippon Hume Corporation 2558.4 Tokio Marine Holdings 3053.6 Hyakujushi Bank Aichi Bank 1575.0 2523.6 LIXIL Group Corporation 1222.8 Nippon Concrete Industries 2023.0 Meiko Trans 1027.7 Japan Pile Corporation 1953.0 Sumitomo Electric Industries 863.9 P.S. Mitsubishi Construction 1756.1 Asahi Glass 852.0 MS&AD Insurance Group Holdings 1685.0 Mitsubishi Corporation 844.8 Asahi Concrete Works 1179.0 Okaya & Co. 681.9 Hankyu Hanshin Holdings 1036.8 627.1 Gunma Bank 1035.4 Noritake 555.4 Higo Bank 855.4 Ogaki Kyoritsu Bank 514.5 Mitsui Fudosan 767.7 433.8 eREX 727.8 Dai-Ichi Life Insurance 417.3 Kuwazawa Corporation 668.6 MS&AD Insurance Group Holdings 360.8 J-POWER Kyushu Electric Power 287.1 657.7 Percentage share of "Zaibatsu" stocks to Haneda Zenith Holdings 561.0 23.8% Yoshicon 393.6 total holdings Note: Blue shading indicates companies belonging to the Morimura Source: Company data, Credit Suisse Group Source: Company data, Credit Suisse

Basic materials/Trading cos 19 11 September 2015

Figure 45: Sumitomo Osaka Cement’s top 20 Figure 46: Tokai Carbon’s top 20 shareholdings (market shareholdings (market value) value) Sumitomo Osaka Cement Market value Market value Tokai Carbon (Sumitomo) (¥ bn) (¥ bn) Holcim Philippines,Inc. 20625.8 Mitsubishi UFJ Financial Group 9520.9 Sumitomo Corporation 4944.6 Bridgestone Corporation 2902.8 Sumitomo Metal Mining 3373.0 Mitsubishi Corporation 1053.1 Sumitomo Mitsui Financial Group 2807.0 Mitsubishi Logistics Corporation 1012.2 Sumitomo Chemical 2654.7 Higo Bank 989.2 NGK Insulators Sumitomo Realty & Development 2202.1 962.3 Toyo Tire & Rubber 955.2 Sumitomo Heavy Industries 2028.4 NOK Corporation 902.5 Sumitomo Mitsui Trust Holdings 1848.7 Mitsubishi Estate 735.4 Mitani Sekisan 1813.2 Daido Steel 697.4 MS&AD Insurance Group Holdings 1320.6 657.9 Yotai Refractories 1224.1 Toagosei 409.2 Mitani Corporation 1172.9 Yamaguchi Financial Group 325.2 Sumitomo Electric Industries 1135.5 K.C.Tech Co.,Ltd. 303.3 Sho-bond Holdings 1049.4 Air Water 274.8 Meidensha Corporation 873.5 Sumitomo Rubber Industries 269.1 Sumitomo Forestry 703.2 Tokio Marine Holdings 239.2 Nittetsu Mining 687.2 Yokohama Rubber 237.7 Nichiha 539.2 Shiga Bank 209.8 Denki Kagaku Kogyo Kabushiki Kaisha 529.4 Nippon Steel & Sumitomo Metal 199.0 Sumitomo Bakelite 513.9 Corporation Percentage share of "Zaibatsu" stocks to Percentage share of Mitsubishi-related 52.4% 46.2% stocks to total holdings total holdings Note: Blue shading indicates companies belonging to the Sumitomo Note: Blue shading indicates companies belonging to the Mitsubishi Group Public Affairs Committee Public Affairs Committee. Tokai Carbon does not belong to the Source: Company data, Sumitomo Group Public Affairs Committee, Mitsubishi Zaibatsu. Credit Suisse Source: Company data, Mitsubishi Public Affairs Committee, Credit Suisse

Figure 47: Nippon Carbon’s top 20 shareholdings (market Figure 48: Toyo Tanso’s top 20 shareholdings (market value) value) Market value Market value Nippon Carbon Toyo Tanso (¥ bn) (¥ bn) 1198.0 Okumura Corporation 99.5 Taiyo Nippon Sanso Corporation 896.2 Kyoei Steel 633.6 Hosokawa Micron Group 75.1 Mizuho Financial Group 425.2 Mizuho Financial Group 69.6 Sumitomo Corporation 149.6 Hyakujushi Bank 40.7 Tokyo Tekko 133.5 Senshu Ikeda Holdings 33.0 Shiga Bank 124.8 SUMCO Corporation 7.7 Nippon Steel & Sumitomo Metal 97.9 Corporation GMB Corporation 1.6 Ogaki Kyoritsu Bank 83.0 Sekisui Machinery 1.6 Sumitomo Mitsui Financial Group 78.3 RIX Corporation 1.4 Tosoh Corporation 70.0 Dai-Ichi Life Insurance 0.2 Daido Steel 68.7 Katakura Industries 59.3 Air Water 57.2 Sompo Japan Nipponkoa Holdings 53.0 Hokuhoku Financial Group 50.8 Hanwa 49.0 Oiles Corporation 48.6 JFE Holdings 44.5 Hosokawa Micron Group 44.1 Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Basic materials/Trading cos 20 11 September 2015

Figure 49: Oji Holdings’ top 20 shareholdings (market Figure 50: Nippon Paper Industries’ top 20 shareholdings value) (market value) Oji Holdings Market value Market value Nippon Paper Industries (Mitsui) (¥ bn) (¥ bn) Sumitomo Mitsui Financial Group 8914.1 Recruit Holdings 16721.0 Sumitomo Mitsui Trust Holdings 5956.0 Mizuho Financial Group 8982.5 Printing 5628.2 Rengo 6691.3 Japan Pulp and Paper 5490.6 Oji Holdings 6253.5 Mizuho Financial Group 4917.4 Japan Pulp and Paper 4696.7 2790.3 Mitsubishi UFJ Financial Group 3369.4 Toray Industries 2761.8 Toppan Printing 2495.4 Nippon Television Holdings 2488.0 Yamaguchi Financial Group 2314.5 Mitsubishi UFJ Financial Group 2219.8 Dai Nippon Printing 2311.3 Chuetsu Pulp & Paper 2097.3 77 Bank JX Holdings 2087.4 2142.7 MS&AD Insurance Group Holdings 2085.5 2123.5 2049.6 Jowa Holdings 2087.8 Juroku Bank 1926.5 Sumitomo Mitsui Trust Holdings 1782.0 Nissha Printing 1893.3 Marubeni Corporation 1574.5 Lion Corporation 1841.3 FUJIFILM Holdings Corporation 1492.7 Japan Tobacco 1698.8 Shizuoka Bank 1378.1 Rengo 1554.9 Sompo Japan Nipponkoa Holdings 1363.0 1532.5 Hiroshima Bank 1302.5 Shizuoka Bank 1296.5 1286.5 Percentage share of "Zaibatsu" stocks to SEIKO PMC Corporation 29.2% 1275.4 total holdings Note: Blue shading indicates companies belonging to the MITSUI Source: Company data, Credit Suisse Group Public Affairs Committee Source: Company data, MITSUI Public Affairs Committee, Credit Suisse

Figure 51: Rengo’s top 20 shareholdings (market value) Figure 52: Itochu Corporation’s top 20 shareholdings (market value) Market value Market value Rengo Itochu Corporation (¥ bn) (¥ bn) Nippon Paper Industries 7071.1 Isuzu Motors 91495.1 Asahi Group Holdings 5148.8 Nissin Foods Holdings 29214.0 Sumitomo Mitsui Financial Group 4329.3 Mazda Motor Corporation 11793.8 Daikin Industries 3867.2 Scatec Solar ASA 11378.6 Yakult Honsha 3630.7 Seven & i Holdings 8810.8 3059.3 MEGMILK SNOW BRAND 8437.0 Meiji Holdings 2295.6 Advance Residence Investment 8077.1 Sapporo Holdings 1923.2 Corporation Toppan Printing 1742.4 Showa Sangyo 5702.3 Sumitomo Corporation 1736.0 Mitsubishi UFJ Financial Group 5327.8 Oji Holdings 1731.6 Group Holdings 5090.2 Ezaki Glico 1311.7 Adways 4754.7 Corporation 1304.1 Mizuho Financial Group 4202.3 Sumitomo Mitsui Trust Holdings 1155.8 Seibu Holdings 4022.9 1149.5 Kanemi Foods 3290.0 Toyo Suisan Kaisha 985.7 Nippon Flour Mills 3271.5 Dai Nippon Printing 984.2 Internet Initiative Japan 3061.6 Yamato Holdings 954.8 Sumitomo Mitsui Financial Group 2947.1 Hisamitsu Pharmaceutical 871.1 Akebono Brake Industry 2276.5 Tokushu Tokai Paper 839.5 H2O Retailing Corporation 1748.3 Saint Marc Holdings 1739.8 Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Basic materials/Trading cos 21 11 September 2015

Figure 53: Marubeni Corporation’s top 20 shareholdings Figure 54: Mitsui & Co.’s top 20 shareholdings (market (market value) value) Market value Mitsui & Co. Market value Marubeni Corporation (¥ bn) (Mitsui) (¥ bn) Yamazaki Baking 14600.6 Seven & i Holdings 82783.3 Mizuho Financial Group 12613.3 Recruit Holdings 43620.0 TonenGeneral Sekiyu K.K. Ain Pharmaciez 12499.2 43020.0 Toyota Motor Corporation 28062.8 Inpex Corporation 11114.5 Yamaha Motor 20494.8 Nisshin Seifun Group 10005.0 Mitsui Fudosan 19143.3 Aeon 9371.8 MS&AD Insurance Group Holdings 16128.3 Dai-Ichi Life Insurance 9235.6 Toray Industries 14244.4 Mitsubishi UFJ Financial Group 8774.7 Mitsui Chemicals 14000.4 Okamoto Industries 7232.6 Nippon Steel & Sumikin Bussan 13498.6 Fuyo General Lease 6707.1 Corporation Isuzu Motors 5922.6 MODEC 13017.1 ASICS Corporation 4997.3 Tokyo Broadcasting System Holdings 12882.4 Tokio Marine Holdings 4396.0 Yamato Kogyo 12754.1 Chemical Industries 4087.0 Nihon Unisys 12022.8 Coca-Cola East Japan 10521.9 Citizen Holdings 3947.5 Kato Sangyo 8213.6 Sapporo Holdings 3760.3 TPV Technology 7950.7 Sumitomo Mitsui Trust Holdings 3335.2 J-Oil Mills 7661.9 Sompo Japan Nipponkoa Holdings 3215.9 SKY Perfect JSAT Holdings 7439.9 Nippon Steel & Sumitomo Metal 3143.2 Dai-Ichi Life Insurance 6679.0 Corporation Percentage share of "Zaibatsu" stocks to 17.1% Itoham Foods 2445.8 total holdings Source: Company data, Credit Suisse Note: Blue shading indicates companies belonging to the MITSUI Public Affairs Committee Source: Company data, MITSUI Public Affairs Committee, Credit Suisse

Figure 55: Sumitomo Corporation’s top 20 shareholdings Figure 56: Mitsubishi Corporation’s top 20 shareholdings (market value) (market value) Sumitomo Corporation Market value Mitsubishi Corporation Market value (Sumitomo) (¥ bn) (Mitsubishi) (¥ bn) Nippon Steel & Sumitomo Metal AYALA 120191.5 46220.6 Corporation Isuzu Motors 105981.4 Toyota Motor Corporation 25106.1 Mitsubishi Motors Corporation 96766.2 Sumitomo Realty & Development 20125.5 Aeon 70637.7 Yamazaki Baking 16726.7 Central Japan Railway Company 58665.0 MS&AD Insurance Group Holdings 15848.3 Tokio Marine Holdings 52237.3 Asahi Group Holdings 14889.8 Nissin Foods Holdings 42198.2 SKY Perfect JSAT Holdings 12353.4 Mitsubishi Heavy Industries 30772.3 Mazda Motor Corporation 11860.6 Mitsubishi Estate 26411.5 Sumitomo Metal Mining 10570.0 Hokuetsu Kishu Paper 26036.1 Nisshin Seifun Group 9698.1 Ryohin Keikaku 25588.1 Kato Sangyo 8518.7 T-GAIA Corp. 23977.4 Sumitomo Electric Industries 8513.6 JX Holdings 23291.8 Sumitomo Rubber Industries 8211.1 Mitsubishi Electric Corporation Daikin Industries 7932.4 22923.5 Dai-Ichi Life Insurance 7755.8 THAI UNION FROZEN PRODUCTS 21634.3 Yamato Kogyo 6863.7 Yamazaki Baking 17611.2 Sumitomo Forestry 5860.3 Inpex Corporation 17496.7 DaikyoNishikawa 5155.0 Mitsubishi UFJ Financial Group 14312.5 Sawai Pharmaceutical 4755.3 Nisshin Seifun Group 13450.0 Honda Motor 4628.4 Kirin Holdings 11354.1 Percentage share of "Zaibatsu" stocks to Percentage share of "Zaibatsu" stocks to 29.0% 32.2% total holdings total holdings Note: Blue shading indicates companies belonging to the Sumitomo Note: Blue shading indicates companies belonging to the Mitsubishi Group Public Affairs Committee Public Affairs Committee Source: Company data, Sumitomo Group Public Affairs Committee, Source: Company data, Mitsubishi Public Affairs Committee, Credit Credit Suisse Suisse

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Figure 57: GS Yuasa’s top 20 shareholdings (market value) Market value GS Yuasa (¥ bn) Shimadzu Corporation 4352.9 Mitsubishi Nichiyu Forklift 2327.0 Bank of Kyoto 2314.0 Nippon Shinyaku 2050.7 Shiga Bank 953.7 Nikon Corporation 921.4 Mitsubishi Estate 774.6 Sumitomo Mitsui Trust Holdings 630.6 Mitsubishi Materials Corporation 488.7 Honda Motor 385.7 Dai Nippon Toryo 379.9 Yellow Hat 338.7 SCREEN Holdings 278.7 Tokio Marine Holdings 265.8 Zinc 261.1 257.0 Sumitomo Metal Mining 235.6 Takara Holdings 228.4 Nissin Electric 218.3 Nanto Bank 191.2 Source: Company data, Credit Suisse

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Companies Mentioned (Price as of 09-Sep-2015) Asahi Glass (5201.T, ¥747, NEUTRAL, TP ¥810) GS Yuasa (6674.T, ¥436) Itochu Corp (8001.T, ¥1,460) Marubeni Corp (8002.T, ¥672) Mitsubishi Corp (8058.T, ¥2,226) Mitsui & Co (8031.T, ¥1,588) NGK Insulators (5333.T, ¥2,580) NSG Group (5202.T, ¥113) Nippon Carbon (5302.T, ¥307) Nippon Electric Glass (5214.T, ¥600) Nippon Paper Industries (3863.T, ¥2,110) Oji Holdings (3861.T, ¥577) Rengo (3941.T, ¥507) Sumitomo Corp (8053.T, ¥1,300) Sumitomo Osaka Cement (5232.T, ¥460, OUTPERFORM, TP ¥610) Taiheiyo Cement (5233.T, ¥389) Tokai Carbon (5301.T, ¥306, OUTPERFORM, TP ¥360) Toyo Tanso (5310.T, ¥1,582) For other companies, see figures 12-18, 41-57

Disclosure Appendix Important Global Disclosures I, Jun Yamaguchi, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Asahi Glass (5201.T)

5201.T Closing Price Target Price Date (¥) (¥) Rating 06-Dec-12 634 650 N 18-Jan-13 609 560 20-Feb-13 647 630 21-May-13 814 700 12-Aug-13 587 670 03-Dec-13 654 660 19-May-14 550 610 05-Aug-14 576 530 07-Nov-14 583 560 07-Apr-15 779 780 NEUTRAL 22-May-15 813 790 02-Sep-15 700 810 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Sumitomo Osaka Cement (5232.T)

5232.T Closing Price Target Price Date (¥) (¥) Rating 07-Dec-12 273 300 N 05-Mar-13 287 350 O 30-May-13 300 390 12-Aug-13 341 420 26-Nov-13 387 500 20-Feb-14 389 490 28-May-14 370 450 27-Nov-14 333 440 03-Jun-15 448 510 25-Aug-15 467 610 NEUTRAL OUTPERFORM * Asterisk signifies initiation or assumption of coverage.

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3-Year Price and Rating History for Tokai Carbon (5301.T)

5301.T Closing Price Target Price Date (¥) (¥) Rating 04-Dec-12 287 270 N 14-Mar-13 321 380 O 03-Jun-13 295 360 27-Aug-14 303 350 02-Dec-14 345 410 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL OUTPERFORM

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 representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; 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, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. 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* 55% (31% banking clients) Neutral/Hold* 29% (38% banking clients) Underperform/Sell* 13% (31% 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.

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Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html 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.

Price Target: (12 months) for Asahi Glass (5201.T)

Method: Our ¥810 target price for Asahi Glass is based on a fair-value P/B of 0.8x applied to FY15-16E average BPS of ¥1,015. We view 0.8x as a fair P/B for basic material companies whose earnings are in the early phases of bottoming out and recovering (e.g. Toyo Tanso, NSG Group; both with similar ROE profiles as Asahi Glass).

Risk: Risks that could cause the share price to diverge from our ¥810 target price for Asahi Glass include the following: Upside -- (1) a stronger- than-expected recovery in the TV-use LCD demand and easing downward pressure on prices, (2) a swifter-than-expected recovery in the European architectural glass business, (3) an acceleration of new product sales in the Electronics segment, and (4) lower-than-expected input costs. Downside -- (1) a slow recovery in TV-use LCD demand, and further downward pressure on prices, (2) a prolonged slump in the European architectural glass business / slower than expected progress in business restructuring, (3) a deceleration of new product sales in the Electronics segment, and (4) higher-than-expected input costs.

Price Target: (12 months) for Sumitomo Osaka Cement (5232.T) Method: In deriving our ¥610 TP, we apply a target P/E of 15.3x (the average 12-month forward P/E since 2005) to the average of our EPS forecasts for FY3/16–17, which is ¥40.0 (we previously applied a P/E of 13.1x, representing a 15% discount to the average P/E of 15.4x, and EPS of ¥38.8). As we now expect recovery in cement demand and SOC’s earnings heading into FY3/17, we no longer apply the 15% discount to the historical average P/E.

Risk: Risks to our ¥610 target price for Sumitomo Osaka Cement include: (1) decreased demand, (2) market share decline, (3) failure to push through cement price hikes, (4) higher input costs, (5) slower than expected earnings growth in non-cement businesses such as battery materials, and (6) yen depreciation. Depending on these factors the share price may not reach out target price.

Price Target: (12 months) for Tokai Carbon (5301.T) Method: We base our ¥360 target price for Tokai Carbon on a P/B of 0.58x (the shares' average since 2012) applied to our FY12/15-16 average BPS forecast of ¥627. We base our P/B on the period since 2012 as this was the year that the carbon black business -- which to that point had been driving earnings growth -- turned to a profit decline due to increased competition, which has continued up to now.

Risk: Risks that may impede achievement of our ¥360 target price for Tokai Carbon include: delays in restructuring, further electrode price erosion, rising input costs, decline in fine carbon demand, and yen appreciation.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures 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 (8001.T, 8002.T, 8031.T, 8053.T, 8058.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (8001.T, 8058.T) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (8031.T, 8053.T, 8058.T) within the past 12 months Credit Suisse has received investment banking related compensation from the subject company (8001.T, 8058.T) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (5232.T, 5201.T, 3861.T, 3863.T, 5202.T, 5214.T, 5233.T, 6674.T, 8001.T, 8002.T, 8031.T, 8053.T, 8058.T) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (8031.T, 8053.T, 8058.T) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (8058.T). Credit Suisse has a material conflict of interest with the subject company (3861.T) . Credit Suisse is acting as a financial advisor to Hokuetsu Kishu Paper Co., Ltd. regarding an acquisition of Alpac Forest Products Inc. from Mitsubishi Corporation and from Oji Holdings Corporation, and an acquisition of Alpac Pulp Sales Inc. from Mitsubishi Corporation.

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Credit Suisse has a material conflict of interest with the subject company (8058.T) . Credit Suisse is acting as a financial advisor to Hokuetsu Kishu Paper Co., Ltd. regarding an acquisition of Alpac Forest Products Inc. and Alpac Pulp Sales Inc. from Mitsubishi Corporation.

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Materials_trading_091115_E.do Basic materials/Trading cos 28c