05 September 2014 Asia Pacific/Japan Equity Research Steel (Steel (Japan)) / OVERWEIGHT
Kobe Steel (5406 / 5406 JP) Rating (from Neutral) OUTPERFORM* Price (04 Sep 14, ¥) 173 UPGRADE RATING
Target price (¥) (from 145) 210¹ Chg to TP (%) 21.4 Market cap. (¥ bn) 628.63 (US$ 6.00) Steel and aluminum: Dawn of multi-material era Enterprise value (¥ bn) 1,257.32 Number of shares (mn) 3,633.68 ■ Both near- and long-term appeal: We upgrade Kobe Steel from Neutral to Free float (%) 73.8 OUTPERFORM and raise our target price from ¥145 to ¥210 (potential 52-week price range 185 - 126 return 21.4%). We see potential for: (1) near-term share price gains driven *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. by a rebound in the steel inventory cycle and rising steel scrap prices and ¹Target price is for 12 months. (2) longer-term gains driven by Kobe Steel’s growth potential as the only
Research Analysts company worldwide with a presence in both high-tensile steel and aluminum as automakers make increased use of these materials to save weight. Shinya Yamada 81 3 4550 9910 ■ Start of multi-material era: Automakers in North America and elsewhere [email protected] are shifting to aluminum body panels to reduce vehicle weight. However, aluminum compares unfavorably with steel in terms of formability, workability, corrosion resistance, and cost, making the most realistic approach here a combination of steel sheet and aluminum. Kobe Steel is the only company worldwide with a presence in both automotive steel sheet and aluminum, and we therefore expect it to become increasingly attractive to investors in the coming multi-material era. This new era will likely also require expertise in welding together different types of metal, and this also plays to Kobe Steel’s strength as evidenced by its standalone welding business. ■ Catalysts/risks: Catalysts include a decision by management to construct an automotive aluminum factory in North America and favorable results announcements. Risks include a sluggish recovery in Chinese demand for construction machinery, production cuts at Japanese automakers, and a stronger yen. ■ Valuation: We base our ¥210 TP on our FY3/16E EPS of ¥20.9 and a P/E of 10x (previously 8.5x), the global steel sector average.
Share price performance Financial and valuation metrics
Year 3/14A 3/15E 3/16E 3/17E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 1,824.7 1,972.0 1,997.0 2,051.0 200 180 Operating profit (¥ bn) 114.5 108.0 137.0 155.0 150 Recurring profit (¥ bn) 85.0 83.0 117.0 138.0 100 130 Net income (¥ bn) 70.2 57.0 76.0 84.0 50 EPS (¥) 19.3 15.7 20.9 23.1 0 80 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Change from previous EPS (%) n.a. 11.8 22.6 21.7 IBES Consensus EPS (¥) n.a. 15.2 16.7 18.2 The price relative chart measures performance against the EPS growth (%) n.m. -18.8 33.3 10.5 TOPIX which closed at 1296.39 on 04/09/14 P/E (x) 7.1 11.0 8.3 7.5 On 04/09/14 the spot exchange rate was ¥104.83/US$1 Dividend yield (%) 2.9 2.3 2.9 2.9 EV/EBITDA(x) 5.8 6.4 5.4 4.8 Performance Over 1M 3M 12M P/B (x) 0.74 0.86 0.80 0.74 Absolute (%) 4.2 16.1 3.6 ROE(%) 11.9 8.2 10.0 10.2 Relative (%) 1.6 11.1 -8.5 Net debt/equity (%) 95.7 86.2 78.0 69.1
Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.
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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
05 September 2014
1: Investment stance and valuation Cyclical factors could drive shares higher near term We upgrade Kobe Steel to OUTPERFORM and raise our TP from ¥145 to ¥210. Share prices for Kobe Steel and other Japanese blast-furnace steelmakers correlate closely with the domestic steel inventory cycle and steel scrap prices, both of which have begun improving. We see this as a good opportunity to accumulate Kobe Steel (Figures 1–2).
Figure 1: Steel shipment-inventory balance and three blast furnaces' TOPIX-relative share prices (%) Ordinary steel shipment - inventory balance (LHS) 3 BF steelmakers' TOPIX-relative share price (YoY, RHS) 30 50%
20 25% 10
0 0%
-10 -25% -20
-30 -50% '07/1 '08/1 '09/1 '10/1 '11/1 '12/1 '13/1 '14/1
Note: Three blast furnace steelmakers: Nippon Steel Sumitomo Metal, JFE Holdings, and Kobe Steel. Source: JISF, Thomson Reuters, Credit Suisse estimates
Figure 2: Steel scrap prices and three blast furnaces' TOPIX-relative share prices (¥/t) 45,000 Scrap prices (LHS) 100 3 blast furnace steelmakers TOPIX-relative share prices (RHS)
90 40,000
80 35,000
70
30,000 60
25,000 50
20,000 40 '11/1 '11/7 '12/1 '12/7 '13/1 '13/7 '14/1 '14/7
Note: Three blast furnace steelmakers: Nippon Steel Sumitomo Metal, JFE Holdings, and Kobe Steel. Source: JISF, Thomson Reuters
Kobe Steel (5406 / 5406 JP) 2 05 September 2014
Start of multi-material era could support longer-term gains We also think the shares could see longer-term gains as automakers increase their use of aluminum and high-tensile steel as a means of reducing vehicle weight. Kobe Steel is the only company worldwide with a core presence in both automotive aluminum and steel sheet, and we expect investors to increasingly see long-term growth prospects as automakers transition to a multi-material era. We think this could easily push valuations higher, as is already happening with numerous aluminum makers worldwide in response to automakers’ increased use of that material (Figures 3–4). Kobe Steel has underperformed the broader market over the past year, suggesting to us that this transition to a multi-material era is not yet priced into the shares (Figure 5). Assuming the company goes ahead with its proposed US automotive aluminum operation as discussed later in this report, we think combined sales of automotive aluminum and high-tensile steel could expand from just under 10% of total sales in FY3/15 to just over 15% in FY3/21 (Figure 6).
Figure 3: Global aluminum companies: Share prices ('13/5 =100) 250 KOBE STEEL UACJ CONSTELLIUM ALCOA KAISER ALUMINUM NORSK HYDRO 200
150
100
50 '13/5 '13/8 '13/11 '14/2 '14/5 '14/8
Source: Thomson Reuters
Figure 4: Global aluminum companies: P/E (x) 40 KOBE STEEL UACJ CONSTELLIUM ALCOA KAISER ALUMINUM NORSK HYDRO 30
20
10
0 '13/5 '13/8 '13/11 '14/2 '14/5 '14/8
Source: Thomson Reuters
Kobe Steel (5406 / 5406 JP) 3 05 September 2014
Figure 5: Kobe Steel: Share prices 200
150
100
Share price (¥) TOPIX-relative share price
50 '13/1 '13/3 '13/5 '13/7 '13/9 '13/11 '14/1 '14/3 '14/5 '14/7 '14/9
Source: Thomson Reuters
Figure 6: Sales of automotive materials (¥mn) 250,000 18% High Tensile Strength Steel Aluminum % to the total sales (RHS) 15% 200,000
12% 150,000
9%
100,000 6%
50,000 3%
0 0% FY14 FY15 FY16 FY17 FY18 FY19 FY20
Note: Sales calculated using Kobe Steel’s percentage stake in overseas JVs Source: Credit Suisse estimates
Kobe Steel (5406 / 5406 JP) 4 05 September 2014
Share price catalyst could be announced as soon as September We think investors could begin reassessing Kobe Steel’s growth potential if the company decides to construct an automotive aluminum panel factory in the US. The company is currently in discussions here with Toyota Tsusho (8015) and aims to conclude an agreement in 1H FY3/15 on the establishment of a joint venture (JV). We accordingly expect an announcement as soon as September. An even longer-term catalyst in components for FCV fueling stations Another potential long-term share price catalyst is Kobe Steel’s involvement in hydrogen compressors and heat exchangers used in hydrogen fueling stations for fuel cell vehicles (FCVs). The company has developed a hydrogen compressor/heat exchanger package unit dubbed HyAC mini that it began taking orders for this past April. The company expects the HyAC mini to reduce the cost of building a hydrogen fueling station by around 20% and the equipment footprint by around 50%. The unit is to be priced at ¥250mn or less, implying sales of around ¥25bn premised on construction of 100 stations and around ¥250bn premised on 1,000 stations. We thus think Kobe Steel could see a substantial top- line boost if the build-out of FVC infrastructure accelerates and the company can secure a high market share. However, it remains to be seen whether FCVs will catch on, and we currently see little possibility of this business becoming a major profit driver. Equity finance and impairment risk Kobe Steel announced a public offering February 2014 that raised ¥83.6bn in March. This has shored up the company’s finances and substantially reduced risk of any additional equity financing. Impairment risk has also decreased as a result of the Kakogawa Works being on course for a turn to profit in FY3/15 after persistent losses. We therefore think earnings and share price risks now center on a decline in demand for end-products, including a slump in the Chinese construction machinery operation and production cuts at Japanese automakers. In short, we think Kobe Steel has reverted to normal. 2: Valuations We continue to base our ¥210 TP on our FY3/16E EPS of ¥20.9 and a P/E of 10x (previously 8.5x), the global steel sector average. The stock could attract a premium due to prospects for rising sales of aluminum (body panels, forged parts for suspension systems, etc), high-tensile steel and other products that help automakers produce lighter vehicles. However, we continue to use average P/E for the global steel sector as we believe Kobe Steel’s existing operations alone are likely to remain significantly undervalued for the foreseeable future.
Figure 7: FY15E P/E at global steelmakers
POSCO
ArcelorMittal
Kobe steel
Hyundai steel
Baosteel
NSSMC
JFE
0 2 4 6 8 10 12 14 (x) Source: Bloomberg estimates
Kobe Steel (5406 / 5406 JP) 5 05 September 2014
3: Steel business Strong in specialty steel Kobe Steel accounts for just 6.8% of Japan’s crude steel production, putting it a distant third behind Nippon Steel & Sumitomo Metal and JFE Steel (Figure 8). However, it is especially strong in the specialty steel used mainly in autos, ranking as the domestic number two in specialty wire rod and structural steel and the domestic number three in bearing steel (Figures 9–11). Automotive valve spring wire (used in engine cylinders) is a particular strength, with the company accounting for a full 50% of the global market.
Figure 8: Crude steel production share (2013) Figure 9: Specialty wire rod production share (2013) JFE JFE Bars & Steel Godo Steel SEI Shapes 0.9% 1.0% 3.3% 0.6% Daido Steel 1.3% Other 14.4% Kyoei Steel 1.5%
Tokyo Steel NSSMC 2.0% 41.0% Kobe Steel JFE Bars & Kobe Steel 40.3% NSSMC Shapes 6.8% 54.7% 2.6%
Nisshin JFE Steel Steel 25.7% 3.5%
Source: Japan Metal Daily Source: Japan Metal Daily
Figure 10: Structural steel production share (2013) Figure 11: Bearing steel production share (2013) Godo Other Nachi- Other Mitsubishi Steel 4.0% Fujikoshi 0.6% Steel 2.4% 3.7% JFE 4.3% JFE Steel Steel 6.0% 4.5% Sanyo Aichi Steel Special NSSMC 7.1% Steel 27.9% Sanyo 7.5% Special NSSMC Steel JFE Bars & 11.0% 39.9% Shapes 8.0% Daido Kobe Steel Kobe Steel 18.8% Steel 15.8% Daido 10.7% Aichi Steel Steel 15.9% 12.0%
Source: Japan Metal Daily Source: Japan Metal Daily
Kobe Steel (5406 / 5406 JP) 6 05 September 2014
Operating environment improving The steel business has been on the rebound since 2013. Orders saw a temporary dip in a reactive decline folowing the consumption tax hike in April of this year; however, ordinary steel demand from the automotive and shipbuilding industries, the main end users, has already begun to recover, and orders in the specialty steel area that Kobe focuses on have also turned around (Figure 12). The company was forced to scale back output at its flagship Kakogawa works in April and May as a result of production glitches, but was able to solve the problems and begin cranking up operating rates again in June and has since recovered to an output growth rate on par with those at other major steelmakers (Figure 13). Driven by a recovery in demand, we expect production volume to remain in a positive YoY growth trend for the time being.
Figure 12: Growth in domestic steel orders Growth in ordinary steel orders
Domestic Construction Auto Shipbuilding Exports Bars H-beams HRC CRC Galvanized
13/11 14% 15% 20% 12% -12% 2% 33% 25% 25% 18% 13/12 19% 20% 23% 27% -13% 8% 21% 25% 17% 19% 14/1 5% 6% 8% 24% -16% -16% 27% 11% 11% 3% 14/2 0% 2% 11% 17% -12% -18% 13% -2% 10% 16% 14/3 -1% -1% -2% 11% -11% -7% 2% -3% -2% -1% 14/4 4% 5% 5% 21% -2% 3% -9% 0% -1% 15% 14/5 4% 6% 0% 10% -6% 6% -3% -1% 1% 14% 14/6 5% 8% -1% 25% -9% 7% 4% -3% -6% 11% Growth in specialty steel orders Industrial For further Structural Stainless Domestic Auto Exports Tool steel Bearing steel machinery processing steel steel 13/11 22% 13% 38% 32% -8% 20% 22% 57% 23% 13/12 17% 29% 37% 13% 0% 26% 14% 32% 17% 14/1 16% 17% 23% 16% 5% 17% 18% 37% 14% 14/2 6% 6% 7% 8% 0% 19% 6% 19% 4% 14/3 6% 7% 5% 7% 2% 9% 7% 12% 5% 14/4 6% 13% -1% 3% -13% 9% 6% 13% 3% 14/5 -2% -4% -1% -3% -12% 1% -4% -2% 10% 14/6 10% 1% 4% 13% 10% 5% 14% 4% 14% Source: JISF
Figure 13: Growth in crude steel production
30%
20%
10%
0%
-10%
NSSMC JFE Kobe Steel -20% 2011/01 2011/07 2012/01 2012/07 2013/01 2013/07 2014/01 2014/07
Source: Japan Metal Daily
Kobe Steel (5406 / 5406 JP) 7 05 September 2014
Spreads improving Spreads (difference between product prices and raw materials costs) in the Asian steel market are at the highest level since 2009, as price declines for raw materials like iron ore have outstripped the rate of decline in product prices (Figure 14). This has driven a recovery in export spreads that has lifted earnings in Kobe’s export business (Figure 15). Domestic spreads are also on the mend as the domestic spot prices has been holding up. Thus, overall spreads at Kobe Steel are improving (Figure 16). Meanwhile, the 21 August Nikkei reported that Toyota and major steelmakers like Nippon Steel & Sumitomo Metal have agreed to cut the price of steel sheet for delivery in 1H FY3/15 by nearly ¥3,000/t HoH. The cut in long-term contract prices for automotive steel sheet is consistent with declines in main raw material prices, so spreads on long-term contract prices will likely remain flat. With spreads widening in the export and domestic spot prices and remaining flat for contract prices, we look for an improvement in the overall spread in FY3/15.
Figure 14: HRC spreads in China (USD/t) 400
300
200
100
0 '05/4 '06/4 '07/4 '08/4 '09/4 '10/4 '11/4 '12/4 '13/4 '14/4
Source: Thomson Reuters
Figure 15: Export spreads at blast furnace steelmakers (¥/t) 90,000 HRC CRC Galvanized steel
60,000
30,000
0 '96/1 '98/1 '00/1 '02/1 '04/1 '06/1 '08/1 '10/1 '12/1 '14/1 Source: MoF
Kobe Steel (5406 / 5406 JP) 8 05 September 2014
Figure 16: Overall spreads at Kobe Steel (¥'000/t) 70
60
50
40
30 05/4-6 06/4-6 07/4-6 08/4-6 09/4-6 10/4-6 11/4-6 12/4-6 13/4-6 Source: Company data, MoF Impairment risk retreats As a result of its relatively small production scale, Kobe’s Kakogawa works, which is primarily focused on production of steel sheet, has operated in the red since the global downturn triggered by the collapse of Lehman Brothers. To stanch this bleeding, the company plans to shut down blast furnaces at its Kobe works in FY3/18 in a bid to boost upstream utilization rates at Kakogawa. The Kobe works, which serves as the company’s main production base for specialty steel, has become highly profitable, so there is some risk associated with separating its upstream and downstream processes. Nonetheless management is moving forward, making a priority of lifting operating rates at Kakogawa and putting it on a solid earnings footing. As noted above, we expect spread improvement to push Kakogawa back into the black in FY3/15. Note that we discuss high-tensile steel in the section on aluminum, which overlaps as a business area.
Kobe Steel (5406 / 5406 JP) 9 05 September 2014
4: Aluminum business Strength in automotive body panels Kobe’s aluminum business is part of its aluminum and copper segment. With estimated annual sales of around ¥200bn, it boasts the second-largest share of the domestic market behind UACJ (5741). It is the top supplier of automotive panel materials, with a 50% domestic market share. We expect the market for automotive panel materials to grow significantly going forward as automakers seek to reduce vehicle weight. We estimate sales in the company’s automotive aluminum business (body panels, forged parts for suspension systems, etc) will total around ¥40bn in FY3/15. Kobe Steel currently has a domestic production capacity of 50,000t for body panel materials. However, the company plans to build a new plant in China in 2016 with a capacity of 100,000t, and we think it intends to build another 100,000t plant in the US in 2017. These plants would boost its current body panel production capacity five-fold. Stricter environmental regulations to expand automotive aluminum market The tightening of environmental regulations and fuel economy standards around the world has spurred a great deal of interest in automotive aluminum. New regulations in these areas in Japan, the US, Europe, and China are to begin to be introduced in 2016 (Figure 17). Since fuel economy can be boosted by reducing vehicle weight, market attention is centered on lightweight materials. The specific gravity of aluminum, at 2.7g/cm3, is about one-third that of steel, at 7.9g/cm3, so substituting aluminum for steel is an effective means to reduce weight. Note that titanium, popularly regarded as the lightest of metals, is actually heavier than aluminum, with a specific gravity of 4.5g/cm3. Only a few metals, such as magnesium at 1.7g/cm3, are lighter than aluminum. Carbon fiber, which is used in race cars, is also lighter, at 1.8g/cm3. However, carbon fiber costs more than aluminum, so usage at present is limited to ultra-luxury cars. The shift toward aluminum is the main technological trend for reducing weight in mass-production vehicles.
Figure 17: Tightening of fuel economy standards around the world
Source: Credit Suisse
Kobe Steel (5406 / 5406 JP) 10 05 September 2014
North American automotive aluminum market to expand rapidly Automotive aluminum is already widely used in forgings, and the market for these products should continue to expand going forward (Figure 18). In North America, the aluminum usage rate is set to rise from 9% currently to 37% in the future (Figure 19). We expect demand for aluminum panel material to jump ten-fold, from about 100,000t now to over 1mnt, by 2025. We expect similarly rapid growth in Europe and China as well (Figure 20).
Figure 18: North American automotive aluminum market (kMT)
Auto Sheet
Other Auto Aluminum (Castings, etc.) 1,125
430 100
3,425 2,720 2,300
2012 2015 2025 Source: Alcoa
Figure 19: In North America, aluminum usage rate to rise to 37%
Today’s SUV Total Mass: 1,711Kg Tomorrow’s SUV Total Mass: 1,237Kg
Glass Glass 3% Other 3% Other 12% 12%
Plastics Steel Plastics 9% 30% 10% Iron Steel Iron 8% 59% 4% Aluminum Mg 9% 4% Aluminum 37%
Source: Alcoa
Figure 20: Automotive aluminum panel materials market ('000t) 1,200 2013 2020 1,000
800
600
400
200
0 US Europe China Japan Source: Company data, Credit Suisse estimates
Kobe Steel (5406 / 5406 JP) 11 05 September 2014
Japanese aluminum market not likely to rapidly expand However Japanese aluminum market is not likely to rapidly expand in the same way. This owes largely to the availability of high-tensile steel, an area in which Japanese steelmakers excel. This steel has significantly higher tensile strength than the 400Mpa typical of ordinary steel, and some ultra-high-tensile steel sheet now in use exceeds 1.2Gpa (Figure 21). Because it is so strong, high-tensile steel can be made thinner, providing a significant weight advantage over ordinary steel sheet. According to Oak Ridge National Laboratory (ORNL) data, using high-tensile steel can reduce the weight of the average passenger vehicle by about 300kg, from 1.7t for a car made primarily of ordinary steel to 1.4t for a car made mostly of high-tensile steel. If aluminum is the main material used, average weight can be reduced a further 200kg, to 1.2t (Figure 22). However, because the cost of aluminum is over double that of high-tensile steel, we expect Japanese automakers to opt instead to continue using high-tensile steel for weight reduction and compensate for the weight difference between it and aluminum through engine and power train improvements (Figure 23).
Figure 21: Development of high-tensile steel
440 Next generation High MPa
590 MPa
Present 780 Ductility MPa High ductility 980 1.2 GPa MPa
1.2
GPa Low
Low Tensile strength High Source: MotorFan
Figure 22: Weight reduction by using aluminum and high-tensile steel Lightweigt Steel Aluminum Intensive Baseline Vehicle Vehicle Iron 127 49 49 Steel 1011 794 366 Pickled Hot Rolled ( SP) 242 181 172 Electro-Galvanized (BIW, SP) 684 344 138 Hot-Dip Galvanized (BIW, SP) 59 45 34 Eng. Steel (Other) 27 224 22 Aluminum 157 194 459 Sheet 12 55 296 Cast (A356) 128 125 125 Extrusion 17 14 38 Other materials 416 416 416 Vehicle Total Weight (Kg) 1,711 1,399 1,236 Source: ORNL
Kobe Steel (5406 / 5406 JP) 12 05 September 2014
Figure 23: Cost of aluminum is over double that of steel ($/t) LME aluminum price 3,000 Steel ASP at Kobe Steel
2,000
1,000
0 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Company data, LME Strength in high-tensile steel According to ORNL, the higher price for cars made from aluminum can be offset by fuel cost savings, but in the case of cars made mainly from high-tensile steel, the breakeven point is 76,000km. Unlike the US with its broad expanses, Japan is a relatively small country where driving distances are fairly short. As a result, private vehicles in Japan are only driven an average of 10,575km/year, meaning it takes over seven years to put 76,000km on a car. These short driving distances in the home market are another reason Japanese automakers are reluctant to switch to aluminum and help to explain why, despite a slight rise, automotive aluminum still accounts for only a little over 3% of the automotive steel sheet market today (Figure 24).
Figure 24: Aluminum ratio to the automotive steel sheet slightly rising Aluminum shipments for auto industry (RHS) (t) 3.4% 30,000 % to automotive steel sheet (LHS)
25,000 3.2%
20,000 3.0% 15,000 2.8% 10,000
2.6% 5,000
2.4% 0 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Source: Japan Aluminium Association, JISF Total solutions provider There are various issues related to using aluminum vs. steel with regard to formability, bondability, weldability, adhesiveness, corrosion resistance, and compatibility when joined with other metals. Also keep in mind that even in a market like the US, where manufacturers are actively working to expand their usage of aluminum, there are no plans for any mass-production vehicles made exclusively of aluminum, and cars are expected to continue to contain plenty of steel. We believe this will lead automakers to ask materials companies to propose different combinations of materials that take into account advantages and disadvantages like weight, cost, formability, and weldability. Given that it has businesses in steel, aluminum, and welding, it seems quite likely that Kobe Steel will become a total solutions provider for automotive-use metal materials. The fact that it never specialized exclusively in steel may finally begin to pay off.
Kobe Steel (5406 / 5406 JP) 13 05 September 2014
5: Earnings forecasts FY3/15 forecasts We forecast a 2% YoY decline in RP to ¥83bn in FY3/15, which exceeds guidance of ¥80bn. This reflects only a modest upward revision of our previous forecast of ¥82bn, but given that it also incorporates ¥10bn in newly added cost assumptions, including ¥5bn related to production issues at Kakogawa and ¥5bn for expanded inventory writedowns, our new forecast represents a hefty ¥11bn upward revision for actual earnings. We expect spread improvement to be better than we initially anticipated for the steel segment. We also raised our forecasts for segments such as welding, aluminum & copper, machinery, and Kobelco Construction Machinery. We assume a ¥22bn YoY improvement in spreads in the steel business. The main factor behind the expected modest YoY decline in companywide RP is a ¥26bn difference in inventory valuations. FY3/16 forecasts We forecast a 41% YoY growth in RP to ¥117bn in FY3/16. This reflects a ¥17bn upward revision of our previous forecast of ¥100bn, owing mainly to an improved outlook for earnings in the steel business, which we expect to jump 127% YoY from ¥28bn to ¥50bn. About half of this gain stems from the dropping out of ¥5bn in costs related to production issues at Kakogawa and ¥9bn in inventory write-downs we expect in FY3/15. We also assume ¥10bn in cost-cutting gains, ¥3bn in gains from expanded production (centering on high-tensile steel), and ¥1bn in spread improvement gains. We expect RP in the aluminum & copper segment to rise ¥2bn YoY to ¥15bn. We also sharply raise our NP forecast from ¥62bn to ¥76bn, mainly to reflect the upward revision to our RP forecast and a decline in the tax rate (from 32% to 30%) due to the booking of loss carry forwards. FY3/17 forecasts We forecast a 18% YoY growth in RP to ¥138bn in FY3/17. This reflects a sharp upward revision of our previous forecast of ¥110bn. As in our FY3/16 forecasts, we hike our RP assumption for the steel business by from ¥47bn to ¥63bn (up ¥13bn YoY) and also raise our earnings outlook for the aluminum & copper business from ¥16bn to ¥21bn (up ¥6bn YoY). We assume the steel business will benefit from ¥3bn in gains from expanded production and ¥10bn in cost savings. In addition to growth in existing areas, the aluminum & copper segment should also benefit from enhancement of aluminum suspension production in the US and launch of automotive body panel production in China.
Figure 25: Earnings forecast summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated Mar-13 A 1,685,529 -9.6 11,234 -81.4 -18,146 NM -26,976 NM -9.0 NM Mar-14 A 1,824,698 8.3 114,548 919.7 85,044 NM 70,191 NM 19.3 NM Mar-15 CS E (new) 1,972,000 8.1 108,000 -5.7 83,000 -2.4 57,000 -18.8 15.7 -18.8 CSE (prev) 1,960,000 7.4 107,000 -6.6 82,000 -3.6 51,000 -27.3 14.0 -27.3 CoE 1,930,000 5.8 105,000 -8.3 80,000 -5.9 55,000 -21.6 15.1 -21.7 IBES E 1,923,867 5.4 112,700 -1.6 85,887 1.0 55,371 -21.1 15.2 -21.4 Mar-16 CS E (new) 1,997,000 1.3 137,000 26.9 117,000 41.0 76,000 33.3 20.9 33.3 CSE (prev) 1,990,000 1.5 120,000 12.1 100,000 22.0 62,000 21.6 17.1 21.6 IBES E 1,965,940 2.2 125,531 11.4 99,533 15.9 60,507 9.3 16.7 10.2 Mar-17 CS E (new) 2,051,000 2.7 155,000 13.1 138,000 17.9 84,000 10.5 23.1 10.5 CSE (prev) 2,020,000 1.5 127,000 5.8 110,000 10.0 69,000 11.3 19.0 11.3 IBES E 1,994,875 1.5 134,686 7.3 107,267 7.8 65,864 8.9 18.2 9.0 Source: Company data, I/B/E/S, Credit Suisse estimates
Kobe Steel (5406 / 5406 JP) 14 05 September 2014
Figure 26: Segment information Consolidated income statement (¥m) 10/3 11/3 12/3 13/3 14/3 15/3E 16/3E 17/3E Sales 1,671,021 1,858,574 1,864,691 1,685,529 1,824,698 1,972,000 1,997,000 2,051,000 Operating profit 46,015 124,550 60,555 11,234 114,548 108,000 137,000 155,000 Non-operating profit 31,447 33,810 40,010 31,752 27,686 30,000 34,000 36,000 Non-operating expenses 67,204 69,278 66,785 61,133 57,190 55,000 54,000 53,000 Recurring profit 10,258 89,082 33,780 -18,146 85,044 83,000 117,000 138,000 Net profit 6,304 52,939 -14,248 -26,976 70,191 57,000 76,000 84,000 Segment information (¥m) 10/3 11/3 12/3 13/3 14/3 15/3E 16/3E 17/3E Sales Iron & steel 705,993 802,923 816,784 710,420 775,232 780,000 780,000 800,000 Welding 76,081 76,353 83,155 81,509 87,388 92,000 94,000 96,000 Aluminum & copper 260,728 301,144 288,641 260,809 294,280 325,000 339,000 366,000 Machinery 166,218 149,197 145,854 149,940 140,122 176,000 185,000 190,000 Natural Resources & Engineering 57,343 62,545 55,441 45,658 38,160 55,000 55,000 55,000 Kobelco Eco-Solutions 78,964 67,376 70,350 70,312 65,769 67,000 67,000 67,000 Kobelco Construction Machinery 213,132 311,946 306,107 267,183 317,473 325,000 325,000 325,000 Kobelco Cranes 46,829 35,294 42,503 39,777 47,415 80,000 80,000 80,000 Other 62,699 50,239 53,150 57,549 56,394 70,000 70,000 70,000 Eliminations 3,031 1,552 2,700 2,368 2,460 2,000 2,000 2,000 Total 1,671,021 1,858,574 1,864,691 1,685,529 1,824,698 1,972,000 1,997,000 2,051,000 Recurring profit Iron & steel -24,690 23,734 -14,686 -50,212 33,593 22,000 50,000 63,000 Welding 1,739 4,620 3,119 2,154 7,201 8,000 9,000 10,000 Aluminum & copper 2,228 14,790 6,081 3,912 15,164 13,000 15,000 21,000 Machinery 20,859 14,513 9,899 12,039 6,486 9,000 10,500 11,500 Natural Resources & Engineering 4,741 3,051 341 -1,335 -3,935 -500 1,000 1,000 Kobelco Eco-Solutions 1,650 3,135 4,235 3,918 2,607 2,500 2,500 2,500 Kobelco Construction Machinery 5,535 26,303 22,865 6,852 15,119 21,000 21,000 21,000 Kobelco Cranes 1,225 -1,363 161 -2,250 3,200 4,500 4,500 4,500 Other 3,090 6,493 7,200 7,554 6,844 6,000 6,000 6,000 Eliminations -6,119 -6,194 -5,438 -780 -1,236 -2,500 -2,500 -2,500 Total 10,258 89,082 33,780 -18,146 85,044 83,000 117,000 138,000 Source: Company data, Credit Suisse estimates
Kobe Steel (5406 / 5406 JP) 15 05 September 2014
Figure 27: Consolidated balance sheet Consolidated balance sheet (¥m) 10/3 11/3 12/3 13/3 14/3 15/3E 16/3E 17/3E Assets Current assets 972,611 996,757 943,394 991,916 1,067,597 1,048,383 1,063,215 1,088,047 Cash & deposits 131,939 145,875 95,378 114,103 151,930 136,967 131,799 136,631 Accounts/notes receivable 283,619 302,846 313,074 318,445 363,514 370,000 380,000 390,000 Inventories 367,060 381,344 408,544 400,517 400,737 390,000 400,000 410,000 Other current assets 190,811 167,263 126,828 161,127 156,411 156,411 156,411 156,411 Allowance for doubtful receivables -818 -571 -430 -2,276 -4,995 -4,995 -4,995 -4,995 Fixed assets 1,276,734 1,234,775 1,216,117 1,235,080 1,221,039 1,283,188 1,316,188 1,347,187 Property, plant & equipment 968,070 933,339 904,837 907,835 913,016 908,640 908,640 908,640 Intangible fixed assets 21,385 22,231 20,494 20,184 19,952 19,952 19,952 19,952 Investment and other fixed assets 287,278 279,203 290,785 307,060 288,070 354,596 387,596 418,595 Total assets 2,249,345 2,231,532 2,159,512 2,226,996 2,288,636 2,331,571 2,379,403 2,435,234
Liabilities Current liabilities 808,173 888,379 881,571 962,881 891,257 844,527 854,527 864,527 Accounts/notes payable 434,819 478,675 447,316 376,713 410,895 420,000 430,000 440,000 Short-term borrowings 167,876 170,657 204,719 377,087 249,835 200,000 200,000 200,000 Short-term bonds 235 35,836 35,176 20,000 26,000 20,000 20,000 20,000 Other current liabilities 205,243 203,211 194,360 189,081 204,527 204,527 204,527 204,527 Fixed liabilities 884,170 745,785 706,682 694,192 662,700 692,289 672,289 652,289 Bonds and CBs 213,186 177,349 172,172 177,000 151,000 131,000 111,000 91,000 Long-term borrowings 525,170 441,099 394,579 385,039 360,411 410,000 410,000 410,000 Reserves for retirement payments 33,247 29,345 52,587 51,557 72,653 72,653 72,653 72,653 Other fixed liabilities 112,567 97,992 87,344 80,596 78,636 78,636 78,636 78,636 Total liabilities 1,692,343 1,634,165 1,588,254 1,657,073 1,553,957 1,536,816 1,526,816 1,516,816
Shareholders' equity Common stock 233,313 233,313 233,313 233,313 250,930 250,930 250,930 250,930 Capital reserve 83,125 83,125 83,125 83,125 100,742 100,742 100,742 100,742 Consolidated surplus 258,853 302,376 280,582 253,199 322,347 364,812 422,644 488,475 Gains on securities 22,529 19,742 13,020 21,147 13,266 20,118 20,118 20,118 Translation adjustments -25,787 -34,127 -37,579 -22,086 3,062 -1,082 -1,082 -1,082 Minority interest 40,330 48,736 55,578 57,871 65,681 65,578 65,578 65,578 Total shareholders' equity 557,002 597,367 571,258 569,922 734,679 794,755 852,587 918,418 Total liabilities and shareholders equity 2,249,345 2,231,532 2,159,512 2,226,996 2,288,636 2,331,571 2,379,403 2,435,234 Source: Company data, Credit Suisse estimates
Figure 28: Consolidated statements of cash flows Consolidated statements of cash flows (¥m) 10/3 11/3 12/3E 13/3 14/3 15/3E 16/3E 17/3E Gain before income tax 14,100 88,867 27,758 -25,231 88,208 83,000 117,000 138,000 Depreciation 118,835 114,819 118,037 106,725 82,936 90,000 95,000 100,000 Increase or decrease in accounts receivable -9,083 -39,295 -18,733 10,495 -5,328 -6,486 -10,000 -10,000 Increase or decrease in inventories 98,566 -17,665 -29,381 18,848 19,067 10,737 -10,000 -10,000 Increase or decrease in accounts payable -40,878 54,559 -24,761 -88,324 898 9,105 10,000 10,000 Others 21,718 -2,317 -3,163 50,306 30,052 -1,000 -5,000 -7,000 Interest and dividends received 6,080 6,532 8,691 8,306 7,085 6,000 6,000 6,000 Interest paid -21,359 -20,693 -19,951 -20,060 -19,155 -16,000 -15,000 -14,000 Taxes paid -15,086 -7,012 -19,011 -15,664 -9,469 -14,538 -20,000 -35,000 CF from operating activities 172,893 177,795 39,486 45,401 194,294 160,818 168,000 178,000
Payments for purchase of fixed assets -128,226 -96,608 -83,284 -109,505 -95,424 -135,000 -135,000 -135,000 Others 7,902 -78 -1,983 -14,008 33,319 0 0 0 CF from investing activities -120,324 -96,686 -85,267 -123,513 -62,105 -135,000 -135,000 -135,000
Increase or decrease in short-term borrowings -9,669 -25,616 57,633 55,215 -39,126 -49,835 0 0 Proceeds from long-term borrowings 93,015 9,804 22,522 167,059 33,858 0 0 0 Repayment of long-term borrowings -37,077 -61,664 -91,611 -73,935 -176,353 49,589 0 0 Dividends paid -75 -8,965 -7,484 -14 -7 -14,535 -18,168 -18,168 Others -75,835 -11,755 -21,293 -20,681 43,127 -26,000 -20,000 -20,000 CF from financing activities -29,641 -98,196 -40,233 127,644 -138,501 -40,781 -38,168 -38,168 Effect of exchange rate 632 -4,903 -1,912 8,850 15,112 0 0 0 Change in cash and cash equivalents 23,559 -21,991 -87,926 58,383 8,799 -14,963 -5,168 4,832 Cash and cash equivalents at the end of year 211,699 189,707 101,900 162,037 170,926 155,963 150,795 155,627 Source: Company data, Credit Suisse estimates
Kobe Steel (5406 / 5406 JP) 16 05 September 2014
Figure 29: Financial summary In JPY bn, unless otherwise stated Profit & Loss 3/14A 3/15E 3/16E 3/17E Key Financials 3/14A 3/15E 3/16E 3/17E Sales revenue 1,824.7 1,972.0 1,997.0 2,051.0 Growth(%) COGS 1,537.2 1,684.0 1,675.0 1,706.0 Sales 8.3 8.1 1.3 2.7 SGA 172.9 180.0 185.0 190.0 EBIT 919.7 -5.7 26.9 13.1 R&D 33.2 33.2 33.2 33.2 Net Income NM -18.8 33.3 10.5 Other op income(expense) -116.2 -123.2 -128.2 -133.2 EPS NM -18.8 33.3 10.5 EBITDA 197.5 198.0 232.0 255.0 Margins(%) Depr. & Amort. 82.9 90.0 95.0 100.0 EBITDA 10.8 10.0 11.6 12.4 Goodwill amort. 0.0 0.0 0.0 0.0 EBIT 6.3 5.5 6.9 7.6 EBIT 114.5 108.0 137.0 155.0 Pretax profit 4.8 4.2 5.9 6.7 Net interest expense 12.5 10.0 9.0 8.0 Net income 3.8 2.9 3.8 4.1 Associates -2.8 1.0 5.0 7.0 Valuation(x) Net other non-op income(exp.) -39.2 -36.0 -34.0 -32.0 EV/Sales 0.6 0.6 0.6 0.6 Recurring profit 85.0 83.0 117.0 138.0 EV/EBITDA 5.8 6.4 5.4 4.8 Extraordinary gain & loss 3.2 0.0 0.0 0.0 EV/EBIT 9.9 11.6 9.1 7.9 Profit before tax 88.2 83.0 117.0 138.0 PER 7.1 11.0 8.3 7.5 Income tax 14.5 20.0 35.0 48.0 PBR 0.7 0.9 0.8 0.7 Minorities 3.5 6.0 6.0 6.0 ROE analysis(%) Net Income 70.2 57.0 76.0 84.0 ROE 11.9 8.2 10.0 10.2 Balance Sheet 3/14A 3/15E 3/16E 3/17E ROIC 6.8 5.9 6.6 6.8 Cash & equivalents 151.9 137.0 131.8 136.6 Asset turnover 79.7 84.6 83.9 84.2 Receivables 363.5 370.0 380.0 390.0 Tax burden 16.5 24.1 29.9 34.8 Inventories 400.7 390.0 400.0 410.0 Financial leverage(x) 3.4 3.2 3.0 2.9 Other current assets 151.4 151.4 151.4 151.4 Credit ratio(%) Current assets 1,067.6 1,048.4 1,063.2 1,088.0 Net debt/Equity 1.0 0.9 0.8 0.7 Property, plant & equipments 913.0 908.6 908.6 908.6 Net debt/EBITDA 3.2 3.2 2.6 2.3 Intangibles 20.0 20.0 20.0 20.0 Interest converage ratio(x) 6.1 5.1 5.8 5.9 Other non-current assets 288.1 354.6 387.6 418.6 Per share data 3/14A 3/15E 3/16E 3/17E Non-current assets 1,221.0 1,283.2 1,316.2 1,347.2 No. of shares(millions) 3633.7 3633.7 3633.7 3633.7 Total assets 2,288.6 2,331.6 2,379.4 2,435.2 EPS(¥) 19.3 15.7 20.9 23.1 Payables 410.9 420.0 430.0 440.0 BPS(¥) 184.1 200.7 216.6 234.7 Short term debt 275.8 220.0 220.0 220.0 DPS(¥) 4.0 4.0 5.0 5.0 Other current liability 204.5 204.5 204.5 204.5 Dividend payout ratio(%) 20.7 25.5 23.9 21.6 Total current liability 891.3 844.5 854.5 864.5 Long term debt 511.4 541.0 521.0 501.0 Other non-current liability 151.3 151.3 151.3 151.3 Total liabilities 1,554.0 1,536.8 1,526.8 1,516.8 Shareholders equity 669.0 729.2 787.0 852.8 Minority interests 65.7 65.6 65.6 65.6 Total shareholder funds 2,288.6 2,331.6 2,379.4 2,435.2 Cashflow 3/14A 3/15E 3/16E 3/17E EBIT 114.5 108.0 137.0 155.0 Depr & Amortisation 82.9 90.0 95.0 100.0 Chage in working capital 41.9 13.4 -10.0 -10.0 Other -45.1 -50.5 -54.0 -67.0 Operating cashflow 194.3 160.8 168.0 178.0 Capex -95.4 -135.0 -135.0 -135.0 Disposal of PPE 0.0 0.0 0.0 0.0 Acquisitions & Investments 0.0 0.0 0.0 0.0 Asset sale proceeds 0.0 0.0 0.0 0.0 Other 33.3 0.0 0.0 0.0 Investing cashflow -62.1 -135.0 -135.0 -135.0 Equity raised 0.0 0.0 0.0 0.0 Dividends paid 0.0 -14.5 -18.2 -18.2 Net borrowings -142.5 49.6 0.0 0.0 Other 4.0 -75.8 -20.0 -20.0 Financing cashflow -138.5 -40.8 -38.2 -38.2 Effect of exchange rates 15.1 0.0 0.0 0.0 Net Change in Cash 8.8 -15.0 -5.2 4.8 Free cash flow 132.2 25.8 33.0 43.0 Note : Reported year may include estimated data Source: Company data, Credit Suisse estimates
Kobe Steel (5406 / 5406 JP) 17 05 September 2014
Companies Mentioned (Price as of 04-Sep-2014) JFE Holdings (5411.T, ¥2,125) Kobe Steel (5406.T, ¥173, OUTPERFORM, TP ¥210) Nippon Steel & Sumitomo Metal (5401.T, ¥291) Toyota Motor (7203.T, ¥6,087) Toyota Tsusho (8015.T, ¥2,752) UACJ Corp (5741.T, ¥448)
Disclosure Appendix Important Global Disclosures I, Shinya Yamada, 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 JFE Holdings (5411.T)
5411.T Closing Price Target Price Date (¥) (¥) Rating 05-Oct-11 1,420 2,650 O 07-Dec-11 1,526 1,820 17-Feb-12 1,580 2,370 07-Jun-12 1,289 2,300 10-Oct-12 994 2,400 09-Jan-13 1,548 2,750 02-Apr-13 1,694 2,100 N 19-Jun-13 2,179 3,000 O 17-Oct-13 2,544 2,700 N 21-Nov-13 2,366 2,200 OUTPERFORM NEUTRAL 03-Jun-14 1,970 2,600 O * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Kobe Steel (5406.T)
5406.T Closing Price Target Price Date (¥) (¥) Rating 05-Oct-11 121 190 N 07-Dec-11 133 125 17-Feb-12 135 120 07-Jun-12 94 90 15-Aug-12 66 70 10-Oct-12 60 60 06-Dec-12 78 60 U 19-Jun-13 132 100 14-Aug-13 169 110 21-Nov-13 179 150 NEUTRAL UNDERPERFORM 20-Mar-14 133 125 03-Jun-14 142 145 N * Asterisk signifies initiation or assumption of coverage.
Kobe Steel (5406 / 5406 JP) 18 05 September 2014
3-Year Price and Rating History for Nippon Steel & Sumitomo Metal (5401.T)
5401.T Closing Price Target Price Date (¥) (¥) Rating 05-Oct-11 210 330 O 07-Dec-11 201 250 17-Feb-12 213 280 07-Jun-12 173 260 12-Aug-12 166 R 14-Aug-12 167 260 O 04-Sep-12 152 270 10-Oct-12 159 310 06-Dec-12 187 260
09-Jan-13 212 300 OUTPERFORM 02-Apr-13 222 260 N REST RICT ED NEUTRAL 19-Jun-13 262 330 O 17-Oct-13 342 330 N 03-Jun-14 291 410 O * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Toyota Motor (7203.T)
7203.T Closing Price Target Price Date (¥) (¥) Rating 05-Oct-11 2,517 2,980 N 08-Feb-12 3,135 * 09-Feb-12 3,130 * 05-Mar-12 3,305 3,950 O * 29-May-12 3,080 3,750 01-Jun-12 3,010 3,300 N 02-Jul-12 3,175 3,200 21-Aug-12 3,260 3,200 * 29-Aug-12 3,175 3,660 05-Oct-12 3,045 3,540 NEUTRAL OUTPERFORM 05-Nov-12 3,210 4,240 O 11-Jan-13 4,260 5,290 21-Feb-13 4,765 5,310 02-Apr-13 4,615 5,650 15-May-13 6,440 7,690 03-Jul-13 6,230 7,520 09-Aug-13 6,170 8,820 26-Sep-13 6,510 8,600 20-Nov-13 6,290 7,370 29-Nov-13 6,380 7,400 08-Jan-14 6,300 7,450 27-Mar-14 5,731 * 03-Apr-14 5,840 7,650 O 30-Jun-14 6,084 7,550 * Asterisk signifies initiation or assumption of coverage. 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
Kobe Steel (5406 / 5406 JP) 19 05 September 2014 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 Ame rican 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, 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.
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Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (53% banking clients) Neutral/Hold* 40% (51% banking clients) Underperform/Sell* 13% (44% 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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Price Target: (12 months) for Kobe Steel (5406.T) Method: We derive our ¥210 target price for Kobe Steel on our FY3/16 EPS estimate and a P/E of 10x, the global steel sector average.
Risk: Risks include steel demand trends, steel price trends, booking of impairment losses for unprofitable steel-mills, and lower-than-forecast earnings at the construction machinery business.
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 Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (5406.T, 5401.T, 7203.T) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (7203.T). Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
Kobe Steel (5406 / 5406 JP) 20 05 September 2014
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (5406.T, 5401.T, 5411.T, 7203.T) within the past 12 months 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 has acted as lead manager or syndicate member in a public offering of securities for the subject company (7203.T) within the past 3 years. 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. 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 ...... Shinya Yamada
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Kobe Steel (5406 / 5406 JP) 21 05 September 2014
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5406_090514_KobeSteel_E.doc Kobe Steel (5406 / 5406 JP) 22