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31 October 2014 Asia Pacific/Japan Equity Research Product Marketing Japan Monthly Highlights Research Analysts MONTHLY Daisuke Takato 813 4550 9671 [email protected] October 2014 ■ Tighter automobile emission standards around the globe will put the spotlight on Japanese component manufacturers such as Denso (6902), NGK Insulators (5333), and NGK Spark Plug (5334). In this Connection Series collaboration between analysts Masahiro Akita, Akinori Kanemoto and Jun Yamaguchi, we look at technology trends, competitive conditions, and market growth potential for filters, valves, spark plugs, exhaust gas sensors, and other products. ■ Hitoshi Hayakawa reinstated coverage of Softbank (9984) with an OUTPERFORM rating and ¥10,000 target price following Asia internet analyst Dick Wei's initiation of Alibaba (OUTPERFORM, TP $114). Hayakawa points out that the market is undervaluing Softbank's investment securities and existing business and has not priced in annual FCF in excess of ¥1tn. ■ Analyst Masashi Mori continued to expand his coverage, adding Sanrio (8136), Japan Tobacco (2914), and Calbee (2229). He rates Hello Kitty franchise owner Sanrio OUTPERFORM as he sees earnings rebounding next fiscal year. Japan Tobacco continues to deliver steady earnings by offsetting volume declines with price increases – he also rates the stock OUTPERFORM. He initated coverage of Calbee with a NEUTRAL rating as he believes the snack-food maker needs a stronger overseas growth strategy to complement its dominant position in the domestic market. Separately, in the diaper market, Uncharm (8113) is struggling in China’s online diaper market, while Kao (4452) is gaining share, according to channel checks. ■ The Japanese market is now trading at just under 1x HOLT net assets following recent strong performance. This compares to global markets which trade at 1.4x, in line with the average premium over the last ten years. It also compares to the pre-Abenomics low of about 0.75x for Japan. HOLT APAC Viewpoint (30 September 2014): Japan ■ Our global commodities team cut its oil price forecast and expects brent crude prices to stay down in a new range centered on $97 per barrel in 2015 and WTI about $89 next year, as oversupply pushes down prices. Accordingly, analyst David Hewitt adjusted his forecasts for INPEX (1605) and JAPEX (1662) and reiterated his OUTPERFORM rating on both stocks. 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 31 October 2014 ■ On the technology side, Apple launched new iPhone and iPad models. We think that (1) the shift to a higher-resolution camera in the iPad Air is slightly positive for Alps Electric (6770) and Mitsumi Electric (6767), both of which are voice coil motor suppliers; (2) the improved Wi-Fi function should benefit Murata Mfg. (6981) and TDK (6762), with Murata also likely to see positive effects from the iPad Air 2’s more- powerful AP and GPU; and (3) an increase in the average NAND flash content should buoy NAND flash demand and stabilize per-GB prices, contributing to margin improvement at Toshiba (6502). ■ The SPE sector could face some headwinds, Hideyuki Maekawa writes, as front-end SPE investment plans are being pushed back and scaled down. He maintains a bullish longer-term view, expecting more investment in FY15 than in 2H 2014, but believes expectations of a recovery in order momentum will decline in the near term. He rates Disco (6146) OUTPERFORM, but downgraded Tokyo Electron (8035), SCREEN Holdings (7735), Hitachi Kokusai Electric (6756) to NEUTRAL. Advantest (6857) remains rated UNDERPERFORM. ■ Japan Display (6740) surprised markets when it cut its full-year OP guidance from a ¥13.7bn profit to an ¥8.2bn operating loss and announced a plant closure, sending the stock limit down the next day (Shunsuke Tsuchiya had downgraded to UNDERPERFORM last month). Sharp (6753) is also likely to see continued competition erode profit, according to Tsuchiya. In the components space, Akinori Kanemoto upgraded Taiyo Yuden (6976) to NEUTRAL as it benefits from new product launches at customers such as Apple. He downgraded Ibiden (4062) to UNDERPERFORM due to the company’s loss of market share for printed circuit boards used in high-end smartphones. ■ With Japanese stocks falling since late September, analyst Jun Yamaguchi took a step back and examined how his multiple coverage sectors (glass, cement, carbon, paper/pulp, trading companies, battery materials) have fared. He believes: (1) NGK Insulators (5333), Sumitomo Osaka Cement (5232), and GS Yuasa (6674) have been oversold; (2) shareholder returns could remain a compelling theme for trading companies once impairment risk has been priced in; (3) NSG Group’s (5202) prospects hinge partially on the stock market reverting to risk-on mode; and (4) Asahi Glass (5201) and Nippon Paper (3863) could face a reduction in consensus forecasts for FY15. ■ Masami Sawato scaled down his optimism on the synthetic rubber sector by downgrading Zeon (4205) and JSR (4185) to NEUTRAL because of contracting margins. He sees the situation recovering next fiscal year as Zeon increases production capacity for S-SBR (solution polymerization styrene-butadiene rubber) used in fuel-efficient tires, and JSR increases shipments. ■ The nonlife insurers are likely to post robust results at the upcoming 2Q earnings. Insurers’ payouts for major natural disaster claims are within company expectations, auto insurance loss ratios are better than anticipated, and a more favorable-than- expected market environment is supporting strong investment profits, analyst Takehito Yamanaka says. His top pick remains MS&AD Insurance (8725). Nomura's (8604) two-notch upgrade to its credit rating from Moody’s should be a positive surprise for the broker, Yamanaka says. The upgrade reflects a one-notch hike in the company's standalone credit assessment and a consequent one-notch uplift in the assumption for systemic support. Japan Monthly Highlights 2 31 October 2014 Earnings preview materials ■ We held a two-day earnings preview seminar. Please see the links for the presentation materials. For an Excel spreadsheet with earnings times and Credit Suisse forecasts, please click here. ■ Oct 14 – English / 日本語 Industrial Electronics Hideyuki Maekawa Electronic Components Akinori Kanemoto Consumer Electronics, Game Software Shunsuke Tsuchiya Internet, IT Services Yuki Nakayasu Real Estate, Housing, Construction, J-REITS Masahiro Mochizuki Pharmaceuticals Fumiyoshi Sakai Consumer staples (HPC, Food & Bev) Masashi Mori ■ Oct 15 – English / 日本語 Machinery Shinji Kuroda Plant Engineering & Shipbuilding Yunchao Zhao Steel, Nonferrous Metals, Cables Shinya Yamada Chemicals, Textiles Masami Sawato Glass, Ceramics, Paper, Batteries, Trading Jun Yamaguchi Telecommunications Hitoshi Hayakawa Brokerage, Insurance, Other Financials Takehito Yamanaka Banks Takashi Miura Previous Monthly Highlight reports Monthly Highlights Monthly Highlights Monthly Highlights (2014) (2013) (2012) December June December June December June November May November May November May October April October April October April September March September March September March August February August February August February July January July January July January Connecting to Clients Date Event Location Analyst Sep 2 Asia Chemical Conference Hong Kong APAC Research Sep 8 ATC Pre-trip Hong Kong Hong Kong Asia Tech team Sep 9 ATC Pre-trip Taipei Taiwan Asia Tech team Sep 10 ~ 12 Asian Technology Conference (ATC) Taiwan Asia Tech team Sep 17 Auto Parts Corporate Day Tokyo Akita Sep 16 ~ 18 CS Asia Insurance Trip Tokyo APAC Research Sep 16 ~ 19 Japan Pharma Tour Japan Sakai Sep 24 ~ 25 Chemicals Corporate Day Tokyo Sawato Sep 29 Chemicals Corporate Day Tokyo Sawato Japan Monthly Highlights 3 31 October 2014 Figure 1: Target price and rating changes since end-September R ating Ticker C om pany D ate A nalyst N ew TP O ld TP TP Change N ew Rating O ld Rating C hange 4062 IBIDEN 09/30 Akinori Kanemoto 1,500 1,850 -19% U/P N dow n 8316 Sumitomo Mitsui Financial Group 09/30 Takashi Miura 6,900 5,600 23% O/P O/P - 8601 Daiw a Securities Group 09/30 Takehito Yamanaka 890 865 3% N N - 8604 Nomura Holdings 09/30 Takehito Yamanaka 716 790 -9% O/P O/P - 2413 M3, Inc. 10/01 Yuki Nakayasu 1,600 1,100 45% N N - 3064 MonotaRO 10/01 Yuki Nakayasu 2,400 2,100 14% N N - 7936 Asics 10/01 Taketo Yamate 2,800 2,500 12% O/P O/P - 9843 Nitori Holdings 10/01 Taketo Yamate 6,100 4,800 27% N N - 8306 Mitsubishi UFJ Financial Group 10/02 Takashi Miura 920 750 23% O/P O/P - 8951 Nippon Building Fund 10/02 Masahiro Mochizuki 510,000 730,000 -30% U/P O/P dow n 8411 Mizuho Financial Group 10/03 Takashi Miura 250 240 4% N N - 8591 Orix 10/03 Takehito Yamanaka 2,010 2,000 0% O/P O/P - 2229 Calbee 10/06 Masashi Mori 3,650 N initiation 2914 Japan Tobacco 10/06 Masashi Mori 4,000 O/P initiation 8136 Sanrio 10/06 Masashi Mori 3,950 O/P initiation 3436 SUMCO 10/08 Masami Saw ato 1,150 820 40% N N - 4063 Shin-Etsu Chemical 10/08 Masami Saw ato 7,500 7,100 6%