27 July 2016 Asia Pacific/ Equity Research (Personal Products (Japan)) / MARKET WEIGHT

Tobacco industry Research Analysts COMMENT

Masashi Mori 81 3 4550 9695 [email protected] Examining the state of Japan’s “heat-not-burn ” market

■ Two products in focus: In Japan’s cigarette market, much of the focus at present is on two type of “heat-not-burn cigarette.” One is iQOS, from Philip Morris International (PMI). This product has made strong gains in market share since going on sale nationwide this April. The other product is Ploom TECH, launched on a trial basis by (JT, 2914) in March. For now, iQOS is garnering much of the attention, having launched before Ploom TECH. That said, both products are gaining in popularity and are constantly in short supply. Recognition is growing rapidly for this new genre known as heat-not-burn , and we expect market penetration to accelerate. While it is too early to forecast the future for these products, we think they have the potential to become game-changers. In this report, we outline the situation at present. ■ PMI’s 2Q results: Announced on 19 July US time, PMI’s 2Q results served to underscore iQOS' growing popularity. In Japan, iQOS (HeatSticks) reached a national share 2.2% (2.7% in the final week of June), up from 0.8% in 1Q. As positives, PMI noted that (1) the device is now cannibalizing about 35% of the company's cigarette portfolio in Japan, down from around 40% as of September 2015; and (2) many smokers are "up-trading" to iQOS from cheaper brands. Based on PMI’s estimates on iQOS’ market share, it seems clear the device has taken some share away from traditional cigarettes. In Japan, PMI continues to undertake clinical trials on iQOS with a view to proving that the health risks are lower. Also, Philip Morris Japan president Paul Riley has been quoted as saying that consultations with the Ministry of Health, Labour, and Welfare and Ministry of Finance indicate that both have a great deal of interest in iQOS. It is evident that PMI considers iQOS an important part of its business strategy in Japan. ■ High profit margins: Under current Japanese legislation, heat-not-burn cigarettes are categorized as “pipe tobacco” and thus the tobacco excise tax is low. With every sale of a ¥460 pack of JT cigarettes, we calculate that JT’s take is around 29% in the case of traditional cigarettes, and roughly 75% in the case of heat-not-burn cigarettes. Even if the government raises the tax rate for heat- not-burn cigarettes, there should still be improvement in the product mix. We presume there is also a relatively high price on every unit weight of tobacco packed into each heat stick or capsule. ■ Outlook for JT: Japan is an important market for JT, generating 40% of total profits. In our view, iQOS could pose quite a threat to JT if it continues gathering momentum in this manner. On the other hand, JT’s Ploom TECH is also gaining in popularity; based on personal experience, we find that both products have their merits and disadvantages. In the near term, we think JT will remain on the back foot, but if JT can ensure sufficient supply we look for benefits in terms of mix improvement. Also, in some ways we believe the current market environment is not bad for JT, in that it is conducive to pricing merits in the future.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE 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

27 July 2016

Comparison of iQOS and Ploom TECH In Japan’s cigarette market, much of the focus at present is on two types of “heat-not-burn cigarette.” One is iQOS, from Philip Morris International (PMI). This product has made astounding gains in market share since going on sale nationwide this April; as we describe later, this was confirmed for the first time in PMI’s 2Q 2016 results. The other product is Ploom TECH, launched on a trial basis by Japan Tobacco (JT) in March. Currently, Ploom TECH is only available in Fukuoka and online. For now, iQOS is garnering much of the attention, having launched before Ploom TECH. That said, both products are gaining in popularity and are constantly in short supply. Recognition is growing rapidly for this new genre known as heat-not-burn cigarettes, and we expect market penetration to accelerate. We have three queries: (1) Is this new trend merely a passing boom or a sign that structural change is about to take place? (2) Will iQOS’s rapid growth exert an adverse impact on the traditional cigarette market and on JT? (3) We note that Japan has no regulations as yet governing heat-not-burn cigarettes. What approach will the government take? At this stage, there are no clear answers to any of these questions, as it remains difficult to establish reasonable forecasts. There is no denying, though, that these products could change the face of Japan's cigarette market. We hope this report concisely sums up the situation at present.

Figure 1: Lineup of iQOS-related products Figure 2: Lineup of Ploom TECH-related products

Source: Image by Credit Suisse Source: Image by Credit Suisse Both products belong to the genre of heat-not-burn cigarettes and are fundamentally similar in structure. In each case, a proprietary device is used to heat tobacco leaves at a temperature that will not burn them, delivering a tobacco-flavored vapor. Because the tobacco does not burn, there is no smoke, in addition to which PMI claims that toxic contaminants such as tar are greatly reduced (some would beg to differ, as there remains insufficient scientific evidence to support this). Popularity is growing, as the risk to health is said to be less than for traditional cigarettes, for non-smokers also. Some Japanese companies are reported to be offering financial incentives to employees switching from traditional cigarettes to the heat-not-burn type. The e-cigarettes found in Europe and the US heat a -laced liquid to produce a vapor. They are comparatively cheap and available in a variety of flavors, and as such have been gaining in popularity. By contrast, both of the Japanese products use real tobacco leaves in place of a nicotine-based liquid. In Japan, e-cigarettes using a nicotine- based liquid come under the Pharmaceutical Affairs Law governing medical devices and pharmaceuticals. As such, there are numerous restrictions on their manufacture and sale. For example, they can be sold by pharmacies, but not in convenience stores. Thus in

Tobacco industry 2 27 July 2016 comparison with the , as things stand now there is very little scope for expansion in the Japanese market. Note that with some exceptions, even products regulated under the Pharmaceutical Affairs Law can be legally imported by individuals for their own use. Even so, e-cigarettes' share of the Japanese market is extremely small. By comparison, heat- not-burn cigarettes use real tobacco and are treated in the same manner as traditional cigarettes. This means they can be sold in regular tobacco shops, convenience stores and so forth. Below, we compare the two products, including some personal observations. In both cases, it remains difficult at this stage to purchase the proprietary devices, which attract high prices on online auction sites. While iQOS delivers a flavor similar to that from traditional cigarettes, it is somewhat annoying that the holder must be recharged after every HeatStick smoked (14 puffs). Ploom TECH can be used for longer, and has the added advantage of producing no odor. On the other hand, the flavor is different to that of a traditional cigarette. It is difficult to rate one over the other, as both products have their merits and disadvantages. The author personally uses all three types of cigarette (including the traditional form) depending on surroundings.

Figure 3: Comparison of iQOS and Ploom TECH Item iQos (PMI) Ploom TECH (JT) Heating method Tobacco is heated directly Tobacco is heated via capsule Trial launch in November 2014 in Nagoya; available in 12 Available since March 2016 in Fukuoka and online (device Launch prefectures from September 2015 and nationwide from April sales were suspended in early March but resumed from late 2016 June) Share in Japan 2.7% at end-June 2016 (5% in ); around Market share, user numbers N/A 600,000 users (100,000 in February)

Type of tobacco Four types, all -brand (two regular and two menthol) Three types, all -brand (one regular and two menthol)

Price for pack of heat sticks ¥460 (20 sticks filled with tobacco) ¥460 (five capsules filled with tobacco, one cartridge) Price of starter kit (tobacco ¥9,980 (available at discount price of ¥4,600 until end-July ¥4,000 (pre-ordering possible between 23 June and 7 July for vaporizer) 2016) ¥2,000) Starter kit resale price on Yahoo Around ¥16,000 Around ¥8,500 Auction

Holder (¥4,980), pocket charger (¥4,480), dedicated cleaner (¥ Battery (¥1,500), USB charger (¥900) , AC adaptor (¥900), Other accessories 680), AC adaptor (¥880), USB cable (¥480) carry case (¥1,100)

12-month warranty (six months, extendable to 12 if product is 12-month warranty; free replacement possible during this Aftersales service registered) period Waiting time to inhale About 15 seconds (holding button down) Immediate About 50 puffs per capsule (official release says a pack of 5 capsules is equivalent to 30 traditional cigarettes, but 14 puffs or six minutes (14 puffs is same as traditional Number of puffs assuming the number of puffs per traditional cigarette at 14, cigarette; eg, Mevius Premium Menthol Option) we think 17.9 traditional cigarettes are closer equivalent to a pack) Secondhand smoke None None 90% reduction compared with traditional cigarettes (contains Tar yields Heating releases no toxic contaminants (contains nicotine) nicotine) Time needed for a battery re- About 90 minutes (enough for 20 sticks) About 90 minutes (enough for five capsules) charge Number of recharges possible About 400x for charger, roughly 7,300x for holder 200–300x Pros Pros ・Possible to use for extended periods, but also to stop after ・Mouthpiece is similar to traditional cigarette, so doesn't feel one ・Minimal smell compared with iQOS (almost no smell at strange all) Special features (the analyst's ・Flavor also similar to traditional cigarettes ・No cleaning required, so maintenance is easy opinion; others may differ) Areas for improvement ・Roughly six minutes charging required to smoke one stick Areas for improvement ・Holder needs cleaning after a certain number of uses ・Flavor differs to traditional cigarettes (milder) ・Heat stick can break when being inserted into holder ¥114,000 assuming each capsule is equivalent to 30 Total annual cost ¥177,000 (¥168,000 for ¥460 traditional cigarettes, ¥157,000 traditional cigarettes, as per official release (¥191,000 if we (20 sticks per day) for ¥430 traditional cigarettes) assume puffs per traditional cigarette at 14) Note: (1) All information is current as of 20 July. (2) The “special features” and “number of puffs” are according to our own experience; others may have different opinions. (3) Comparison of “total annual cost” takes into account the cost of replacing batteries and holder, but not the cost of electric power used for charging. In addition, the total annual cost for traditional cigarettes does not include the cost of and so forth. Source: Credit Suisse, based on company data, Nikkei TRENDY (August 2016 issue), etc.

Tobacco industry 3 27 July 2016 iQOS's share of Japanese market began growing in 2Q 2016 PMI reported 2Q 2016 earnings on 19 July US time. In Japan, iQOS (HeatSticks) reached a national share for the quarter of 2.2% (2.7% in the final week of June), up from 0.8% in 1Q, which PMI described as an “exceptional performance.” According to PMI, 70% of iQOS purchasers in Japan have been either "fully or predominantly" converted to the product, up from a conversion rate of around 30% previously. As positives, PMI noted that (1) the device is now cannibalizing about 35% of the company's cigarette portfolio in Japan, down from around 40% as of September 2015, and (2) many smokers are "up- trading" to iQOS from cheaper brands. PMI estimates there are approximately 600,000 users of iQOS in Japan (versus 100,000 or so back in February). iQOS currently is present in 10 markets around the world, but by the end of the year it should be available in around 20 markets.

Figure 4: Market share in Japan for iQOS (HeatSticks)

Source: Company data PMI’s 2Q results served to confirm iQOS’ growing popularity in Japan. According to nationwide data for Japan released on 15 July, overall demand for traditional cigarettes fell 5.2% in June, dropping 2.6% in Jan–Jun. Based on PMI’s estimates on iQOS’ market share, it seems clear the device has taken some share away from traditional cigarettes. JT has reported a 0.7% YoY fall in domestic sales volume for Jan–Jun, and thus is tracking just ahead of the pace needed to meet full-year guidance. In our view, though, iQOS could pose quite a threat to JT if it continues to gain momentum in this manner. In the 13 June 2016 issue of Nikkei Business, Philip Morris Japan president Paul Riley is quoted as saying that (1) it would be acceptable if all traditional cigarette users switched over to iQOS, (2) clinical trials still under way in Japan could deliver accurate data, and if health risks are proven to be low there remains scope for regulatory authorities to revise the various rules pertaining to tobacco, and (3) consultations with the MHLW (Ministry of Health, Labour, and Welfare) and MoF (Ministry of Finance) indicate that both have a great deal of interest in iQOS. We think it is evident that PMI considers iQOS an important part of its business strategy in Japan. We note that there are seven directly operated iQOS Store outlets in Japan—in Fukuoka, Hiroshima, Nagoya, Sendai, Harajuku, Umeda, and Shin-Saibashi. In late July, we visited the Harajuku outlet in Tokyo at the time of its opening, only to find the devices had already sold out. One successful purchaser had been lining up since 5:00 in the morning, and the

Tobacco industry 4 27 July 2016 store did not open until 11:00 a.m. Visiting a directly operated outlet therefore seems to offer no guarantee of a purchase. The Harajuku outlet has four floors, and includes an exclusive lounge where visitors can also partake of free beverages. The ambience is similar to that of an airport lounge; and our conclusion is that PMI has really ramped up its marketing. PMI has invested over $2bn in research and development into what it calls “reduced-risk products (RRPs),” the program that gave rise to iQOS. Besides iQOS, the company has three other RRP platforms in the pipeline: one that uses a controlled heating device and two that produce an aerosol by vaporizing a liquid nicotine solution. We will be keenly observing the global response to RRPs, from the standpoint of the tobacco market’s future evolution.

Figure 5: Monthly trend in iQOS conversion rate in Japan

Source: Company data

Figure 6: iQOS (HeatSticks) offtake volume performance

Source: Company data

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Figure 7: PMI’s reduced-risk product (RRP) platforms

Source: Company data

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Figure 8: iQOS Store outlet in Harajuku, Tokyo Figure 9: iQOS Store’s floor guide

Source: Company data Source: Credit Suisse Uncertain outlook for regulatory tightening In its 2 July 2016 issue, the Weekly Toyo Keizai carried an article by Yumiko Mochizuki, former chief of the National Cancer Center’s Tobacco Policy Research Division. According to the article, roughly 1.27mn people die in Japan each year, of whom at least 10% die from active or passive . While on the one hand the Ministry of Health, Labour, and Welfare (MHLW) is working to improve public health in Japan, on the other hand, the Ministry of Finance (MOF) earns around ¥2tn annually in tobacco tax revenues and also several tens of billions of yen in dividends from JT. Thus, there is an entrenched conflict of interest, between health and the economy. It has been estimated that smoking adds approximately ¥1.7tn to Japan’s annual healthcare expenditure, and that hospitalization and death from smoking cause ¥2.4tn in costs due to reduced workforce size, far exceeding the combined revenue from tobacco excise taxes and dividends. The smoking rate in Japan has fallen to around 20% and remained there for several years, but by 2022, the government aims to lower the rate of smoking further, to 12%. In the aforementioned article, though, Ms. Mochizuki noted that Japan lags well behind the rest of the world in initiatives to ban smoking and prevent . In a survey of 2,000 adults undertaken by the National Cancer Center (the results of which were released at end-May 2016), 70% of respondents were in favor of visual health warnings on tobacco packages, with just under 50% of smokers also in support of the idea. Even among smokers, only 20% disagreed. Tobacco retails for much less in Japan than in other industrialized nations, and there are no major laws regulating smoking areas and warnings. Strangely enough, even among smokers there is a push for stronger regulations. Rules governing e-cigarettes in Japan may as well be non-existent, and even in the West, where e-cigarettes are more common, regulations are only in their infancy. What's more, there is insufficient scientific evidence regarding e-cigarettes (in terms of toxicity, safety, etc.), and even among experts opinions are divided. Frankly speaking, opinions vary, and

Tobacco industry 7 27 July 2016 include (1) e-cigarettes should mitigate the adverse health effects from smoking, (2) the liquids used in e-cigarettes pose a risk to health as some of the constituent substances are harmful, (3) many people smoke both e-cigarettes and traditional cigarettes, so e- cigarettes likely will have limited benefit, and (4) as e-cigarettes are easily accessible for young people, they could in fact add to the smoking population. As yet, there remains no global consensus.

Figure 10:US, European, Japanese e-cigarette regulations State laws vary widely but the FDA introduced nationwide regulations in Aug 2016. US Makers must register. E-cigarettes banned to under 18s as with regular tobacco New products must be vetted by the FDA. Claims to reduce health risk need approval. EU countries generally put it in the consumer staples category but some may treat it as a pharmaceutical. Europe From 2016, max nicotine limit is 20mg/ml in principle; makers must display warnings about nicotine addiction. Products approved by the UK's MHRA can be prescribed as smoking- cessation treatments. No laws/regulations specifically targeting e-cigarettes at present. Japan Products containing nicotine designated as pharmaceuticals. E-cigarette production/sales effectively prohibited (import/usage by individuals permitted) Source: Nikkei Business (13 July 2016) Below, we quote from an 11 April 2016 statement from the Japan Society for , concerning so-called “new tobacco products” (e-cigarettes and so forth). Such products contain nicotine, just as cigarettes do. Accordingly, nicotine is contained in exhaled breath, resulting in a risk of acute myocardial infarction from passive inhalation. Such products contain various carcinogenic substances, just like cigarettes, so they entail the risk of lung, oral, stomach, renal and other types of cancer. Unlike cigarettes, the harmful substances they emit are imperceptible. Accordingly, people in their vicinity cannot avoid the passive smoking that occurs as a result. This makes them particularly dangerous. Use of such products should not be permitted in any public spaces including bars or restaurants or means of public transportation. Non-burning heated tobacco products contain about the same amount of nicotine as cigarettes, as well as carcinogens accumulated from the soil such as radioactive polonium and nitrosoamine arising from the tobacco production process. Nicotine is an addictive substance that is designated as a deadly poison under the Poisonous and Deleterious Substances Control Act, with 40–50 mg being a lethal dose. Until the safety of the above products can be confirmed scientifically, they should not be used around other people. Of course, their use in public places should be prohibited. Moreover, according to materials released on 18 June 2015 by the MHLW, there is a risk of e-cigarettes causing acute . While there have been few such cases in Japan, as of February 2014 US poison control centers reportedly were receiving over 200 related calls each month. Against this backdrop, in 2014 the MHLW set up a commission to investigate the health effects of e-cigarettes. On 16 July 2016, the Weekly Diamond published results from a survey of the 20 ordinance-designated cities that have imposed smoking regulations, and of restaurants operating in those cities. In 13 of these 20 municipalities, iQOS and other heat-not-burn cigarettes fall outside the remit of regulations concerning traditional cigarettes; the main reason given is that the lack of a flame means there is no risk of burns or house fires. In a small number of municipalities, though, e-cigarettes are regulated, as they are considered to meet the legal definition of tobacco. According to the Weekly Diamond, opinions among

Tobacco industry 8 27 July 2016 restaurants are divided also. The magazine suggests iQOS has the potential to trigger changes in regulations, and indeed to alter the entire industry. It concludes that the authorities may well move beyond the good/bad conflict, embracing the “harm reduction” concept put forward by PMI and coming up with an entirely new tobacco policy. “Harm reduction” is a policy approach to a harmful activity that seeks to reduce the harm caused by the activity rather than to prevent the activity itself. The idea is gradually gaining traction in the West, to the extent, for example, that there are moves to legalize marijuana in order to minimize abuse of highly addictive drugs. For the Japanese, this is an alien concept.

Figure 11: Responses of 20 designated-city governments to heat-not-burn cigarettes; unregulated in 13 municipalities Response Government Reason Sapporo City No flame, so no risk of burns or house fires Sendai City No flame, so no risk of burns or house fires Saitama City Not regulated by current laws Chiba City No flame, so no risk of burns or house fires Kawasaki City Not regulated by current laws Sagamihara City No flame, so no risk of burns or house fires Unregulated Niigata City No flame, so no risk of burns or house fires Shizuoka City No flame, so no risk of burns or house fires Nagoya City No flame, so no risk of burns or house fires Sakai City No flame, so no risk of burns or house fires Kobe City No flame, so using it does not constitute "smoking" Kitakyushu City Not regulated by current laws Kumamoto City No flame, so no risk of burns or house fires Yokohama City Legal framework not in place; user warnings Considering Kyoto City No moves to regulate; issuing user warnings regulations Osaka City Considering regulations, providing guidance to users Fukuoka City Considering regulations, providing guidance to users Hamamatsu City Usage/behavior similar to smoking, unpleasant/bad etiquette Regulated Okayama City Meets legal definition of tobacco Hiroshima City Meets legal definition of tobacco

Note: All information current as of 27 June, based on interviews with local government Source: Weekly Diamond (16 July 2016 issue)

Tobacco industry 9 27 July 2016

Figure 12: Central/local government and restaurant/bar owner views on heat-not-burn cigarettes: baffled local governments, hesitant restaurant/bar owners, wait-and-see ministries

Philip Morris Sees iQOS as a realistic solution for reducing health risks for smokers who cannot give up tobacco. Believes Japan should International (PMI) revise regulations based on clinical trial results.

Ministry of Finance Classifies as pipe tobacco as no other suitable category exists under the current Tobacco Business Act. May issue opinion (MoF) following announcement of clinical trial results.

Ministry of Health, Disregards harm-reduction claims; even if health risks are Labour and Welfare reduced. Does not recommend to consumers while (MHLW) association with diseases has not been disproved.

Not sure what to make of the new products. When formulating Local government smoking regulations, didn't envisage vaporizers, which fall through the regulatory cracks in many cases.

While showing an understanding of the product, nearly all treat Restaurant/bar it as a regular cigarette to prevent disputes between owners customers; some however allow use of vaporizers in non- smoking sections.

Source: Weekly Diamond (16 July 2016) Margins likely high at present Under current Japanese legislation, heat-not-burn cigarettes are categorized as “pipe tobacco” and thus the tobacco excise tax is low. With every ¥460 pack of sold, JT gets ¥135, or about 29% of the retail price. By contrast, with every sale of Ploom TECH at the same price, we calculate that JT's take is ¥346, or around 75% of the retail price. The calculation is more difficult for iQOS, but at the very least, we think PMI’s take is higher than in the case of traditional cigarettes, as iQOS falls into the category of pipe tobacco. Of course, such revenue will not feed immediately through into profit, as both companies have invested large sums that will take some time to recoup. Once the phase of forward investment is over, though, both iQOS and Ploom TECH should deliver benefits in the form of mix improvement. Once the government decides on a legislative framework for heat-not-burn cigarettes, it is likely to raise the tobacco excise tax on these products. Even in this case, though, the pros should outweigh the cons, as the median price for cigarettes could rise to close to ¥460 (heat-not-burn tobacco price) from traditional cigarettes which are priced at ¥430–440. In addition, the price on every unit weight of tobacco packed into each heat stick or capsule is likely to be higher than for the tobacco contained in traditional cigarettes. A simple comparison is difficult, though, as (1) each Ploom TECH package also contains separate cartridge, and (2) in heat-not-burn cigarettes the sticks and capsules also contain materials other than leaf tobacco, in addition to which processing fees may well be high.

Tobacco industry 10 27 July 2016

Figure 13: Breakdown of RSP for a single pack of JT cigarettes (¥) Paper-wrapped cigarette Ploom TECH MEVIUS Seven Stars Retail selling price 420 440 460 460 Consumption tax 31 33 34 34 Excise tax 245 245 245 34 Trade margin 42 44 46 46 JT margin 102 118 135 346 0 0 0 0 (% of RSP) Retail selling price 100.0 100.0 100.0 100.0 Total tax 65.7 63.1 60.6 14.9 Consumption tax 7.4 7.4 7.4 7.4 Excise tax 58.3 55.7 53.2 7.5 Trade margin 10.0 10.0 10.0 10.0 JT margin 24.3 26.9 29.4 75.1

Source: Credit Suisse

Figure 14: Weight and unit sales price comparisons for traditional and heat-not-burn cigarettes MEVIUS LARK iQOS iQOS Ploom TECH Ploom TECH (Premium Menthol (Smart Plus Splash (Regular) (Mint) (Regular) (Cooler Purple) Option Yellow) Purple) Unit 1 stick 1 stick 1 capsule 1 capsule 1 stick 1 stick Whole weight (g) 0.77 0.82 0.59 0.56 0.96 0.79 External weight (filter,paper) (g) 0.47 0.52 0.25 0.25 0.36 0.30 Internal weight (tobacco leaf,etc) (g) 0.30 0.30 0.34 0.31 0.60 0.49 1 pack retail price (JPY) 460 460 460 460 440 390 # of sticks or capsules per 1 pack 20 20 5 5 20 19 Retail price per 1g internal weight (JPY) 77 77 271 297 37 42 Note: A simple comparison is difficult as each Ploom TECH package also contains a separate cartridge. Source: Credit Suisse

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Companies Mentioned (Price as of 27-Jul-2016) Japan Tobacco (2914.T, ¥4,110) Philip Morris International (PM.N, $98.96)

Disclosure Appendix

Important Global Disclosures I, Masashi Mori, 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 Japan Tobacco (2914.T)

2914.T Closing Price Target Price Date (¥) (¥) Rating 20-Nov-13 3,705 4,200 O 18-Apr-14 3,229 NR 06-Oct-14 3,603 4,000 O * 19-Jan-15 3,152 3,650 27-Mar-15 3,820 4,300 16-Jun-15 4,378 5,000 15-Mar-16 4,567 5,200 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM N O T RAT ED

3-Year Price and Rating History for Philip Morris International (PM.N)

PM.N Closing Price Target Price Date (US$) (US$) Rating 02-Aug-13 89.59 90.00 N 12-Feb-14 78.44 85.00 23-Jan-15 82.82 80.00 28-Apr-15 82.88 84.00 25-Aug-15 77.39 83.00 19-Oct-15 88.42 86.00 11-Nov-15 85.05 83.00 08-Apr-16 100.88 93.00 * Asterisk signifies initiation or assumption of coverage. NEUTRAL

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Tobacco industry 12 27 July 2016

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Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 51% (43% banking clients) Neutral/Hold* 35% (17% banking clients) Underperform/Sell* 13% (38% banking clients) Restricted 1% *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.

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. See the Companies Mentioned section for full company names The subject company (PM.N, 2914.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 (PM.N, 2914.T) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (PM.N, 2914.T) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (PM.N, 2914.T) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (PM.N, 2914.T) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (PM.N).

For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=240125&v=-2cg4snoytg28s5r83okaha0fy . Important Regional Disclosures recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.

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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 https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (PM.N, 2914.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. This research report is authored by: Credit Suisse Securities (Japan) Limited ...... Masashi Mori 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 ...... Masashi Mori

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

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Tobacco_Evapor_072716_E.doc Tobacco industry 15