Japan Monthly Highlights Product Manager MONTHLY

30 November 2015 Asia Pacific/Japan Equity Research Product Marketing Japan Monthly Highlights Product Manager MONTHLY Daisuke Takato 813 4550 9671 [email protected] November 2015 ■ August may have been the bottom for machine tool orders, analyst Shinji Kuroda says, as he switches to a near-term bullish view on the subsector for the next six months, while maintaining a longer-term bearish view. He expects YoY order declines to contract in 2016 and for orders to turn positive around April 2016, with the help of substantial new subsidies in Japan, orders for robodrills for the iPhone 7, and business recovery in Europe and the US. He raised his rating on Okuma (6103) to OUTPERFORM and highlights SMC (6273), THK (6481) and Fanuc (6954) as short-term beneficiaries. ■ On the other hand, Kuroda remains bearish on the construction machinery sector. The CRB Index, a leading indicator for emerging economies and for construction machinery and other infrastructure stocks, has fallen to a 13- year low. Kuroda sees increased downside risk for Komatsu (6301) and Hitachi Construction Machinery (6305). ■ News that Apple's Asian suppliers have begun revising down their iPhone production plans (see our Asian technology sector report) could be a good buying opportunity for Japanese tech companies into next year as adjustments in the Jan–Mar production schedule could also exhaust the bad news for the iPhone 7. Our Japan tech team had been forecasting production of 82mn iPhones in Oct–Dec and 55–60mn in Jan–Mar, but the Asia team now expects around 10% less. ■ Elsewhere in tech, our view remains that integrated fan-out wafer level packages (InFO-WLP) are likely to be adopted in new iPhone products in 2016. We expect this to benefit Disco (6146), but Ibiden (4062) is at risk of losing business due to structural changes in the packaging substrate market. ■ Fumiyoshi Sakai continues to like Ono Pharmaceutical (4528) as his top pick in the pharmaceuticals sector, as he expects the PD1 inhibitor cancer treatment Opdivo to generate high domestic sales and overseas royalties, and believes investors have yet to fully price in profit growth from Opdivo’s emergence as a blockbuster product. He also believes that risks of potential reimbursement price cuts for Opdivo will likely be postponed and have been reflected in recent forecasts. Sakai also upgraded eye-drop maker Santen (4536) to OUTPERFORM and raised his target price on kampo maker Tsumura (4540), while cutting Eisai (4523) to UNDERPERFORM. ■ Most companies reported 2Q earnings that were more or less in line with consensus. 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 30 November 2015 ■ Jun Yamaguchi raised his rating on Nippon Electric Glass (5214) to OUTPERFORM – for the first time since initiating in 2011 – as he expects improvements in LCD glass productivity, gentler price decline rates, and improved glass fiber profitability are likely to continue supporting earnings. Yamaguchi also updated his views on trading companies and continues to prefer Mitsubishi Corp (8058) for its higher yield and superior shareholder-friendly stance at a time when declining commodity prices have hit the entire sector. He downgraded Marubeni (8002) to NEUTRAL amid increased risk of resource- related asset writedowns. ■ Masashi Mori continues to see Kose (4922) as his top pick among the cosmetics sector, with its strong brand recognition in cosmetics likely to boost profits from inbound tourism and the expansion of duty-free stores, as well as cross-border e- commerce in Asia. Elsewhere in the consumer goods space, Mori expanded his market share tracking report beyond just diapers to include baby formula and baby bottles, sanitary products and birth-control products (both in the hygiene category), and oral care products. Online sites are gaining in importance as sales channels, making these data a leading indicator for in-store sales, in his view. He also reiterated his OUTPERFORM ratings on Lion (4912) and Kao (4452). ■ Masahiro Akita reiterated his OUTPERFORM rating on Aisin Seiki (7259) as one of the key beneficiaries of a possible realignment among Toyota Motor’s (7203) suppliers. Akita believes the company’s automatic transmission business will help it reach record-high sales. Toyota Boshoku (3116) could be another beneficiary of the Toyota group reogranization. ■ In the real estate sector, Masahiro Mochizuki points out that while vacancy rates fell 7bps in October to 4.46%, the improvement was not enough to drive any acceleration in rents. His preferred play in his coverage sector is housing. Meanwhile, he has a bearish view on housing equipment companies, after downgrading TOTO (5332) to UNDERPERFORM. Japan Monthly Highlights 2 30 November 2015 Japan Focus List We removed Seven & i (3382) after suspending coverage of the retail sector. Figure 1: Japan Focus List and performance as of Sep 30. Relative performance is vs. Topix. Perf since Upside / Ticker Company Analyst inception Downside 1w 1m 3m 6m 12m 4528 Ono Pharmaceutical Fumiyoshi Sakai 62% 17% 3.5 15.8 26.3 52.9 80.8 6762 TDK Akinori Kanemoto 57% 12% -0.5 10.2 16.5 -7.4 9.2 4922 KOSE Masashi Mori 52% 11% 2.8 7.5 9.6 61.3 200.1 9201 Japan Airlines Timothy Ross 25% 59% -4.0 -8.9 -4.7 9.2 9.5 8750 Dai-ichi Life Insurance Takehito Yamanaka 20% 36% -1.4 1.4 -4.8 2.5 14.4 6367 Daikin Industries Shinji Kuroda 11% 10% -1.0 9.2 17.3 -3.4 -2.0 7259 Aisin Seiki Masahiro Akita 9% 21% -2.4 0.1 12.4 -8.3 3.6 3402 Toray Industries Masami Sawato 7% 30% 0.8 3.9 1.3 12.8 8.0 6758 Sony Mika Nishimura 0% 29% -0.1 -8.5 -0.9 -8.5 12.5 7203 Toyota Motor Masahiro Akita -2% 30% 1.7 0.4 1.7 -5.4 -8.2 5233 Taiheiyo Cement Jun Yamaguchi -5% 41% -3.2 -4.8 -11.1 7.4 -8.2 9984 SoftBank Group Corp. Hitoshi Hayakawa -7% 31% -1.1 -6.1 -12.4 -7.5 -30.9 1803 Shimizu Corporation Masahiro Mochizuki -9% 42% -0.1 -3.1 -16.4 14.2 17.2 8303 Shinsei Bank Takashi Miura -14% 40% -0.7 -9.8 -15.0 -1.8 -7.2 8801 Mitsui Fudosan Masahiro Mochizuki -14% 27% -0.9 -7.0 -10.5 -6.6 -21.1 Source: Credit Suisse estimates Previous Monthly Highlight reports Monthly Highlights Monthly Highlights Monthly Highlights Monthly Highlights (2015) (2014) (2013) (2012) Dec Jun Dec Jun Dec Jun Dec Jun Nov May Nov May Nov May Nov May Oct Apr Oct Apr Oct Apr Oct Apr Sep Mar Sep Mar Sep Mar Sep Mar Aug Feb Aug Feb Aug Feb Aug Feb Jul Jan Jul Jan Jul Jan Jul Jan Japan Monthly Highlights 3 30 November 2015 Figure 2: Target Price and Rating Changes since previous month-end TP New Old Rating Ticker Company Date Analyst New TP Old TP Change Rating Rating Change 3401 Teijin 11/04 Masami Sawato 480 440 9% N N - 6674 GS Yuasa 11/04 Jun Yamaguchi 460 510 -10% N N - 9101 Nippon Yusen Kabushiki Kaisha 11/04 Timothy Ross 350 380 -8% O/P O/P - 6305 Hitachi Construction Machinery 11/05 Shinji Kuroda 1,700 1,900 -11% U/P U/P - 5202 NSG Group 11/06 Jun Yamaguchi 125 135 -7% O/P O/P - 6301 Komatsu 11/06 Shinji Kuroda 2,100 2,400 -13% N N - 4041 Nippon Soda 11/09 Masami Sawato 930 930 0% N O/P down 4151 Kyowa Hakko Kirin 11/10 Fumiyoshi Sakai 2,200 2,100 5% N O/P down 6302 Sumitomo Heavy Industries 11/10 Shinji Kuroda 630 850 -26% N N - 5333 NGK Insulators 11/11 Jun Yamaguchi 2,680 2,550 5% N N - 6471 NSK 11/11 Shinji Kuroda 1,700 2,000 -15% O/P O/P - 3281 GLP J-REIT 11/12 Masahiro Mochizuki 140,000 139,638 0% O/P O/P - 4523 Eisai 11/12 Fumiyoshi Sakai 7,000 7,800 -10% U/P N down 5201 Asahi Glass 11/12 Jun Yamaguchi 760 810 -6% N N - 8967 Japan Logistics Fund 11/12 Masahiro Mochizuki 270,000 290,000 -7% O/P O/P - 5214 Nippon Electric Glass 11/13 Jun Yamaguchi 830 610 36% O/P N up 6268 Nabtesco Corporation 11/16 Shinji Kuroda 2,600 2,800 -7% N N - 4540 Tsumura & Co 11/17 Fumiyoshi Sakai 3,800 3,100 23% O/P O/P - 5486 Hitachi Metals 11/17 Shinya Yamada 1,890 1,840 3% O/P N up 6141 DMG Mori Seiki 11/18 Shinji Kuroda 1,800 2,200 -18% N N - 6367 Daikin Industries 11/18 Shinji Kuroda 9,600 9,400 2% O/P O/P - 2229 Calbee 11/19 Masashi Mori 4,600 3,800 21% N N - 4912 Lion 11/19 Masashi Mori 1,450 1,220 19% O/P O/P - 4922 KOSE 11/19 Masashi Mori 14,500 13,000 12% O/P O/P - 4927 Pola Orbis HD 11/19 Masashi Mori 9,500 8,200 16% O/P O/P - 5332 TOTO 11/19 Masahiro Mochizuki 3,900 3,800 3% U/P N down 5711 Mitsubishi Materials 11/19 Shinya Yamada 490 420 17% O/P O/P - 5714 Dowa Holdings 11/19 Shinya Yamada 880 1,100 -20% N N - 5803 Fujikura 11/19 Shinya Yamada 660 680 -3% N N - 8283 PALTAC 11/19 Masashi Mori 2,750 2,700 2% O/P O/P - 3116 Toyota Boshoku 11/20 Masahiro Akita 3,200 2,750 16% O/P O/P - 4452 Kao 11/20 Masashi Mori 7,300 6,400 14% O/P O/P - 4507 Shionogi 11/20 Fumiyoshi Sakai 6,500 5,600 16% O/P O/P - 4527 Rohto Pharma 11/20 Masashi Mori 2,200 2,050 7% N N - 4528 Ono Pharmaceutical 11/20 Fumiyoshi Sakai 23,000 18,000 28% O/P O/P - 4543 Terumo 11/20 Fumiyoshi Sakai 3,900 3,400 15% N N - 6273 SMC 11/20 Shinji Kuroda 37,000 39,000 -5% O/P O/P - 6481 THK 11/20 Shinji Kuroda 2,800 2,600 8% O/P O/P - 7259 Aisin Seiki 11/20 Masahiro Akita 6,000 5,600 7% O/P O/P - 4503 Astellas Pharma 11/24 Fumiyoshi

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