17 June 2013 Asia Pacific/Japan Equity Research Transportation (Marine Transportation (Japan)) / OVERWEIGHT

Japanese shipping sector Research Analysts INITIATION

Davin Wu 852 2101 6917 [email protected] Shipping profits rise as yen sinks Timothy Ross Figure 1: Japan shipping P/B vs. ROE* 65 6212 3337 [email protected] 3.5x 30% Stock Rating TP Upside 25% 3.0x MOL OP 490 39% 20% 2.5x NYK OP 340 39% K-Line UP 180 -1% 15% 2.0x 10% 1.5x 5% 0% 1.0x -5% 0.5x -10%

0.0x -15%

2009 2007 2008 2010 2011 2012 2013 2014 PB (left) ROE (Right)

Source: Company data, Credit Suisse estimates *Average of MOL, NYK and K-Line

■ Rising returns to lift valuations: Despite a strong rally, the shipping sector is trading at one standard deviation (STD) below its long-term mean P/B and 27% below its economic value. We believe a recovery in the dry bulk market driven by scrapping and yen weakness should support higher valuations. We see the fleet market value as a more appropriate valuation base, as we expect fluctuations in the yen to cause fleet value to deviate from book values. We base our target prices on a combination of ROE–P/B and economic values of business portfolios. ■ Long USD, short JPY: The Japanese shipping companies generate much more USD revenues than costs, having net long USD positions. We expect the yen’s depreciation to magnify a dry bulk market recovery; every ¥1 depreciation against the USD should lift the sector’s profit by 4.4% and stock valuations by 1.3%. A weak yen would also help reduce the sector’s leverage and improve its ability to service yen-denominated debt with USD receipts. ■ Buy MOL: We identify six catalysts for the sector: (1) sustained depreciation of the yen; (2) improving Japanese export data; (3) upward revisions to company profit guidance; (4) accelerating iron ore shipment to China due to a larger price discount for imported ore; (5) rebounding dry bulk shipping rates; and (6) resulting improvement in earnings. Our top pick is MOL (9104, OUTPERFORM, TP ¥490), followed by NYK (9101, OUTPERFORM, TP ¥340). MOL is most leveraged to currency movements and a dry bulk recovery. We expect its earnings improvement to be the most pronounced among all of the shipping companies we cover in Asia. We rate Kawasaki Kisen (K-Line; 9107, TP ¥180) UNDERPERFORM because of its high exposure to falling long-haul container shipping rates.

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17 June 2013 Focus charts and table

Figure 2: Shipping group revenue by segment Figure 3: Proportion of capesize trading in spot market

100% 4% 35% 10% 11% 12% 90% 17% 0% 27% 30% 35% 80% 44% 30% 70% 45% 38% 25% 60% 25% 82% 23% 50% 100%100%100%100%100%100% 89% 55% 40% 83% 20% 30% 46% 51% 15% 20% 45% 42% 10% 10% 18% 14% 10% 10%

0%

NYK

NOL CSD

MOL 5%

OOIL

CSCL

Hanjin

K-Line

Maersk

COSCO

Wan HaiWan

Sinotrans PacBasin Evergreen 0% Bulk Liners Others MOL NYK K-Line

Source: Company data, Credit Suisse estimates *post-hedging Source: Company data, Credit Suisse estimates

Figure 4: Capesize supply–demand growth Figure 5: Earnings estimates at different FX rates US$/day YoY JPY mn 100,000 25.0% 90,000 90,000 80,000 80,000 20.0% 70,000 70,000 60,000 60,000 15.0% 50,000 50,000 40,000 10.0% 40,000 30,000 30,000 20,000 5.0% 20,000 10,000 10,000 - 0.0% -

MOL K-Line NYK

2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Capesize earnings (left) Demand Supply At JPY100/USD (base case) At JPY120/USD

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

Figure 6: Price to adjusted NAV Figure 7: CS estimates vs. consensus and co. guidance 60% FY03/2014 FY03/2014 FY03/2014 47% CS Consensus Co Guidance 40% NPAT NPAT NPAT CS CS Rating ¥ mn ¥ mn ¥ mn vs. consensus vs. guidance 17% 18% 20% 12% 7% MOL OP 57,898 37,989 50,000 52.4% 15.8% 2% 0% K-Line UP 8,500 15,869 13,000 -46.4% -34.6%

-6% NYK OP 32,635 30,618 27,000 6.6% 20.9% -20% -17% -25% Total 99,033 84,476 90,000 17.2% 10.0% -40% -39% -37%

-60% -51%

NYK NOL

CSD

MOL

EMC

OOIL

CSCL

K-Line

COSCO

Wan Wan Hai PacBasin Sinotrans Source: Company data, Credit Suisse estimates Source: Company data, Bloomberg, Credit Suisse estimates

Japanese shipping sector 2 17 June 2013 Shipping profits rise as yen sinks Bulk is leading the recovery Capesize dry bulk vessels and liner units are key swing factors affecting Japanese Scrapping activities so far shippers’ profitability. After experiencing last year the weakest dry bulk market since 1986, on track to hit our estimate we believe that the annual average capesize rate is set to rebound by 35% in FY3/14E, for the year driven by a high level of scrapping and a rebound in iron ore shipments. With China’s A 22% price discount for imported iron ore price now 22% cheaper than the domestic equivalent, we expect iron ore import iron ore relative to shipments to China to regain momentum in 2H 2013. The yen’s depreciation should domestic equivalent means magnify revenue growth. We believe MOL and NYK, oriented as they are toward the dry that China’s ore imports are bulk segment, are likely to see a sharp rebound in their core earnings this year. set to regain momentum Long USD, short JPY Buying Japanese shipping companies is equivalent to buying a USD asset that generates Japanese shipping more USD revenues than costs. With the Bank of Japan (BoJ) committed to a quantitative companies generate far easing policy to boost the economy, associated yen weakness should boost shippers’ more USD revenues than revenues and asset valuations. We estimate that every ¥1 depreciation against the USD costs; a weak JPY is should lift the sector’s profit by 4.4% and valuation by 1.3%. The stocks’ liquidity and positive for their earnings financial leverage should also improve significantly. Positive earnings surprise MOL and NYK’s profit projections were based on JPY/USD assumptions of ¥90–95 and an Upcoming earnings of NYK average bunker price of US$650/t, but the yen is trading at between ¥95–100/US$, and and MOL are likely to beat the bunker price is currently US$600/t. We believe the companies will need to revise up guidance, which is based on profit guidance this summer. Our net profit estimates for MOL and NYK are 18% higher conservative macro than company projections and 29% higher than the Bloomberg consensus. K-Line will assumptions likely see profitability weaken as container shipping spot rates drop sharply. We believe the 20% FY3/14 earnings growth the company projects and the 49% growth consensus outlook are unlikely to materialize. K-Line derives almost half of its revenue from the liner business. Our expectation of sustained weakness in the long-haul market is based on the company’s earnings recovery being far less robust than the market anticipates. Relief of balance sheet pressures The Japanese shippers have far more debt denominated in JPY than other currencies. Weak JPY means greater Japan’s quantitative easing policy and the associated JPY depreciation should improve ability to service JPY debt the companies’ ability to use USD earnings to service their JPY debt. We expect their with US earnings. EBITDA/interest ratio to rise to 9.4x from 6.3x in FY3/14. A sharp fall in the JPY loan interest rate and expectations of currency depreciation should drive the shippers’ preference towards more JPY debt, mitigating their requirement for fresh equity. A stronger cash balance due to the strength of USD should reduce their net debt levels. MOL our top pick; K-Line rated UNDERPERFORM Despite a strong rally, the sector is trading at 0.6x P/B, one STD below its long-term mean MOL is most leveraged to P/B of 1.25x and 18% below adjusted book value based on vessel market values. Rising favorable currency ROE and appreciating vessel prices should drive valuation multiple expansion. We rate movements and a dry bulk MOL and NYK both OUTPERFORM, with 39% and 39% potential upside, respectively. recovery; K-Line’s earnings MOL is most leveraged to favorable currency movements and an anticipated recovery in are negatively affected by the dry bulk segment. We rate K-Line UNDERPERFORM, with 1% potential downside, as falling container rates we expect weak earnings growth due to its high exposure to the liner business, which is impacted by fiercer competition as a result of weakening industry discipline. Our TPs for all stocks are based on the average of an ROE–P/B valuation and economic net asset values. The former should capture earnings momentum, while the latter reflects changes in asset values.

Japanese shipping sector 3 17 June 2013 Table of contents

Focus charts and table 2 Shipping profits rise as JPY sinks 3 Comparable company valuations 5 Bulk is leading the recovery 6 Long USD, short JPY 16 Positive earnings surprise 19 Relief of balance sheet pressures 20 MOL is our top pick 22 Key risks 25 Nippon Yusen Kabushiki Kaisha (9101 / 9101 JP) 26 Kawasaki Kisen Kaisha Ltd. (9107 / 9107 JP) 31 Mitsui O.S.K. Lines Ltd (9104 / 9104 JP) 37

Japanese shipping sector 4 17 June 2013 Comparable company valuations

Figure 8: Shipping company valuations* Company Reuters Share price Last Close Mkt cap Rating Target Up/Down FY03/14 EV/ Code currency Price (US$ mn) price side (%) PE EBITDA PB ROE CSD 1138.HK HKD 2.99 1,864 OP 5.40 81% 19.4 14.2 0.3 1.8% MOL 9104.T JPY 352 4,436 OP 490 39% 7.3 7.3 0.7 10.3% Sinotrans 0368.HK HKD 1.82 936 OP 2.60 43% 9.4 0.2 0.4 4.5% NYK 9101.T JPY 245 4,380 OP 340 39% 12.7 9.3 0.6 4.9% Pacific Basin 2343.HK HKD 4.39 1,095 OP 5.00 14% 11.9 7.5 0.8 6.8% WHL 2615.TW TWD 15.05 1,119 OP 17.25 15% 12.7 3.2 1.0 8.0% MAERSK MAERSKb.CO DKK 41,080 31,385 UP 42,700 4% 9.6 3.5 0.8 8.2% K-Line 9107.T JPY 182 1,799 UP 180.00 -1% 21.3 7.7 0.5 2.5% OOIL 0316.HK HKD 47.15 3,801 UP 45.00 -5% 8.8 6.6 0.8 8.7% Cn COSCO 1919.HK HKD 3.08 4,958 UP 3.00 -3% -7.4 40.8 1.1 -14.9% EMC 2603.TW TWD 16.05 1,869 UP 15.50 -3% 16.9 9.8 0.9 5.3% NOL NEPS.SI SGD 1.05 2,165 UP 0.95 -10% 27.9 9.0 0.9 3.1% CSCL 2866.HK HKD 1.80 3,547 UP 1.20 -33% -56.0 26.6 0.7 -1.2% *Share prices as of 14 June 2013 Source: Company data, Credit Suisse estimates, Bloomberg

Japanese shipping sector 5 17 June 2013 Bulk is leading the recovery

Diversified business portfolios and limited exposure to the spot shipping market set the Capesize vessels trading in Japanese players apart from their global competitors. While other shipping groups in Asia the spot market and the liner typically have a clear focus on one particular shipping segment, the Japanese players are business are the key far more diversified, with businesses spanning dry bulk, crude oil, oil products, LNG, earnings drivers chemicals, cars, logistics, cruises, terminals, real estate and air cargo. A combination of contract-based business and a low correlation among different business lines means that their earnings are subject to less volatility than peers outside Japan.

Figure 9: Shipping group revenue by segment Figure 10: Revenue exposure to spot shipping market

100% 4% 100% 4% 10% 11% 12% 11% 10% 12% 90% 17% 90% 20% 17% 0% 27% 27% 28% 80% 35% 80% 30% 35% 44% 45% 50% 70% 24% 70% 45% 38% 45% 60% 61% 60% 60% 90% 82% 23% 100% 50% 100%100%100%100%100%100% 50% 89% 55% 80% 48% 83% 40% 73% 40% 72% 66% 30% 59% 30% 46% 55% 50% 51% 20% 44% 20% 45% 42% 29% 28% 10% 17% 10% 18% 10% 14% 10% 0%

0%

NOL NYK

CSD

MOL

OOIL

CSCL

Hanjin

K-Line

NYK

NOL

CSD

MOL

OOIL

CSCL

Hanjin

COSCO

K-Line

Wan Hai

Maersk

PacBasin Sinotrans

COSCO

Wan HaiWan

Evergreen

Sinotrans PacBasin Evergreen Spot shipping revenue Contract shipping revenue Bulk Liners Others Non-shipping

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Key swing factors driving earnings and stock prices are the spot operations of the capesize dry bulk fleet and container shipping, which is also primarily a spot business. We estimate that these are responsible for 80% of earnings fluctuations. MOL has the highest proportion of capesize vessel trading in the spot market. Although all of the Japanese players run liner business, the struggling long-haul routes to the US and Europe only account for half of MOL’s liner capacity. It is far more insulated from the slump in long-haul rates than K-Line and NYK.

Figure 11: Proportion of capesize trading at spot market Figure 12: Vessel deployment by region 35% 30% 30% 25% 25%

20%

15% 10% 10%

5%

0% MOL NYK K-Line

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

Japanese shipping sector 6 17 June 2013

Scrapping is the solution to dry bulk oversupply Among all the sub-segments in shipping, dry bulk is our preferred exposure. The most The most acute part of the acute part of the dry bulk shipping down cycle is already behind us. As supply growth dry bulk shipping downturn slows in 2013, demand is likely to outpace supply for the first time since 2006 and a long is behind us process of excess capacity absorption appears set to commence.

Figure 13: Excess demand over supply vs. average BDI vs. dry bulk stock price index 20,000 6.0% 18,000 4.0% 16,000 2.0% 14,000 0.0% 12,000 -2.0% 10,000 -4.0% 8,000 -6.0% 6,000 4,000 -8.0% 2,000 -10.0% - -12.0% 2000 2002 2004 2006 2008 2010 2012 2014E

BDI average Dry bulk stock index Excess demand/supply

Source: Clarksons, the Baltic Exchange, Credit Suisse estimates A low base in 2012 provides an easy comparison for 2013, with freight rates expected to rise for the first time in two years across all segments. See our 21 February dry bulk upgrade report, Light at the end of the tunnel is a blow torch. Level of scrapping activities in 2013 could surprise the market Our 5.3% global dry bulk demand forecast for 2013 approximates the consensus view. However, new ship deliveries are likely to be much lower than originally scheduled, and the level of scrapping should remain high. The dry bulk fleet holds significant potential for Scrapping to permanently scrapping of older vessels, primarily in the smaller segments. In 2012, the global dry bulk remove 4.5% of tonnage fleet expanded 10.4% YoY, despite scrapping having hit a record high at 5% of fleet. New globally in 2013 vessel deliveries that the companies anticipate in 2013 see the fleet expanding by a gross 11.4%, projected delivery slippage of 20% (vs. 29% in 2012) and a 4.5% scrap rate drive forecast net fleet growth of only 4.6% in 2013, starting to absorb the past seven years’ excess supply a year earlier than we had originally anticipated. The delta between what a ship is worth as scrap and what it can produce in terms of A high scrap price and low freight rates is something that we dub the ‘scrap gap’. A sustained high level of scrap price freight rates keep driving and low freight rates below the cash cost to break even are driving the ship owners ship owners to send their towards the breaking yard. This has been increasingly noticeable over the past three ships to the breaking yard years, when dry bulk vessel demolition has been running around 5% of total fleet. We believe that the current market estimate of a 3.5% scrapping rate could be too light.

Japanese shipping sector 7 17 June 2013

Figure 14: Order book vs. ‘scrappable’ tonnage Figure 15: Freight rates and steel prices vs. scrapping No of vessel Olderbook / old 500 6.0% tonnage ratio 1000 3.00 5.0% 900 2.8x 400 2.50 800 2.1x 4.0% 700 2.00 300 600 3.0% 1.3x 500 1.50 200 400 2.0% 300 1.00 0.4x 100 200 0.50 1.0% 100 0 0.00 0 0.0% Capesize Panamax Handymax Handysize 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013E Orderbook Fleet >20-yrs-old Orderbook/old tonnage Scrapping as % of fleet (RHS) Avg BDI (1993 =100) Avg Scrap price (1993 =100)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Capesize is bottoming out. The Japanese shipping companies are major owners of capesize vessels. The big three together control a quarter of the global capesize fleet. More than half of Japan’s iron ore shipping demand is being satisfied by the big three players, which operate most of their vessels under long-term contracts with cargo owners. MOL and NYK have the highest spot exposure, having 30% and 25% of their capesize fleet trading in the spot market, respectively. Although most are tied in to profitable long-term contracts, capesize vessels trading in the spot market determine the direction of shipping profitability. The yen’s depreciation this year indicates that any dry bulk rate improvement would be significantly magnified by its currency conversion.

Figure 16: Earnings impact of 10% chg. in capesize rate Figure 17: Dry bulk fleet size by company (’000 dwt) US$ mn Dwt 000 45,000 8.0 1.3% 7.0 40,000 35,000 6.0 2.0% 5.4% 1.7% 30,000 5.0 25,000 4.0 20,000 3.0 15,000 2.0 10,000 0.7% 1.0 5,000 0.0% 0.0% -

-

NYK

CSD

MOL

K-line

NYK

CSD

MOL

COSCO

K-Line

PacBasin Sinotrans

COSCO

Sinotrans PacBasin Earnings impact % = earnings impact / NPAT Capesize & VLOC Panamax Handy Others

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

Last year, capesize rates reached a historical low since 1986, averaging only Capesize rate is set to US$7,430/day, down 66% YoY. Supply growth should slow significantly, and a long rebound to a level above the process of capacity absorption has just begun. The current rate of US$6,500/day, below cash cost to break even the cash cost of US$8,500/day, is unsustainable, in our view. We believe that the rate is poised to trend up in the coming months, driven by rising iron ore shipments from Australia and Brazil, and a high level of scrapping activities. Major ship owners, including Golden Ocean and D/S Norden, are curbing the proportion of time charter contracts of more than one year to position themselves for a sizable rally in rates. Our base case is that the annual average capesize rate will rise 35% from last year to US$10,000/day, which should boost Japanese players’ aggregate earnings by about 7% (before forex impact) in FY3/14.

Japanese shipping sector 8 17 June 2013

China’s iron ore imports to regain momentum Despite concern about China’s economic growth, China’s iron ore imports are on track to hit our annual target of 4.7%. China imported 322mn tonnes of iron ore in the first five months of this year, up 4.7% from a year earlier. Global benchmark iron ore prices fell 17% in May, encouraging many Chinese buyers to replenish their inventories, which has been falling for nine months since September 2012. With the iron ore import price now 22% cheaper than the domestic equivalent, we expect iron ore shipments to China to gain momentum in 2H 2013.

Figure 18: China iron ore inventory Figure 19: Iron ore pricing, domestic vs. import (US$/ton)

110 250

100 200 90

80 150

70 100 60

50 50

40 - 30 2006 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Domestic ore price Imported iron ore, CFR

Source: Bloomberg Source: Bloomberg Expect capesize fleet growth to slow to only 3.6% in 2013, based on our expectation that 4.4% of global capesize capacity is permanently removed via scrapping. This compares to 4.75% demand growth for global iron ore shipments. A challenging commercial reality and sustained high scrap prices have encouraged more cash-strapped capesize owners to send their vessels to the breaking yards. Scrapping activity YTD is on track to hit our annual estimate. During the first five months of this year, 4.9mn capesize deadweight tonnes were scrapped, representing 40% of our annual target.

Figure 20: Order book vs. old tonnage by vessel class Figure 21: Capesize – Supply–demand US$/day YoY Dwt mn x = orderbook / old tonnage 100,000 25.0% 70 0.83x 0.57x 90,000 60 80,000 20.0% 1.26x 50 70,000 60,000 15.0% 40 50,000 30 40,000 10.0% 30,000 20 20,000 5.0% 10 10,000 - 0.0%

-

2013 2014 2015 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Capesize Panamax Handy 2002 Orderbook Tonnage >15 years Capesize earnings (left) Demand Supply

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

Japanese shipping sector 9 17 June 2013

The capesize scrap age has also been falling rapidly. In 2012, the average scrapping age Scrapping of old tonnage is was 21 years. This year, capesize vessels as young as 15 years have been sent for scrap, key to correcting supply– as the availability of newer vessels in the market make their employment prospects demand imbalance this year significantly less promising. At present, the order book of capesize is 17% smaller than tonnage older than 15 years. If the trend to scrap younger capesize vessels continues, it is possible that we will see flat fleet growth for 2014–15E. This development would be positive for MOL and NYK, because bulk shipping contributes more than 40% of their earnings volatility.

Figure 22: Earnings volatility contribution by segment* Figure 23: Capesize – Net fleet growth

100% 3% 5% 5% 20.00 30.0% 0% 8% 10% 12% 90% 19% 80% 15.00 70% 57% 25.0% 58% 43% 10.00 60% 77% 41% 50% 100%100%100%100%100%100% 82% 95% 92% 5.00 20.0% 40% 30% 35% - 45% 20% 37% 41% 15.0% 10% 20% (5.00) 8% 8% 0%

(10.00) 10.0%

NOL NYK

CSD

MOL

OOIL

CSCL

Hanjin

K-Line

Maersk

COSCO

Wan Wan Hai

Sinotrans PacBasin

1Q11 2Q11 4Q12 1Q13 1Q10 2Q10 3Q10 4Q10 3Q11 4Q11 1Q12 2Q12 3Q12 2Q13 Evergreen Bulk Liners Others Scrapping Deliveries Capesize fleet growth (right)

* Measured by the absolute change in segmental earnings divided by Source: Company data, Credit Suisse estimates total absolute change in all segmental earnings Source: Clarksons

Liners: Sliding towards self-destruction After a large loss as a result of the price war initiated by Maersk and the European debt Capacity pressure is crisis in 2011, the liners have become more organized to control industry capacity to encouraging the liners to restore shipping rates to a profitable level. While they achieved a certain level of success repeat their self-destructive in 2012, their commitment to industry discipline is in doubt, when a record number of competitive behaviours large-size vessel deliveries coincide with weakening European demand. The industry is, in our view, increasingly engaging in a competitive behavior that is self-destructive, including undercutting their competitors by lowering prices and their inability to make timely decisions to withdraw capacity. After peaking during the cargo rush before the Chinese New Year in February, Shanghai A price war started by a few Containerised Freight Index (SCFI) rates have been on a downtrend. The Asia–Europe Asian players has driven rate has fallen for the sixth consecutive week since the General Rate Increase in down the Asia-EU spot rate mid-March, which resulted in only limited success. Today’s Asia–Europe spot rate of US$641/TEU is 66% below the level last year and 50% below US$1,300/TEU, the estimated breakeven level for the industry.

Japanese shipping sector 10 17 June 2013

Figure 24: SCFI composite and long-haul shipping rates to Europe and US West Coast 2,500

2,000

1,500

1,000

500

- Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Asia-Europe (US$/TEU) Asia-USWC (US$/TEU) SCFI

Source: Shanghai Shipping Exchange We are pessimistic on the Asia–Europe route this year. Affected by persistently high Record deliveries of large- unemployment and weakening consumer confidence, demand during 1Q fell 1.3% YoY. sized vessel coincide with a However, supply is set to grow by 10%, as the new large-sized vessels hit the water this sustained weakness in year. The tools to reduce supply, such as slow steaming and returning of chartered European demand vessels, were used last year and will no longer have any incremental impact. To fix the situation, a more robust approach to capacity management is desperately needed by the industry, but the enormous pressure for some carriers to maintain their load factors mean that liners are likely to be slow to react.

Figure 25: Eurozone unemployment rate Figure 26: EU imports from Asia 13.00 60.0% 50.0% 12.00 40.0%

30.0% 11.00 20.0%

10.00 10.0%

0.0% 9.00 -10.0%

8.00 -20.0% -30.0%

7.00

Jul-12 Jul-02 Jul-07

Jan-05 Jan-10

2005 2006 2007 2008 2009 2010 2011 2012 2013 Jan-00

Mar-04 Mar-09

Nov-00 Sep-01 Nov-05 Sep-06 Nov-10 Sep-11 May-03 May-08 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Lackluster performance of the transpacific trade. Strong demand for building materials A recovering housing driven by the US housing recovery appears to be offset by the weakness in the consumer market in the US is being retail sector. Although demand growth in 1Q was down 3.5% YoY, the liners were able to offset by weakening maintain its average load factor on this trade at around 85%, because the industry players consumer retail sales were disciplined in vessel deployment. However, the decision by the G6 Alliance to expand their service into the transpacific trade and carriers’ plan to cascade unwanted smaller vessel class, particularly 5000-8000 TEU, from Asia-Europe trade threaten to undermine the capacity discipline. Evergreen and CSCL have introduced new service

Japanese shipping sector 11 17 June 2013 loops to the US in May 2013. The alliance of CMA CGM, MSC and CKYH is upsizing its vessels on the transpacific service. These developments, coupled with weakening demand, could depress vessel utilization in the remainder of the year. The current spot rate of US$2,102/FEU is 13% lower than in last year. We are concerned that liners could be unable to obtain any rate hike on their annual service contracts to be renewed in May.

Figure 27: Retail sales growth in the US Figure 28: US single family house starts 15.0% 000 units 700 10.0% 650 5.0% 600 0.0% 550 -5.0% 500 -10.0% 450

-15.0% 400 350 -20.0%

300

Jul-12 Jul-08 Jul-09 Jul-10 Jul-11

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Electrical appliances Furniture Apparel

1/1/2010 4/1/2010 7/1/2010 1/1/2011 4/1/2011 7/1/2011 1/1/2012 4/1/2012 7/1/2012 1/1/2013 4/1/2013

10/1/2010 10/1/2012 10/1/2011 Source: CEIC Source: Bloomberg

Liners increasingly irrelevant to the Japanese shipping giants. The status of the The Japanese liners are late Japanese liners line is best described as ‘swing division’. With the exception of K-Line, in the game of vessel liners are no longer a major source of profit. However, a high exposure to the spot market upsizing, and they are in liner operations means that they contribute more earnings volatility than other segments, moving down the league which are often tied in to long-term contracts. Each Japanese liner has a market share of table less than 3%. This compares with the 16% market share of Maersk, the industry leader, and the 5% of the market controlled by Evergreen, the largest player in Asia. The Japanese liners are not strong enough individually to lead the market, but they are also too large to be ignored. Key features of the Japanese liners are the high proportion of chartered-in fleet and their balanced route mix. They have been pursuing an asset-light fleet strategy. A high average percentage of charter fleet of 79% means that they will not be as leveraged to a cyclical upturn as others. However, they also suffered less during the previous downturns, because of greater flexibility in fleet adjustment. While Maersk’s order of large-sized containerships with a carrying capacity of more than 10,000 TEU have triggered an order rush for this type of vessel by liners globally, the Japanese players are far more restrained in expanding their VLCS fleet, relying more on share space swap or chartering with their allied partners rather than heavily investing in new ships. Compared to their competitors in the Asia–Europe market, the Japanese players are facing significantly less pressure to maintain utilization. With other segments growing much faster than liners, we believe that the segment will become far less important in a few years. MOL is a major player in intra-Asia shipping, which we estimate contributes half of its liner revenue. It should be relatively insulated from the downturn in the long-haul market, in our view.

Japanese shipping sector 12 17 June 2013

Figure 29: Vessel deployment by region Figure 30: Global Top 20 liners (1 May 2013) Asia-EU Average Total % of owned % of Market Rnk Operator TEU Ships fleet Charter Share Market Size 1 APM-Maersk 2,584,713 585 52% 48% 16% Shares TEU 2 Mediterranean Shg Co 2,306,616 473 45% 55% 14% 3 CMA CGM Group 1,436,903 417 36% 64% 9% Maersk 20% 9,463 4 Evergreen Line 740,350 190 55% 45% 5% 5 COSCO Container L. 729,541 161 54% 46% 4% CKYH (including K-Line) 18% 8,982 6 Hapag-Lloyd 697,008 150 53% 47% 4% 7 Hanjin Shipping 630,337 117 47% 53% 4% MSC 15% 13,803 8 APL 605,603 123 44% 56% 4% 9 CSCL 601,948 144 68% 32% 4% CMA CGM 11% 11,241 10 MOL 528,174 112 24% 76% 3% 11 OOCL 484,105 98 67% 33% 3% G6 Alliance (Inclduing MOL and NYK) 18% 8,881 12 NYK Line 431,082 100 24% 76% 3% 13 Hamburg Süd Group 410,583 100 53% 47% 3% Evergreen 6% 6,527 14 Yang Ming Marine Transport372,662 Corp. 85 64% 36% 2% 15 K Line 357,364 70 15% 85% 2% CSCL 6% 10,025 16 Zim 337,017 89 44% 56% 2% 17 Hyundai M.M. 333,706 55 30% 70% 2% UASC 3% 13,470 18 PIL (Pacific Int. Line) 317,249 153 65% 35% 2% 19 UASC 258,395 44 77% 23% 2% Others 3% 8,001 20 CSAV Group 255,568 54 19% 81% 2% Source: Company data, Credit Suisse estimates Source: Alphaliners

Car carriers: Beneficiary of yen weakness The three Japanese shipping companies are the dominant players in the car carrier The car shipping market is market, and this business been a source of stable profit for the Japanese shippers. The characterised by a car carrier market is characterised by an oligopolistic market structure, an extremely stable concentrated market and a freight rate environment and high entry barriers. Four carriers—NYK, MOL, EUKOR and stable pricing environment K-Line—control a total global capacity of more than 50%. A concentrated market and a high degree of industry discipline have kept the pricing of the service extremely stable. The profitability of the carriers is far more leveraged to the throughput growth and vessel utilization than shipping rates.

Figure 31: Car carrier market share (1 January 2013) Figure 32: Japanese OEMs’ global production Carriers Number Share Cars Share 000'car 1 NYK 104 15.83% 599,897 16.26% 30,000 15% 2 EUKOR 78 11.87% 497,455 13.48% 3 MOL 83 12.63% 475,809 12.89% 28,000 10% 4 Kawasaki 79 12.02% 413,134 11.20% 26,000 5% 5 Wallenius Wilhelmsen Line 61 9.28% 400,140 10.84% 24,000 6 Others 69 10.50% 302,648 8.20% 22,000 0% 7 HAL 46 7.00% 281,438 7.63% 20,000 -5% 8 HYUNDAI GLOVIS 47 7.15% 252,554 6.84% 18,000 9 GRIMALDI (NAPLES) 45 6.85% 177,428 4.81% -10% 10 N.M.C.C. 11 1.67% 102,370 2.77% 16,000 -15% 11 UECC 9 1.37% 42,930 1.16% 14,000 12 SALLAUM LINES 6 0.91% 40,376 1.09% 12,000 -20%

13 A.R.C 7 1.07% 40,270 1.09%

2010 2007 2008 2009 2011 2012

14 TOYOFUJI 6 0.91% 34,560 0.94% 2006 2013E 15 CSAV 6 0.91% 29,251 0.79% Car YoY Total 657 100.00% 3,690,260 100.00% Source: NYK Source: Credit Suisse Japan Auto Research

In 2012 car shipments recovered to the pre-earthquake level. We see the car carrier business as a beneficiary of the weakening JPY and expect another year of strong growth in 2013. A sustained depreciation of the JPY should provide a new impetus to the volume Car shipments are expected growth from the Japanese automakers. We anticipate 7% growth in car shipments for the to rise 7% this year sector in FY3/14. Key risks to the segment’s earnings are the potential fines imposed on

Japanese shipping sector 13 17 June 2013 the carriers by the regulators and the loss of pricing discipline. The Fair Trade Commission, Japan's anti-trust watchdog, is investigating more than ten shipping companies on the suspicion of forming a cartel to raise prices of sending cars overseas. The authorities in Canada, the US and Europe have also launched similar investigations. None of the Japanese carriers has made any provision yet. LNG: Future profit driver, despite near-term pressure At present, LNG shipping is not yet a major earnings driver for the Japanese shipping The contract-based companies. However, LNG is a new earnings driver that should reshape the profit outlook. business model of LNG All of them are looking to expand their LNG fleet, especially MOL, which plans to grow its shipping ensures profitability fleet by 44% between 2012 and 2020. We are positive on the long-term outlook of the LNG shipping segment. The consensus is expecting overall LNG shipping demand to rise from 250mn tonnes in 2012 to 370mn tonnes in 2020, implying annual growth of 6.7%. At present, 360 LNG carriers are actively trading, with 88 vessels on order. The spot market and direct competition among ship owners almost do not exist, because the vessels are typically tied in to long-term contracts with the cargo owners, ensuring a stable profit for the ship owners. Japan, a dominant LNG consumer, was the single largest factor driving the market in Japan’s LNG demand is tied 2012, as a consequence of the massive shutdown of nuclear power plants. However, two to changes in the nation’s factors will likely negatively affect the medium-term outlook for the sector: (1) the new energy policy government is eager to restart an unknown number of nuclear power plants; and (2) 81 new vessels are scheduled be delivered between 2013 and 2015, but the new LNG production facilities, especially those in the US and Australia will not come online until 2017. New vessels that are yet to secure long-term contracts could face the risk of unemployment.

Figure 33: Global LNG owners league table Figure 34: LNG consumption projections (tonne mn) Owners No 1000m cum Share 400 1 Qatar Gas Transport 52 8,133 15% 2 NYK 66 3,811 7% 350 3 MOL 67 3,672 7% 300 4 MISC 29 3,387 6% 5 Teekay Shipping 19 1,914 4% 250 6 K-Line 43 1,770 3% 7 Golar 14 1,623 3% 200 8 Japanese power and gas co 23 1,441 3% 150 9 Bergesen Worldwide 13 1,271 2% 10 Others Japanese owners 64 645 1% 100 11 Exmar 6 427 1% 50 12 Korean owners 22 2,634 5% 13 Global oil major / power / gas company 116 11,705 22% 0 Others 97 11,425 21% 2009 2010 2011 2012 2020E Total 631 53,858 100% Japan AEJ EU Americas

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates, various energy research institutes

Japanese shipping sector 14 17 June 2013

Tankers: Inevitable secular decline Among all the shipping segments, crude tankers are the most overbuilt, and at the same The downturn in crude oil time facing an apparently inevitable secular decline in demand as a result of the shale gas shipping is expected to revolution. The crude segment is characterised by insufficient demand and oversupply of persist for an extended large-sized vessels. We expect another year of disappointment. Credit Suisse’s global oil period of time & gas teams forecast global crude oil demand growth to be only 1.4%, up slightly from 1.0% in 2012. China, the second most important consumer of crude oil, is the key demand driver, with expected YoY growth of 5.0% in YoY in 2013. A reasonably robust crude oil demand growth from China will be largely offset by persistently weak demand in the Eurozone and slowing American demand. The crude tanker fleet is projected to grow 4.3% in 2013, surpassing even the most Long-term contracts have optimistic forecast of the demand growth. The oversupply pressure will likely be most insulated the Japanese pronounced for the Aframax segment, which is facing intense competition with an shippers from the downturn increasing number of Suezmax, while the overall trade for the smaller crude tankers is declining. The demand–supply gap for VLCC, the largest vessel class, is likely to narrow in 2013, with both fleet and demand growing at 5% YoY. However, the market should remain oversupplied as a result of high delivery volumes since 2009. We believe that further downside in rate is limited, but expect an extended downturn. The Japanese players are relatively insulated from the downturn, because more than 90% of their large-sized tanker vessels are operated under long-term contracts.

Figure 35: 2013 global crude oil demand growth estimates Figure 36: Crude tanker supply–demand 6.00% 8.0% 1,600 1,400 5.00% 6.0% 1,200 4.0% 4.00% 1,000 2.0% 3.00% 800 0.0% 2.00% 600 -2.0% 1.00% 400 -4.0% 200 0.00% -6.0% -

-1.00%

2010 2007 2008 2009 2011 2012

2014E 2013E 2015E -2.00% Demand growth Supply growth Global Americas Europe China Avg Baltic Dirty Index (right)

Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates The shale gas revolution will fundamentally change the industry landscape. The progress in shale gas exploration is likely to prompt a shift in the energy mix globally towards more natural gas. While the development of shale energy is still at an early stage, we believe that this will become an important driver of a secular decline in crude tanker shipping. The sizeable shale reserves in North America and China mean that shipping demand growth for crude oil from the Middle East could be dramatically reduced, although the exact impact to the tanker market remains unclear without knowing the exploration plan of the countries with sizeable reserves.

Japanese shipping sector 15 17 June 2013 Long USD, short JPY

Over the past ten years, Japanese shipping companies’ earnings and valuations have Weak JPY to boost typically trended in line with their Asian peers’. However, a clear divergence in stock shippers’ earnings, raise valuation patterns has emerged over the past six months, as the JPY started reversing its asset valuations and six-year appreciation. Currency is a key theme for Japan’s shipping sector this year. improve their liquidity Japanese shipping companies are sensitive to any JPY movement. With the BoJ committed to a quantitative easing policy, the associated JPY weakness should become the key factor driving the sector’s earnings and investor preference towards companies generating USD cash flows. We identify four positive outcomes as a direct result of the JPY weakness: (1) Market perception that rising Japanese exports will benefit shipping companies (2) Earnings improvement as a result of higher translated USD shipping receipts (3) Positive revaluation impacts from their USD assets (4) Liquidity improvements via lower funding costs and lower financial leverage

Figure 37: USD:JPY vs. shippers’ P/B valuations 3.50 130.0

3.00 120.0 2.50 110.0 2.00 100.0 1.50 90.0 1.00

0.50 80.0

0.00 70.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

AEJ shipping Japan shipping JPY/USD (right)

Source: Bloomberg (1) JPY and trade; perception and reality

A sharp depreciation in the JPY against the currencies of Japan’s major trading partners A weak JPY should raise could easily give the market the perception of an improving outlook for Japan’s trade, and car shipping volumes, but its thus for Japanese shippers. However, Japan’s trade with the world represents an impact is limited for other insignificant volume in container shipping, tanker and dry bulk. Most of the shipping shipping segments services of the Japanese players are performed outside Japan and their destiny is tied in to the global shipping cycle. Despite this, we believe the misplaced optimism is likely to persist, especially among retail investors. Improving Japanese export data is expected to remain an important positive catalyst. In reality, the primary beneficiary of the weak JPY should be the car carrier service. This is a concentrated market dominated by a few Japanese players serving primarily Japanese automakers, which account for 31% of global demand. NYK is the leading player in the car market, having a global market share of 16%. Our Japan auto research team expects global OEM production of Japan’s automakers to grow by 7% in 2013. Japan is a major importer of LNG, but we believe that its demand pattern is tied in to the country’s plan for energy mix and is not very sensitive to currency movements.

Japanese shipping sector 16 17 June 2013

Figure 38: Japan’s export growth (YoY) Figure 39: Japan’s share of shipping volume 20.0% 100% 90% 15.0% 80% 70% 10.0% 68% 69% 60% 83% 88% 5.0% 50% 92% 96% 0.0% 40% 30% -5.0% 20% 32% 31% 10% -10.0% 17% 12% 0% 8% 5%

-15.0%

Car LNG

-20.0% Coal

Ironore

Crudeoil

Container

Jul-12

Apr-12 Oct-12 Apr-13

Jun-12 Jan-13

Jan-12 Japan Rest of the world

Mar-13 Mar-12

Feb-12 Feb-13

Aug-12 Sep-12 Nov-12 Dec-12 May-12 Source: Company data, Credit Suisse estimates Source: IMF, UNCTAD, Credit Suisse Economic Research

(2) Japanese players generally short JPY, long US USD. Almost all the shipping Every ¥1 depreciation would receipts are in USD. However, most of their debt, operating lease payments, depreciation boost the sector’s earnings and corporate expenses are denominated in JPY. Generally, they have net long positions by 4.4% in USD. We estimate that every ¥1 depreciation against the USD would lift the sector’s NPAT by 4.4% in FY3/14E. This would be particularly apparent in the bulk shipping business, the major cost of which is the depreciation charge based on the acquisition value recorded in JPY on their books. (3) Asset revaluation. The value of vessels is a key factor in determining the value of Every ¥1 depreciation would shipping companies and their borrowing capacity. Their vessels, a type of USD asset, boost the sector’s valuation would be increasingly valuable in JPY terms due to the yen’s depreciation. In contrast, by 0.8–1.7% most of the shipping companies’ debts are denominated in yen. We estimate that every ¥1 depreciation should boost stock valuations by 0.8–1.7%. The market for secondary vessels is currently in a new trough, but we believe further price downside is limited by rising vessel value.

Figure 40: ¥1 depreciation – impact on earnings and valuation Appreciation of JPY1/USD Appreciation Appreciation Change in NPAT of JPY1/USD of JPY1/USD JPY mn % Chg in NPAT % Chg in target price MOL 2,000 3.4% 1.3% NYK 1,100 3.4% 0.8% K-Line 1,300 15.3% 1.7% Source: Company data, Credit Suisse estimates

Japanese shipping sector 17 17 June 2013

Figure 41: Profit estimates at different FX rates Figure 42: Target price at different FX rates JPY mn Target price / share 90,000 700 80,000 600 70,000 500 60,000 50,000 400 40,000 300 30,000 200 20,000 10,000 100 - 0 MOL K-Line NYK MOL K-Line NYK At JPY100/USD (base case) At JPY120/USD At JPY100/USD (base case) At JPY120/USD

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates (4) Better liquidity. A stronger USD means that shippers’ ability to service their yen- denominated debt becomes stronger. A weak yen would drive down their loans to value position, enhancing their ability to borrow from banks, when interest rates are falling. Please refer to page 20 about how currency depreciation could improve shippers’ ability to fund their businesses.

Japanese shipping sector 18 17 June 2013 Positive earnings surprise MOL and NYK, which are oriented towards the dry bulk segment, are likely to see a sharp MOL is most likely to beat rebound in their core earnings this year, as a direct consequence of a 35% increase in the guidance and consensus annual average capesize spot shipping rate and an 18% annual average depreciation of JPY to ¥100 per USD. MOL’s and NYK’s profit projections look conservative to us. Their guidance, published in April 2013, was based on a currency assumption of only ¥90–95 per USD and an average bunker price of US$650/t, but the yen is currently trading at ¥95–100 with a bunker price of US$600/t. It is likely that the shippers will have to publish much higher profit guidance this summer, after revising key macro assumptions.

Our earnings estimates for MOL and NYK are on average 18% higher than company K-Line’s guidance has not guidance and 29.5% higher than consensus. However, K-Line, which focuses on container factored in a slump in the shipping, is expected to suffer from falling container shipping spot rates. The company is container shipping rate guiding towards a 20% increase in liner profit. We believe this is unlikely to materialise, given our expectation of a 24% drop in the Asia–Europe rate and utilization of only 85%. The weakness in the spot market should be reflected in the company’s upcoming 1Q (June 2013) results.

Figure 43: Credit Suisse estimates vs. consensus and company guidance FY03/13 FY03/14E FY03/14E FY03/14E Actual CS Consensus co. guidance NPAT NPAT YoY NPAT NPAT CS CS (¥ mn) (¥ mn) (%) (¥ mn) (¥ mn) vs. cons (%) vs. guid. (%) MOL (178,844) 57,898 132 37,989 50,000 52.4 15.8 K-Line 10,670 8,500 -20 15,869 13,000 -46.4 -34.6 NYK 18,897 32,635 73 30,618 27,000 6.6 20.9 Total (149,277) 99,033 166 84,476 90,000 17.2 10.0 Source: Company data, Bloomberg, Credit Suisse estimates

Japanese shipping sector 19 17 June 2013 Relief of balance sheet pressures The ability to finance the vessels at a low cost is critical to shareholders’ returns. Japan’s Japanese shippers’ financial quantitative easing policy and yen depreciation are likely to enhance Japanese shipping leverage is much higher companies’ financial positions, as well as their ability to service existing debt obligations. than their peers in Asia, but Although they are running a global shipping operation with the USD as the transactional their cost of debt is among currency, their business is primarily financed by low-cost yen-denominated debt. As a the lowest consequence, their average pre-tax cost of debt last year was only 1.7%, far less than the Non-Japan Asia average of 2.9%. Given a much higher corporate tax rate in Japan, the post-tax cost of debt is only 1.1% at an effective tax rate of 33%. The net gearing of the Japanese players is generally quite high, averaging 149% in FY3/13, higher than the Asia ex. Japan average of 131%. Only COSCO and Hanjin are more leveraged than the Japanese players. A likely prolonged downturn in the liner business and the pressure to upsize their liner fleet have raised concerns as to whether the Japanese players will need to raise more funding through equity issuance.

Figure 44: Net gearing of Asian shippers in FY12 Figure 45: Effective interest rate of Asia shippers in FY12

700% 620% 6.0% 600% 4.6% 5.0% 4.5%4.4% 500% 400% 4.0% 3.0% 300% 3.0% 2.8% 2.4% 186%170%157% 2.2%2.1% 200% 139%121%116% 2.0% 1.5%1.5% 100% 59% 38% 23% 22% 1.2%1.0% 0% 1.0% -18%

-100% 0.0%

NOL NYK

CSD

MOL

OOIL

NOL NYK

CSD

MOL

CSCL

Hanjin

OOIL

K-Line

CSCL

Hanjin

K-Line

COSCO

WanHai

COSCO

WanHai

PacBasin

PacBasin Evergreen Evergreen Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Improving debt servicing ability We argue that the Japanese players could afford a highly leveraged balance sheet, given Weaker yen to drive up their low financing cost and a high proportion of their revenue locked under long-term EBITDA/interest ratio to 9.4x contract. Despite high gearing, their ability to service their debt is actually greater than in FY3/14E, up from 6.3x their competitors in the region. This is evidenced by an average EBITDA-to-interest ratio of last year 6.3x last year, higher than the regional average of 5.2x. A weaker yen means a greater ability to service the yen debt with their USD shipping earnings. The Japanese shipping sector average ratio is expected to rise further to 9.4x in FY3/14E. JPY loans are a better alternative to equity financing The pressure to raise fresh equity has been significantly relieved, compared to six months JPY debt is more appealing ago. The quantitative easing policy pursued by the BoJ and the associated currency to the shippers, when depreciation have improved the credit funding environment of the Japanese players. The interest rates and the cheap debt in Japan has become even cheaper, especially the short-dated debt. The domestic currency value are 12-month TIBOR, a benchmark rate for yen-denominated shipping loans, fell to just 0.34% falling from 0.46% a year ago. Falling interest rates and the increasing availability of credit should drive a preference for yen loans over equity, in our view.

Japanese shipping sector 20 17 June 2013

Figure 46: EBITDA-to-interest ratio in FY12 Figure 47: TIBOR 12-month rate 20.0 0.70 17.2 0.65 15.0 0.60 9.7 9.2 Average = 5.2x 10.0 0.55 6.6 6.1 6.1 5.0 3.4 0.50 2.2 1.4 1.4 0.8 0.45 0.0 0.40 -1.5

-5.0 0.35

NYK NOL CSD

MOL 0.30

OOIL

CSCL

Hanjin

K-Line

COSCO

WanHai

PacBasin

Evergreen

Jul-10 Jul-11 Jul-12

Oct-12 Apr-13 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12

Jan-11 Jan-12 Jan-13 Jan-10 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates As a USD business, the credibility of the Japanese players should be evaluated based on We expect net gearing to their USD financial positions. A weaker yen should make their yen-denominated debt and come down to 140% in the loan-to-value ratios smaller in their USD financial statements for creditors. This should FY3/14, from 149% last also lower their net gearing ratios in USD terms to levels closer to their peers in Asia, as year. well as increasing their borrowing capacities. In their published yen-based financial statements, stronger shipping receipts in foreign currencies are expected to drive down the Japanese shippers’ average net gearing level to 140% in FY3/14E from 149% last year. Market concern about credit default is relieved We see the pricing of credit default swap as an indicator of market perception towards the shippers’ credibility. A poor dry bulk market and strong yen caused the cost of credit protection to rise 54% between January 2012 and September 2012. The spike was especially pronounced for K-Line. The announcement of quantitative easing, falling TIBOR and the open support by their creditors in providing funding have significantly reduced their default risk. K-Line was able to secure a ¥30bn quasi-equity 60-year subordinated debt by a syndicate of banks, which includes the Development Bank of China, Mizuho and Sumitomo Mitsui Trust Bank. The cost of credit protection for the Japanese shippers has fallen by 65% since September 2012.

Figure 48: Credit Default Swap (Senior 5-year) pricing CDS Basis point 1,000 900 800 700 600 500 400 300 200 100 0 2007 2008 2009 2010 2011 2012 2013 K-Line NYK MOL

Source: Bloomberg

Japanese shipping sector 21 17 June 2013 MOL is our top pick Although the sector has experienced a strong rally, we expect multiple upcoming catalysts to drive the stocks higher. These include: (1) a sustained depreciation of the JPY against the USD; (2) a rebound in the capesize shipping rate; (3) rising car shipments by Japanese automakers; (4) a resulting improvement in earnings over the coming quarters; (5) upward revisions in companies’ profit guidance; (6) the announcement of profitable new contracts; and (7) Japan’s improving export data. MOL is our top pick, followed by NYK. Both MOL and NYK have material exposure to bulk MOL and NYK, with higher shipping. They are better positioned to benefit from an improving operating environment. dry bulk exposure, should We see the potential upside surprise in earnings in the coming quarters, as both the experience a stronger companies and the sell-side brokers continue to revise their currency and freight rate rebound in earnings targets. Although K-Line will benefit from a favorable currency movement, it is much more exposed to the container shipping segment – which faces downward pressure on profit. We argue that a rapidly falling long-haul container shipping rate means that its earnings rebound should be far less pronounced than what the company and consensus are expecting. Stocks are trading at their cyclical low point, despite strong rallies Valuations of the Japanese shippers have almost doubled from the record-low 0.33x P/B Japanese shipping stocks in September 2012, helping lead the cyclical-led rally. Although the risk-on rallies triggered underperformed the market by the quantitative easing policy in Japan have lifted the stocks from a distressed by 16%, trading at one STD valuation, the Japan shipping sector is trading at only 0.6x P/B. This is one STD below the below their long-term long-term mean valuation of 1.25x P/B and similar to the trough level seen in 2009. The average sector underperformed the Nikkei 225 index by 16% over a one year period.

Figure 49: P/B—Current valuation vs. peak and trough Figure 50: Japanese shipping, NJA shipping and TOPIX* 1.80 200 1.60 180 1.40 1.17 1.20 160 1.00 0.80 140 0.80 0.66 0.58 0.60 0.40 0.47 120 0.35 0.60 0.40 0.21 100 0.20

- 80

NYK

CSD MOL

STX 60

K-Line Industry

COSCO May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13

Sinotrans PacBasin Mean (Normalized) Trough (2008-09) Current Japan shipping Nikkei 225 NJA shipping

Source: Company data, Credit Suisse estimates *Indexed to 100 as of May 2012 Source: Company data, Credit Suisse estimates

Japanese shipping sector 22 17 June 2013

Rising ROE should support higher valuation multiple Earnings growth momentum is key to driving the valuation. Historically, the sector’s price Earnings growth is gaining performance has tracked ROE and consensus EPS closely, but the latter appears to be a momentum this year lagging indicator to us. We believe that the earnings impact of a recovering dry bulk shipping rate and car carrier shipments will be boosted by currency appreciation this year. The sector’s aggregate ROE is expected to rebound from –7% last year to 6.7% in FY03/2014. This is historically consistent with the valuation of 1.0x P/B or above.

Figure 51: Japan shipping – Price to book vs. ROE* Figure 52: Consensus EPS* vs. stock price 3.5x 35% 120 70 30% 110 3.0x 60 25% 100 50 2.5x 20% 90

2.0x 15% 80 40 10% 70 30 1.5x 5% 60 0% 20 1.0x 50 -5% 10 0.5x 40 -10%

30 0

Jan-10 May-11 Sep-12 Sep-09 May-10 Sep-10 Jan-11 Sep-11 Jan-12 May-12 Jan-13 May-13

0.0x -15% May-09

2010 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014

PB (left) ROE (Right) Japan shipping price index (left) Japan shipping consensus EPS index (right) *Average of MOL, NYK and K-Line *Average EPS of NYK, MOL and K-Line Source: Company data, Credit Suisse estimates Source: Bloomberg Economic net asset value—A useful benchmark at cyclical turning points The direction of newbuild values and vessels earnings are intuitively linked, with the recent Vessel value is bottoming. recovery in the dry bulk shipping market suggesting upside to dry bulk vessel values, Scrap price should limit which have fallen to a historical low, together with shipping freight rates. We believe the further downside economic net asset value, which we calculate by replacing the fleet book value with the market value, is a much more reliable basis than accounting book value for comparing stock valuations across the sector.

Figure 53: Dry bulk—Vessel values and rate Figure 54: Containership—Vessel values and rate 12,000 1,000 US$/TEU US$/days 50,000 20000 900 10,000 45,000 18000 800 40,000 8,000 35,000 16000 700 30,000 6,000 600 25,000 14000 4,000 20,000 500 15,000 12000 2,000 400 10,000 10000 5,000

0 300 0 8000

2005 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013

2000 2007 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013

BDI (left) Newbuild price US$/dwt (right) 3,500 TEU T/C rate (right) Newbuild price, US$/TEU (left)

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

Japanese shipping sector 23 17 June 2013

Unlike their peers in Hong Kong and China, vessels’ book values under the Japanese Japanese shippers’ vessel accounting standard are at least 40% lower than those accounted for under International book value is depreciated Financial Reporting Standard (IFRS). The Japanese players depreciate most of their 40% faster than their peers vessels over only 15 years. This contrasts with their HK-listed competitors, which listed in the HK/China depreciate their vessels over 25 years. This explained the large valuation premium of 90% market in price to book value over price to adjusted book value between 2005 and 2008. However, a 35% appreciation of the yen against the USD between 2008 and 2012 and falling vessel values over the same period have significantly narrowed the gap. A weaker JPY means that the vessel value should outpace the book value once again.

Figure 55: Price/adjusted book value Figure 56: Japanese stocks – Price to adjusted book* 60% 47% 3.2x 40% 2.8x 2.4x 17% 18% 20% 12% 7% 2.0x 2% 0% 1.6x -6% 1.2x -20% -17% 0.8x -25% -40% 0.4x -39% -37% 0.0x -60% -51%

2006 2007 2008 2009 2010 2011 2012 2013

NYK NOL

CSD

MOL

EMC OOIL

CSCL P/NAV P/B

K-Line

COSCO

Wan Wan Hai PacBasin Sinotrans Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates*Average of NYK, MOL and K-Line To set our TPs, we are prompted to use a combination of P/B valuation based on the Our TPs set at an average historical relationship between shareholders’ returns and P/Bs, and economic net asset of P/B valuation and NAV values based on market values of vessels and financial assets/liabilities. The former could help us capture the earnings momentum, while the latter could reflect changes in vessel prices and currencies.

Japanese shipping sector 24 17 June 2013 Key risks Forex exposure. The primary transactional currency is the USD, but the Japanese shipping players typically have more USD revenue than cost, leaving a net long position in the USD. Their debt is also predominantly denominated in the yen. Appreciation of the yen is generally negative to the business and vice versa. Renewed price war in Asia-Europe. A further weakening of pricing discipline among the shipping groups in the Asia-Europe container shipping market and mounting pressure of new vessel deliveries could prompt the players to engage in a renewed price war. This could result in large losses similar to those they experienced in 2011. A hard-landing for China’s economy. China represents 60% of global iron ore demand. Any slowdown in fixed asset investment means that dry bulk shipping demand will be at risk. The iron-ore carrying segment is most affected by demand from China. Unclear off-balance sheet exposure. A lack of disclosure is a key drawback in investing in the Japanese shipping stocks. We estimate that at least 70% of the operating vessels are not brought on the balance sheet. The term and duration of the lease contracts are both unclear to investors. The potential implementation of IFRS reporting standards could bring some of these off-balance sheet assets and liabilities back on the balance sheet, stretching the balance sheet further. Vessel impairment. Unlike their competitors in Asia, the Japanese shipping companies assess vessel impairment on a group basis. The profitability and value of a certain class of vessels are evaluated as a group. The upcoming implementation of the IFRS accounting standard, which assesses the impairment on an individual vessel basis, could trigger more impairment charges. Fines imposed by regulators. The Fair Trade Commission, Japan's anti-trust watchdog, is investigating more than ten shipping companies on suspicion of forming a cartel to raise the price of sending cars overseas. The authorities in Canada, the US and Europe are also launching similar investigations. The Japanese shipping companies may have to make provisions for fines that may be imposed by the regulators as a result. Sensitivities. The earnings performance of the Japanese shippers could be adversely affected by unfavorable movements in currency, fuel prices and capesize shipping rates.

Figure 57: Earnings sensitivities to currency, fuel and capesize rate Appreciation US$10/ton 10% change of JPY1/USD drop in fuel in capesize rate % Chg in NPAT % Chg in NPAT % Chg in NPAT MOL 3.4% 2.4% 1.4% NYK 3.4% 4.3% 2.1% K-Line 15.3% 17.6% 7.0% Source: Company data, Credit Suisse estimates

Japanese shipping sector 25 17 June 2013

Asia Pacific / Japan

Nippon Yusen Kabushiki

Kaisha (9101 / 9101 JP) Rating OUTPERFORM*

Price (14 Jun 13, ¥) 245 Target price (¥) 340¹ Rising returns to drive valuation Chg to TP (%) 38.8 Market cap. (¥ bn) 415.57 (US$ 4.38) Enterprise value (¥ bn) 1,489.46 ■ Initiate coverage of NYK at OUTPERFORM: NYK is a beneficiary of a Number of shares (mn) 1,696.22 recovering dry bulk market and the yen’s depreciation. The bulk shipping unit Free float (%) 75.0 is set to benefit from a rebound in capesize rate from a below-cash-cost 52-week price range 299 - 134 price level and rising car shipments by the Japanese automakers.

*Stock ratings are relative to the coverage universe in each ■ Currency sensitive: Liners and bulk shipping, which represent 61% of analyst's or each team's respective sector. ¹Target price is for 12 months. NYK’s revenues, are sensitive to the movement in currency, because of their net USD revenue exposure. Any rate improvement in the USD will be Research Analysts enlarged through currency conversion. Every ¥1 depreciation against the Davin Wu USD should boost NYK’s NPAT by 3.2%, or ¥1.1 bn. 852 2101 6917 [email protected] ■ Conservative guidance: NYK’s management is guiding towards net profit of Timothy Ross only ¥27bn this year, based on a currency assumption of ¥90 per USD and a 65 6212 3337 [email protected] bunker price assumption of US$650/t. This is much lower than prevailing spot prices. We believe the company will have to revise up its profit guidance this summer. Our NPAT estimate of ¥32bn is 6% higher than consensus and 20% higher than guidance. ■ Catalysts/Risks: Our ¥340 target price is based on a combination of P/B valuation and economic NAV. The stock is trading at 0.6x P/B, below its long-term mean of 1.3x and its NAV of ¥400. We expect a sharp rebound in the capesize shipping rate, sustained depreciation of the JPY and an upward revision to the company’s profit guidance to drive the up the share price. The key risk for NYK is reversal of the JPY appreciation trend.

Share price performance Financial and valuation metrics

Year 3/13A 3/14E 3/15E 3/16E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 1,897.1 2,019.3 2,082.6 2,112.8 400 120 Operating profit (¥ bn) 17.4 59.8 91.7 92.8 300 100 Recurring profit (¥ bn) 17.7 47.4 80.3 81.4 200 80 Net income (¥ bn) 18.9 32.6 51.8 55.8 100 60 EPS (¥) 11.1 19.2 30.5 32.9 0 40 6-11 10-11 2-12 6-12 10-12 2-13 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 18.0 26.5 34.7 The price relative chart measures performance against the EPS growth (%) n.m. 72.7 58.7 7.6 TOPIX which closed at 1056.45 on 14/06/13 P/E (x) 21.8 12.7 8.0 7.5 On 14/06/13 the spot exchange rate was ¥94.88/US$1 Dividend yield (%) 1.6 2.0 3.1 3.4 EV/EBITDA(x) 13.2 9.3 7.5 7.2 Performance Over 1M 3M 12M P/B (x) 0.63 0.62 0.58 0.55 Absolute (%) -6.8 -7.5 16.7 ROE(%) 3.1 4.9 7.5 7.6 Relative (%) 8.8 -8.0 -28.9 Net debt/equity (%) 170.1 159.0 143.1 127.4

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Japanese shipping sector 26 17 June 2013

Bulking shipping is leading the way Despite having the most diversified business portfolio among the shipping companies in Capesize is the key swing Asia and management’s efforts to grow its non-shipping units, bulk shipping (including dry factor, despite a diversified bulk, car and tanker) and liners were the key earnings drivers of NYK. The shipping units business portfolio account for only 61% of revenues, but they have been responsible for more than 90% of NYK’s earnings volatility over the past six years. We expect the recovery in dry bulk shipping, a weakening JPY and falling bunker prices to be the key factors driving a 72% earnings rebound. Bulk shipping will be leading the way. Bulk vessel costs, mainly depreciation, are recorded in the JPY and it will not change over time. In contrast, shipping contracts are predominantly priced in the USD. We anticipate a 35% rebound in the annual average capesize spot rate to US$10,000/day this year. This will be magnified by an expected 18% annual average depreciation of the JPY. Every ¥1 depreciation against the USD should boost NYK’s net profit by 3.2% or ¥1.1bn. The car carrier division, which represents roughly 15% of revenue, should benefit from an expected 7% increase in car shipments.

Figure 58: NYK – Recurring profit by segment Figure 59: Dry bulk profit margin vs. BDI 250,000 9,000 30.0%

200,000 8,000 25.0% 7,000 150,000 20.0% 6,000 100,000 5,000 15.0% 50,000 4,000 10.0% 3,000 0 5.0% 2,000 (50,000) 1,000 0.0%

(100,000) 0 -5.0%

3/2005 3/2006 3/2007 3/2008 3/2009 3/2010 3/2011 3/2012 3/2013

3/2009 3/2013 3/2007 3/2008 3/2010 3/2011 3/2012

3/2014E 3/2015E 3/2016E

3/2014E 3/2015E 3/2016E Bulk Liners Non-shipping units BDI level Dry bulk profit

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Earnings to beat company and consensus estimates NYK’s projecting FY3/14 net profit to be ¥27bn, up from ¥19bn last year. This is based on Company profit guidance a JPY:USD forecast of 90, bunker price forecast of US$650/t and a 5% increase in car appears to be conservative shipments. The guidance and key assumptions look quite conservative to us. Our earnings forecast of this year is 6% higher than consensus and 20% higher than guidance. Although our expectation of a 24% drop in the Asia-Europe container rate is much lower than a 4% decline in NYK’s budget, our average JPY:USD assumption of 100 this year and an average bunker price of US$613 should explain our premium earnings forecasts.

Figure 60: Recurring pre-tax earnings change Figure 61: Earnings sensitivities and impact as % of profit JPY bn JPY mn 90 80 1,600 4% 70 9 1,400 7 (29) 1,200 3% 60 3% 50 23 1,000 40 800 2% 30 600 20 47 20 400 10 18 200

0 0 Bulk

Fuel US$10/ton ¥1 depreciation 1% change in 10% change in

Forex Liners

Others change in fuel Asia-EU liner capesize rate

Recurring Recurring profit03/14 profit03/13 price rate

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

Japanese shipping sector 27 17 June 2013

Rising shareholders’ return and vessel value The valuation of NYK typically tracks closely with its ROE trend. Based on our expectation ROE expansion and rising of a sustained uptrend in the dry bulk shipping market, ROE is expected to reach 6.5% vessel value should support over FY3/14–15. This is historically consistent with a price-to-book valuation multiple of a higher valuation multiple 0.8x or ¥283/share. Due to the weakening yen, we believe the vessel book value is likely to further deviate from the market value. As a consequence, we are prompted to set our TP at ¥340 based on the average of P/B valuation and the economic NAV of ¥400/share, in order to capture the effect of rising vessel value, as well as the earnings growth momentum. Key catalysts to drive the stocks higher are: (1) the positive change in the currency expectation, (2) a rebound in the capesize shipping rate and (3) the upward revision in the company’s earnings guidance.

Figure 62: P/B vs. ROE Figure 63: P/adjusted book value* vs. P/B

3.0x 25% 3.2x 20% 2.8x 2.5x 15% 2.4x 2.0x 2.0x 10% 1.6x 1.5x 5% 1.2x 0% 1.0x 0.8x -5% 0.5x 0.4x -10% 0.0x 0.0x -15% 2006 2008 2010 2012 2014 2005 2007 2009 2011 2013 P/NAV P/B Rolling PB ROE

Source: Company data, Credit Suisse estimates * book values of the vessels are replaced by market values Source: Company data, Credit Suisse estimates Economic net asset value provides strong underlying support Given the cyclicality, the conglomerate nature of its business and a volatile currency, we believe the economic NAV is a good valuation reference point, which captures the change in value for their vessels, non-shipping business and investment securities. We have derived a break-up valuation for the economic value of NYK’s owned assets, less the debt that is outstanding against these. The value of Yusen Logistics and investment securities are based on their market prices. The resulting valuation is adjusted for a 20% haircut to represent an assumed liquidity discount to divest such a portfolio of assets.

Figure 64: Estimated economic NAV of NYK Asset Currency Value Comment Owned fleet ¥ mn 853,880 Second-hand value; ¥100 per US$ Terminals ¥ mn 69,750 10x P/E Yusen Logistics ¥ mn 25,660 Market price Investment securities ¥ mn 302,645 Others asset ¥ mn 716,757 Book value of property, land and intangible assets Less: Net debt ¥ mn (1,073,883) Less: Minority interest ¥ mn (47,645) Equity value ¥ mn 847,164 Adjusted equity value ¥ mn 677,731 20% haircut for liquidity impact Equity value/share ¥ 400 1,701 mn share Source: Company data, Credit Suisse estimates

Japanese shipping sector 28 17 June 2013

Company background Nippon Yusen Kabushiki Kaisha (NYK) is the largest shipping group in Asia in terms of sales. Its businesses span across dry bulk, tanker, car carrier, container, LNG, air cargo and cruise. The company has a leading market position in dry bulk, container, car carrier and LNG shipping. Its dry bulk fleet and container shipping fleet are ranked 1 and 12, respectively. Along with Hapag-Lloyd, OOCL, APL, Hyundai Merchant Marine and Mitsui OSK, NYK line, the container shipping unit is a member of the G6 shipping alliance controlling 20% of global container shipping capacity.

Figure 65: NYK – Revenue breakdown Figure 66: NYK – Composition of fleet by dwt Real Estate Other Others Cruises 8% 9% Container 0.4% 8% 2% Liner Trade LNG 3% Air Cargo 22% 4%

Terminal Tanker 7% 20%

Logistics 18% Dry bulk Bulk 60% Shipping 39%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates NYK was established in 1885 through the merger of Yubin Kisen Mitsubishi and Kyodo Unyu Kaisha. The company listed its shares in the Tokyo Stock Exchange in 1949. Nippon Cargo Airlines became a consolidated subsidiary of NYK in 2005. NYK is a core member of Mitsubishi group of companies. At present, Mitsubishi-related companies hold a combined 10% holding in NYK.

Figure 67: Top 20 liners (G6 members in yellow) Figure 68: Global Top 5 dry bulk ship operators Total % of owned % of Market Rnk Operator TEU Ships fleet Charter Share Dwt 000 1 APM-Maersk 2,584,713 585 52% 48% 16% 45,000 2 Mediterranean Shg Co 2,306,616 473 45% 55% 14% 3 CMA CGM Group 1,436,903 417 36% 64% 9% 40,000 4 Evergreen Line 740,350 190 55% 45% 5% 5 COSCO Container L. 729,541 161 54% 46% 4% 35,000 6 Hapag-Lloyd 697,008 150 53% 47% 4% 30,000 7 Hanjin Shipping 630,337 117 47% 53% 4% 8 APL 605,603 123 44% 56% 4% 25,000 9 CSCL 601,948 144 68% 32% 4% 20,000 10 MOL 528,174 112 24% 76% 3% 11 OOCL 484,105 98 67% 33% 3% 15,000 12 NYK Line 431,082 100 24% 76% 3% 13 Hamburg Süd Group 410,583 100 53% 47% 3% 10,000 14 Yang Ming Marine Transport372,662 Corp. 85 64% 36% 2% 5,000 15 K Line 357,364 70 15% 85% 2% 16 Zim 337,017 89 44% 56% 2% - 17 Hyundai M.M. 333,706 55 30% 70% 2% NYK MOL COSCO K-Line China 18 PIL (Pacific Int. Line) 317,249 153 65% 35% 2% 19 UASC 258,395 44 77% 23% 2% Group Shipping 20 CSAV Group 255,568 54 19% 81% 2% Group Source: Alphaliners Source: Company data, Credit Suisse estimates Key risks: (1) A reversal of the JPY depreciation trend; (2) a surge in dry bulk vessel new orders which offset the positive impact of scrapping; and (3) a sharp and sustained rise in bunker price. HOLT Analysis Our estimates point to CFROI approaching 2.4% in FY3/14 versus a peak of 4.3% in FY3/11 and a ten-year median of 3.8%. On this basis, HOLT warranted valuation suggests 69% upside. NYK’s shares have generally looked cheap in HOLT and that the current valuations are in line with deep cyclical stocks during their early recovery stage.

Japanese shipping sector 29 17 June 2013

Nippon Yusen Kabushiki Kaisha 9101 / 9101 JP Price (14 Jun 13): ¥245.00, Rating:: OUTPERFORM, Target Price: ¥340.00, Analyst: Davin Wu Target price scenario Key earnings drivers 3/13A 3/14E 3/15E 3/16E Scenario TP %Up/Dwn Assumptions USDJPY 82.3 100.0 100.0 100.0 Upside 400.00 63.27 1.0x P/B Bunker Price (USD/ton) 670.2 620.0 620.0 620.0 Central Case 340.00 38.78 Blended NAV and ROE-based P/B Capesize rate (USD/day) 7,370 10,125 12,656 12,656 Downside 240.00 (2.04) 0.6x P/B — — — —

— — — — Income statement (¥ bn) 3/13A 3/14E 3/15E 3/16E Per share data 3/13A 3/14E 3/15E 3/16E Sales revenue 1,897 2,019 2,083 2,113 Shares (wtd avg.) (mn) 1,697 1,697 1,697 1,697 Cost of goods sold 1,705 1,765 1,791 1,817 EPS (Credit Suisse) (¥) 11.1 19.2 30.5 32.9 SG&A 175.1 194.0 200.0 203.0 DPS (¥) 4.00 5.00 7.63 8.21 Other operating exp./(inc.) (97.5) (100.0) (100.0) (100.0) BVPS (¥) 383 397 420 444 EBITDA 115.0 159.8 191.7 192.8 Operating CFPS (¥) 55.4 73.1 86.5 91.2 Depreciation & amortisation 97.5 100.0 100.0 100.0 Key ratios and 3/13A 3/14E 3/15E 3/16E EBIT 17.4 59.8 91.7 92.8 valuation Net interest expense/(inc.) 15.3 16.9 15.9 15.9 Growth(%) Non-operating inc./(exp.) 13.9 2.5 2.5 2.5 Sales revenue 4.94 6.44 3.13 1.45 Associates/JV 1.7 2.0 2.0 2.0 EBIT 172 243 53 1 Recurring PBT 17.7 47.4 80.3 81.4 Net profit 126 73 59 8 Exceptionals/extraordinaries — — — — EPS 126 73 59 8 Taxes (4.0) 12.8 26.5 23.6 Margins (%) Profit after tax 21.7 34.6 53.8 57.8 EBITDA 6.1 7.9 9.2 9.1 Other after tax income — — — — EBIT 0.92 2.96 4.40 4.39 Minority interests 2.8 2.0 2.0 2.0 Pre-tax profit 0.93 2.35 3.86 3.85 Preferred dividends — — — — Net profit 1.00 1.62 2.49 2.64 Reported net profit 18.9 32.6 51.8 55.8 Valuation metrics (x) Analyst adjustments — — — — P/E 22.0 12.7 8.0 7.5 Net profit (Credit Suisse) 18.9 32.6 51.8 55.8 P/B 0.64 0.62 0.58 0.55 Cash flow (¥ bn) 3/13A 3/14E 3/15E 3/16E Dividend yield (%) 1.63 2.04 3.12 3.35 EBIT 17.4 59.8 91.7 92.8 P/CF 4.42 3.35 2.83 2.69 Net interest — — — — EV/sales 0.80 0.74 0.69 0.65 Tax paid — — — — EV/EBITDA 13.2 9.3 7.5 7.2 Working capital (198.7) (8.6) (5.1) (0.9) EV/EBIT 87.4 24.9 15.7 14.9 Other cash & non-cash items 275.2 72.8 60.1 63.0 ROE analysis (%) Operating cash flow 94.0 124.0 146.7 154.8 ROE 3.07 4.92 7.46 7.59 Capex (307.0) (250.0) (250.0) (250.0) ROIC 0.41 2.42 3.43 3.70 Free cash flow to the firm (213.1) (126.0) (103.3) (95.2) Asset turnover (x) 0.78 0.81 0.82 0.82 Disposals of fixed assets 158.5 158.0 158.0 158.0 Interest burden (x) 1.02 0.79 0.88 0.88 Acquisitions — — — — Tax burden (x) 1.23 0.73 0.67 0.71 Divestments — — — — Financial leverage (x) 3.48 3.43 3.31 3.19 Associate investments — — — — Credit ratios Other investment/(outflows) 13.0 10.0 10.0 10.0 Net debt/equity (%) 158 148 133 119 Investing cash flow (135.6) (82.0) (82.0) (82.0) Net debt/EBITDA (x) 9.6 6.7 5.3 5.0 Equity raised (0.010) — — — Interest cover (x) 1.14 3.54 5.77 5.83 Dividends paid (6.8) (8.5) (13.0) (13.9) Net borrowings 270.2 20.0 — — Source: Company data, Thomson Reuters, Credit Suisse estimates. Other financing cash flow (85.4) — — — Financing cash flow 178.0 11.5 (13.0) (13.9) 12MF P/E multiple Total cash flow 136.4 53.6 51.8 58.9 120 Adjustments 10.8 — — — Net change in cash 147.2 53.6 51.8 58.9 100 Balance sheet (¥ bn) 3/13A 3/14E 3/15E 3/16E 80 Cash & cash equivalents 176.9 230.5 282.2 341.1 Current receivables 222.5 236.9 244.3 247.8 60 Inventories 64.6 68.8 70.9 71.9 40 Other current assets 271.0 271.0 271.0 271.0 Current assets 735.0 807.1 868.4 931.9 20

Property, plant & equip. 1,106 1,098 1,090 1,082 0 Investments 251.9 253.9 255.9 257.9 2008 2009 2010 2011 2012 2013 Intangibles 39.0 39.0 39.0 39.0 Other non-current assets 298.1 288.1 278.1 268.1 Total assets 2,430 2,486 2,532 2,579 12MF P/B multiple Accounts payable 180.7 187.1 189.8 192.6 Short-term debt 127.0 127.0 127.0 127.0 1.80 Current provisions — — — — 1.60 Other current liabilities 146.6 150.0 151.8 152.7 1.40 Current liabilities 454.3 464.2 468.7 472.3 1.20 Long-term debt 1,157 1,177 1,177 1,177 1.00 Non-current provisions — — — — 0.80 Other non-current liab. 120.0 120.0 120.0 120.0 0.60 Total liabilities 1,732 1,762 1,766 1,770 0.40 Shareholders' equity 651.1 675.2 714.1 755.9 0.20 Minority interests 47.6 49.6 51.6 53.6 0.00 Total liabilities & equity 2,430 2,486 2,532 2,579 2008 2009 2010 2011 2012 2013

Source: IBES

Japanese shipping sector 30 17 June 2013

Asia Pacific / Japan

Kawasaki Kisen Kaisha Ltd. (9107 /

9107 JP) Rating UNDERPERFORM* [V]

Price (14 Jun 13, ¥) 182 Target price (¥) 180¹ Prospects tied in to a struggling liner market Chg to TP (%) -1.1 Market cap. (¥ bn) 170.67 (US$ 1.80) Enterprise value (¥ bn) 617.48 ■ Initiate coverage of Kawasaki Kisen at UNDERPERFORM: With almost Number of shares (mn) 937.75 half of its revenue from container shipping, Kawasaki Kisen’s (K-Line) near- Free float (%) 75.0 term earnings prospects are tied in to the performance of long-haul shipping 52-week price range 237 - 94 rates. Given a 45% YTD decline in the Asia-Europe rate, we believe the company’s earnings growth will be less pronounced than the market is *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. anticipating. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). ■ A renewed price war triggered by a record delivery of large-sized vessels

Research Analysts and a weakening industry discipline in the Asia-EU liner market should have Davin Wu a negative impact on K-Line’s earnings. Although its asset-light strategy 852 2101 6917 should help avoid a huge loss, we are concerned that it would lose market [email protected] share to rivals operating Ultra Large Container Ships with significant cost Timothy Ross advantage. 65 6212 3337 [email protected] ■ Limited earnings growth: Like their competitor in Japan, K-Line, especially the bulk shipping division, should benefit from a sharp depreciation of the JPY. Every ¥1 depreciation should boost the company’s profit by 11% or ¥1.3bn. However, an expected deterioration in liner’s profit from ¥6.6bn last year to ¥22bn loss in FY3/14 should largely offset the JPY benefit. ■ Liner shipping rates keep falling, although we are approaching the summer peak season. A prevalent oversupply of tonnage should limit the peak season surcharge this summer. We expect K-Line profitability to weaken in the coming quarters. Our earnings forecast of ¥8.5bn is 49% below consensus and 34% lower than guidance of ¥13bn. We set our target price at ¥180 based on an average of 0.40x P/B valuation and the economic NAV. The key risk to our negative view is a sharp rebound in container shipping rates. Share price performance Financial and valuation metrics

Year 3/13A 3/14E 3/15E 3/16E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 1,134.8 1,176.5 1,216.2 1,220.3 400 120 Operating profit (¥ bn) 14.9 17.4 44.8 47.2 300 100 Recurring profit (¥ bn) 28.6 16.5 44.9 47.3 200 80 Net income (¥ bn) 10.7 8.5 28.0 30.6 100 60 EPS (¥) 10.7 8.5 28.1 30.7 0 40 6-11 10-11 2-12 6-12 10-12 2-13 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 16.9 27.0 35.5 The price relative chart measures performance against the EPS growth (%) n.m. -20.3 229.4 9.3 TOPIX which closed at 1056.45 on 14/06/13 P/E (x) 18.6 21.3 6.5 5.9 On 14/06/13 the spot exchange rate was ¥94.88/US$1 Dividend yield (%) — 1.0 3.1 3.4 EV/EBITDA(x) 8.0 7.7 5.9 6.0 Performance Over 1M 3M 12M P/B (x) 0.55 0.49 0.46 0.43 Absolute (%) -18.8 -20.2 20.5 ROE(%) 3.7 2.5 7.8 8.0

Relative (%) -3.1 -20.6 -25.1

Net debt/equity (%) 121.0 128.6 126.5 122.9 Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Japanese shipping sector 31 17 June 2013

Renewed priced war in Asia–Europe liner market K-Line’s profitability tends to be more volatile than its Japanese peers’, owing to its liner Liners are undercutting each exposure. Container shipping, which contributes half of the company’s revenue, is the key other by slashing rates. earnings driver. We believe the operating environment of the container market will remain Peak season surcharge very challenging this year, especially on the Asia–EU route. A combination of a record could be limited this summer level of vessel delivery in FY3/14 and the weakening of capacity discipline among the players means that there will be rising pressure on spot shipping rates. Liners are undercutting each other by slashing rates. After peaking in January 2013, container rates have been on a downtrend. According to Alphaliner, K-Line deploys 34% of its fleet to the Asia–EU market, where the rate correction is most pronounced, falling by 45% YTD. This should drive K-Line’s liner earnings to a ¥22bn loss in FY03/14 from a ¥6.6bn profit last year, offsetting a 48% rise in bulk profit to ¥35bn. In the worst case, a renewed price war in the liner market that resembles that of 2011 could cause K-Line to repeat its heavy losses.

Figure 69: K-Line recurring profit vs. container rate index* Figure 70: Long-haul shipping rate 150 1400 2,500

1300 100 2,000

1200 50 1,500 1100 0 1,000 1000

(50) 900 500

(100) 800 -

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

3/2007 3/2010 3/2008 3/2009 3/2011 3/2012 3/2013

3/2014E 3/2015E 3/2015E Recurring profit, JPY bn (left) CCFI (right) Asia-EU Asia-USWC NSCFI

*3/2014 CCFI was YTD average rate. Source: Company data, Credit Suisse estimates Source: Shanghai Shipping Exchange, Company data Potential market share loss in the downturn K-Line is far more asset-light than its competitor, with only 15% of its fleet being self-owned vessels. It will have greater ability to adjust the fleet size in response to a changing market landscape. Its competitors are increasing deploying vessels >10,000 TEU to the Asia–EU route, but the capacity of K-Line’s largest vessel is only 8,900 TEU.

Japanese shipping sector 32 17 June 2013

Figure 71: K-Line—Container shipping fleet by size Figure 72: Shipping alliance in the Asia-EU market Asia-EU Average 1,400 TEU Market Size 2,000 TEU 1% 8% Shipping alliance Shares TEU 2,800 TEU Maersk 20% 9,463 2% 8,000 TEU or over CKYH 18% 8,982 31% MSC 15% 13,803

3,500 TEU CMA CGM 11% 11,241 28% G6 Alliance 18% 8,881 Evergreen 6% 6,527 CSCL 6% 10,025 5,500 TEU UASC 3% 13,470 30% Others 3% 8,001

Source: Company data Source: Company data, Credit Suisse estimates, Alphaliners Unlike its competitors which started ordering the Ultra Large Container Ship in 2010, K-Line is lacking the scale to K-Line placed the orders for five 14,000 TEU only in March 2013. They will not be compete in Asia-EU market delivered until 2015. Although K-Line should be facing relatively less pressure to cut price to maintain utilisation, we worry that its existing fleet will lack the scale to compete and maintain its market share in Europe. Without any new delivery, its fleet size is expected to be flat in the next two years. Valuation running ahead of fundamentals Like MOL and NYK, K-Line’s bulk division will benefit from the recovery in the dry bulk Earnings are likely to market and a sharp depreciation in the JPY. We estimate that every ¥1 depreciation disappoint the market in the against the USD should boost K-Line profit by ¥1.3bn or 15% of its profit. Falling interest coming quarters rates and the strength of the USD have helped improve K-Line’s ability to service its JPY-denominated debt obligation and mitigated the risk of further equity raising. However, renewed losses at its liner division mean that its profit rebound will be far less than what the company and consensus are anticipating. We expect K-Line to post a net profit of ¥8.5bn, down 20% from ¥10.6bn last year. This is below consensus forecast of ¥15.8bn and company profit guidance of ¥13bn. The profitability of K-Line is likely to weaken in the coming quarters.

Figure 73: K-Line – P/B vs. ROE Figure 74: P/adjusted book value* vs. P/B 1.4x 40% 4.0x 3.6x 1.2x 30% 3.2x 1.0x 20% 2.8x

0.8x 10% 2.4x 2.0x 0.6x 0% 1.6x 0.4x -10% 1.2x 0.8x 0.2x -20% 0.4x 0.0x -30% 0.0x 2008 2010 2012 2014 2004 2006 2008 2010 2012 2014 Rolling PB ROE P/NAV P/B

Source: Company data, Credit Suisse estimates *Book values of vessels are replaced by market values Source: Company data, Credit Suisse estimates.

Japanese shipping sector 33 17 June 2013

The share price has been up 78% from its trough in September 2012. We argue that the Earnings are likely to valuation is already running ahead of the company’s fundamentals and consensus disappoint the market in the forecasts, which have not factored the slump in liner shipping rates yet. We prefer using a coming quarters combination of price-to-book and economic net asset value in setting our TP. The former can capture the earnings change momentum during an cyclical turning point, while the latter could factor in the impact of currency and asset value. Our ¥180 TP is based on the average of 0.40x P/B and an economic NAV of ¥225. The positive valuation impact from an appreciating USD asset and investment securities is being offset by a weak earnings momentum. Our TP implies a P/B valuation of 0.53x P/B. We have derived a break-up valuation for the economic value of K-Line’s owned assets, less the debt that is outstanding against these. The value of investment securities is based on their market prices. The resulting valuation is adjusted for a 20% haircut to represent an assumed liquidity discount to divest such as portfolio of assets.

Figure 75: K-Line economic NAV Asset Currency Value Comment Owned fleet ¥ mn 508,163 Secondhand value;¥100 per US$ Investment securities ¥ mn 87,198 Market value Others asset ¥ mn 114,042 Book value of land and vessels under construction Less: Net debt ¥ mn (432,621) Less: Minority interest ¥ mn (21,404) Equity value ¥ mn 255,377 Adjusted equity value ¥ mn 204,302 20% haircut for liquidity impact Equity value / share ¥ 217 939 mn share Source: Company data, Credit Suisse estimates Company background Kawasaki Kisen (K-Line) is Japan’s third-largest shipping company. K-Line was established in 1919 by Kawasaki Shipbuilding. Today, K-Line is a diversified shipping group with operations in containership, dry bulk, tanker, car carrier and other shipping services. Container shipping service is the core business, contributing 47% of the company’s revenue. K-Line container shipping fleet is ranked 15 in the world. Along with COSCO, Yang Ming and Hanjin Shipping, Kawasaki Kisen is a member of the CKYH alliance, a global container-shipping consortium.

Figure 76: Revenue breakdown by segment Figure 77: Top 20 liners (CKYH members in yellow) Total % of owned % of Market Rnk Operator TEU Ships fleet Charter Share Other 1 APM-Maersk 2,584,713 585 52% 48% 16% 11% 2 Mediterranean Shg Co 2,306,616 473 45% 55% 14% 3 CMA CGM Group 1,436,903 417 36% 64% 9% 4 Evergreen Line 740,350 190 55% 45% 5% 5 COSCO Container L. 729,541 161 54% 46% 4% 6 Hapag-Lloyd 697,008 150 53% 47% 4% Containership 7 Hanjin Shipping 630,337 117 47% 53% 4% 47% 8 APL 605,603 123 44% 56% 4% 9 CSCL 601,948 144 68% 32% 4% 10 MOL 528,174 112 24% 76% 3% 11 OOCL 484,105 98 67% 33% 3% Bulk 12 NYK Line 431,082 100 24% 76% 3% 13 Hamburg Süd Group 410,583 100 53% 47% 3% shipping 14 Yang Ming Marine Transport372,662 Corp. 85 64% 36% 2% 42% 15 K Line 357,364 70 15% 85% 2% 16 Zim 337,017 89 44% 56% 2% 17 Hyundai M.M. 333,706 55 30% 70% 2% 18 PIL (Pacific Int. Line) 317,249 153 65% 35% 2% 19 UASC 258,395 44 77% 23% 2% 20 CSAV Group 255,568 54 19% 81% 2% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Key risks: (1) A sharp rebound in container shipping rate, (2) a sharp and sustained fall in bunker price and (3) a sharp rise in investment securities value.

Japanese shipping sector 34 17 June 2013

HOLT Analysis Our estimates point to CFROI approaching 3.4% in FY3/14 versus 4.3% achieved in FY3/08 and a ten-year median of 3.3%. On this basis, HOLT warranted valuation suggests 181% upside. K-Line’s shares have generally looked cheap in HOLT and that the current valuations are in line with deep cyclical stocks during their early recovery stage. However, K-Line exposure to loss-making liner segment means that cash profit should be growing slower than revenue.

Japanese shipping sector 35 17 June 2013

Kawasaki Kisen Kaisha Ltd. 9107.T / 9107 JP Price (14 Jun 13): ¥182.00, Rating:: OUTPERFORM [V], Target Price: ¥180.00, Analyst: Davin Wu Target price scenario Key earnings drivers 3/13A 3/14E 3/15E 3/16E Scenario TP %Up/Dwn Assumptions USDJPY 82.3 100.0 100.0 100.0 Upside 300.00 64.84 1.0x P/B Bunker Price (USD/ton) 670.2 620.0 620.0 620.0 Central Case 180.00 (1.10) 0.5x P/B Capesize rate (USD/day) 7,350 10,125 12,656 12,656 Downside 120.00 (34.07) 0.4x P/B — — — —

— — — — Income statement (¥ bn) 3/13A 3/14E 3/15E 3/16E Per share data 3/13A 3/14E 3/15E 3/16E Sales revenue 1,135 1,177 1,216 1,220 Shares (wtd avg.) (mn) 996.7 996.7 996.7 996.7 Cost of goods sold 1,039 1,077 1,086 1,088 EPS (Credit Suisse) (¥) 10.7 8.5 28.1 30.7 SG&A 80.7 82.0 85.0 85.0 DPS (¥) — 1.73 5.70 6.23 Other operating exp./(inc.) (59.7) (63.0) (63.0) (63.0) BVPS (¥) 363 370 394 421 EBITDA 74.6 80.4 107.8 110.2 Operating CFPS (¥) 59.7 72.0 88.4 93.3 Depreciation & amortisation 59.7 63.0 63.0 63.0 Key ratios and 3/13A 3/14E 3/15E 3/16E EBIT 14.9 17.4 44.8 47.2 valuation Net interest expense/(inc.) 11.2 10.9 9.9 9.9 Growth(%) Non-operating inc./(exp.) 24.9 10.0 10.0 10.0 Sales revenue 16.7 3.7 3.4 0.3 Associates/JV — — — — EBIT 137 17 157 5 Recurring PBT 28.6 16.5 44.9 47.3 Net profit 126 (20) 229 9 Exceptionals/extraordinaries 4.3 — — — EPS 121 (20) 229 9 Taxes 19.5 5.0 15.0 16.0 Margins (%) Profit after tax 13.4 11.5 29.9 31.3 EBITDA 6.6 6.8 8.9 9.0 Other after tax income — — — — EBIT 1.31 1.48 3.68 3.87 Minority interests 2.7 3.0 1.9 0.7 Pre-tax profit 2.52 1.40 3.69 3.88 Preferred dividends — — — — Net profit 0.94 0.72 2.30 2.51 Reported net profit 10.7 8.5 28.0 30.6 Valuation metrics (x) Analyst adjustments — — — — P/E 17.0 21.3 6.5 5.9 Net profit (Credit Suisse) 10.7 8.5 28.0 30.6 P/B 0.50 0.49 0.46 0.43 Cash flow (¥ bn) 3/13A 3/14E 3/15E 3/16E Dividend yield (%) — 0.95 3.13 3.42 EBIT 14.9 17.4 44.8 47.2 P/CF 3.05 2.53 2.06 1.95 Net interest — — — — EV/sales 0.51 0.52 0.53 0.54 Tax paid — — — — EV/EBITDA 7.82 7.68 5.93 5.96 Working capital 21.6 (1.8) (3.8) (0.3) EV/EBIT 39.1 35.5 14.3 13.9 Other cash & non-cash items 22.9 56.1 47.1 46.1 ROE analysis (%) Operating cash flow 59.5 71.7 88.1 93.0 ROE 3.66 2.47 7.80 7.99 Capex (132.3) (140.0) (140.0) (140.0) ROIC 0.63 1.52 3.54 3.52 Free cash flow to the firm 32.2 (33.3) (16.9) (12.0) Asset turnover (x) 0.96 1.01 1.02 1.00 Disposals of fixed assets 97.1 35.0 35.0 35.0 Interest burden (x) 1.92 0.95 1.00 1.00 Acquisitions — — — — Tax burden (x) 0.41 0.70 0.67 0.66 Divestments — — — — Financial leverage (x) 3.26 3.13 3.00 2.87 Associate investments — — — — Credit ratios Other investment/(outflows) 10.7 — — — Net debt/equity (%) 114 120 118 115 Investing cash flow (24.5) (105.0) (105.0) (105.0) Net debt/EBITDA (x) 5.53 5.56 4.35 4.41 Equity raised 10.4 — — — Interest cover (x) 1.33 1.60 4.53 4.77 Dividends paid — (1.5) (5.0) (5.5) Net borrowings 4.4 (30.0) — — Source: Company data, Thomson Reuters, Credit Suisse estimates. Other financing cash flow 77.1 — — — Financing cash flow 91.9 (31.5) (5.0) (5.5) 12MF P/E multiple Total cash flow 126.9 (64.8) (21.9) (17.5) 120 Adjustments 7.4 — — — Net change in cash 134.3 (64.8) (21.9) (17.5) 100 Balance sheet (¥ bn) 3/13A 3/14E 3/15E 3/16E 80 Cash & cash equivalents 162.1 97.3 75.4 57.9 Current receivables 86.9 90.1 93.1 93.4 60 Inventories 42.7 44.3 45.8 45.9 40 Other current assets 62.5 62.5 62.5 62.5 Current assets 354.2 294.2 276.8 259.8 20

Property, plant & equip. 623.8 665.8 707.8 749.8 0 Investments 87.1 88.1 89.1 90.1 2008 2009 2010 2011 2012 2013 Intangibles 5.9 5.9 5.9 5.9 Other non-current assets 109.4 109.4 109.4 109.4 Total assets 1,180 1,163 1,189 1,215 12MF P/B multiple Accounts payable 82.6 85.6 86.4 86.5 Short-term debt 96.6 96.6 96.6 96.6 1.60 Current provisions — — — — 1.40 Other current liabilities 82.4 82.4 82.4 82.4 1.20 Current liabilities 261.6 264.6 265.3 265.5 1.00 Long-term debt 477.6 447.6 447.6 447.6 0.80 Non-current provisions — — — — Other non-current liab. 79.3 79.3 79.3 79.3 0.60 Total liabilities 818.5 791.5 792.2 792.3 0.40 Shareholders' equity 340.6 347.5 370.5 395.6 0.20 Minority interests 21.4 24.4 26.3 27.0 0.00 Total liabilities & equity 1,180 1,163 1,189 1,215 2008 2009 2010 2011 2012 2013

Source: IBES

Japanese shipping sector 36 17 June 2013

Asia Pacific / Japan

Mitsui O.S.K. Lines Ltd (9104 / 9104 JP) Rating OUTPERFORM* [V]

Price (14 Jun 13, ¥) 352 Target price (¥) 490¹ A big profit turnaround with multiple catalysts Chg to TP (%) 39.2 Market cap. (¥ bn) 420.92 (US$ 4.44) Enterprise value (¥ bn) 1,291.80 ■ Initiate coverage of Mitsui O.S.K. at OUTPERFORM: Mitsui O.S.K. (MOL) Number of shares (mn) 1,195.78 is our top pick in the shipping sector. It is most leveraged to a favorable Free float (%) 65.0 currency movement, a recovering dry bulk market and a growing LNG 52-week price range 445 - 177 shipping business. Earnings growth momentum this year is expected to be the most pronounced among the shipping companies in Asia. *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. ■ Boosted by JPY weakness: Due to its high exposure to bulk shipping, MOL [V] = Stock considered volatile (see Disclosure Appendix). enjoys the positive impact of a weakening JPY more than their peers in

Research Analysts Japan. While its depreciation and debt are predominantly in the JPY, most of Davin Wu its shipping receipts are in the USD and it should be boosted through 852 2101 6917 currency conversion. We estimate that every ¥1 depreciation will boost [email protected] MOL’s profit by 3.4% or ¥2bn. Timothy Ross 65 6212 3337 ■ A big turnaround in the dry bulk unit: MOL’s cost pressure has been [email protected] significantly relieved, after making a one-off write-down of ¥96bn in 4Q for its expensive dry bulk vessels chartered in at the market peak. A lower cost base, an expected 35% rebound in the average capesize rate and a 30% average depreciation of the JPY should drive a considerable upswing in ROE to 10% this year, up from –30% in FY3/13. ■ Multiple positive catalysts in the coming months: (1) A sustained depreciation trend of the JPY, (2) sequential quarterly earnings improvement, (3) an upward revision in the company profit guidance driven by changes in spot exchange rate and freight rate increases, (4) any sign of earnings improvement of Daiichi Chuo Kisen, a loss-making dry bulk affiliate, and (5) the announcement of more lucrative LNG projects with guaranteed profits. The key risk to our view is a reversal of the yen-appreciation trend.

Share price performance Financial and valuation metrics

Year 3/13A 3/14E 3/15E 3/16E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 1,509.1 1,660.7 1,718.4 1,742.6 600 120 Operating profit (¥ bn) -15.8 95.9 105.5 112.5 400 100 Recurring profit (¥ bn) -28.6 83.6 94.7 101.7 80 Net income (¥ bn) -178.8 57.9 66.2 74.3 200 60 EPS (¥) -149.6 48.4 55.4 62.1 0 40 6-11 10-11 2-12 6-12 10-12 2-13 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 31.7 45.5 67.0 The price relative chart measures performance against the EPS growth (%) n.m. n.m. 14.3 12.2 TOPIX which closed at 1056.45 on 14/06/13 P/E (x) -2.1 7.3 6.4 5.7 On 14/06/13 the spot exchange rate was ¥94.88/US$1 Dividend yield (%) — 0.57 0.57 0.57 EV/EBITDA(x) 15.4 7.3 6.9 6.6 Performance Over 1M 3M 12M P/B (x) 0.70 0.72 0.65 0.58 Absolute (%) -12.9 4.8 24.4 ROE(%) -30.5 10.3 10.6 10.8 Relative (%) 2.8 4.3 -21.2 Net debt/equity (%) 156.8 147.4 132.3 117.4

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Japanese shipping sector 37 17 June 2013

Recovering from recording breaking losses Among the Japanese shipping companies, MOL is most sensitive to the currency MOL is most leveraged to movement and bulk shipping, which represent half of MOL’s revenue. In FY3/12, MOL the currency movement experienced the weakest dry bulk shipping market since 1986. The Baltic Dry Index fell 37% YoY, negatively affecting approximately 32% of its vessels trading in the spot market. Although the oversupply of tonnage as a result of overbuilding will continue to impact the market, we believe a combination of sustained high level of scrapping and pressure for the ship-owner to cover its cash cost should lift freight rate above its cash breakeven level. We expect MOL’s achieved spot capesize rate to rise from US$7,500/day to US$10,000/day in FY3/14.

Figure 78: MOL’s recurring profit vs. Baltic Dry Index Figure 79: Earnings impact of ¥1 depreciation JPY bn 2,500 18.0% 200,000 9,000 % = proportion of NPAT 16.0% 8,000 3.4% 150,000 2,000 7,000 14.0% 100,000 6,000 12.0% 5,000 1,500 50,000 15.3% 10.0% 4,000 3.2% 0 3,000 8.0% 1,000 2,000 (50,000) 6.0% 1,000 (100,000) 0 500 4.0%

2.0%

3/2012 3/2006 3/2007 3/2008 3/2009 3/2010 3/2011 3/2013

3/2015E 3/2016E 3/2014E - 0.0% Pre-exceptional net profit BDI (right) MOL K-Line NYK

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates The USD dominates the revenue accounts for MOL, especially bulk shipping, but it represents a much smaller proportion of expenses, the difference is a net long position in the USD. We estimate that every ¥1 depreciation will boost the company earnings by 3.4% or ¥2bn. The rate improvement of the dry bulk spot rate will be enlarged by an expected 30% average depreciation of the yen. The translated losses at its liners division, which also conducts its business in the USD, will become smaller. Cost reduction through depreciation change and one-off write-down MOL transferred more than 130 vessels chartered in during the market peak to its We like MOL’s proactive Singapore subsidiary last year. The restructuring ended up with a ¥96bn write-down of the step to write down the contracts to market value, which eroded its book value by 15%. This essentially booked charter contract last year, the future losses of expensive vessels in FY3/13. In addition, MOL’s decision to lengthen leaving it with a lower cost the depreciable year of its dry bulk vessels to 20 years from 12–15 years is expected to base cut annual costs by ¥10bn. With a lower cost base to start with, MOL’s profit improvement will be more pronounced than its peers this year. LNG to shape the future of MOL With a 7.2% market share, MOL is the world’s largest LNG fleet operator. It is the most MOL best positioned to win active player in expanding its LNG fleet and we believe it is well positioned to win new new lucrative LNG contracts lucrative contracts. The latest deal was the joint project with China Shipping Development (1138 HK, OUTPERFORM) and Sinopec Kanton (934, Not Rated), which we believe should yield an IRR of at least 12%. Given our positive view on the LNG demand outlook and the contract nature of the LNG shipping business, we believe the market should react positively to any new LNG projects that MOL participates.

Japanese shipping sector 38 17 June 2013

Valuation substantially less than vessel value MOL outperforms its peers in Asia in terms of earnings growth momentum and asset We expect a big swing in appreciation. Our FY3/14 NPAT estimate of ¥58bn is higher than management’s projection ROE from to 11.7%, from of ¥50bn and consensus forecast of ¥37.9bn. Although MOL is expecting a similar –30% last year magnitude of the dry bulk rate rebound, the key difference between our average currency forecast of ¥100 per USD. This compares to their average assumption of ¥95 per USD. Our fuel price assumption of US$620/t is also lower than the company’s assumption of US$650/t. As the JPY is trading at 100/USD today and bunker price at only US$598/t, we believe management is likely to revise its earnings projection upwards in the coming quarters. We expect a considerable swing in ROE from –30% in FY3/13 to 10.3% in FY3/14. In the past, the stock had typically traded above its book value when ROE reached such a level.

Figure 80: MOL – P/B vs. ROE Figure 81: MOL – P/B vs. P/adjusted book value*

2.5x 40% 3.2x 30% 2.8x 2.0x 20% 2.4x 2.0x 1.5x 10% 0% 1.6x 1.0x -10% 1.2x -20% 0.8x 0.5x -30% 0.4x 0.0x -40% 0.0x 2006 2008 2010 2012 2014 2005 2007 2009 2011 2013 Rolling P/NAV ROE P/NAV P/B

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates *book values of vessels are replaced by market values Although there is no material difference between the book value and vessel market values. The ships, a type of USD asset, should be rising in value when the yen depreciates. As a consequence, we are prompted to set our TP based on a combination of vessel-value based economic NAV, which captures the impact of vessel value change, and ROE–P/B, which gauges the earnings momentum. Our ¥490 TP is based on an average of ¥540 NAV per share and a valuation based on a P/B of 0.9x.

Figure 82: Economic net asset value Asset Currency Value Comment Owned fleet ¥ mn 1,310,520 Secondhand value; ¥100 per US$ Investment securities ¥ mn 128,100 Market value Daibiru Corp (8806 JP) ¥ mn 65328 Market value Daiichi Chuo Kisen (9132 JP) ¥ mn 7,583 Market value Ferry ¥ mn 19,166 13x P/E based on US-listed peers Associated business (mainly real estate) ¥ mn 181,807 20 x P/E based on real estate peers Others asset ¥ mn 21,209 Less: Net debt ¥ mn (839,555) Less: Minority interest ¥ mn (81,956) Equity value ¥ mn 812,203 Adjusted equity value ¥ mn 649,762 20% liquidity discount Equity value/share ¥ 540 Source: Credit Suisse estimates, Bloomberg, Clarksons, company data

Japanese shipping sector 39 17 June 2013

Company background Mitsui O.S.K. lines (MOL) is a diversified shipping conglomerate. Its major businesses include dry bulk shipping, tanker, LNG, car carrier and container shipping. Compared to its peers in Japan, MOL has the highest exposure to dry bulk shipping and container shipping. The company was founded in 1964 following the merger of Osako Shosen Kaisha and Mitsui Steamship. Its current incarnation dates back to 1999, when the company merged with Navix Line.

Figure 83: MOL—Revenue breakdown by segment Figure 84: MOL—Fleet by segment (no. of vessels) Associated Others businesses 1% Others 7% 5% Ferry Car carrier 4% 13%

Dry bulk 42% Bulk LNG 48% 7% Container 40%

Tanker 21% Container 12%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Its dry bulk fleet and container shipping fleet are ranked 2nd and 10th, respectively. Along with Hapag-Lloyd, OOCL, APL, Hyundai Merchant Marine and NYK Line, MOL is a key member of the G6 shipping alliance controlling 20% of global container shipping capacity.

Figure 85: Global Top 20 container shipping companies Figure 86: Global Top 5 dry bulk vessel operators Total % of owned % of Market Rnk Operator TEU Ships fleet Charter Share Dwt 000 1 APM-Maersk 2,584,713 585 52% 48% 16% 45,000 2 Mediterranean Shg Co 2,306,616 473 45% 55% 14% 3 CMA CGM Group 1,436,903 417 36% 64% 9% 40,000 4 Evergreen Line 740,350 190 55% 45% 5% 5 COSCO Container L. 729,541 161 54% 46% 4% 35,000 6 Hapag-Lloyd 697,008 150 53% 47% 4% 30,000 7 Hanjin Shipping 630,337 117 47% 53% 4% 8 APL 605,603 123 44% 56% 4% 25,000 9 CSCL 601,948 144 68% 32% 4% 20,000 10 MOL 528,174 112 24% 76% 3% 11 OOCL 484,105 98 67% 33% 3% 15,000 12 NYK Line 431,082 100 24% 76% 3% 13 Hamburg Süd Group 410,583 100 53% 47% 3% 10,000 14 Yang Ming Marine Transport372,662 Corp. 85 64% 36% 2% 5,000 15 K Line 357,364 70 15% 85% 2% 16 Zim 337,017 89 44% 56% 2% - 17 Hyundai M.M. 333,706 55 30% 70% 2% NYK MOL COSCO K-Line China 18 PIL (Pacific Int. Line) 317,249 153 65% 35% 2% 19 UASC 258,395 44 77% 23% 2% Group Shipping 20 CSAV Group 255,568 54 19% 81% 2% Group Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Key risks: (1) A reversal of the JPY depreciation trend; (2) a surge in dry bulk vessel new orders which offset the positive impact of scrapping; and (3) a sharp and sustained rise in bunker price. HOLT Analysis Our estimates point to CFROI approaching 2.7% in FY3/14 versus 4.6% achieved in FY3/08 and a ten-year median of 3.7%. On this basis, HOLT warranted valuation suggests 102% upside. MOL’s shares have generally looked cheap in HOLT and that the current valuations are in line with deep cyclical stocks during their early recovery stage.

Japanese shipping sector 40 17 June 2013

Mitsui O.S.K. Lines Ltd 9104 / 9104 JP Price (14 Jun 13): ¥352.00, Rating:: OUTPERFORM [V], Target Price: ¥490.00, Analyst: Davin Wu Target price scenario Key earnings drivers 3/13A 3/14E 3/15E 3/16E Scenario TP %Up/Dwn Assumptions USDJPY 82.3 100.0 100.0 100.0 Upside 588.00 67.05 1.2x P/B Bunker Price (USD/ton) 662.8 620.0 620.0 620.0 Central Case 490.00 39.20 1.0x P/B Capesize rate (USD/day) 7,500 10,125 11,644 11,924 Downside 343.00 (2.56) 0.7x P/B — — — —

— — — — Income statement (¥ bn) 3/13A 3/14E 3/15E 3/16E Per share data 3/13A 3/14E 3/15E 3/16E Sales revenue 1,509 1,661 1,718 1,743 Shares (wtd avg.) (mn) 1,195 1,195 1,195 1,195 Cost of goods sold 1,432 1,460 1,505 1,520 EPS (Credit Suisse) (¥) (150) 48 55 62 SG&A 92.9 105.0 108.0 110.0 DPS (¥) — 2.00 2.00 2.00 Other operating exp./(inc.) (94.7) (81.0) (81.0) (81.0) BVPS (¥) 444 490 543 602 EBITDA 78.9 176.9 186.5 193.5 Operating CFPS (¥) 66 110 123 130 Depreciation & amortisation 94.7 81.0 81.0 81.0 Key ratios and 3/13A 3/14E 3/15E 3/16E EBIT (15.8) 95.9 105.5 112.5 valuation Net interest expense/(inc.) 11.3 13.3 14.3 14.3 Growth(%) Non-operating inc./(exp.) 3.5 3.5 3.5 3.5 Sales revenue 5.1 10.0 3.5 1.4 Associates/JV (4.9) (2.5) — — EBIT 36 708 10 7 Recurring PBT (28.6) 83.6 94.7 101.7 Net profit (588) 132 14 12 Exceptionals/extraordinaries (109.4) — — — EPS (588) 132 14 12 Taxes 36.1 20.9 26.5 25.4 Margins (%) Profit after tax (174.1) 62.7 68.2 76.3 EBITDA 5.2 10.7 10.9 11.1 Other after tax income — — — — EBIT (1.04) 5.77 6.14 6.45 Minority interests 4.8 4.8 2.0 2.0 Pre-tax profit (1.89) 5.03 5.51 5.83 Preferred dividends — — — — Net profit (11.9) 3.5 3.9 4.3 Reported net profit (178.8) 57.9 66.2 74.3 Valuation metrics (x) Analyst adjustments — — — — P/E (2.35) 7.27 6.36 5.66 Net profit (Credit Suisse) (178.8) 57.9 66.2 74.3 P/B 0.79 0.72 0.65 0.58 Cash flow (¥ bn) 3/13A 3/14E 3/15E 3/16E Dividend yield (%) — 0.57 0.57 0.57 EBIT (15.8) 95.9 105.5 112.5 P/CF 5.33 3.21 2.87 2.70 Net interest — — — — EV/sales 0.84 0.78 0.75 0.73 Tax paid — — — — EV/EBITDA 16.0 7.3 6.9 6.6 Working capital 47.1 (15.1) (2.3) (1.3) EV/EBIT (79.9) 13.5 12.2 11.3 Other cash & non-cash items 47.7 50.3 43.7 44.8 ROE analysis (%) Operating cash flow 79.0 131.1 146.9 155.9 ROE (30.5) 10.3 10.6 10.8 Capex (165.5) (180.0) (160.0) (160.0) ROIC (1.34) 4.78 4.80 5.14 Free cash flow to the firm (25.3) (28.9) 6.9 15.9 Asset turnover (x) 0.70 0.74 0.74 0.72 Disposals of fixed assets 80.2 20.0 20.0 20.0 Interest burden (x) 1.81 0.87 0.90 0.90 Acquisitions — — — — Tax burden (x) 1.26 0.75 0.72 0.75 Divestments — — — — Financial leverage (x) 3.49 3.28 3.11 2.95 Associate investments — — — — Credit ratios Other investment/(outflows) (18.9) — — — Net debt/equity (%) 136 128 116 104 Investing cash flow (104.2) (160.0) (140.0) (140.0) Net debt/EBITDA (x) 10.6 4.9 4.6 4.4 Equity raised 0.15 — — — Interest cover (x) (1.39) 7.21 7.38 7.87 Dividends paid (3.0) (2.4) (2.4) (2.4) Net borrowings 176.9 — 20.0 20.0 Source: Company data, Thomson Reuters, Credit Suisse estimates. Other financing cash flow (35.2) — — — Financing cash flow 138.8 (2.4) 17.6 17.6 12MF P/E multiple Total cash flow 113.5 (31.3) 24.5 33.5 120 Adjustments 4.3 — — — Net change in cash 117.8 (31.3) 24.5 33.5 100 Balance sheet (¥ bn) 3/13A 3/14E 3/15E 3/16E 80 Cash & cash equivalents 186.7 155.4 179.9 213.4 Current receivables 145.4 160.0 165.6 167.9 60 Inventories 59.4 65.4 67.7 68.6 40 Other current assets 122.7 122.7 122.7 122.7 Current assets 514.2 503.5 535.8 572.6 20

Property, plant & equip. 1,194 1,273 1,332 1,391 0 Investments 193.9 191.4 191.4 191.4 2008 2009 2010 2011 2012 2013 Intangibles 22.9 22.9 22.9 22.9 Other non-current assets 239.5 239.5 239.5 239.5 Total assets 2,165 2,230 2,322 2,417 12MF P/B multiple Accounts payable 142.6 145.4 149.9 151.4 Short-term debt 164.5 164.5 164.5 164.5 2.5 Current provisions — — — — Other current liabilities 118.6 121.3 122.3 122.7 2.0 Current liabilities 425.7 431.2 436.7 438.6 1.5 Long-term debt 861.7 861.7 881.7 901.7 Non-current provisions — — — — 1.0 Other non-current liab. 257.7 257.7 257.7 257.7 Total liabilities 1,545 1,551 1,576 1,598 0.5 Shareholders' equity 535.4 590.9 654.7 726.6 Minority interests 82.0 86.7 88.7 90.7 0.0 Total liabilities & equity 2,165 2,230 2,322 2,417 2008 2009 2010 2011 2012 2013

Source: IBES

Japanese shipping sector 41 17 June 2013

Companies Mentioned (Price as of 14-Jun-2013) AP Moller Maersk (MAERSKb.CO, Dkr41120.0) China COSCO Holdings (1919.HK, HK$3.08) China Shipping Container Lines Company Ltd (2866.HK, HK$1.8) China Shipping Development (1138.HK, HK$2.99) Evergreen Marine (2603.TW, NT$16.05) Hanjin Shipping (117930.KS, W6,690) Kawasaki Kisen Kaisha Ltd. (9107.T, ¥182, UNDERPERFORM[V], TP ¥180) Mitsui O.S.K. Lines Ltd (9104.T, ¥352, OUTPERFORM[V], TP ¥490) Neptune Orient Lines (NEPS.SI, S$1.05) Nippon Yusen Kabushiki Kaisha (9101.T, ¥245, OUTPERFORM, TP ¥340) Orient Overseas International (0316.HK, HK$47.15) Pacific Basin Shipping Ltd (2343.HK, HK$4.39) Sinotrans Shipping (0368.HK, HK$1.82) Teekay Tankers LTD. (TNK.N, $2.83) Wan Hai Lines (2615.TW, NT$15.05)

Disclosure Appendix

Important Global Disclosures Timothy Ross and Davin Wu, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her 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 Kawasaki Kisen Kaisha Ltd. (9107.T)

9107.T Closing Price Target Price Date (¥) (¥) Rating 06-Sep-11 181 300 O * 03-Oct-11 155 170 N 12-Jan-12 130 150 16-Feb-12 178 200 28-May-12 139 230 O 08-Nov-12 98 200 16-Nov-12 102 NR * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL N O T RAT ED

3-Year Price and Rating History for Mitsui O.S.K. Lines Ltd (9104.T)

9104.T Closing Price Target Price Date (¥) (¥) Rating 06-Sep-11 304 630 O * 03-Oct-11 279 540 16-Feb-12 353 400 N 03-Apr-12 364 410 28-May-12 269 350 O 06-Jul-12 281 370 08-Nov-12 187 230 16-Nov-12 195 NR * Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL N O T RAT ED

Japanese shipping sector 42 17 June 2013

3-Year Price and Rating History for Nippon Yusen Kabushiki Kaisha (9101.T)

9101.T Closing Price Target Price Date (¥) (¥) Rating 06-Sep-11 218 340 O * 03-Oct-11 202 280 12-Jan-12 179 300 16-Feb-12 238 240 N 03-Apr-12 262 270 28-May-12 203 280 O 06-Jul-12 209 290 08-Nov-12 149 240 16-Nov-12 160 NR * Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL N O T RAT ED

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 ratings are based on a sto ck’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the re levant 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; Australia, New Zealand are, and 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.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (54% banking clients) Neutral/Hold* 40% (48% banking clients) Underperform/Sell* 15% (39% 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.

Japanese shipping sector 43 17 June 2013

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Nippon Yusen Kabushiki Kaisha (9101.T)

Method: We set our target price of ¥340 for NYK based on the average of 0.8x P/B valuation and economic NAV of ¥400. The P/B component of the valuation is underpinned by FY03/14 ROE of 4.9%, which is historically consistent (FY03/05–FY03/2013) with a valuation of about 0.8x P/B.

Risk: Key risks for Nippon Yusen include the following: (1) a change in the global economic outlook (in particular deterioration in the North American economy); (2) a change in bunker prices accompanying falling crude oil prices; (3) yen fluctuation; (4) a change in the outlook for crude steel production in China; (5) a downturn in automotive output and accompanying drop in transportation volume; (6) a change in the outlook for container freight rates. Additionally, variations in electronic component shipments could affect the company's logistics and air cargo businesses in ways contrary to current expectations.

Price Target: (12 months) for Kawasaki Kisen Kaisha Ltd. (9107.T) Method: We set our target price of ¥180 for NYK based on the average of 0.4x P/B valuation and economic NAV of ¥217. The P/B component of the valuation is underpinned by FY03/14 ROE of 2.5%, which is historically consistent (FY03/05–FY03/2013) with a valuation of about 0.4x P/B. Risk: Key risks for Kawasaki Kisen include: (1) a change in the global economic outlook (in particular deterioration in the North American economy); (2) a change in bunker prices accompanying falling crude oil prices; (3) forex volatility; (4) a change in the outlook for crude steel production in China; (5) a downturn in automotive output and accompanying drop in transportation volume; (6) changes in the outlook for container freight rates.

Price Target: (12 months) for Mitsui O.S.K. Lines Ltd (9104.T) Method: We set our target price of ¥490 for NYK based on the average of 0.9x P/B valuation and economic NAV of ¥540. The P/B component of the valuation is underpinned by FY03/14 ROE of 10.3%, which is historically consistent (FY03/05–FY03/2013) with a valuation of about 0.9x P/B.

Risk: Key risks for Mitsui O.S.K.Lines include the following: (1) changes in the global economic outlook (in particular deterioration in the North American economy); (2) the movement in bunker prices ; (3) yen fluctuation; (4) a change in the growth outlook for Chinese crude steel production, (5) a downturn in automotive output and accompanying drop in transportation volume; and (6) changes in outlook for container freight rates.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (9104.T, 0368.HK, 2615.TW, 2603.TW, NEPS.SI) 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 (0368.HK) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (9104.T, 2615.TW, 2603.TW) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (0368.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (0368.HK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (9101.T, 9104.T, 0368.HK, 0316.HK, 2603.TW, NEPS.SI) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (9104.T, 2615.TW, 2603.TW) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (TNK.N).

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