Daiseki / 9793

COVERAGE INITIATED ON: 2010.06.18 LAST UPDATE: 2019.01.07

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Key financial data ------3 Recent updates ------5 Highlights ------5 Trends and outlook ------6 Monthly trends ------6 Quarterly trends and results ------7 Full-year company forecasts ------16 Outlook ------32 Business ------43 Business description ------43 Strengths and weaknesses ------51 Market and value chain ------52 Strategy ------56 Financial statements ------57 Income statement ------57 Balance sheet ------59 Cash flow statement ------59 Other information ------61 History ------61 Top management ------62 Employees ------62 Major shareholders ------63 Dividends and shareholder returns ------63 Investor relations ------63 Historical performance and news ------64 Historical performance ------64 News------77 Company profile ------80

02/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Key financial data

Income statement FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 26,968 35,160 37,224 29,080 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 50,200 YoY 24.6% 30.4% 5.9% -21.9% 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2% 2.1% Gross profit 8,959 12,011 11,699 8,841 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 15,050 YoY 28.9% 34.1% -2.6% -24.4% 9.6% 8.4% -2.2% 19.7%5.0%1.4%-5.5% 17.1% 3.9% GPM 33.2% 34.2% 31.4% 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% 30.0% Operating profit 5,697 8,201 7,539 4,865 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,100 YoY 39.6% 44.0% -8.1% -35.5% 10.8% 6.7% -6.0% 35.0%0.1%7.5%-9.3% 23.3% 3.7% OPM 21.1% 23.3% 20.3% 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 18.1% Recurring profit 5,701 8,191 7,673 4,986 5,587 5,901 5,554 7,400 7,436 7,955 7,228 8,914 9,220 YoY 39.2% 43.7% -6.3% -35.0% 12.1% 5.6% -5.9% 33.2%0.5%7.0%-9.1% 23.3% 3.4% RPM 21.1% 23.3% 20.6% 17.1% 17.7% 16.2% 15.4% 17.6% 16.3% 15.7% 16.3% 18.1% 18.4% Net income 3,220 5,060 4,022 2,547 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833 6,000 YoY 36.7% 57.1% -20.5% -36.7% 22.3% 2.6% -5.3% 30.4% 2.4% -4.7% 7.4% 41.2% 2.9% Net margin 11.9%14.4%10.8%8.8%9.9%8.7%8.4%9.4%8.8%7.6%9.3%11.9%12.0% Per share data (JPY; stock split adjusted) Shares issued (year-end; '000) 42,342 45,124 45,124 45,124 45,124 45,124 45,125 45,125 45,125 45,125 45,125 43,000 - EPS 76.2 113.4 89.3 56.6 69.2 70.9 67.2 87.5 89.6 85.8 95.8 136.5 140.3 Dividend per share 10.6 15.5 19.0 19.0 20.0 20.0 21.0 22.0 24.0 28.0 29.0 40.0 46.0 Book value per share 642 819 888 927 977 1,027 1,076 1,144 1,214 1,261 1,319 1,427 - Balance sheet (JPYmn) Cash and cash equivalents 12,548 20,716 18,440 17,015 17,917 19,723 20,174 24,416 26,763 28,830 27,256 28,183 Total current assets 18,766 29,658 26,584 23,885 26,191 28,277 28,477 34,773 38,554 40,194 39,240 39,849 Tangible fixed assets 18,886 21,295 24,573 26,497 28,243 28,831 30,991 29,798 32,122 30,155 33,163 37,354 Investments and other assets 2,699 2,815 5,726 8,373 9,094 9,463 9,595 7,977 7,699 6,267 8,052 9,053 Intangible fixed assets 286 1,192 1,395 1,619 2,527 2,247 1,967 1,690 1,422 1,021 938 850 Total assets 37,652 50,955 51,158 50,383 54,435 57,108 59,468 64,571 70,677 70,350 72,403 77,203 Accounts payable 2,014 2,335 1,870 1,835 2,403 2,650 2,651 3,296 3,811 3,521 3,877 3,420 Short-term debt 1,244 1,694 1,223 876 1,120 845 1,372 860 1,500 1,139 2,099449 Total current liabilities 7,466 8,346 6,893 5,017 6,932 7,300 7,429 8,075 10,485 9,147 9,228 8,814 Long-term debt 1,695 1,893 602 523 353 182 10 - - 725 425 500 Total fixed liabilities 2,421 2,687 1,448 1,415 1,324 1,279 1,203 1,360 1,573 1,919 1,666 1,755 Total liabilities 9,888 11,033 8,341 6,432 8,257 8,580 8,632 9,435 12,058 11,067 10,895 10,570 Net assets 27,764 39,921 42,816 43,950 46,177 48,528 50,835 55,136 58,618 59,283 61,508 66,633 Total interest-bearing debt 2,939 3,587 1,825 1,399 1,473 1,027 1,382 860 1,500 1,864 2,524 949 Cash flow statement (JPYmn) Cash flows from operating activities 4,805 5,650 6,944 4,817 5,476 4,922 5,041 6,093 5,241 7,509 5,813 9,938 Cash flows from investing activities -2,805 -4,729 -6,551 -4,873 -3,324 -1,709 -6,019 933 -2,493 -2,829 -4,452 -6,237 Cash flows from financing activities 738 7,206 -2,629 -1,367 -1,258 -1,396 -577 -841 -484 -3,702 -1,934 -2,957 Financial ratios ROA (RP-based) 16.4% 18.5% 15.0% 9.8% 10.7% 10.6% 9.5% 11.9% 11.0% 11.3% 10.1% 11.9% ROE 12.5% 15.8% 10.5% 6.2% 7.3% 7.1% 6.4% 7.9% 7.6% 7.0% 7.4% 9.9% Equity ratio 72.1% 72.4% 78.1% 82.9% 80.8% 81.0% 81.5% 79.8% 77.3% 77.7% 77.9% 79.0% Source: Shared Research based on company data

03/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Subsidiary earnings: Group and by subsidiary (JPYmn)

04/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Recent updates

Highlights

On January 7, 2019, Daiseki Co., Ltd. announced earnings results for Q3 FY02/19; see the results section for details.

On the same day, Daiseki Eco. Solution Co., Ltd. (“DES”; TSE: 1712) announced a revision to its full-year FY02/19 earnings forecasts.

Revised FY02/19 forecasts

▷ Sales: JPY14.4bn (previous forecast: JPY14.6bn) ▷ Operating profit: JPY810mn (JPY740mn) ▷ Recurring profit: JPY820mn (JPY730mn) ▷ Net income: JPY500mn (JPY440mn) ▷ EPS: JPY29.72 (JPY26.16)

* Net income is net income attributable to owners of the parent.

Reason for the revision Earnings improved as the drop in unit prices on orders (caused by heavy competition) in the soil contamination research and cleanup business stabilized and cost reduction efforts at DES plants made steady progress.

On the same day, the company announced a revision to its FY02/19 dividend forecast.

In light of the projected FY02/19 earnings results and progress of the medium-term plan, the company revised up its dividend forecast from JPY40 to JPY46 per share.

On October 11, 2018, Shared Research updated the report following interviews with the company.

On October 1, 2018, the company announced earnings results for 1H FY02/19; see the results section for details.

For previous releases and developments, please refer to the News and topics section.

05/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Trends and outlook

Monthly trends

Daiseki Co. monthly sales, year-on-year performance (JPYmn) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY02/08 Act. 2,043 1,871 1,997 1,883 1,882 2,020 1,849 2,166 2,161 2,263 1,832 1,887 23,859 FY02/09 Act. 2,326 2,346 2,333 2,524 2,351 2,347 2,200 2,260 2,226 1,968 1,301 1,428 25,614 FY02/10 Act. 1,407 1,405 1,479 1,510 1,580 1,572 1,539 1,698 1,870 1,947 1,670 1,526 19,209 FY02/11 Act. 1,815 1,821 1,812 1,745 1,846 1,911 1,817 1,832 1,976 1,986 1,578 1,712 21,856 FY02/12 Act. 2,046 1,986 1,996 2,319 2,251 2,083 1,928 1,972 1,891 2,034 1,723 1,778 24,011 FY02/13 Act. 2,100 2,112 2,176 1,969 1,938 2,104 1,955 1,988 1,984 2,066 1,696 1,715 23,808 FY02/14 Act. 2,114 2,042 2,130 2,041 2,158 2,170 2,019 2,168 2,139 2,283 1,852 1,953 25,074 FY02/15 Act. 2,418 2,252 2,151 2,192 2,283 2,271 2,252 2,299 2,149 2,334 1,912 1,941 26,459 FY02/16 Act. 2,351 2,323 2,147 2,308 2,304 2,230 2,103 2,292 2,023 2,247 1,787 1,895 26,016 FY02/17 Act. 2,166 2,125 2,133 2,129 2,275 2,226 2,219 2,222 2,140 2,278 1,870 1,977 25,746 FY02/18 Act. 2,497 2,360 2,375 2,367 2,389 2,452 2,328 2,455 2,442 2,631 2,173 2,304 28,778 FY02/19Act.2,7422,5252,6502,6652,6652,7952,6832,8502,768 FY02/16 Est. 2,343 2,323 2,322 2,315 2,342 2,410 2,320 2,363 2,337 2,467 2,056 2,107 26,091 Diff. 8 - -175 -7 -38 -180 -217 -71 -314 -220 -269 -212 -75 FY02/17 Est. 2,151 2,233 2,206 2,237 2,249 2,274 2,257 2,303 2,280 2,417 2,050 2,103 26,760 Diff. 15 -108 -73 -108 26 -48 -38 -81 -140 -139 -180 -126 -1,014 FY02/18 Est. 2,317 2,305 2,268 2,287 2,303 2,310 2,300 2,321 2,309 2,408 2,005 2,097 27,230 Diff. 180 55 107 80 86 142 28 134 133 223 168 207 1,548 FY02/19 Est. 2,563 2,545 2,514 2,544 2,549 2,567 2,527 2,572 2,488 2,631 2,223 2,277 30,000 Diff. 179 -20 136121116228156278280 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY02/08 Act. 14.6% 10.9% 15.4% 9.0% 5.6% 11.1% 5.4% 33.0% 19.6% 19.8% 15.4% 18.1% 14.7% FY02/09 Act. 13.9% 25.4% 16.8% 34.0% 24.9% 16.2% 19.0% 4.3% 3.0% -13.0% -29.0% -24.3% 7.4% FY02/10 Act. -39.5% -40.1% -36.6% -40.2% -32.8% -33.0% -30.0% -24.9% -16.0% -1.1% 28.4% 6.9% -25.0% FY02/11 Act. 29.0% 29.6% 22.5% 15.6% 16.8% 21.6% 18.1% 7.9% 5.7% 2.0% -5.5% 12.2% 13.8% FY02/12 Act. 12.7% 9.1% 10.2% 32.9% 21.9% 9.0% 6.1% 7.6% -4.3% 2.4% 9.2% 3.9% 9.9% FY02/13 Act. 2.6% 6.3% 9.0% -15.1% -13.9% 1.0% 1.4% 0.8% 4.9% 1.6% -1.6% -3.5% -0.8% FY02/14 Act. 0.7% -3.3% -2.1% 3.7% 11.4% 3.1% 3.3% 9.1% 7.8% 10.5% 9.2% 13.9% 5.3% FY02/15 Act. 14.4% 10.3% 1.0% 7.4% 5.8% 4.7% 11.5% 6.0% 0.5% 2.2% 3.2% -0.6% 5.5% FY02/16 Act. -2.8% 3.2% -0.2% 5.3% 0.9% -1.8% -6.6% -0.3% -5.9% -3.7% -6.5% -2.4% -1.7% FY02/17 Act. -7.9% -8.5% -0.7% -7.8% -1.3% -0.2% 5.5% -3.1% 5.8% 1.4% 4.6% 4.3% -1.0% FY02/18 Act. 15.3% 11.1% 11.3% 11.2% 5.0% 10.2% 4.9% 10.5% 14.1% 15.5% 16.2% 16.5% 11.8% FY02/19Act.9.8%7.0%11.6%12.6%11.6%14.0%15.2%16.1%13.3% FY02/16 Est. -3.1% 3.2% 7.9% 5.6% 2.6% 6.1% 3.0% 2.8% 8.7% 5.7% 7.5% 8.6% -1.4% FY02/17 Est. -8.5% -3.9% 2.7% -3.1% -2.4% 2.0% 7.3% 0.5% 12.7% 7.6% 14.7% 11.0% 2.9% FY02/18 Est. 7.0% 8.5% 6.3% 7.4% 1.2% 3.8% 3.7% 4.5% 7.9% 5.7% 7.2% 6.1% 5.8% FY02/19 Est. 2.6% 7.8% 5.9% 7.5% 6.7% 4.7% 8.5% 4.8% 1.9% 0.0% 2.3% -1.2% 4.2% Daiseki Co. monthly gross profit margin Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY02/08 Act. 36.4% 39.2% 38.5% 39.1% 39.1% 38.9% 40.2% 38.2% 36.4% 40.2% 36.2% 31.5% 37.9% FY02/09 Act. 38.7% 37.5% 39.8% 35.7% 37.3% 37.8% 39.4% 38.0% 31.6% 33.0% 29.0% 22.7% 35.8% FY02/10 Act. 35.5% 35.4% 34.6% 34.1% 35.1% 35.2% 37.0% 36.5% 33.3% 32.3% 30.4% 31.0% 34.2% FY02/11 Act. 39.8% 38.2% 38.9% 38.5% 38.6% 34.8% 37.1% 39.4% 34.8% 36.1% 33.2% 30.9% 36.8% FY02/12 Act. 39.3% 36.8% 34.6% 32.1% 35.4% 34.2% 36.3% 37.7% 36.8% 36.2% 33.4% 28.7% 35.2% FY02/13 Act. 38.7% 38.5% 35.9% 35.0% 33.7% 34.1% 35.7% 35.6% 35.3% 33.8% 32.3% 25.9% 34.8% FY02/14 Act. 36.4% 37.1% 37.4% 36.6% 35.6% 36.5% 37.1% 36.8% 35.1% 35.9% 32.4% 29.6% 35.7% FY02/15 Act. 38.2% 37.5% 36.9% 39.2% 37.6% 37.7% 36.2% 36.5% 37.9% 36.1% 33.2% 30.9% 36.7% FY02/16 Act. 36.0% 36.5% 35.5% 35.5% 35.5% 34.4% 34.4% 36.4% 34.1% 35.2% 31.1% 31.7% 34.9% FY02/17 Act. 37.3% 37.5% 36.8% 36.6% 37.6% 35.8% 36.8% 38.2% 37.2% 37.7% 33.5% 33.3% 36.6% FY02/18 Act. 39.0% 39.3% 40.0% 38.6% 38.4% 37.1% 36.4% 39.6% 36.8% 39.0% 33.2% 31.4% 37.5% FY02/19Act.39.7%37.9%38.8%39.5%38.4%38.0%38.8%39.0%37.7% Source: Shared Research based on company data Note: Includes gross profit on soil contamination cleanup sales to Daiseki Eco. Solution; GPM tends to decrease in months when sales are high.

Daiseki Co. sales and GPM

3,000 42%

2,800 40%

2,600 38% 2,400 36% 2,200 34% 2,000

1,800 32% FY02/16 FY02/17 FY02/18 FY02/19 1,600 FY02/16 FY02/17 FY02/18 FY02/19 30% (JPYmn) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Source: Shared Research based on company data

06/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Quarterly trends and results

FY02/17 FY02/18 FY02/19 FY02/19 Init. Est. FY02/17 FY02/18 FY02/19 Yo Y change Vs. Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q1Q2Q3Q4Cml. Q3 Cml. Q3 Cml. Q3 Q1 Q2 Q3 Q1 Q2 Q3 Sales 11,614 11,254 10,884 10,480 12,720 12,196 11,398 12,871 12,398 13,851 12,650 12,200 14,100 12,200 11,700 33,752 36,314 38,899 -322 +1,655 +1,252 +198 -249 +450 YoY -15.7% -14.7% -13.5% -6.9% 9.5% 8.4% 4.7% 22.8% -2.5% 13.6% 11.0% -4.1% 15.6% 7.0% -9.1% -14.7% 7.6%7.1% Gross profit 3,158 3,138 3,212 2,859 3,744 3,570 3,467 3,703 3,829 3,888 3,912 9,508 10,781 11,629 +85 +318 +445 GPM 27.2% 27.9% 29.5% 27.3% 29.4% 29.3% 30.4% 28.8% 30.9% 28.1% 30.9% 28.2% 29.7% 29.9% +1.5pp -1.2pp +0.5pp SG&A expenses 1,322 1,299 1,339 1,287 1,443 1,408 1,411 1,445 1,485 1,527 1,549 3,960 4,262 4,561 +42 +119 +138 YoY -9.7% 0.1% 14.4% -1.5% 9.2%8.4%5.4%12.3%2.9%8.5%9.8% 0.7%7.6%7.0% Operating profit 1,835 1,840 1,873 1,572 2,300 2,162 2,057 2,258 2,343 2,361 2,363 2,380 2,500 2,300 1,920 5,548 6,519 7,067 +43 +199 +306 -37 -139 +63 YoY -15.2% -8.5% -10.3% -0.9% 25.3% 17.5% 9.8% 43.6% 1.9% 9.2% 14.9% 3.5% 15.6% 11.8% -15.0% -11.4% 17.5%8.4% OPM 15.8% 16.3% 17.2% 15.0% 18.1% 17.7% 18.0% 17.5% 18.9% 17.0% 18.7% 19.5% 17.7% 18.9% 16.4% 16.4% 18.0% 18.2% +0.8pp -0.7pp +0.6pp -0.6pp -0.7pp -0.2pp Recurring profit 1,854 1,863 1,893 1,618 2,348 2,206 2,057 2,303 2,356 2,387 2,416 2,420 2,530 2,320 1,950 5,610 6,611 7,159 +8 +181 +359 -64 -143 +96 0 8.2% 17.5% 3.1% 14.7% 12.8% -15.3% -11.5% 17.8% 8.3% RPM 16.0% 16.6% 17.4% 15.4% 18.5% 18.1% 18.0% 17.9% 19.0% 17.2% 19.1% 19.8% 17.9% 19.0% 16.7% 16.6% 18.2% 18.4% +0.5pp -0.9pp +1.1pp -0.8pp -0.7pp +0.1pp Net income 999 1,046 1,105 982 1,548 1,412 1,393 1,480 1,583 1,491 1,618 1,570 1,590 1,530 1,480 3,150 4,353 4,692 +35 +79 +225 +13 -99 +88 YoY -7.8% 4.0% 11.3% 28.5% 55.0% 35.0% 26.1% 50.7% 2.3% 5.6% 16.2% 1.4% 12.6% 9.8% - 2.2%38.2%7.8% Net margin 8.6% 9.3% 10.2% 9.4% 12.2% 11.6% 12.2% 11.5% 12.8% 10.8% 12.8% 12.9% 11.3% 12.5% 12.6% 9.3% 12.0% 12.1% +0.6pp -0.8pp +0.6pp -0.1pp -0.5pp +0.2pp FY02/17 FY02/18 FY02/19 FY02/19 Init. Est. FY02/17 FY02/18 FY02/19 Yo Y change Vs. Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q1Q2Q3Q4Cml. Q3 Cml. Q3 Cml. Q3 Q1 Q2 Q3 Q1 Q2 Q3 Daiseki Co. Sales 6,425 6,632 6,563 6,126 7,232 7,209 7,226 7,110 7,918 8,126 8,302 7,622 7,660 7,587 7,131 19,620 21,668 24,347 +686 +917 +1,076 +296 +466 +715 YoY -5.8% -3.1% 2.2% 3.3% 12.6% 8.7% 10.1% 16.1% 9.5% 12.7% 14.9% 5.4% 6.3% 5.0% 0.3% -2.3% 10.4%12.4% Gross profit 2,392 2,435 2,459 2,147 2,856 2,745 2,723 2,476 3,077 3,145 3,200 2,940 2,900 2,850 - 7,286 8,324 9,422 +221 +400 +477 +137 +245 +350 GPM 37.2% 36.7% 37.5% 35.0% 39.5% 38.1% 37.7% 34.8% 38.9% 38.7% 38.5% 38.6% 37.9% 37.6% - 37.1% 38.4% 38.7% -0.6pp +0.6pp +0.9pp +0.3pp +0.8pp +1.0pp SG&A expenses 818 839 830 809 925 894 924 888 951 980 971 960 940 940 - 2,487 2,743 2,901 +26 +86 +47 -9 +40 +31 Operating profit 1,574 1,596 1,629 1,338 1,931 1,851 1,799 1,588 2,126 2,165 2,229 1,980 1,960 1,910 1,610 4,799 5,581 6,521 +195 +314 +430 +146 +205 +319 YoY -4.7% -1.8% 3.0% 13.7% 22.7% 16.0% 10.4% 18.7% 10.1% 17.0% 23.9% 2.5% 5.9% 6.2% 1.4% -1.2% 16.3%16.8% OPM 24.5% 24.1% 24.8% 21.8% 26.7% 25.7% 24.9% 22.3% 26.9% 26.6% 26.8% 26.0% 25.6% 25.2% 22.6% 24.5% 25.8% 26.8% +0.1pp +1.0pp +2.0pp +0.9pp +1.1pp +1.7pp Daiseki Eco. Solution Sales 4,149 3,277 3,547 3,399 3,984 3,482 2,859 4,601 3,332 4,475 3,086 3,344 4,834 3,303 3,528 10,974 10,325 10,893 -652 +993 +228 -12 -359 -217 YoY -28.4% -34.5% -22.4% -8.4% -4.0% 6.3% -19.4% 35.4% -16.4% 28.5% 8.0% -16.1% 38.8% 15.5% -23.3% -28.6% -5.9% 5.5% Gross profit 781 663 694 558 683 530 437 1,010 623 683 512 693 822 250 - 2,138 1,650 1,817 -59 +153 +74 -70 -139 +262 GPM 18.8% 20.2% 19.6% 16.4% 17.1% 15.2% 15.3% 21.9% 18.7% 15.3% 16.6% 20.7% 17.0% 7.6% - 19.5% 16.0% 16.7% +1.6pp +0.0pp +1.3pp -2.0pp -1.8pp +9.0pp SG&A expenses 302 271 318 296 338 337 282 364 350 359 381 346 344 -33 - 892 956 1,089 +12 +22 +99 +4 +15 +414 Operating profit 479 392 376 262 345 193 156 646 273 324 131 347 478 283 345 1,247 693 728 -72 +131 -25 -74 -154 -152 YoY -31.7% -43.5% -46.1% -38.3% -28.0% -50.8% -58.6% 146.8% -20.8% 68.0% -16.0% 0.7% 147.8% 81.7% -46.6% -40.4% -44.4% 5.0% OPM 11.5% 12.0% 10.6% 7.7% 8.7% 5.5% 5.4% 14.0% 8.2% 7.2% 4.2% 10.4% 9.9% 8.6% 9.8% 11.4% 6.7% 6.7% -0.5pp +1.7pp -1.2pp -2.2pp -2.6pp -4.3pp Daiseki MCR Sales 565 474 515 596 614 650 805 776 741 778 665 667 683 728 661 1,554 2,069 2,184 +127 +128 -140 +74 +95 -63 YoY -29.3% -41.4% -23.8% -10.5% 8.7% 37.1% 56.3% 30.2% 20.7% 19.7% -17.4% 8.6% 5.1% -9.6% -14.8% -32.0% 33.1%5.6% Gross profit -95 -169 11 57 98 6 97 112 63 -63 -2 8745121- -253 201 -2 -35 -69 -99 -24 -108 -123 GPM -16.8% -35.7% 2.1% 9.6% 16.0% 0.9% 12.0% 14.4% 8.5% -8.1% -0.3% 13.0% 6.6% 16.6% - -16.3% 9.7% -0.1% -7.5pp -9.0pp -12.4pp -4.5pp -14.7pp -16.9pp SG&A expenses 65 58 59 53 60 55 76 58 57 60 56 55 56 56 - 182 191 173 -3 +5 -20 +2 +4 - Operating profit -160 -227 -48 438-49 21 54 6 -123 -58 32-11 65 20 -435 10 -175 -32 -74 -79 -26 -112 -123 YoY ------1,250.0% -84.2% -- -15.8% - 209.5% -63.0% --- OPM -28.3% -47.9% -9.3% 0.7% 6.2% -7.5% 2.6% 7.0% 0.8% -15.8% -8.7% 4.8%-1.6% 8.9% 3.0% -28.0% 0.5% -8.0% -5.4pp -8.3pp -11.3pp -4.0pp -14.2pp -17.7pp System Kikou Sales 507 884 322 348 888 839 495 405 406 509 611 569 938 610 383 1,713 2,222 1,527 -482 -330 +116 -163 -429 +1 YoY 40.8% 45.4% -65.2% -61.5% 75.1% -5.1% 53.7% 16.4% -54.3% -39.3% 23.4% -35.9% 11.8% 23.2% -5.4% -9.6% 29.7% -31.3% Gross profit 36 162 0 56 54 236 157 56 3 66 160 105 159 123 - 198 447 229 -51 -170 +3 -102 -93 +37 GPM 7.1% 18.3% 0.0% 16.1% 6.1% 28.1% 31.7% 13.8% 0.7% 13.0% 26.2% 18.5% 17.0% 20.2% - 11.6% 20.1% 15.0% -5.3pp -15.2pp -5.5pp -17.7pp -4.0pp +6.0pp SG&A expenses 84 81 78 77 66 65 74 80 67 73 99 75 77 77 - 243 204 240 +1 +8 +25 -8 -4 +22 Operating profit -48 81 -78 -21 -12 171 83 -24 -64 -7 61 308246-40 -45 243 -11 -52 -178 -22 -94 -89 +15 YoY -----111.1%- ----26.5% --52.0% -44.6% - --- OPM -9.5% 9.2% -24.2% -6.0% -1.4% 20.4% 16.8% -5.9% -15.8% -1.4% 10.0% 5.3% 8.7% 7.5% -10.4% -2.6% 10.9% -0.7% -14.4pp -21.8pp -6.8pp -21.0pp -10.1pp +2.4pp FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/19 FY02/19 FY02/20 FY02/21 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Q3Q4Est. Q3Est. Q2Init. Est. MTP MTP Sales 35,160 37,224 29,080 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 50,200 53,000 56,500 YoY 30.4% 5.9% -21.9% 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2% 2.1% 5.6% 6.6% Gross profit 12,011 11,699 8,841 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 15,050 15,800 17,150 GPM 34.2% 31.4% 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% 30.0% 29.8% 30.4% SG&A expenses 3,809 4,159 3,976 4,296 4,752 4,870 4,999 5,605 5,238 5,247 5,707 5,950 5,700 5,950 YoY 16.8% 9.2% -4.4% 8.0% 10.6% 2.5% 2.6% 12.1% -6.5% 0.2% 8.8% 4.3% -4.2% 4.4% Operating profit 8,201 7,539 4,865 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,100 10,100 11,200 YoY 44.0% -8.1% -35.5% 10.8% 6.7% -6.0% 35.0% 0.1% 7.5% -9.3% 23.3% 3.7% 11.0% 10.9% OPM 23.3% 20.3% 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 18.1% 19.1% 19.8% Recurring profit 8,191 7,673 4,986 5,587 5,901 5,554 7,400 7,436 7,955 7,228 8,914 9,220 10,200 11,300 RPM 23.3% 20.6% 17.1% 17.7% 16.2% 15.4% 17.6% 16.3% 15.7% 16.3% 18.1% 18.4% 19.2% 20.0% Net income 5,060 4,022 2,547 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833 6,000 6,400 7,000 YoY 57.1% -20.5% -36.7% 22.3% 2.6% -5.3% 30.4% 2.4% -4.7% 7.4% 41.2% 2.9% 6.7% 9.4% Net margin 14.4% 10.8% 8.8% 9.9% 8.7% 8.4% 9.4% 8.8% 7.6% 9.3% 11.9% 12.0% 12.1% 12.4% FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/19 FY02/19 FY02/20 FY02/21 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Q3Q4Est. Q3Est. Q2Init. Est. MTP MTP Daiseki Co. Sales 23,859 25,614 19,209 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 30,000 YoY 14.7% 7.4% -25.0% 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8% 4.2% Gross profit 9,042 9,167 6,567 8,035 8,453 8,278 8,942 9,699 9,068 9,433 10,800 11,240 GPM 37.9% 35.8% 34.2% 36.8% 35.2% 34.8% 35.7% 36.7% 34.9% 36.6% 37.5% 37.5% SG&A expenses 2,882 3,009 2,785 2,838 2,978 3,015 3,076 3,265 3,033 3,296 3,630 3,780 Operating profit 6,160 6,158 3,782 5,197 5,475 5,263 5,866 6,434 6,035 6,137 7,170 7,460 YoY 21.9% -0.0% -38.6% 37.4% 5.3% -3.9% 11.5% 9.7% -6.2% 1.7% 16.8% 4.0% OPM 25.8% 24.0% 19.7% 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.9% 24.9% Daiseki Sales 7,774 9,040 6,991 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 14,350 14,640 15,010 16,650 19,230 Eco. YoY 37.8% 16.3% -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% -3.9% -1.9% 0.6% 10.9% 15.5% Gross profit 1,470 1,622 1,308 733 1,085 1,392 2,120 2,100 3,603 2,696 2,659 2,230 2,193 2,870 3,281 4,063 GPM 18.9% 17.9% 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.8% 17.8% 15.5% 15.0% 19.1% 19.7% 21.1% SG&A expenses 512 617 615 605 677 801 823 874 1,086 1,188 1,320 1,420 1,453 1,415 1,502 1,536 Operating profit 957 1,005 693 128 408 592 1,298 1,226 2,517 1,508 1,339 810 740 1,455 1,779 2,527 YoY 63.5% 5.0% -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% -11.2% -39.5% -44.7% 8.6% 22.3% 42.0% OPM 12.3% 11.1% 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 5.6% 5.1% 9.7% 10.7% 13.1% Daiseki Sales 3,182 3,479 3,003 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,739 MCR YoY - 9.3% -13.7% 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% -3.8% Gross profit 1,330 778 841 615 380 373 617 475 -316 -196 313 329 GPM 41.8% 22.4% 28.0% 19.0% 12.3% 13.4% 19.8% 15.2% -10.7% -9.1% 11.0% 12.0% SG&A expenses 223 259 281 307 445 351 375 756 409 235 249 223 Operating profit 1,107 519 560 308 -65 22 242 -281 -725 -431 64 106 YoY - -53.1% 7.9% -45.0% --1,019.9% ---- 65.6% OPM 34.8% 14.9% 18.6% 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% 3.9% System Sales 9612,539 2,244 2,963 3,145 2,800 2,061 2,627 2,500 Kikou YoY -164.2% -11.6% 32.0% 6.1% -11.0% -26.4% 27.5% -4.8% Gross profit 155 431 279 452 446 548 254 503 432 GPM 16.1% 17.0% 12.4% 15.3% 14.2% 19.6% 12.3% 19.1% 17.3% SG&A expenses 172 309 374 331 307 360 320 285 314 Operating profit -17 122 -95 121 139 188 -66 218 118 YoY ----14.9%35.3%-- -45.9% OPM -1.8% 4.8% -4.2% 4.1% 4.4% 6.7% -3.2% 8.3% 4.7% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods

07/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Q3 FY02/19 results (out January 7, 2019) Results overview In cumulative Q3 FY02/19, sales and profits increased YoY with sales finishing at JPY38.9bn (+7.1% YoY) and operating profit at JPY7.1bn (+8.4% YoY); recurring profit was JPY7.2bn (+8.3% YoY) and net income attributable to owners of the parent was JPY4.7bn (+7.8% YoY). All three profit items recorded a record high for the cumulative Q3 period. Results at the parent company were up YoY and above plan. At DES, profitability had weakened due to a drop in unit prices per order since the start of the fiscal year and the business environment remains difficult. However, efforts such as strengthening direct sales to clients and reducing costs began to bear fruit slowly, and the subsidiary is showing signs of improved profitability. The results at subsidiaries Daiseki MCR and System Kikou lagged, with operating profit down YoY and below plan. That said, since the parent accounts for the majority of sales and earnings, the company was able to offset most of the decline in earnings at its subsidiaries.

Along with the release of Q1 FY02/19 results, the company also unveiled its long-term management vision for the year 2030, targeting sales of JPY150bn (3.0x versus FY02/18), operating profit of JPY25bn (2.8x), and ROE of 15% (versus 9.9% in FY02/18). See discussion below for further details.

Quarterly operating profit by subsidiary

2,088 2,343 2,361 2,363 2,500 2,164 2,011 2,300 2,258 Daiseki DES MCR SKK Eliminations, other 2,134 2,162 1,917 324 131 1,835 1,840 2,057 273 1,849 1,956 1,873 345 1,834 1,647 1,795 409 1,778 702 2,000 1,698 278 693 697 1,586 193 646 1,632 479 376 156 1,524 204 1,473 392 1,572 1,470 1,407 1,431 299 245 255 276 95 194 1,238 1,500 1,300 108 499 262 2 30 1,096 151 1,088 262 425 25 877 96 71 11 2,126 2,165 2,229 1,000 140 1,931 1,800 1,783 1,851 1,799 1,637 1,576 1,651 1,626 1,581 1,574 1,596 1,629 1,588 1,425 1,491 1,468 1,559 1,551 1,519 1,328 1,380 1,408 1,302 1,357 1,275 1,338 1,106 1,235 1,177 500 1,062 965

-500 (JPYmn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data

DES announced a downward revision to its sales and earnings forecasts on September 14, 2018, but announced an upward revision for full-year results on January 7, 2019 when it released the Q3 FY02/19 earnings results. DES believes full-year profits will surpass the previous forecasts, since the drop in unit prices on orders (caused by heavy competition) in the soil contamination research and cleanup business has stabilized and cost reduction efforts at its plants have made steady progress, improving the profitability as a result. Meanwhile, Daiseki has not revised its consolidated earnings forecasts for the full year.

Daiseki Co. (parent)

FY02/17 FY02/18 FY02/19 Vs. Est. FY02/19 Initial Est. FY02/17 FY02/18 FY02/19 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Act. Act. Init. Est. Sales 6,425 6,632 6,563 6,126 7,232 7,209 7,226 7,110 7,918 8,126 8,302 +296 +466 +715 7,622 7,660 7,587 7,131 25,746 28,778 30,000 Nagoya1,882 1,987 2,005 1,885 2,351 2,279 2,179 2,126 2,302 2,381 2,382 -11 +61 +55 2,313 2,320 2,327 2,190 7,761 8,937 9,150 Hokuriku 717 790 769 677 793 830 880 797 960 986 1,008 +43 +44 +103 917 942 905 836 2,955 3,303 3,600 Kansai 1,067 1,113 1,010 996 1,180 1,235 1,234 1,259 1,348 1,453 1,443 +93 +135 +179 1,255 1,318 1,264 1,213 4,188 4,909 5,050 Kyushu 1,192 1,216 1,149 1,093 1,217 1,206 1,203 1,209 1,440 1,375 1,358 +120 +112 +84 1,320 1,263 1,274 1,193 4,651 4,836 5,050 Kanto 1,367 1,299 1,407 1,282 1,481 1,402 1,490 1,529 1,650 1,657 1,827 +89 +99 +265 1,561 1,558 1,562 1,469 5,357 5,904 6,150 Chiba 198 223 219 190 207 254 238 188 215 272 282 -41 +13 +27 256 259 255 230 832 888 1,000 YoY -5.8% -3.1% 2.2% 3.3% 12.6% 8.7% 10.1% 16.1% 9.5% 12.7% 14.9% 5.4% 6.3% 5.0% 0.3% -1.0% 11.8% 4.2% Nagoya -9.2% -3.7% -2.3% 6.3% 24.9% 14.7% 8.7% 12.8% -2.1% 4.5% 9.3% -1.6% 1.8% 6.8% 3.0% -2.5% 15.2% 2.4% Hokuriku -14.4% -12.3% -0.3% -8.4% 10.6% 5.1% 14.4% 17.7% 21.1% 18.8% 14.5% 15.6% 13.5% 2.8% 4.9% -9.0% 11.8% 9.0% Kansai -3.6% -3.7% -5.8% - 10.6% 11.0% 22.2% 26.4% 14.2% 17.7% 16.9% 6.4% 6.7% 2.4% -3.7% -3.3% 17.2% 2.9% Kyushu 2.1% 14.3% 6.6% 4.5% 2.1% -0.8% 4.7% 10.6% 18.3% 14.0% 12.9% 8.5% 4.7% 5.9% -1.3% 6.8% 4.0% 4.4% Kanto -4.5% -10.0% 11.0% 6.9% 8.3% 7.9% 5.9% 19.3% 11.4% 18.2% 22.6% 5.4% 11.1% 4.8% -3.9% 0.2% 10.2% 4.2% Chiba -2.5% 4.7% 25.1% 8.0% 4.5% 13.9% 8.7% -1.1% 3.8% 7.1% 18.5% 23.7% 2.0% 7.1% 22.3% 8.2% 6.7% 12.6% Gross profit 2,392 2,435 2,459 2,147 2,856 2,745 2,723 2,476 3,077 3,145 3,200 +137 +245 +350 2,940 2,900 2,850 - 9,433 10,800 11,240 GPM 37.2% 36.7% 37.5% 35.0% 39.5% 38.1% 37.7% 34.8% 38.9% 38.7% 38.5% +0.3pp +0.8pp +1.0pp 38.6% 37.9% 37.6% - 36.6% 37.5% 37.5% SG&A expenses 818 839 830 809 925 894 924 888 951 980 971 -9 +40 +31 960 940 940 940 3,296 3,630 3,780 SG&A ratio 12.7% 12.7% 12.6% 13.2% 12.8% 12.4% 12.8% 12.5% 12.0% 12.1% 11.7% -0.6pp -0.2pp -0.6pp 12.6% 12.3% 12.3% 13.1% 12.8% 12.6% 12.6% Operating profit 1,574 1,596 1,629 1,338 1,931 1,851 1,799 1,588 2,126 2,165 2,229 +146 +205 +319 1,980 1,960 1,910 1,610 6,137 7,170 7,460 YoY -4.7% -1.8% 3.0% 13.7% 22.7% 16.0% 10.4% 18.7% 10.1% 17.0% 23.9% 2.5% 5.9% 6.2% 1.4% 1.7% 16.8% 4.0% OPM 24.5% 24.1% 24.8% 21.8% 26.7% 25.7% 24.9% 22.3% 26.9% 26.6% 26.8% +0.9pp +1.1pp +1.7pp 26.0% 25.6% 25.2% 22.6% 23.8% 24.9% 24.9% WTI crude oil (USD/barrel) 42 46 47 53 50 47 53 61 66 69 66 47 52 60–65 YoY -22.1% -10.1% 4.5% 57.9% 18.7% 1.1% 12.3% 16.2% 33.6% 46.9% 24.9% 1.8% 11.9% 14.4–23.9% USD/JPY 111 104 105 115 112 111 112 111 108 111 110 108 111 108 YoY -7.8% -16.0% -13.4% -3.2% 1.0% 7.1% 7.2% -3.4% -3.7% -0.2% -1.6% -10.3% 2.8% -3.1% Source: Shared Research based on company data

08/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Index of industrial production and Daiseki parent sales

20% Daiseki Co. Industrial production index (right axis) 20 15% 15

10% 10

5% 5

0% 0

-5% -5

-10% -10

-15% -15 Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data

Results The parent reported sales of JPY24.3bn (+12.4% YoY), operating profit of JPY6.5bn (+16.8% YoY), recurring profit of JPY6.7bn (+16.4% YoY), and net income attributable to owners of the parent of JPY4.7bn (+15.9% YoY). Sales and earnings came in higher YoY and versus plan. These results reflected an increase in gross profit stemming from successful measures to increase market share, and rising industrial production and an accompanying increase in both handling volumes and prices for recycled heavy oil. Operations in Hokuriku (except for Nagoya), Kanto, Kansai, Kyushu, and Chiba all logged record-high sales for cumulative Q3.

As the sluggish recovery of the industrial production index has continued, since FY02/17 the company has been working to implement a set of new operational measures designed to expand its market share. Thus, it has been working on increasing the order volume from its existing clients while at the same time winning new clients by strengthening its suite of sales support tools. Daiseki appears to be further pushing these efforts to expand its sales routes and market share and the number of new accounts and overall accounts has been steadily increasing. Since Q4 FY02/17, the industrial production index has been increasing YoY—combined with effects from winning clients, this resulted in earnings growth from Q1 FY02/18.

There appears to have been no particular change to the company's cost structure. The GPM fell 0.6pp YoY in Q1, but this was because the Nagoya facility had a large, highly profitable project in FY02/18. Excluding this factor, the GPM remains favorable. In Q2, the GPM rose 0.6pp, aided by solid top-line growth and rising fuel prices. Recycled fuel sales increased by nearly 20%, easily outpacing the 3% increase in volume of recycled heavy oil as prices rose and margins improved along with a rise in the price of crude oil. Furthermore, despite a rise in transportation costs related to collection of industrial waste (part of CoGS) and higher SG&A expenses incurred in relation to sales of recycled fuel and other products, the company still managed to increase its OPM by 1.0pp to 26.8% by negotiating higher prices to help absorb the higher costs.

Price negotiations are ongoing in anticipation of further increases in transportation costs, and margins on recycled fuel sales are widening even more as crude oil prices rise. Considering current market conditions and the fact that trends in selling prices for recycled heavy oil and procurement prices for raw materials (sump oil, which accounts for 70–80% of outside procurement costs) lag crude oil prices*, the company expects to see margins on recycled fuel continue to widen in 2H. The company said the margin improvement in 1H added roughly JPY100mn to earnings in 1H and in 2H it may add another JPY100mn versus 1H. Together with the expansion of the company's sales team (discussed below), this suggests to us that the company will be able to maintain a similar earnings structure from Q3 onward.

*Recycled heavy oil prices: Selling prices for recycled heavy oil normally lag crude oil prices by three to six months while procurement prices (for used oil) usually lag crude oil prices by more than six months. This means margins on recycled heavy oil tend to widen when crude oil prices are in an uptrend. In contrast, when crude oil prices are in a downtrend, the impact on selling prices of recycled heavy oil will be reflected much sooner and earnings will be depressed (as was seen in FY02/16). Taking into consideration the speed of price negotiations, the pace at which crude oil prices are currently rising appears to be desirable.

09/81 Daiseki / 9793

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to reflect increases in distribution costs heading into FY02/19. It has conducted related negotiations, and as of the beginning of FY02/19 believed it could pass on most of this increase to prices. The company's current forecast assumes a 0.1pp decline in the gross profit margin in FY02/19.

FY02/17: Until Q2 FY02/17, the company’s efforts were frustrated by the macro environment—namely, a drop in the prices of recycled heavy oil due to the strong yen and a decline in the price of crude oil, and the slow recovery in the industrial production index. Meanwhile, progress was made in customer numbers and the expansion of collection routes, and results from an increase in the capacity of supplementary fuel facilities were seen. Sales turned positive from Q3 and margins for recycled heavy oil improved. In Q4 FY02/17 and Q1 FY02/18, owing to a recovery in industrial production, measures to win clients and to expand market share succeeded. This significantly contributed to an increase in sales and profits. Since industrial waste collection is defined by a business structure that collects waste after it has accumulated, earnings tend to lag the industrial production index.

Recycled heavy oil prices tend to change three months after Japanese Heavy Oil A price changes. Recycled heavy oil prices dropped when heavy oil prices dropped. That said, the procurement cost for waste oil—the raw material for recycled heavy oil—did not drop much partly due to fierce competition between companies and the prospect of a crude oil market recovery. However, in 2016, procurement costs began to decline and “Heavy Oil A” prices started rising in April, stimulating demand and stopping the decline in recycled heavy oil in June.

Crude Oil CIF price trends 100,000 200 CIF price (JPY/kl) CIF price (USD/barrael, right axis) 80,000 150

60,000 100 40,000

50 20,000

- - Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Shared Research based on Ministry of Economy, Trade and Industry data

Index of industrial production and Daiseki parent sales (excluding sales to DES) Daiseki Co. sales (Nagoya, Hokuriku) (JPYmn) (JPYmn) Daiseki Co. sales (ex. DES) Industrial prod. index (right axis) Industrial prod. index: Chubu (right axis) 3,500 Transportation equip. industry (Chubu; right axis) 140 8,000 160

7,000 140 3,000 120

6,000 120 2,500 100

5,000 100 2,000 80 4,000 80 1,500 60 3,000 60

2,000 40 1,000 40 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17

(JPYmn) Daiseki Co. sales (Kansai) (JPYmn) Daiseki Co. sales (Kanto, Chiba) (JPYmn) Daiseki Co. sales (Kyushu) 1,600 140 2,100 140 1,600 140 Industrial prod. index: Kinki (right axis) Industrial prod. index: Kanto (right axis) Industrial prod. index: Kyushu (right axis)

1,400 120 1,800 120 1,400 120 1,200 1,200 100 1,500 100 100 1,000 1,000 80 1,200 80 80 800 800 60 900 60 60 600 600 40 600 40 40 400 400

200 20 300 20 200 20

0 - 0 - 0 - Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 Source: Shared Research based on Ministry of Economy, Trade and Industry data

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Daiseki Eco. Solution (DES)

Daiseki Eco. Solution FY02/18 FY02/19 Vs. Init. Est. FY02/19 Init. Est. FY02/17 FY02/18 FY02/19 FY02/20 FY02/19 FY02/20 FY02/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q1Q2Q3Q4Q1Q2Q3Q4Act.Act.Est. Q3 Est. Q2 Init. Est. MTP MTP Sales 3,984 3,482 2,859 4,601 3,332 4,475 3,086 -12 -359 -217 +72 3,344 4,834 3,303 3,528 14,373 14,926 14,350 14,640 15,010 16,650 19,230 Soil contamination research and cleanup 3,417 2,907 2,185 4,020 2,787 3,948 2,475 -20 -352 -256 +437 2,807 4,300 2,731 2,611 12,123 12,529 12,141 12,444 12,449 - - Nagoya 1,696 1,098 861 752 800 704 715 -261 -457 -489 -177 1,061 1,161 1,204 1,117 4,443 4,407 3,129 3,265 4,543 - - Tokyo 1,130 1,220 910 2,353 957 2,669 1,244 -14 +138 +327 +404 971 2,531 917 886 4,433 5,613 6,286 6,000 5,305 - - Kansai 586 570 399 831 977 542 501 +231 -50 -92 +210 746 592 593 590 2,992 2,386 2,592 3,059 2,521 - - Tohoku 4 201682533215 +24 +16 -2 - 29 16 17 18 256 122 134 120 80 - - Plasterboard recycling 353 363 395 373 393 374 372 -5 -19 -62 +4 398 393 434 395 1,320 1,483 1,510 1,600 1,620 - - GAC 226 234 254 245 253 247 247 -7 -7 -39 +3 260 254 286 260 782 959 994 1,049 1,060 - - GAK 128 128 138 127 140 127 124 +2 -12 -24 +1 138 139 148 135 538 521 516 551 560 - - Others 214 212 280 209 151 153 240 +12 +12 +101 -370 139 141 139 522 929 914 698 594 941 - - Yo Y -4.0% 6.3% -19.4% 35.4% -16.4% 28.5% 8.0% -16.1% 38.8% 15.5% -23.3% -24.7% 3.9% -3.9% -1.9% 0.6% 10.9% 15.5% Soil contamination research and cleanup -7.6% 1.6% -26.2% 54.4% -18.4% 35.8% 13.3% -17.9% 47.9% 25.0% -35.0% -28.5% 3.3% -3.1% -0.7% -0.6% Plasterboard recycling 9.2% 19.5% 15.1% 6.4% 11.4% 3.0% -5.8% 12.7% 8.2% 10.0% 6.0% 10.9% 12.4% 1.8% 7.9% 9.2% Others 68.0% 88.8% 15.2% -53.2% -29.2% -27.9% -14.3% -34.9% -33.5% -50.3% 149.8% -0.0% -1.6% -23.7% Gross profit 683 530 437 1,010 623 683 512 -70 -139 -154 693 822 666 688 2,696 2,659 2,230 2,193 2,870 3,281 4,063 Gross margin 17.1% 15.2% 15.3% 21.9% 18.7% 15.3% 16.6% -2.0pp -1.8pp -3.6pp 20.7% 17.0% 20.2% 19.5% 18.8% 17.8% 15.5% 15.0% 19.1% 19.7% 21.1% Cost ratio 82.9% 84.8% 84.7% 78.1% 81.3% 84.7% 83.4% +2.0pp +1.8pp +3.6pp 79.3% 83.0% 79.8% 80.5% 81.2% 82.2% 84.5% 85.0% 80.9% 80.3% 78.9% SG&A expenses 338 337 282 364 350 359 381 +4 +15 -2 346 344 383 343 1,188 1,320 1,420 1,453 1,415 1,502 1,536 YoY 11.8% 24.0% -11.4% 22.6% 3.6% 6.5% 35.1% 2.3% 2.2% 35.8% -5.6% 9.4% 11.1% 7.6% 10.1% 7.2% 6.1% 2.3% SG&A ratio 8.5% 9.7% 9.9% 7.9% 10.5% 8.0% 12.3% +0.2pp +0.9pp +0.7pp +0.0pp 10.3% 7.1% 11.6% 9.7% 8.3% 8.8% 9.9% 9.9% 9.4% 9.0% 8.0% Operating profit 345 193 156 646 273 324 131 -74 -154 -152 -269 347 478 283 345 1,508 1,339 810 740 1,455 1,779 2,527 YoY -28.0% -50.8% -58.6% 146.8% -20.8% 68.0% -16.0% 0.7% 147.8% 81.7% -46.6% -40.1% -11.2% -39.5% -44.7% 8.6% 22.3% 42.0% OPM 8.7% 5.5% 5.4% 14.0% 8.2% 7.2% 4.2% -2.2pp -2.6pp -4.3pp -7.7pp 10.4% 9.9% 8.6% 9.8% 10.5% 9.0% 5.6% 5.1% 9.7% 10.7% 13.1% Soil contamination research and cleanup 13.0% 9.6% 6.1% 18.1% 12.2% 10.2% 9.4% 15.1% 12.7% - Plasterboard recycling 14.7% 17.8% 21.1% 16.9% 21.4% 20.7% 19.1% 9.4% 17.7% - Treatment volume (MT) 226,968 203,540 167,204 312,269 217,403 164,307 209,494 843,487 909,981 YoY 15.7% 11.7% -18.4% 20.1% -4.2% -19.3% 25.3% -22.6% 7.9% Cleanup volume (MT) 9,675 39,714 31,693 38,706 42,997 30,046 36,749 42,081 119,788 YoY -22.1% 602.2% 256.8% 155.9% 344.4% -24.3% 16.0% -29.6% 184.7% Capital expenditures (increase in fixed assets) 2,710 4,479 3,750 300 300 Depreciation and amortization 197 200 211 214 174 175 526 822 680 989 826 EBITDA 541 393 367 860 447 499 2,035 2,161 2,135 2,768 3,353 EBITDA margin 13.6% 11.3% 12.8% 18.7% 13.4% 11.2% 14.2% 14.5% 14.2% 16.6% 17.4%

Plasterboard recycling FY02/18 FY02/19 Vs. Init. Est. FY02/19 Init. Est. FY02/17 FY02/18 FY02/19 FY02/20 FY02/19 FY02/20 FY02/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q1Q2Q3Q4Q1Q2Q3Q4Act.Act.Est. Q3 Est. Q2 Init. Est. MTP MTP Sales 353 363 395 373 393 374 372 -5 -19 -62 +4 398 393 434 395 1,320 1,483 1,510 1,600 1,620 GAC 226 234 254 245 253 247 247 -7 -7 -39 +3 260 254 286 260 782 959 994 1,049 1,060 GAK 128 128 138 127 140 127 124 +2 -12 -24 +1 138 139 148 135 538 521 516 551 560 YoY 9.2% 19.5% 15.1% 6.4% 11.4% 3.0% -5.8% 12.7% 8.2% 10.0% 6.0% 10.9% 12.4% 1.8% 7.9% 9.2% GAC 13.0% 32.2% 27.0% 19.5% 11.9% 5.6% -2.8% 15.0% 8.5% 12.6% 6.1% -3.9% 22.6% 3.6% 9.4% 10.5% GAK 1.6% 1.6% -2.1% -12.4% 9.4% -0.8% -10.1% 7.8% 8.6% 7.2% 6.3% 43.1% -3.2% -1.0% 5.8% 7.5% Collection volume (tons) 18,419 18,489 19,300 18,214 20,121 18,829 19,522 69,087 74,422 - GAC 10,523 11,041 11,233 10,826 11,635 11,656 11,920 40,049 43,623 - （GAC processing volume） ------GAK 7,896 7,448 8,067 7,388 8,486 7,173 7,602 29,038 30,799 - Sales per collection volume 19 20 20 20 20 20 19 19 20 - GAC 21212323222121 20 22 - （GAC processing volume） -- - GAK 16171717161816 19 17 - YoY -1.5% 5.4% 10.7% 2.9% 2.0% 1.1% -6.8% -2.5% 4.1% - GAC 3.4% 10.7% 20.9% 15.7% 1.2% -0.0% -8.4% -9.7% 12.6% - （GAC processing volume） ------GAK -10.2% -3.7% -4.6% -15.4% 1.8% 3.0% -4.6% 13.6% -8.7% - Operating profit 52 65 83 63 84 78 71 125 263 - YoY 1.7% 163.6% 274.8% 134.8% 62.1% 19.9% -15.1% 51.2% 111.0% - OPM 14.7% 17.8% 21.1% 16.9% 21.4% 20.7% 19.1% 9.4% 17.7% - Depreciat ion and amort izat ion 269 224 - EBITDA 394 487 - YoY 10.6% 23.7% - EBITDA margin 29.8% 32.8% - Sales, GPM, and OPM

6,000 30% Sales GPM (right axis) OPM (right axis)

5,000 21.9% 25% 21.2% 20.7% 20.1% 19.6%20.3%20.3% 19.9% 20.2%19.6% 19.3%18.8% 19.4% 19.3% 19.2%18.8% 18.7% 4,000 17.3%17.8% 18.0% 17.2% 20% 16.9% 16.9% 16.4%17.1% 16.6% 15.5% 16.1% 15.3% 14.6% 14.6% 14.5% 14.7% 15.2% 15.2% 15.3% 13.6% 13.9% 14.4% 13.7% 13.9% 14.0% 3,000 13.1% 13.2% 12.9% 15% 11.7% 12.1% 12.0% 10.9% 11.4%11.5% 10.4% 10.1% 10.8% 10.6% 9.1% 9.7% 8.6% 8.7% 8.2% 2,000 7.2% 7.8%7.8% 7.2% 7.7% 7.2% 10% 5.9% 5.4% 5.1% 5.3% 5.5% 5.5% 4.7% 4.2% 1,000 2.0%2.1% 5% 0.2% 0.7% 0 0% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 (JPYmn) FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research, based on company data

Results Daiseki Eco. Solution (DES) logged sales of JPY10.9bn (+5.5% YoY), operating profit of JPY728mn (+5.0% YoY), recurring profit of JPY740mn (+4.8% YoY), net income attributable to owners of the parent of JPY437mn (+0.7% YoY). The subsidiary aggressively pressed on to expand into the recycling space mainly in its soil contamination research and cleanup business. It also worked to reduce costs at its plants. However, the competition in the market and the resulting drop in unit prices on orders, sluggish utilization rates at some recycling centers, and costs incurred on headquarters relocation weighed down results.

On January 7, 2019, DES announced a revision to its full-year earnings forecasts again. The subsidiary revised up its forecasts for profits as earnings have improved underpinned by a slowdown in the pace of unit price decline on orders and steady progress in the cost-cutting efforts at its plants.

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In the soil contamination research and cleanup business, sales increased YoY thanks to robust demand in the Kanto region. Earnings improved as the drop in unit prices on orders have slowed down and the plants made progress in reducing costs. The Yatomi Recycling Center continued to improve profitability by focusing on selecting suitable processing projects and cutting costs.

In the plasterboard recycling business, DES marked solid gains in processing volumes in central and western Japan. Sales of solidifying agents remained strong, following the previous fiscal year trend.

Among other businesses, the biodiesel fuel business and the PCB consulting business also performed well, but sales fell on the conclusion of processing projects for general waste.

Order unit prices With unit prices on orders still coming down and the market environment turning soft, the drop in unit prices in 2H FY02/18 was not followed by a rebound in 1H FY02/19. It appears that these conditions were the result of suppliers that mainly handle soil that is not contaminated by construction waste or other materials not paying much attention to the handling of soil that did need to be cleaned and accepting orders at low prices. The fact that most of soil did not need to be cleaned and that companies competing for orders from the primary general contractors were motivated to offer low bids made for a highly competitive market environment. However, with prices having dropped about as far as they could go, the unit prices on orders Daiseki has been receiving have been basically flat since the second half of last year. Still, Daiseki's gross profit margin has taken a big hit. If the high-margin brownfield projects are excluded from 1H results, the gross profit margin would be around 14%, well below the 18.8% gross profit margin recorded in FY02/17 when DES did not have any brownfield projects.

The company plans to strengthen measures to counter the drop in unit prices on orders. Under the assumption that unit prices will not bounce back with changes in market factors only, the company looks to bring them up with its own efforts. Specifically, it looks to strengthen consulting sales to upstream, aggressively work to gain access to upstream information by leveraging the group’s strengths, and focus on winning value-added projects such as brownfield projects.

Regarding consulting sales, at the time DES was first listed on the stock exchange its main strength was its one-stop solutions service; from upstream it could take six month or more (sometimes as much as two years) to win consulting contracts. As DES's name recognition increased it won an increasing number of contracts via general contractors and, with some of these being very large and some with very short turnaround times (as little as two months), its commitment to consulting services gradually dwindled. However, starting in 2H the company is determined to get back to its roots and resume consulting sales in earnest. By tapping into the parent company's strong client base of manufacturers, DES is looking to get advanced information on the detailed capital spending plans of manufacturers and use this information to get consulting projects and follow-on orders for soil decontamination work. The company says it sees these efforts adding to the bottom line results starting in 1H FY02/20.

Yatomi Recycling Center At the Yatomi Recycling Center, the company is focusing more on improving profitability than increase processing volumes (assuming it is processing soil that is suitable for cleaning, it may be able to improve its gross profit margin by 10pp or more). During FY02/18, the company sought to increase processing volume to build up its expertise in cleaning processes and increase the facility's capacity utilization rate. In FY02/19, however, DES focused on increasing processing of soil from the Tokai region and Western Japan, which are better suited to the decontamination process compared to the heavy clay soil of the Kanto region. Although the Yatomi Recycling Center continued running at a loss in 1H (and is still running at a loss of roughly JPY10mn per month), the earnings structure of the facility has improved to the extent that it is generating an operating profit excluding depreciation of JPY22mn per month. By FY02/20, the company sees the Yatomi Recycling Center running in the black at the operating profit level thanks to higher operating rates and lower depreciation (because the capital expenditures associated with the Yatomi facility were very large, for most of the equipment the company is using fixed-rate declining-balance depreciation.)

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New recycling centers DES is also in the process of building two new recycling centers, one in the city of Yokohama and one in Gifu Prefecture. These facilities are expected to contribute to results from FY02/20 onward, and at the earliest, might be up and running by January 2019. The new recycling facility in Yokohama is aimed at capturing the swell of demand around the time of the Tokyo Olympics; the one in Gifu Prefecture is aimed at meeting the demand stemming from the extensive tunnel construction being done for the Linear Chuo Shinkansen Line that will run through Gifu Prefecture.

DES already has one recycling center in Yokohama but it is small, with a total lot size of 8,563sqm and the facility itself having 4,061sqm of floor space and processing capacity of 300,000 tons per annum. This compares with its Nagoya Recycling Center, which has a total lot size of 17,790sqm with the facility itself having 4,750sqm of floor space and processing capacity of 300,000 tons, and its Osaka Recycling Center, which has a total lot size of 10,670sqm with the facility itself having 6,184sqm of floor space and processing capacity of 300,000 tons. Moreover, unlike the recycling centers in Nagoya and Osaka, the company's existing recycling center in Yokohama does not have any berthing facilities to accommodate cargo ships. This increases its costs greatly because when ships arrive in port it needs to rent outside warehousing space and pay for land transportation between the port and the recycling center. According to reports, the new recycling center the company is building in Yokohama will have a total lot size of 15,059sqm and the processing facility itself will have 6,098sqm of floor space. As this will make it roughly the same size as the recycling centers in Nagoya and Osaka, the new Yokohama Recycling Center will be in a good position to win orders for large projects (which require a lot of space to store soil during processing). Because it will have berthing facilities for ships, it will also be able to cut out a lot of spending on outside contractors. In short, the enhanced features of the new recycling center in Yokohama will add to both the top- and the bottom-line results. Because the demand is there, the new Yokohama Recycling Center will ramp up operations quickly. Although the operating permits have not been granted yet, Shared Research would note that the likelihood of the permits being granted is high enough for the company's revised forecast to include depreciation for the months the recycling centers are expected to be in operation (roughly two months) in FY02/19.

Soil contamination treatment volume

450,000 Soil contamination treatment volume (incl. industrial waste) Cleanup (right axis) 45,000 400,000 40,000 350,000 35,000 300,000 30,000 250,000 25,000 200,000 20,000 150,000 15,000 100,000 10,000 50,000 5,000 0 0 (MT) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 (MT) FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data

Yatomi Recycling Center: Potential driver of earnings expansion Cleaning volume increased by roughly 30,000 tons in Q2 and Q4 (as shown in the following Figure), mainly due to the operation of the Yatomi Recycling Center (roughly 10,000 tons/month). However, the cleaning volume did not yet reach the break-even point (roughly 15,000 tons/month), and this impacted profits. Underlying factors included: 1) trial and error in preparation for the future: DES has been testing various contaminated soils to identify which ones are suitable for cleaning (cost compatible); 2) collection volume shortfall: the collection volume of soils suitable for cleaning was lower than expected; 3) change in processing methods: outsourcing to high-cost cement manufacturers increased owing to a decrease in cleaning volume; and 4) securing demand: DES was behind schedule in securing buyers for the cleaned soil whose volume significantly increased due to larger processing capacity. As a result, the Yatomi Recycling Center's capacity utilization rate over the full year was less than 50%. The company originally forecasted processing volume of 180,000 tons and a loss of JPY80mn, but only processed 80,000 tons and posted a wider loss of JPY380mn, which was a major reason behind the shortfall versus forecasts.

However, the company has indicated it accumulated processing expertise on which type of soil can maximize profits. In its earnings briefing, management said GPM for soil that requires cleaning may increase by 10–15% over ordinary soil processing, and an additional 10–15% for soil that is suitable for cleaning. The company accordingly sees the Yatomi Recycling Center as a potential driver of earnings expansion. In addition, rather than indiscriminately chasing high profit, management also hinted it may adopt a policy of holding down earnings to secure volume. Amid an increase in overall projects in FY02/19, the company aims to raise the capacity utilization rate at Yatomi Recycling Center to 80% by the year-end through cooperation among sales staff of various facilities to select projects suitable for cleaning, which is expected to translate into orders.

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The Yatomi Recycling Center has a cleaning capacity of 20,000 tons/month. Daiseki estimates that if it processes soils suitable for cleaning (for example; soil that can be freed of all contamination with just one cleaning cycle) rather than outsourcing the same work to cement manufacturers, GPM will be 10pp to 15pp higher. This is because work outsourced to cement manufacturers, which accounts for 40% of sales, can be significantly reduced. There are some cases where cleaned soil can be sold as construction materials, such as roadbed materials. The Q2 CoGS-to-sales ratio at DES was 84.8%. According to calculations, of the Q2 monthly average processing volume of roughly 68,000 tons, if the company improved GPM for 20,000 tons by 15pp, the CoGS-to-sales ratio can be pushed down to 80.4%, and profit will increase by JPY154mn per quarter. Thus, Daiseki expects Yatomi Recycling Center to contribute to earnings growth, but for cumulative Q3, losses expanded due to the reasons mentioned above. However, it can break even if processing volume exceeds 15,000 tons/month (before depreciation costs: JPY330mn annually, fixed-rate). In FY02/19, earnings will get a significant boost if gross profits improve and the temporary cost increase seen in FY02/18 is eliminated. Shared Research will closely monitor these developments.

Capital investment DES is carefully and steadily moving forward with capital investment projects. The company planned for three major capital investment projects during the current three years. The first project is the Yatomi Recycling Center (mentioned above), the second is the recycling center in Gifu, and the third, a new recycling center in Yokohama. The company aimed to win major contracts related to 2020 Tokyo Olympics and subsequent demand for redevelopment with the establishment of the new center in Yokohama, and large-scale demand related to the partial opening of the Linear Chuo Shinkansen Line (bullet train) in 2027 with the center in Gifu. The balance sheet as of Q1 indicates a roughly JPY2.6bn increase in land holdings and this increasing by JPY250mn in Q2, presumably from related land acquisitions. In regard to funding, DES appears to have accessed the parent’s (Daiseki Co.) net cash via intra-group borrowing.

After investing JPY4.5bn in FY02/18, the company plans to invest about JPY3.8bn in FY02/19. The original plan was to invest JPY6.5bn in FY02/18, but a portion was pushed back to FY02/19. The company initially aimed to complete the new facilities in Gifu and Yokohama by end-FY02/19, and start operations in early FY02/20. It targets a capacity utilization rate of 40% by FY02/20 (sales of about JPY800mn per facility), and a rate of 80% in FY02/21 (roughly JPY1.8bn). As of Q2, the company expects construction to be completed by the end of 2018 and operations to start up in January 2019 (assuming the necessary permits are granted), so it has included two months’ worth of depreciation charges for these facilities in its budget for FY02/19. The company is aiming to quickly ramp up operations at the new Yokohama Recycling Center, but much will depend on the progress of the tunnel construction work for the Gifu Center.

GAC, GAK plasterboard collection volumes

5,000 GAC (monthly) GAC (quarterly average) GAK (quarterly average) 5,000

4,000 4,000

3,000 3,000

2,000 2,000

1,000 1,000

- - (MT) Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 (MT) Source: Shared Research based on company data

Soil contamination sales by region

3,000 Nagoya Kansai Tokyo Tohoku

2,500

2,000

1,500

1,000

500

0 (JPYmn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data

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Daiseki MCR FY02/17 FY02/18 FY02/19 Vs. Est. FY02/19 Initial Est. FY02/17 FY02/18 FY02/19 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Act. Act. Init. Est. Sales 565 474 515 596 614 650 805 776 741 778 665 +74 +95 -63 667 683 728 661 2,150 2,846 2,739 YoY -29.3% -41.4% -23.8% -10.5% 8.7% 37.1% 56.3% 30.2% 20.7% 19.7% -17.4% 8.6%5.1%-9.6% -14.8% -27.1% 32.4% -3.8% Gross profit -95 -169 11 57 98 6 97 112 63 -63 -2 -24 -108 -123 87 45 121 - -196 313 329 GPM -16.8% -35.7% 2.1% 9.6% 16.0% 0.9% 12.0% 14.4% 8.5% -8.1% -0.3% -4.5pp -14.7pp -16.9pp 13.0% 6.6% 16.6% - -9.1% 11.0% 12.0% SG&A expenses 6558595360557658576056 +2+40 555656-20 235 249 223 Operating profit -160 -227 -48 438-49 21 54 6 -123 -58 -26 -112 -123 32-11 65 20 -431 64 106 YoY ------1,250.0% -84.2% -- -15.8% - 209.5% -63.0% - - 65.6% OPM -28.3% -47.9% -9.3% 0.7% 6.2% -7.5% 2.6% 7.0% 0.8% -15.8% -8.7% -4.0pp -14.2pp -17.7pp 4.8%-1.6% 8.9% 3.0% -20.0% 2.2% 3.9% LME Lead (USD/t) (a) 1,748 1,794 2,051 2,254 2,211 2,250 2,446 2,560 2,368 2,229 2,198 2,300 2,300 2,300 2,300 1,960 2,365 2,420 Exchange rate (JPY/USD) (b) 110.8 103.7 104.7 114.6 111.9 111.1 112.2 110.7 107.8 110.8 110.4 113.0 113.0 113.0 113.0 108.4 111.5 108.0 (a) x (b) (JPY'000/kg) 194 186 215 258 247 250 274 283 255 247 243 260 260 260 260 212 264 261 YoY -16.3% -14.7% 6.0% 27.8% 27.7% 34.4% 27.8% 9.7% 3.2% -1.1% -11.6% 5.1%4.0%-5.3% -8.3% -0.5% 24.1% -0.9% Lead market price in Japan (JPY/kg) (c) 252 244 269 318 307 308 335 343 317 312 289 315 315 315 315 271 323 - YoY -13.3% -12.9% 2.1% 21.5% 21.8% 26.2% 24.6% 7.8% 3.1% 1.3% -13.8% 2.4%2.1%-6.0% -8.3% -1.2% 19.4% - Sales /(c) (FY02/15 average=100) 80 70 69 67 72 2,109 86 81 84 2,493 83 76 78 83 75 71 79 YoY -18.4% -32.7% -25.3% -26.4% -10.8% 7,570.6% 25.4% 20.7% 17.0% 8,948.2% -4.2% 6.1%2.9%-3.8% -7.1% -26.3% 10.9% Source: Shared Research based on company data Note: The domestic lead price in FY02/17 is an estimate by Shared Research based on projected LME lead prices and exchange rates.

Lead price trends LME lead prices in yen (JPY/kg) LME spot prices (USD/MT; right axis) 290 2,900

270 2,700

250 2,500

230 2,300

210 2,100

190 1,900

170 1,700

150 1,500 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Source: Shared Research based on Bloomberg and Mizuho Bank data

System Kikou

FY 02/ 17 FY02/18 FY02/19 Vs. Est. FY02/19 Init. Est. FY02/17 FY02/18 FY02/19 (JPYmn)Q1Q2Q3Q4Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Act. Act. Init. Est. Sales 507 884 322 348 888 839 495 405 406 509 611 -163 -429 +1 569 938 610 383 2,061 2,627 2,500 YoY 40.8% 45.4% -65.2% -61.5% 75.1% -5.1% 53.7% 16.4% -54.3% -39.3% 23.4% -35.9% 11.8% 23.2% -5.4% -26.4% 27.5% -4.8% Gross profit 36 162 0 56 54 236 157 56 3 66 160 -102 -93 +37 105 159 123 - 254 503 432 GPM 7.1% 18.3% 0.0% 16.1% 6.1% 28.1% 31.7% 13.8% 0.7% 13.0% 26.2% -17.7pp -4.0pp +6.0pp 18.5% 17.0% 20.2% - 12.3% 19.1% 17.3% Operating profit -48 81 -78 -21 -12 171 83 -24 -64 -7 61 -94 -89 +15 30 82 46 -40 -66 218 118 YoY - - - - - 111.1% - - - - -26.5% --52.0% -44.6% - - --45.9% OPM -9.5% 9.2% -24.2% -6.0% -1.4% 20.4% 16.8% -5.9% -15.8% -1.4% 10.0% -21.0pp -10.1pp +2.4pp 5.3% 8.7% 7.5% -10.4% -3.2% 8.3% 4.7% Source: Shared Research based on company data

For previous results, see the Historical performance section.

15/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Full-year company forecasts

FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Act.Act.Act.Init. Est. Target Target Consolidated Sales 26,968 35,160 37,224 29,080 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 50,200 53,000 56,500 YoY 24.6% 30.4% 5.9% -21.9% 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2%2.1%5.6%6.6% Gross profit 8,959 12,011 11,699 8,841 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 15,050 15,800 17,150 GPM 33.2% 34.2% 31.4% 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% 30.0% 29.8% 30.4% SG&A expenses 3,261 3,809 4,159 3,976 4,296 4,752 4,870 4,999 5,605 5,238 5,247 5,707 5,950 5,700 5,950 YoY 13.6% 16.8% 9.2% -4.4% 8.0% 10.6% 2.5% 2.6% 12.1% -6.5% 0.2% 8.8% 4.3% -4.2% 4.4% Operating profit 5,697 8,201 7,539 4,865 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,100 10,100 11,200 YoY 39.6% 44.0% -8.1% -35.5% 10.8% 6.7% -6.0% 35.0%0.1%7.5%-9.3% 23.3% 3.7% 11.0% 10.9% OPM 21.1% 23.3% 20.3% 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 18.1% 19.1% 19.8% Recurring profit 5,701 8,191 7,673 4,986 5,587 5,901 5,554 7,400 7,436 7,955 7,228 8,914 9,220 10,200 11,300 RPM 21.1% 23.3% 20.6% 17.1% 17.7% 16.2% 15.4% 17.6% 16.3% 15.7% 16.3% 18.1% 18.4% 19.2% 20.0% Net income 3,220 5,060 4,022 2,547 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833 6,000 6,400 7,000 YoY 36.7% 57.1% -20.5% -36.7% 22.3% 2.6% -5.3% 30.4% 2.4% -4.7% 7.4%41.2%2.9%6.7%9.4% Net margin 11.9%14.4%10.8%8.8%9.9%8.7%8.4%9.4%8.8%7.6%9.3%11.9%12.0% 12.1% 12.4% FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Act.Act.Act.Init. Est. Target Target Daiseki Co. Sales 20,799 23,859 25,614 19,209 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 30,000 31,200 32,200 (parent) YoY 16.6% 14.7% 7.4% -25.0% 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8%4.2%4.0%3.2% Gross profit 7,823 9,042 9,167 6,567 8,035 8,453 8,278 8,942 9,699 9,068 9,433 10,800 11,240 GPM 37.6% 37.9% 35.8% 34.2% 36.8% 35.2% 34.8% 35.7% 36.7% 34.9% 36.6% 37.5% 37.5% SG&A expenses 2,768 2,882 3,009 2,785 2,838 2,978 3,015 3,076 3,265 3,033 3,296 3,630 3,780 Operating profit 5,055 6,160 6,158 3,782 5,197 5,475 5,263 5,866 6,434 6,035 6,137 7,170 7,460 8,100 8,500 YoY 31.5% 21.9% -0.0% -38.6% 37.4% 5.3% -3.9% 11.5% 9.7% -6.2% 1.7%16.8%4.0%8.6%4.9% OPM 24.3% 25.8% 24.0% 19.7% 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.9% 24.9% 26.0% 26.4% Daiseki Sales 5,643 7,774 9,040 6,991 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 15,010 16,650 19,230 Eco. Solution YoY 75.5% 37.8% 16.3% -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% 0.6% 10.9% 15.5% Gross profit 976 1,470 1,622 1,308 733 1,085 1,392 2,120 2,100 3,603 2,696 2,659 2,870 3,281 4,063 GPM 17.3% 18.9% 17.9% 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.8% 17.8% 19.1% 19.7% 21.1% SG&A expenses 391 512 617 615 605 677 801 823 874 1,086 1,188 1,320 1,415 1,502 1,536 Operating profit 586 957 1,005 693 128 408 592 1,298 1,226 2,517 1,508 1,339 1,455 1,779 2,527 YoY 204.0% 63.5% 5.0% -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% -11.2% 8.6% 22.3% 42.0% OPM 10.4% 12.3% 11.1% 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 9.7% 10.7% 13.1% Daiseki Sales 3,182 3,479 3,003 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,739 2,815 2,854 MCR YoY - 9.3% -13.7% 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% -3.8% 2.8% 1.4% Gross profit 1,330 778 841 615 380 373 617 475 -316 -196 313 329 GPM 41.8% 22.4% 28.0% 19.0% 12.3% 13.4% 19.8% 15.2% -10.7% -9.1% 11.0% 12.0% SG&A expenses 223 259 281 307 445 351 375 756 409 235 249 223 Operating profit 1,107 519 560 308 -65 22 242 -281 -725 -431 64 106 213 213 YoY - -53.1% 7.9% -45.0% - - 1,019.9% - - - - 65.6% 100.9% - OPM 34.8% 14.9% 18.6% 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% 3.9% 7.6% 7.5% System Kikou Sales 961 2,539 2,244 2,963 3,145 2,800 2,061 2,627 2,500 YoY -164.2%-11.6% 32.0% 6.1% -11.0% -26.4% 27.5% -4.8% Gross profit 155 431 279 452 446 548 254 503 432 GPM 16.1% 17.0% 12.4% 15.3% 14.2% 19.6% 12.3% 19.1% 17.3% SG&A expenses 172 309 374 331 307 360 320 285 314 Operating profit -17 122 -95 121 139 188 -66 218 118 YoY - - - - 14.9% 35.3% - - -45.9% OPM -1.8% 4.8% -4.2% 4.1% 4.4% 6.7% -3.2% 8.3% 4.7% FY02/16 FY02/17 FY02/18 FY02/19 Initial Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Consolidated Sales 13,772 13,193 12,582 11,262 11,614 11,254 10,884 10,480 12,720 12,196 11,398 12,871 12,200 14,100 12,200 11,700 YoY 22.1% 15.3% 10.6% -3.2% -15.7% -14.7% -13.5% -6.9% 9.5% 8.4% 4.7% 22.8% -4.1% 15.6% 7.0% -9.1% Gross profit 3,629 3,309 3,258 2,892 3,158 3,138 3,212 2,859 3,744 3,570 3,467 3,703 GPM 26.4% 25.1% 25.9% 25.7% 27.2% 27.9% 29.5% 27.3% 29.4% 29.3% 30.4% 28.8% SG&A expenses 1,464 1,298 1,170 1,306 1,322 1,299 1,339 1,287 1,443 1,408 1,4111,445 YoY 14.2% -11.4% -18.5% -8.2% -9.7% 0.1% 14.4% -1.5% 9.2% 8.4% 5.4% 12.3% Operating profit 2,164 2,011 2,088 1,586 1,835 1,840 1,873 1,572 2,300 2,162 2,057 2,258 2,380 2,500 2,300 1,920 YoY 1.4% 4.9% 17.4% 7.7% -15.2% -8.5% -10.3% -0.9% 25.3% 17.5% 9.8% 43.6% 3.5% 15.6% 11.8% -15.0% OPM 15.7% 15.2% 16.6% 14.1% 15.8% 16.3% 17.2% 15.0% 18.1% 17.7% 18.0% 17.5% 19.5% 17.7% 18.9% 16.4% Recurring profit 2,182 2,048 2,107 1,618 1,854 1,863 1,893 1,618 2,348 2,206 2,057 2,303 2,420 2,530 2,320 1,950 RPM 15.8% 15.5% 16.7% 14.4% 16.0% 16.6% 17.4% 15.4% 18.5% 18.1% 18.0% 17.9% 19.8% 17.9% 19.0% 16.7% Net income 1,084 1,006 993 764 999 1,046 1,105 982 1,548 1,412 1,393 1,480 1,570 1,590 1,530 1,480 YoY -8.4% -9.5% 2.3% -0.8% -7.8% 4.0% 11.3% 28.5% 55.0% 35.0% 26.1% 50.7% 1.4% 12.6% 9.8% - Net margin 7.9% 7.6% 7.9% 6.8% 8.6% 9.3% 10.2% 9.4% 12.2% 11.6% 12.2% 11.5% 12.9% 11.3% 12.5% 12.6% FY02/16 FY02/17 FY02/18 FY02/19 Initial Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Daiseki Co. Sales 6,822 6,843 6,419 5,932 6,425 6,632 6,563 6,126 7,232 7,209 7,226 7,110 7,622 7,660 7,587 7,131 (parent) YoY - 1.4% -4.2% -4.1% -5.8% -3.1% 2.2% 3.3% 12.6% 8.7% 10.1% 16.1% 5.4% 6.3% 5.0% 0.3% Gross profit 2,459 2,408 2,252 1,949 2,392 2,435 2,459 2,147 2,856 2,745 2,723 2,476 - - - - GPM 36.0% 35.2% 35.1% 32.9% 37.2% 36.7% 37.5% 35.0% 39.5% 38.1% 37.7% 34.8% ---- SG&A expenses 808 782 671 772 818 839 830 809 925 894 924 888 - - - - Operating profit 1,651 1,626 1,581 1,177 1,574 1,596 1,629 1,338 1,931 1,851 1,799 1,588 1,980 1,960 1,910 1,610 YoY -8.3% -8.8% 0.3% -7.7% -4.7% -1.8% 3.0% 13.7% 22.7% 16.0% 10.4% 18.7% 2.5% 5.9% 6.2% 1.4% OPM 24.2% 23.8% 24.6% 19.8% 24.5% 24.1% 24.8% 21.8% 26.7% 25.7% 24.9% 22.3% 26.0% 25.6% 25.2% 22.6% Daiseki Sales 5,798 5,002 4,574 3,712 4,149 3,277 3,547 3,399 3,984 3,482 2,859 4,601 3,344 4,834 3,303 3,528 Eco. Solution YoY 87.4% 74.0% 42.5% 1.4% -28.4% -34.5% -22.4% -8.4% -4.0% 6.3% -19.4% 35.4% -16.1% 38.8% 15.5% -23.3% Gross profit 979 963 949 711 781 663 694 558 683 530 437 1,010 - - - - GPM 16.9% 19.3% 20.7% 19.2% 18.8% 20.2% 19.6% 16.4% 17.1% 15.2% 15.3% 21.9% ---- SG&A expenses 278 270 252 287 302 271 318 296 338 337 282 364 - - - - Operating profit 702 693 697 425 479 392 376 262 345 193 156 646 347 478 283 345 YoY 71.3% 149.4% 152.7% 61.7% -31.7% -43.5% -46.1% -38.3% -28.0% -50.8% -58.6% 146.8% 0.7% 147.8% 81.7% -46.6% OPM 12.1% 13.9% 15.2% 11.4% 11.5% 12.0% 10.6% 7.7% 8.7% 5.5% 5.4% 14.0% 10.4% 9.9% 8.6% 9.8% Daiseki Sales 799 809 676 666 565 474 515 596 614 650 805 776 667 683 728 661 MCR YoY 16.3% 19.1% -22.4% -25.7% -29.3% -41.4% -23.8% -10.5% 8.7% 37.1% 56.3% 30.2% 8.6% 5.1% -9.6% -14.8% Gross profit 148 -141 -172 -151 -95 -169 11 57 98 6 97 112 - - - - GPM 18.5% -17.4% -25.4% -22.7% -16.8% -35.7% 2.1% 9.6% 16.0% 0.9% 12.0% 14.4% - - - - SG&A expenses 200 67 67 73 65 58 59 53 60 55 76 58 - - - - Operating profit -52 -208 -239 -224 -160 -227 -48 438-49 21 54 32 -11 65 20 YoY ------1,250.0% -15.8% -209.5% -63.0% OPM -6.5% -25.7% -35.4% -33.6% -28.3% -47.9% -9.3% 0.7% 6.2% -7.5% 2.6% 7.0% 4.8% -1.6% 8.9% 3.0% System Kikou Sales 360 608 925 905 507 884 322 348 888 839 495 405 569 938 610 383 YoY -39.4% -44.3% 60.9% 2.3% 40.8% 45.4% -65.2% -61.5% 75.1% -5.1% 53.7% 16.4% -35.9% 11.8% 23.2% -5.4% Gross profit -1 33 181 335 36 162 0 56 54 236 157 56 - - - - GPM -0.3% 5.4% 19.6% 37.0% 7.1% 18.3% 0.0% 16.1% 6.1% 28.1% 31.7% 13.8% - - - - SG&A expenses 79 78 83 120 84 81 78 77 66 65 74 80 - - - - Operating profit -80 -45 98 215 -48 81 -78 -21 -12 171 83 -24 30 82 46 -40 YoY --988.9%305.7%-----111.1%----52.0% -44.6% - OPM -22.2% -7.4% 10.6% 23.8% -9.5% 9.2% -24.2% -6.0% -1.4% 20.4% 16.8% -5.9% 5.3% 8.7% 7.5% -10.4% Source: Shared Research based on company data

16/81 Daiseki / 9793

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Assumption Index Unit FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Assumption Act. Diff. Assumption Act. Diff. Assumption Act. Diff. Assumption Act. Diff. Assumption Act. Diff. Cruide oil price W T I crude oil USD 95–105 85.3 -15% 45–55 46.0 -8% 35.0 46.9 34% 50–55 52.4 - 60–65 Forex USD/JPY 100.0 108.2 8% 120.0 120.8 1% 115.0 108.4 -6% 113.0 111.5 -1% 108.0 Lead price LME lead USD/MT 2,150 2,046 -5% 1,900 1,767 -7% 1,820 1,965 8% 2,300 2,365 3% 2,420 Source: Shared Research based on company data

Long-term management vision "VISION 2030" (announced on June 29, 2018) The company normally updates its medium-term business plan every April when it releases results for the prior fiscal year, making it a rolling three-year plan. This year, however, along with the release of Q1 FY02/19 results the company also unveiled its long-term management vision. Reflecting the growing societal concern about the environment and the sustainable development goals laid out in the United Nation's 2030 Agenda for Sustainable Development (adopted in September 2015), the company's long-term vision for 2030 is based on its company philosophy of contributing to society by creating a better environment. In this relation, the company also noted that October 1, 2018 will be the 60-year anniversary of its founding.

Dubbed “Vision 2030: Becoming the No. 1 recycling company in Asia,” Daiseki's long-term management vision for the year 2030 sets a target sales of JPY150bn (3.0x vs. FY02/18), operating profit of JPY25bn (2.8x), and ROE of 15% (versus 9.9% in FY02/18). In order to meet these targets, the company has embarked on what it calls its “33 (San-San) Project.”

33 (San-San) Project: Aimed at making the company a shining example to the world by developing businesses in three main locations, establishing three new core businesses, capturing a 30% market share at its core domestic businesses, and tripling sales and operating profit from current levels.

33 (San-San) Project Under the 33 Project the company aims to triple sales and operating profit through the following means:

▷ Developing businesses in three main locations: planning to open three new Daiseki Co. facilities ▷ Establishing three new core businesses: aiming to add three new businesses with a scale of JPY10.0bn to the current core businesses (parent’s liquid waste processing and DES’ contaminated soil processing) ▷ Capturing a 30% market share at its core domestic businesses: aiming to raise the market share of the parent’s liquid waste processing business from just under 10% to 30%

Targets for each company are as follows:

▷ Daiseki Co. (sales of more than JPY70.0bn): grow market share to 30% ▷ DES (sales of more than JPY30.0bn): double sales at existing businesses ▷ Other subsidiaries (sales of more than JPY10.0bn): expand existing businesses ▷ New business areas (sales of more than JPY30.0bn): establish three new businesses with a scale of JPY10.0bn or more

To achieve the long-term vision, the basic strategy in existing business areas calls for the following:

▷ Japan: establish closer coordination between existing business offices to provide coverage for those areas where it has little presence, and develop new businesses as a means to gain entry to new areas ▷ Overseas: begin market research with the idea of moving into other markets in Asia ▷ Technology and equipment development: increase recycle rates and expand the range of goods handled by using new technology and new equipment ▷ Group strategy: increase synergies among group companies by increasing intra-group collaboration through personnel exchanges and other means

The basic strategy in new business areas calls for the following:

▷ M&A: undertake M&A to advance the themes "environment" and "recycle"

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▷ Alliance strategy: increase business alliances, including alliances with companies in different industries

In terms of personnel development, the basic strategy is as follows:

▷ Work environment: create a work environment where workers feel fulfilled and want to grow, and where men and women work on equal terms ▷ Human resources development: increase employee advancement opportunities through more employee exchanges among group companies, more extensive training programs, and the start of in-house competitions for spots on new project teams

The following are overviews by company.

Performance (JPYbn)

(JPYbn) (JPYbn) Daiseki Co. DES Other New key businesses Daiseki Co. DES OPM (right axis) ROE (right axis) 160 150 30 25 19.8 25 19.1 140 New businesses: 18.1 25 17.1 17.3 17.8 20 JPY30.0bn+ 16.0 16.1 15.7 15.0 15.4 120 16.7 Other group companies: 20 15.0 15 JPY10.0bn+ 100 9.9 7.9 DES: 15 7.3 7.1 7.6 7.0 7.4 10 6.4 11 80 JPY30.0bn+ 10 9 9 10 8 3 5 57 77 7 2 51 53 1 60 49 50 5 6 5 3 1 46 44 1 1 2 42 0 37 36 5 0 1 0 31 19 7 7 8 9 40 15 17 Daiseki Co.: 5 6 6 6 6 13 19 14 15 5 5 7 8 11 JPY70.0bn+ 20 5 0 -5 29 30 31 32 22 24 24 25 26 26 26 0 -5 -10 FY02/11 FY02/16 FY02/21 FY02/31 FY02/11 FY02/16 FY02/21 FY02/31 Source: Shared Research based on company data

Daiseki Co. As outlined in the 33 Project, Daiseki Co. will be in charge of adding new business sites, expanding market share, and establishing new businesses. To the six existing business sites—Nagoya (in charge of Chubu region), Kanto (located in Tochigi; in charge of entire Kanto region in coordination with Chiba), Chiba (focusing on recycled fuel), Kansai (located in Akashi, Hyogo; in charge of Kansai, Chugoku [Okayama, Tottori], and Shikoku regions), Kyushu (located in Kitakyushu, Fukuoka; in charge of Kyushu and Chugoku [Yamaguchi, Hiroshima, Shimane] regions), and Hokuriku (located in Ishikawa; in charge of the area from Akita to Kyoto)—the company plans to add three new business sites. It is already hurrying to acquire land to establish a new south Kanto facility to cover an area it has become difficult for the Kanto facility to cover, and is also planning to add two sites in west Japan. This is because the Kanto site is already operating in cramped conditions, with little room to expand sales (the company was targeting JPY6.0bn in sales at the time the facility was established, and FY02/18 sales hit JPY4.9bn), and the company aims to capture demand that currently falls between the Kansai and Kyushu sites. It then hopes to expand sales by increasing market share for the various facilities, including new ones, to around 30%, the same as the Nagoya facility.

In regard to establishing new business, Daiseki Co. says it already has one in the works, which it hopes to launch in FY02/22. The details are unclear, but it seems the company aims for regional development as with its core businesses, targeting sales of JPY10.0bn or more (perhaps targeting more than JPY1.0bn per site). The establishment of facilities will require investment (perhaps JPY2.0bn or more), but it is possible for the company to apply its own funds and profitability is likely to be high. The other two businesses are still in the planning stages, but the project is set to run through FY02/31, so for now we would like to watch progress on the first new business.

DES DES has repeatedly stated that it hopes to derive more than fifty percent of sales from businesses other than soil contamination research and cleanup (which accounted for 84% in FY02/18). DES has not yet released its own long-term management vision, but the vision apparently calls for doubling sales to more than JPY30.0bn at existing businesses (including the plasterboard recycling business) and little else.

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In regard to existing businesses, the Linear Chuo Shinkansen Line (bullet train) is set to start operating between Tokyo and Nagoya in 2027, and the opening of the full line through to Osaka, originally scheduled for 2045, may be moved up by as much as eight years (with a new target of 2037) through the use of government investment and loans. DES aims to establish two new sites by end FY02/19. First of all, Shared Research would like to focus on whether DES can capture large projects that will allow it to maintain high operating rates.

Other subsidiaries, M&A, etc. In regard to other subsidiaries, Daiseki Co. basically appears to be expecting growth through the expansion of existing businesses. As before, it also plans to actively conduct M&A where synergies with its own businesses can be anticipated. It will proceed with alliances—such as an alliance between DES and Yoshino Gypsum Co., Ltd., to develop the plasterboard recycling business—but appears to be giving mergers priority. There is a significant difference in OPM between the two core companies, Daiseki Co. (24.9% in FY02/18) and DES (9.0%). Whereas Daiseki Co. is targeting OPMs of at least 10% for possible M&A targets, it does not appear to be necessarily seeking only companies with high profitability. It says the number of M&As is increasing in FY02/19. It appears the intention is to take advantage of disposal by sale under favorable conditions as the industry environment improves.

In addition, as part of efforts to develop human resources, the company will launch an in-house recruitment system as a new project in 2H. This being its first such attempt, it is unknown what the response will be, but Shared Research expects new businesses can be born from the collective wisdom of its employees.

ROE and shareholder returns The company says the ROE target of 15% was calculated based on the projected tax rate for the final year of the medium-term plan and an assumed dividend payout ratio of 30%. A trial calculation puts the outlook for ROE at 12%. Looking at ROE (net income divided by average of shareholder equity at beginning and end of financial year), since the numerator is calculated from operating profit of JPY25.0bn, it is necessary to reduce equity, which serves as the denominator. Possible measures to achieve this are either raising the dividend payout ratio or purchasing treasury stock. Based on past trends at the company, Shared Research believes the former is more likely.

ROE, dividend payout ratio, DOE

ROE Net margin 120% Payout ratio Total shareholder return ratio DOE 3% 2.7% 25% Total asset turnover (right axis) Financial leverage (right axis) 1.5 2.7%

100% 2.3% 2.2% 2.3% 2.2% 1.38 2.2% 2.2% 20% 1.3 2.1% 2.1% 2.1% 1.35 1.33 1.29 1.29 1.9% 15.8% 1.27 1.27 80% 2% 1.24 1.22 1.24 1.23 1.24 15% 1.1 11.9% 11.9% 14.4% 10.8% 60% 9.9% 12.5% 9.4% 9.3% 10% 8.8% 8.7% 8.4% 8.8% 0.9 7.6% 10.5% 9.9% 40% 1%

7.9% 7.6% 7.0% 0.79 7.3% 7.1% 7.4% 33.6% 5% 0.77 6.4% 0.7 31.3% 32.1% 0.73 6.2% 28.9% 28.2% 30.2% 0.72 20% 25.1% 26.8% 0.68 0.65 0.68 0.66 21.3% 21.4% 0.60 0.62 0.62 13.9% 13.8% 0% 0.57 0.5 0% 0% FY02/07 FY02/12 FY02/17 FY02/07 FY02/12 FY02/17 Source: Shared Research based on company data

FY02/19 company forecasts (initial plan) Group companies expected to achieve higher sales and profit. Aiming at record-setting operating profit on consolidated and parent bases In FY02/19, Daiseki forecasts sales of JPY50.2bn (+2.1% YoY) and an operating profit of JPY9.1bn (+3.7%). In FY02/18, it beat its FY02/08 profit record (gross profit of JPY12.0bn, operating profit of JPY8.2bn, recurring profit of JPY8.2bn), and it intends to continue setting record profits in FY02/19 and subsequent years.

In FY02/18, DES profit finished below forecast and declined YoY owing to a delay in the startup of the newly established Yatomi Recycling Center (cleaning facility) and a low capacity utilization rate at the facility. However, strong domestic industrial production coupled with ongoing initiatives to secure new customers at Daiseki Co. drove an increase in earnings. A recovery in resource prices also provided a tailwind for Daiseki Co. and MCR earnings. In addition, the phasing out of low-margin projects at

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SKK delivered contributions throughout the year. Accordingly, operating profit declined at DES (-JPY169mn YoY) but increased at all other group companies (Daiseki Co. +JPY1.0bn, MCR +JPY495mn, SKK +JPY284mn).

In FY02/19, the company looks for an external environment comparable to FY02/18, and forecasts sustained profit growth supported by 1) an increase in the capacity utilization rate of Yatomi Recycling Center at DES, 2) sales expansion that outpaces domestic industrial production growth on increased order volume from existing customers and new customer development, and 3) margin improvement at Daiseki Co. driven by trends in resource prices and unchanged performance at MCR. Areas of concern identified by Shared Research are a) the uptrend in outsourced waste transportation fees, b) DES’s ability to steadily acquire projects, and c) the external environment. However, with regard to a), Daiseki Co.’s employees handle a large portion of its transportation (roughly 60%), and since the company has taken related measures including price negotiations in FY02/18, there should not be any major impact. However, DES relies entirely on outsourced transportation, so its GPM will likely be affected (this has been factored into forecasts). Turning to b), the company has indicated the 1H outlook as of early April was largely favorable. Meanwhile, the assumptions underlying c) are expected to have little impact as shown in the previous table.

Operating profit

12,000 11,200 Daiseki (parent) Daiseki Eco. Solution Daiseki MCR System Kikou Eliminations, other 10,100 10,000 9,100 2,527 7,849 8,777 8,201 1,779 7,302 7,539 7,298 7,120 1,455 8,000 1,339 1,226 2,517 1,005 5,750 1,508 5,697 957 5,390 5,404 1,298 6,000 4,865 408 586 128 592 4,082 693 8,100 8,500 4,000 3,102 193 7,460 2,683 7,170 2,341 2,483 100 6,160 6,158 5,866 6,434 6,035 6,137 1,890 2,007 5,197 5,475 5,263 120 49 151 5,055 2,000 6 3,844 3,782 2,955 1,901 2,206 2,063 2,460 2,488 0 -20

-2,000 FY02/00 FY02/05 FY02/10 FY02/15 FY02/20 (JPYmn) 中計 Source: Shared Research based on company data

Forecasts for group companies Daiseki Co.: forecasts further growth in recycled heavy oil margins from April, and believes an OPM of 25.5% (versus forecast of 24.8%) on sales of JPY30.0bn is achievable (management adopted conservative forecasts to absorb fluctuations in subsidiary earnings). DES: anticipates profit growth of over JPY300mn on an increase in the capacity utilization rate at Yatomi Recycling Center (presently just below 50%, year-end target of 80%). It looks for order growth to offset a YoY decline of JPY500mn in brownfield projects and a decline of several hundred million yen in work related to the Kumamoto earthquake. Also, by the year-end, it expects to complete new facilities that will aim to secure demand related to the Linear Chuo Shinkansen Line and the Tokyo Olympics. MCR: expects volume and prices to remain unchanged, but looks for an earnings boost from demand prompted by revisions to the Basel Convention Act (from June, not factored into forecasts). System Kikou: forecasts flat earnings, but it is unclear whether the overseas project in Abu Dhabi will start in FY02/19 (not factored into forecasts). In addition, the operating profit forecasts for MCR and System Kikou are identical to last year’s medium-term targets.

While suffering from higher resource prices, the parent company has been improving its cost structure by enhancing supplementary fuel plant capacity and has also been gaining new clients. The improvement of its cost structure produced effects in FY02/18, which should continue to appear in FY02/19. As was the case in FY02/18, its client acquisition should act as a tailwind if the industrial production index, which is another macroeconomic factor, keeps recovering.

In FY02/19, DES plans to create two additional processing facilities (to be completed by the year-end and start operating in FY02/20) in view of future demand related to the Tokyo Olympics in 2020 and the Linear Chuo Shinkansen Line that partially opens in 2027 and fully opens in 2037. The new facilities are expected to further raise DES’ position in the industry, which allows

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DES to be one of a few companies capable of winning large contracts. The company also intends to actively engage brownfield projects, if such opportunities appear.

MCR looks for demand prompted by revisions to the Basel Convention Act, and sees lead outflows to South Korea returning to Japan. Broker export permits are set to expire in June–September, so the company expects an increase in demand from June.

A key factor to watch for MCR is the revised Basel Convention Act in connection with regulations governing the “Control of Import, Export, etc. of Specified Hazardous Wastes and Other Wastes.” The Basel Convention Act was formulated to ensure proper control of transboundary movements of hazardous wastes, and the revised act is expected to drastically reduce exports of lead-acid storage batteries (2016 export volume was 118,000 tons, all of which went to South Korea). There was a rush to secure export permits in April–May 2017 and after the one-year validity of such permits expires, demand is expected to pick up from June 2018. As of Q3 FY02/18, the company was already receiving a larger number of inquiries from export brokers. Its new plant (annual production volume of 16,512 tons) still has excess capacity, and management is mulling whether to increase production through additional deployment of personnel.

Will a new Daiseki Co. facility in south Kanto open? One major issue that has been facing Daiseki Co. is the opening of a new facility in south Kanto (east Japan). It is difficult for the company to secure land suitable for handling industrial waste. Thus far, it has used acquisitions to expand in south Kanto, but now plans to acquire land and build a factory itself. The company has already appointed an executive officer in charge of this initiative, and built a framework for acquiring land quickly. There is high demand for land in the south of the Greater Tokyo Area, which includes the area stretching from Tokyo, from Kanagawa prefecture to Yokohama. The company has yet to gain a foothold in this area, so the potential impact on earnings is significant. Daiseki Co.

Daiseki (parent) FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Init. Est. Target Target Sales 20,799 23,859 25,614 19,209 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 30,000 31,200 32,200 Nagoya8,080 8,935 9,841 6,488 6,986 7,705 7,487 7,881 8,233 7,962 7,761 8,937 9,150 - - Hokuriku 3,096 3,219 3,307 2,345 2,834 2,781 2,793 3,104 3,197 3,249 2,955 3,303 3,600 - - Kansai 2,943 4,107 4,355 3,462 3,985 4,147 4,142 4,190 4,434 4,332 4,188 4,909 5,050 - - Kyushu 3,081 3,201 3,312 2,831 3,312 3,448 3,597 3,915 4,236 4,356 4,651 4,836 5,050 - - Kanto 2,890 3,276 4,126 3,471 4,040 5,170 5,045 5,157 5,424 5,344 5,357 5,904 6,150 - - Chiba 706 667 672 610 698 756 742 825 933 769 832 888 1,000 - - YoY 16.6% 14.7% 7.4% -25.0% 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8% 4.2% 4.0% 3.2% Nagoya 9.2% 10.6% 10.1% -34.1% 7.7% 10.3% -2.8% 5.3% 4.5% -3.3% -2.5% 15.2% 2.4% - - Hokuriku 10.7% 4.0% 2.7% -29.1% 20.9% -1.9% 0.4% 11.1% 3.0% 1.6% -9.0% 11.8% 9.0% - - Kansai 35.3% 39.6% 6.0% -20.5% 15.1% 4.1% -0.1% 1.2% 5.8% -2.3% -3.3% 17.2% 2.9% - - Kyushu 18.9% 3.9% 3.5% -14.5% 17.0% 4.1% 4.3% 8.8% 8.2% 2.8% 6.8% 4.0% 4.4% - - Kanto 24.8% 13.4% 25.9% -15.9% 16.4% 28.0% -2.4% 2.2% 5.2% -1.5% 0.2% 10.2% 4.2% - - Chiba 26.5% -5.5% 0.7% -9.2% 14.4% 8.3% -1.9% 11.2% 13.1% -17.6% 8.2% 6.7% 12.6% - - Gross profit 7,823 9,042 9,167 6,567 8,035 8,453 8,278 8,942 9,699 9,068 9,433 10,800 11,240 - - GPM 37.6% 37.9% 35.8% 34.2% 36.8% 35.2% 34.8% 35.7% 36.7% 34.9% 36.6% 37.5% 37.5% - - SG&A expenses 2,768 2,882 3,009 2,785 2,838 2,978 3,015 3,076 3,265 3,033 3,296 3,630 3,780 - - YoY 11.9% 4.1% 4.4% -7.4% 1.9% 4.9% 1.2% 2.0% 6.1% -7.1% 8.7% 10.1% 4.1% - - SG&A ratio 13.3% 12.1% 11.7% 14.5% 13.0% 12.4% 12.7% 12.3% 12.3% 11.7% 12.8% 12.6% 12.6% - - Operating profit 5,055 6,160 6,158 3,782 5,197 5,475 5,263 5,866 6,434 6,035 6,137 7,170 7,460 8,100 8,500 YoY 31.5% 21.9% -0.0% -38.6% 37.4% 5.3% -3.9% 11.5% 9.7% -6.2% 1.7% 16.8% 4.0% 8.6% 4.9% OPM 24.3% 25.8% 24.0% 19.7% 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.9% 24.9% 26.0% 26.4% WTI crude oil (USD/bbl)65789168819793988546475260~6560~6560~65 YoY 10.0% 20.2% 16.8% -25.9% 20.3% 19.0% -3.9% 5.7% -13.3% -46.1% 1.8% 11.9% - - - USD/JPY 117 116 101 94 87 79 82 100 108 121 108 111 108 108 108 YoY 4.2% -1.0% -12.8% -7.4% -7.5% -8.7% 3.7% 21.5% 8.7% 11.7% -10.3% 2.8% -3.1% -- Daiseki (parent) FY02/16 FY02/17 FY02/18 FY02/19 Initial Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 6,822 6,843 6,419 5,932 6,425 6,632 6,563 6,126 7,232 7,209 7,226 7,110 7,622 7,660 7,587 7,131 Nagoya2,072 2,063 2,053 1,774 1,882 1,987 2,005 1,885 2,351 2,279 2,179 2,126 2,313 2,320 2,327 2,190 Hokuriku 838 901 771 739 717 790 769 677 793 830 880 797 917 942 905 836 Kansai 1,107 1,156 1,072 996 1,067 1,113 1,010 996 1,180 1,235 1,234 1,259 1,255 1,318 1,264 1,213 Kyushu 1,167 1,064 1,078 1,046 1,192 1,216 1,149 1,093 1,217 1,206 1,203 1,209 1,320 1,263 1,274 1,193 Kanto 1,432 1,444 1,268 1,199 1,367 1,299 1,407 1,282 1,481 1,402 1,490 1,529 1,561 1,558 1,562 1,469 Chiba 203 213 175 176 198 223 219 190 207 254 238 188 256 259 255 230 YoY - 1.4% -4.2% -4.1% -5.8% -3.1% 2.2% 3.3% 12.6% 8.7% 10.1% 16.1% 5.4% 6.3% 5.0% 0.3% Nagoya -10.1% -0.7% 3.5% -5.0% -9.2% -3.7% -2.3% 6.3% 24.9% 14.7% 8.7% 12.8% -1.6% 1.8% 6.8% 3.0% Hokuriku 11.9% 6.8% -7.3% -4.3% -14.4% -12.3% -0.3% -8.4% 10.6% 5.1% 14.4% 17.7% 15.6% 13.5% 2.8% 4.9% Kansai 1.7% 1.8% -4.8% -8.0% -3.6% -3.7% -5.8% - 10.6% 11.0% 22.2% 26.4% 6.4% 6.7% 2.4% -3.7% Kyushu 7.5% -4.1% 1.6% 6.7% 2.1% 14.3% 6.6% 4.5% 2.1% -0.8% 4.7% 10.6% 8.5% 4.7% 5.9% -1.3% Kanto 6.1% 6.0% -11.8% -6.0% -4.5% -10.0% 11.0% 6.9% 8.3% 7.9% 5.9% 19.3% 5.4% 11.1% 4.8% -3.9% Chiba -16.5% -0.9% -32.4% -18.5% -2.5% 4.7% 25.1% 8.0% 4.5% 13.9% 8.7% -1.1% 23.7% 2.0% 7.1% 22.3% Gross profit 2,459 2,408 2,252 1,949 2,392 2,435 2,459 2,147 2,856 2,745 2,7232,476---- GPM 36.0% 35.2% 35.1% 32.9% 37.2% 36.7% 37.5% 35.0% 39.5% 38.1% 37.7% 34.8% ---- SG&A expenses808782671772818839830809925894924888---- YoY 5.3% -1.6% -25.1% -4.3% 1.2%7.3%23.7%4.8%13.1%6.6%11.3%9.8%---- SG&A ratio 11.8% 11.4% 10.5% 13.0% 12.7% 12.7% 12.6% 13.2% 12.8% 12.4% 12.8%12.5%---- Operating profit 1,651 1,626 1,581 1,177 1,574 1,596 1,629 1,338 1,931 1,851 1,799 1,588 1,980 1,960 1,910 1,610 YoY -8.3% -8.8% 0.3% -7.7% -4.7% -1.8% 3.0% 13.7% 22.7% 16.0% 10.4% 18.7% 2.5% 5.9% 6.2% 1.4% OPM 24.2% 23.8% 24.6% 19.8% 24.5% 24.1% 24.8% 21.8% 26.7% 25.7% 24.9% 22.3% 26.0% 25.6% 25.2% 22.6% WTI crude oil (USD/bbl)54514533424647535047536160~6560~6560~6560~65 YoY -47.0% -49.3% -46.9% -36.6% -22.1% -10.1% 4.5%57.9%18.7%1.1%12.3%16.3% USD/JPY 120 123 121 118 111 104 105 115 112 111 112 111 108 108 108 108 YoY 17.6% 20.7% 9.8% -0.3% -7.8% -16.0% -13.4% -3.2% 1.0% 7.1% 7.2% -3.4% -3.4% -2.8% -3.8% -2.4% Source: Shared Research based on company data

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Key issue: acquiring land in south Kanto; aiming for highest ever earnings As mentioned, the acquisition of land in south Kanto is a key issue facing Daiseki Co., although it is not included in forecasts for FY02/16.

South Kanto facility Existing facilities operating in Kanto are located in Tochigi Prefecture and Chiba Prefecture (mainly recycling waste oil). There is strong demand for industrial waste processing services in the area stretching from Tokyo to Yokohama, where there is a high concentration of companies in the heavy and chemical industries. Yet Daiseki has struggled to expand there, owing to transportation costs and time. Previously, the company attempted to expand quickly into this area through acquisitions, in view of the time it would take to acquire permission to process industrial waste. But now it aims to acquire land itself. In FY02/17, it has appointed an executive officer to lead this initiative, and has built a framework for acquiring land as soon as possible.

Even if it is able to buy land, it will probably be many years before it can get permission to process industrial waste. So this initiative will not lead to higher earnings in the short term, but we think it may contribute to medium-term earnings.

Demand for industrial waste processing by region (data from Ministry of the Environment) FY2012 North Kanto South Kanto Central Japan West Japan Kyushu Nationwide Ibaraki, Tochigi Chiba Tokyo, Aichi, Gifu Shiga, Kyoto, Osaka ('000 tons) Gunma, Saitama Kanagawa Mie, Shizuoka Hyogo, Nara, Wakayama Waste oil, acid, alkali 593 864 537 1,479 1,236 1,241 7,585 % of total 7.8% 11.4% 7.1% 19.5% 16.3% 16.4% 100.0% Source: Shared Research based on company data Company aims to continue setting record operating profit; initiatives thus far to pay off amid improved macroeconomic factors Daiseki Co. achieved record-high operating profit in FY02/18 (beating the FY02/15 result), and aims to set a new record in FY02/19. In FY02/16 and FY02/17, its earnings were largely affected by macroeconomic factors such as dropped crude oil prices and stagnation in industrial production. They had adverse effects especially on the demand and profit margin of highly profitable recycled heavy oil (which appears to account for about 5% of FY02/17 total sales). In FY02/17, the company moved past its most difficult period and saw recovery. In FY02/18, margin recovery contributed to earnings through the year and demand also increased owing to higher crude oil prices, providing a sharp boost to profit growth. In FY02/18, sales of recycled heavy oil reached JPY1.6bn (+34.6%, +JPY420mn), and we understand the company looks for a further JPY230–240mn increase (+14.3%) in FY02/19. From April, it also expects a further increase in prices, which lag crude oil prices. Recycled heavy oil has a high marginal profit ratio, and therefore delivers strong profit contributions. This is an area Shared Research intends to watch carefully.

Effects from improvement in its business/earnings structures are also expected. While lower crude oil prices depressed operating profit by an estimated JPY1.3bn in FY02/16 and FY02/17, and depreciation costs rose JPY250mn, the company managed to limit the decline in its operating profit to about JPY300mn. As for sales, despite the stagnation in industrial production, it gained new clients to increase its waste collection volume from 970,000 tons (FY02/15) to 1,000,000 tons (FY02/17). It also expanded collection routes for recycled heavy oil. Thus, it succeeded in increasing base sales for which the influence of the lower crude oil prices (about estimated JPY1.5bn lower sales) was excluded. As for profit, it has been creating a framework for increased production of supplementary fuel to reduce processing cost by switching outsourcing to make its own sales.

As a result, against the backdrop of a roughly 4% increase in the industrial production index from an average of 98.3 in FY02/17 to an average of 102.4 in FY02/18, Daiseki Co. successfully expanded its market share with sales rising 11.8% (+JPY3.0bn) thanks to an increase in accepted waste volume by 9% to 1,090,000 tons (increase of 7% for heavy recycled oil) and impact from higher resource prices (estimated sales boost of over JPY30.0bn).

In FY02/19, the company sees the external environment trending broadly in line with present conditions, and it looks for 1,120,000 tons of accepted waste volume (+3%), an estimated increase of 14% in heavy recycled oil (+JPY230–240mn; estimated volume increase of 11%, price rise effect of JPY50mn). It forecasts a 4.2% rise in sales (+JPY1.2bn) to JPY30.0bn, partially factoring in price negotiations to address rises in outsourced transportation fees.

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It forecasts a GPM deterioration of +0.1pp YoY for FY02/19. In view of the improved margin of recycled heavy oil and increased production of supplementary fuel, Shared Research sees this as a slightly conservative forecast.

Number of accounts: Daiseki parent (accounts that generated revenue during the year under review)

6,500 6,352 1,000 6,000 Full-year No. of new accounts (right axis) 6,268 1H

6,013 5,558 6,000 5,826 800 5,715 5,500 789 777 658 5,693 795 5,307 769 608 698 5,500 5,407 690 673 664 600 5,135 5,256 617 626 5,014 584 5,123 5,072 5,000 4,841 4,884 4,953 5,000 400 4,6914,742 4,589 4,495 4,500 4,386 4,500 200 4,286 4,221

4,000 0 4,000 FY02/06 FY02/08 FY02/10 FY02/12 FY02/14 FY02/16 FY02/18 FY02/08 FY02/10 FY02/12 FY02/14 FY02/16 FY02/18

Daiseki parent sales vs. Industrial production index (YoY)

20% Daiseki (parent) Industrial production index (right axis) 20 15% 15

10% 10

5% 5

0% 0

-5% -5

-10% -10

-15% -15 Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 Source: Shared Research based on company data

Visualization of recycled heavy oil price

Selling prices: Bottomed in Jun. and Sep. 2016 Recycled heavy oil selling prices Procurment prices: Falling since Dec. 2015

Waste oil procurement prices

FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

CIF price trends 100,000 200 90,000 180 80,000 160 70,000 140 60,000 120 50,000 100 40,000 80 30,000 60 20,000 40

10,000 CIF price (JPY/kl) CIF price (USD/barrael, right axis) 20 0 - Mar 2003Mar 2004Mar 2005Mar 2006Mar 2007Mar 2008Mar 2009Mar 2010Mar 2011Mar 2012Mar 2013Mar 2014Mar 2015Mar 2016Mar 2017 Shared Research based on Ministry of Finance Japan, Ministry of Economy, Trade and Industry

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Increase in capacity at supplementary fuel facilities showing results With a capital investment of JPY2.3bn in FY02/15 and JPY1.1bn in FY02/16, Daiseki parent worked on bolstering its capacity, first transferring its Nagoya fuel recycling facility (supplementary fuel) and increasing its processing capacity in FY02/15 (JPY1.4bn), and then expanding a recycled fuel facility at Kansai recycling works in FY02/16 (JPY316mn). The Nagoya plant began operations in February 2015 (the company fully exited old facilities in June 2015). Sales of supplementary fuel at the plant surged 18.5% YoY (up 5.4% for the entire company), landing in line with forecast. It continued to focus on supplementary fuel in FY02/17, increasing volume 16% YoY in line with forecast. Enhancement at Kansai recycling facility contributed to it through the year.

The company planned to further increase sales volume by 8% in FY02/18, but actual sales growth came to 5%. This reflected factors such as a recovery in the price of recycled heavy oil, and impact from switching the portion of recycled heavy oil used for supplementary fuel back to recycled heavy oil sales. Recycled heavy oil volume increased 7%, falling short of the forecast (+14%), but sales rose 34.6% to JPY420mn, clearing the forecast (+28%, +JPY340–350mn), so we see no reason for concern. The company looks for another 3% increase for supplementary fuel in FY02/19 (recycled heavy oil volume up an estimated 11–12%; sales up 14% or JPY230–240mn). Note that the rise in supplementary fuel production lowers the cost of disposing waste, since that waste can be sold as supplementary fuel to generate revenue, whereas disposing waste is usually a pure expense.

The scheme at the recycled fuel facility at Kansai recycling works was to transfer its fuel oil processing facility to plots of land acquired around the recycling works and to add to it, so as to add a facility for supplementary fuel on the plot formerly used for fuel oil processing (March 2016). Moreover, the company is enhancing sludge treatment facilities and increased industrial waste processing capacity on the plot formerly used for fuel oil processing.

Waste collection volume and recycled volume (left) and non-recycled volume (right)

Waste shipment volume ('000 tons) Waste shipment volume ('000 tons) Landfills ('000 tons) 1,200 350 Fuel recycling ('000 tons, right axis) 1,200 Burning ('000, right axis) 100 Raw material recycling ('000 tons, right axis) 300 90 1,000 1,000 80 250 70 800 800 60 200 600 600 50 150 40 400 400 30 100 20 200 200 50 10 0 0 0 0 FY02/03 FY02/06 FY02/09 FY02/12 FY02/15 FY02/18 FY02/03 FY02/06 FY02/09 FY02/12 FY02/15 FY02/18 Source: Shared Research based on company data

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Daiseki Eco. Solution

Daiseki Eco. Solution FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Init. Est. Target Target Sales 5,643 7,774 9,040 6,991 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 4,834 3,303 3,528 Nagoya1,830 3,286 4,668 3,378 2,314 2,334 2,303 3,189 3,505 5,682 4,443 4,407 1,161 1,204 1,117 Tokyo2,892 3,075 2,611 1,647 1,632 3,295 2,671 2,585 2,915 6,568 4,433 5,613 2,531 917 886 Kansai 920 1,252 1,761 1,966 1,254 1,598 1,430 2,377 4,584 4,260 2,992 2,386 592 593 590 Tohoku ------1491,349 514 480 256 122 16 17 18 GA Chubu ------662 732 769 814 782 959 254 286 260 GA Kyushu ------128 293 376 538 521 139 148 135 YoY 75.5% 37.8% 16.3% -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% -67.6% -31.7% 6.8% Nagoya - 79.6% 42.1% -27.6% -31.5% 0.9% -1.3% 38.5% 9.9% 62.1% -21.8% -0.8% -73.7% 3.7% -7.2% Tokyo-6.3%-15.1% -36.9% -0.9% 101.9% -18.9% -3.2% 12.8% 125.3% -32.5% 26.6% -54.9% -63.8% -3.4% Kansai - 36.1% 40.7% 11.6% -36.2% 27.4% -10.5% 66.2% 92.8% -7.1% -29.8% -20.3% -75.2% 0.2% -0.5% Tohoku ------805.4%-61.9% -6.6% -46.7% -52.3% -86.9% 6.3% 5.9% GA Chubu ------10.6% 5.0% 5.9% -3.9% 22.6% -73.5% 12.6% -9.1% GA Kyushu ------128.9%28.3%43.1%-3.2% -73.3% 6.5% -8.8% Gross profit 976 1,470 1,622 1,308 733 1,085 1,392 2,120 2,100 3,603 2,696 2,659 - - - GPM 17.3% 18.9% 17.9% 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.8% 17.8% --- SG&A expenses 391 512 617 615 605 677 801 823 874 1,086 1,188 1,320 - - - YoY 33.1% 31.0% 20.5% -0.4% -1.5% 11.8% 18.3% 2.7% 6.3% 24.3% 9.4% 11.1% - - - SG&A ratio 6.9% 6.6% 6.8% 8.8% 11.6% 9.4% 10.7% 7.8% 6.8% 5.7% 8.3% 8.8% - - - Operating profit 586 957 1,005 693 128 408 592 1,298 1,226 2,517 1,508 1,339478283345 YoY 204.0% 63.5% 5.0% -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% -11.2% -64.3% -40.8% 21.9% OPM 10.4% 12.3% 11.1% 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 9.9% 8.6% 9.8% Net income 325 529 608 378 45 209 299 713 715 1,516 955 944 - - - Net margin 5.8% 6.8% 6.7% 5.4% 0.9% 2.9% 4.0% 6.7% 5.6% 7.9% 6.6% 6.3% - - - Soil treatment volume (a) --710,412 470,630 391,817 602,916 530,937 660,238 818,887 1,090,056 843,487 909,981 - - - YoY --- -33.8% -16.7% 53.9% -11.9% 24.4% 24.0% 33.1% -22.6% 7.9% - - - Cleanup ------41,610 46,175 56,022 59,737 42,081 119,788 - - - YoY ------11.0%21.3%6.6%-29.6% 184.7% - - - Soil treatment sales / (a) (JPY) ----12,879 11,613 12,348 14,389 14,068 15,565 14,373 13,768 - - - YoY ------9.8% 6.3% 16.5% -2.2% 10.6% -7.7% -4.2% --- Sales 5,643 7,774 9,040 6,991 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 15,010 16,650 19,230 Soil treatment - - - - 5,046 7,001 6,556 9,500 11,520 16,966 12,123 12,529 12,449 - - Plasterboard ------659 732 769 1,191 1,320 1,483 1,620 - - Others - - - - 184 226 294 354 554 929 929 914 - - - Operating profit 586 957 1,005 693 128 408 592 1,298 1,226 2,517 1,508 1,339 1,455 1,779 2,527 Soil treatment - - - - 367 661 747 1,427 1,369 2,830 1,832 1,587 - - - Plasterboard ------12719417482125263--- Others - - - - 46 79 58 65 93 130 142 167 - - - Adjustments - - - - -285 -332 -340 -388 -410 -526 -590 -678 --- OPM 10.4% 12.3% 11.1% 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 9.7% 10.7% 13.1% Soil treatment - - - - 7.3% 9.4% 11.4% 15.0% 11.9% 16.7% 15.1% 12.7% - - - Plasterboard ------19.2%26.5%22.6%6.9%9.4%17.7%--- Others - - - - 25.0% 34.8% 19.8% 18.3% 16.7% 14.0% 15.3% 18.2% - - - Depreciation 157 300 321 360 298 259 338 305 313 525 526 822 680 989 826 Soil treatment - - - - 248 210 182 165 164 180 190 544 - - - Plasterboard ------96 72 82 274 269 224 - - - Others - - - - 25 25 55 43 40 52 46 38 - - - Adjustments - - - -252452527182116- - - EBITDA 743 1,257 1,326 1,054 426 667 929 1,603 1,539 3,042 2,035 2,161 2,135 2,768 3,353 Soil treatment - - - - 615 871 929 1,592 1,533 3,010 2,021 2,131 - - - Plasterboard ------223267256356394487--- Others - - - - 71 103 113 108 133 183 188 204 - - - EBITDA margin 13.2% 16.2% 14.7% 15.1% 8.1% 9.2% 12.4% 15.1% 12.0% 15.9% 14.2% 14.5% 14.2% 16.6% 17.4% Soil treatment - - - - 12.2% 12.4% 14.2% 16.8% 13.3% 17.7% 16.7% 17.0% - - - Plasterboard ------33.8% 36.4% 33.3% 29.9% 29.8% 32.8% - - - Others - - - - 38.4% 45.7% 38.5% 30.4% 24.0% 19.6% 20.2% 22.3% - - - Capital expenditures 1,715 1,009 620 469 112 217 1,343 776 1,625 739 2,710 4,479 3,750 300 300 Soil treatment - - - - 96 88 368 44 187 148 2,563 4,392 - - - Plasterboard ------97 134 583 409 104 45 - - - Others - - - - 15 127 199 84 782 147 30 4 - - - Adjustments - - - - 1 268051374351338- - - Daiseki Eco. Solution FY02/16 FY02/17 FY02/18 FY02/19 Initial Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 5,798 5,002 4,574 3,712 4,149 3,277 3,547 3,399 3,984 3,482 2,859 4,601 3,344 4,834 3,303 3,528 Nagoya1,598 1,339 1,447 1,298 1,444 977 1,012 1,010 1,696 1,098 861 752 1,061 1,161 1,204 1,117 Tokyo2,252 1,982 1,109 1,225 1,592 1,071 975 795 1,130 1,220 910 2,353 971 2,531 917 886 Kansai 1,505 966 1,182 607 492 762 964 774 586 570 399 831 746 592 593 590 Tohoku 78 144 114 144 168 52 11 25 4 20 16 82 29 16 17 18 Others 64 347 401 118 127 112 244 445 214 212 280 209 139 141 139 522 GA Chubu 175 186 226 227 200 177 200 205 226 234 254 245 260 254 286 260 GA Kyushu 81 85 99 111 126 126 141 145 128 128 138 127 138 139 148 135 YoY 87.4% 74.0% 42.5% 1.4% -28.4% -34.5% -22.4% -8.4% -4.0% 6.3% -19.4% 35.4% -16.1% 38.8% 15.5% -23.3% Nagoya 58.8% 86.6% 74.6% 36.2% -9.6% -27.0% -30.1% -22.2% 17.5% 12.4% -14.9% -25.5% -37.4% 5.7% 39.8% 48.5% Tokyo 179.0% 235.3% 80.9% 35.5% -29.3% -46.0% -12.1% -35.1% -29.0% 13.9% -6.7% 196.0% -14.1% 107.5% 0.8% -62.3% Kansai 128.1% -22.1% -6.5% -57.3% -67.3% -21.1% -18.4% 27.5% 19.1% -25.2% -58.6% 7.4% 27.3% 3.9% 48.6% -29.0% Tohoku -72.1% 2,300.0% -40.0% 278.9% 115.4% -63.9% -90.4% -82.6% -97.6% -61.5% 45.5% 228.0% 625.0% -20.0% 6.3% -78.0% Others -61.1% 138.9% 321.1% -21.1% 98.6% -67.6% -39.2% 278.8% 68.0% 88.8% 14.6% -53.1% -34.9% -33.5% -50.3% 149.8% GA Chubu -1.3% 6.1% 4.1% 14.1% 14.3% -4.8% -11.5% -9.7% 13.0% 32.2% 27.0% 19.5% 15.0% 8.5% 12.6% 6.1% GA Kyushu 19.1% 26.9% 28.6% 37.0% 55.6% 48.2% 42.4% 30.6% 1.6% 1.6% -2.1% -12.4% 7.8% 8.6% 7.2% 6.3% Gross profit 9799639497117816636945586835304371,010---- GPM 16.9% 19.3% 20.7% 19.2% 18.8% 20.2% 19.6% 16.4% 17.1% 15.2% 15.3% 21.9% ---- SG&A expenses278270252287302271318296345337282365---- SG&A ratio4.8%5.4%5.5%7.7%7.3%8.3%9.0%8.7%8.7%9.7%9.9%7.9%---- Operating profit 702 693 697 425 479 392 376 262 338 193 156 645 347 478 283 345 YoY 71.3% 149.4% 152.7% 61.7% -31.7% -43.5% -46.1% -38.3% -29.4% -50.8% -58.6% 146.4% 2.6% 147.8% 81.7% -46.5% OPM 12.1% 13.9% 15.2% 11.4% 11.5% 12.0% 10.6% 7.7% 8.5% 5.5% 5.4% 14.0% 10.4%9.9%8.6%9.8% Net income 41646843919330825721617425212558510---- YoY 72.9% 181.2% 202.0% 18.8% -26.1% -45.1% -50.8% -9.9% -18.1% -51.6% -73.0% 193.5%---- Net margin7.2%9.4%9.6%5.2%7.4%7.9%6.1%5.1%6.3%3.6%2.0%11.1%---- Soil t reat ment volume 244,319 323,864 284,383 261,160 220,649 196,187 182,296 204,965 260,039 226,968 203,540 167,204---- YoY -----9.7% -39.4% -35.9% -21.5% 17.9% 15.7% 11.7% -18.4% ---- Cleanup 9,893 18,059 17,119 11,379 13,180 12,418 5,656 8,882 15,125 9,675 39,71431,693---- Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

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Look for improved capacity utilization at Yatomi Recycling Center and completion of facilities capable of securing large contracts by end-FY02/19 The company forecasts FY02/19 sales of JPY15.0bn (+0.5% YoY, +JPY84mn) and operating profit of JPY2.9bn (+8.6%, +JPY116mn), thus looking for a modest increase in sales alongside an upturn in profit. This forecast is based on following plans and assumptions.

▷ Continued strong demand from regular businesses offsetting a decline in brownfield projects (about JPY1.5bn in Q4 FY02/18, about JPY1.0bn in Q2 FY02/19) and the end of Kumamoto earthquake restoration support work (several hundred million yen), resulting in 0.5% sales growth ▷ Plan to increase the capacity utilization rate at the Yatomi Recycling Center from just below 50% (processing volume of 80,000 tons) in FY02/18 to 80% by end-FY02/19 ▷ Completion of new facilities in Gifu and Kanto by end FY02/19, paving the way for the start of operations in early FY02/20. As of early April, the company expected orders and the business environment for soil processing to hold firm in 1H

The two new cleaning facilities are intended to secure large contracts related to 2020 Tokyo Olympics and the Linear Chuo Shinkansen Line, and the company had planned major capital investment (JPY8.0bn over two years) accordingly. Although capital investment was pushed back slightly (JPY4.5bn booked in FY02/18 versus target of JPY6.5bn), the company looks for related earnings contributions to materialize from FY02/20. At the earnings briefing, management commented that its medium-term plan assumes a 40% capacity utilization rate in FY02/20 and 80% in FY02/21, and sales contributions of JPY1.8bn over the two years.

Delay in brownfield projects: The company initially looked for sales of JPY2.0bn, but as the applicable land expanded, it now intends to divide it into two parts and sell it accordingly. The construction period was delayed due to the building of a road on the area dividing the two parts of the land, but the company says it was able to gain related expertise.

Yatomi Recycling Center The Yatomi Recycling Center started operating in March 2017, and initial forecasts called for cleaning volume of 181,500 tons and an operating loss of JPY80mn (accounting basis) attributable to startup expenses and an increase in depreciation costs. However, test operation and data collection took more time than expected, and cleaning volume in 1H finished at 28,000 tons versus the targeted 82,500 tons. The company forecasted 1H sales of JPY550mn and a recurring loss of JPY65mn, but posted sales of JPY150mn and a recurring loss of JPY195mn (sales short JPY400mn of forecast and recurring profit JPY130mn below plan). In addition, the 54,000-ton difference between the cleaning volume target of 82,500 tons and the handled volume of 28,000 tons was processed (outsourced) as cement recycling at a high cost. This depressed profit by JPY540mn and contributed to a total JPY184mn decline versus plan. Full-year processing volume came to 80,000 tons, finishing below the target of 100,000 tons, while the operating loss deepened to JPY380mn, coming in JPY300mn below target.

The company forecasts an FY02/19 operating loss of about JPY60mn. It aims to reach monthly profitability from Q4 by ultimately lifting the processing volume to 16,000 tons per month (capacity utilization rate of 80%), and looks for earnings contributions from FY02/20. To this end, it will work to secure cleaning projects for contaminated soil that is suitable for cleaning through coordination between various facilities. The company learned in FY02/18 that winning projects involving soil that is suitable for cleaning leads to higher capacity utilization rates. Specifically, it has gained expertise in identifying types of contaminated soil that are suitable for cleaning and deliver high earnings. Although it also accumulated such expertise to a certain extent in 2H FY02/18, the overall market was in a period of slow demand at the time, which had an impact. As demand rebounds in FY02/19, the company believes it can achieve a capacity utilization rate of 80% by carefully selecting appropriate projects and winning corresponding orders.

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Yatomi Recycling Center to contribute to earnings growth, but for cumulative Q3 FY02/17, losses expanded due to the reasons mentioned above. However, it can break even if processing volume exceeds 15,000 tons/month (before depreciation costs: JPY330mn annually, fixed-rate). In FY02/19, earnings will get a significant boost if gross profits improve and the temporary cost increase seen in FY02/18 is eliminated. Shared Research will closely monitor these developments.

Continue actively securing brownfield contracts FY02/19 forecasts do not include new brownfield contracts, but the company plans to book the portion carried over from FY02/18 (about JPY1.0bn) in Q2 (contracts already signed but sales booked at time of handover). The JPY500mn or so profit difference with the roughly JPY1.5bn booked in FY02/18 will push profit down. Profitability is low because the company is shouldering the risk.

Under the brownfield contracts, DES purchases contaminated lands to clean and then sell them. Normally, developers purchase contaminated lands and pay treatment fees to DES for cleaning. However, if contamination is serious as groundwater is highly contaminated for example, the buyer and seller inevitably worry about contamination remaining after cleaning. Therefore, an expert like DES purchases the land to responsibly clean it for reliable land sale. The brownfield contracts’ method is suitable for complex contracts requiring difficult treatment. Though it is difficult to process a great number of such contracts, the company is willing to gain brownfield contracts, if any.

DES faces risks from purchase cost and land ownership, but it can acquire profit on land sale in addition to normal treatment fees. That said, since buyers for lands handled under brownfield contracts are predetermined to a certain degree, the company intends to mainly pursue large projects (i.e., no land purchases worth about JPY100–200mn). It has no intention of buying and selling land based on its own prediction of market tendencies since real estate is not its core business. Brownfield contracts are posted as sales in Q4 upon construction completion as the company is the prime contractor.

The year for investment necessary to firmly capture expanding business opportunities FY02/18 and FY02/19 are two years dedicated to investment necessary to firmly capture expanding business opportunities. In order to create two new soil processing facilities, the company has budgeted JPY8.2bn for capital spending during the two years (to be funded with a combination of internal reserves and outside borrowing), which is equivalent to over 6x the operating profit recorded in FY02/18. Compared to last year’s targets (FY02/18 JPY6.5bn, FY02/19 JPY1.6bn), some investment has been pushed back to FY02/19, but the company says the delay only spans about six months. It has changed the timing of the start of operations at the two new facilities from during FY02/19 to early FY02/20. It now looks for sales of JPY1.8bn at each of the two facilities in FY02/20 and FY02/21 (assuming respective capacity utilization rates of 40% and 80% each). It is unclear whether this has been factored into the company’s medium-term plan, but processing capacity derived from sales via a backward calculation looks small compared to the area of the facilities.

These investments are proactive ones aimed at firmly capturing expanding business opportunities such as the acquisition of large contracts including those related to the Linear Chuo Shinkansen Line. As of FY02/18, the company’s processing capacity is 1,000,000 tons/year (950,000 tons for soil processing and 50,000 tons for cleaning) at three locations Tokyo, Nagoya, and Osaka. In March 2017, 300,000 tons (200,000 tons for cleaning) at Yatomi (Aichi Pref.) was added. Shared Research believes the two new facilities (without cleaning facilities) may add around 600,000 tons/year, assuming they are comparable in size to the facilities in Tokyo, Osaka, and Nagoya. Yatomi’s operation allowed the company to acquire processing contracts requiring a cleaning process with higher added value than that of ordinary soil processing. The company’s capacity utilization rate for such contracts should increase further with the addition of the Gifu and Kanto facilities.

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Soil contamination treatment volume

400,000 40,000 Soil contamination treatment volume (incl. industrial waste) Purification (right axis) 350,000 35,000 300,000 30,000 250,000 25,000 200,000 20,000 150,000 15,000 100,000 10,000 50,000 5,000 0 0 (MT) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 (MT) FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 Source: Shared Research based on company data

Soil contamination sales by region 3,000 Nagoya Kansai Tokyo Tohoku 2,500

2,000

1,500

1,000

500

0 (JPYmn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q2 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Est. Source: Shared Research based on company data Steady results at the plasterboard recycling business At the plasterboard recycling business, Green Arrows Chubu (GAC) and Green Arrows Kyushu (GAK) are expected to see higher sales. At GAC, its second plant, which specializes in producing solidifying agents and soil stabilization agents, went into full-scale operation in April 2015. GAK’s second production line has also contributed to earnings in Q3 FY02/16 onward. Transportation volume of solidifying agents in FY02/17 declined 24% YoY to 19,939 tons (from 26,342 tons in FY02/16), but rose 56% to 31,032 tons in FY02/18, contributing to an expansion in added value. The contribution from solidifying agents can also be seen in the estimated average unit price obtained by dividing GAC sales by processed volume. The company anticipates further expansion in FY02/19. It needed time to switch suppliers until FY02/17, but we understand that progress with customer development and an increase in projects are supporting strong performance.

In June 2015, the company obtained the permits needed to handle and store PCB (polychlorinated biphenyl). It steadily expanded business and secured profit in FY02/17. It forecasts generally robust results also in the Bio-diesel fuel business.

Targeting sales weighting of 50% for new businesses Over the medium term, the company intends to achieve an even sales split between soil processing and new businesses. As of FY02/18, soil processing generated 84% of sales, but the company aims to gradually grow the plasterboard recycling business and the PCB business, which have been steadily expanding, until they account for 50%. The company sees redevelopment in the Tokyo region and large-scale infrastructure project demand driving earnings during the period covered by the medium-term plan, and it intends to take initiatives to ensure new businesses deliver contributions in the next five to 10 years.

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GAC, GAK plasterboard collection volumes (metric tons)

4,500 4,500 GAC (quarterly average) GAK (quarterly average) 4,000 4,000 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 - - (MT) Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 (MT) Source: Shared Research based on company data

Plasterboard Plasterboard FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Init. Est. Target Target Sales ------659 732 769 1,191 1,320 1,483 1,620 - - GAC ------662 732 769 814 782 959 1,060 - - GAK ------128 293 376 538 521 560 - - YoY ------11.1% 5.1% 54.8% 10.9% 12.4% 9.2% - - GAC ------10.6% 5.0% 5.9% -3.9% 22.6% 10.5% - - GAK ------128.9%28.3%43.1%-3.2% 7.5% - - Operating profit ------127 194 174 82 125 263 - - - YoY ------53.1%-10.4% -52.6% 51.2% 111.0% - - - OPM ------19.2% 26.5% 22.6% 6.9% 9.4% 17.7% - - - EBITDA ------223 267 256 356 394 487 - - - YoY ------19.7%-3.8% 38.8% 10.6% 23.7% - - - EBITDA margin ------33.8% 36.4% 33.3% 29.9% 29.8% 32.8% - - - Capit al expenditures ------97 134 583 409 104 45 - - - Depreciation ------96 72 82 274 269 224 - - - Collect ion volume (t) (a) ----16,446 23,545 31,223 42,767 57,092 60,718 69,087 74,422 - - - GAC ----16,446 23,545 31,223 34,144 38,411 37,660 40,049 43,623 - - - GAK ------8,623 18,681 23,058 29,038 30,799 - - - YoY - - - - - 43.2% 32.6% 37.0% 33.5% 6.4% 13.8% 7.7% - - - GAC - - - - - 43.2% 32.6% 9.4% 12.5% -2.0% 6.3% 8.9% - - - GAK ------116.6%23.4%25.9%6.1%--- Sales / Collection volume ------21.1 17.1 13.5 19.6 19.1 19.9 - - - GAC ------21.2 21.4 20.0 21.6 19.5 22.0 - - - GAK ------14.8 15.7 16.3 18.5 16.9 - - - YoY ------18.9% -21.3% 45.6% -2.5% 4.3% - - - GAC ------1.2%-6.7% 8.0% -9.7% 12.6% - - - GAK ------5.7%4.0%13.6%-8.7% --- Plasterboard FY02/16 FY02/17 FY02/18 FY02/19 Initial Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 254 271 327 338 323 304 343 350 353 363 395 373 398 393 434 395 GAC 175 186 226 227 200 177 200 205 226 234 254 245 260 254 286 260 GAK 81 85 99 111 126 126 141 145 128 128 138 127 138 139 148 135 YoY 44.3% 54.5% 49.8% 69.9% 27.1% 12.2% 4.9% 3.5% 9.2% 19.5% 15.1% 6.4% 12.7% 8.2% 10.0% 6.0% GAC -1.3% 6.1% 4.1% 14.1% 14.3% -4.8% -11.5% -9.7% 13.0% 32.2% 27.0% 19.5% 15.0% 8.5% 12.6% 6.1% GAK 19.1% 26.9% 28.6% 37.0% 55.6% 48.2% 42.4% 30.6% 1.6% 1.6% -2.1% -12.4% 7.8% 8.6% 7.2% 6.3% Operating profit16831285125222752658363 YoY -63.0% -50.6% 290.1% -10.1% 84.2% -51.9% -9.3% 20.6% 93.3% 24.6% 29.0% -24.4% OPM6.3%2.9%9.4%8.2%15.8%8.1%6.5%7.7%14.7%17.8%21.1%16.9% Collect ion volume (t) (a) 14,001 13,737 17,092 15,888 16,608 16,307 18,554 17,618 18,419 18,489 19,300 18,214 GAC 8,393 8,937 10,607 9,723 9,630 9,243 10,693 10,483 10,523 11,041 11,233 10,826 GAK 5,608 4,800 6,485 6,165 6,978 7,064 7,861 7,135 7,896 7,448 8,067 7,388 YoY 7.3% -2.4% 7.6%12.7%18.6%18.7%8.6%10.9%10.9%13.4%4.0%3.4% GAC -8.9% -7.5% 5.4%2.6%14.7%3.4%0.8%7.8%9.3%19.5%5.1%3.3% GAK46.5%8.8%11.4%33.4%24.4%47.2%21.2%15.7%13.2%5.4%2.6%3.5% Sales / Collection volume 18.2 19.7 19.1 21.3 19.5 18.6 18.5 19.9 19.2 19.620.420.5 GAC 20.920.821.323.320.819.118.719.621.521.222.622.6 GAK 14.417.715.318.018.117.817.920.316.217.217.117.2 YoY 34.4% 58.3% 39.2% 50.7% 7.1% -5.5% -3.4% -6.6% -1.5% 5.4%10.7%2.9% GAC 8.4% 14.6% -1.2% 11.1% -0.4% -8.0% -12.2% -16.2% 3.4%10.7%20.9%15.7% GAK -18.7% 16.6% 15.4% 2.7% 25.0% 0.7% 17.5% 12.9% -10.2% -3.7% -4.6% -15.4% Source: Shared Research based on company data

29/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Daiseki MCR

Daiseki MCR FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Init. Est. TargetTarget Sales - 3,182 3,479 3,003 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,739 2,815 2,854 YoY - - 9.3% -13.7% 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% -3.8% 2.8% 1.4% Gross profit - 1,330 778 841 615 380 373 617 475 -316 -196 313 329 - - GPM - 41.8% 22.4% 28.0% 19.0% 12.3% 13.4% 19.8% 15.2% -10.7% -9.1% 11.0% 12.0% - - SG&A expenses - 223 259 281 307 445 351 375 756 409 235 249 223 - - YoY - - 16.1% 8.5% 9.3% 45.0% -21.0% 6.7% 101.5% -45.9% -42.5% 6.0% -10.4% -- SG&A ratio - 7.0% 7.4% 9.4% 9.5% 14.4% 12.6% 12.1% 24.1% 13.9% 10.9% 8.7% 8.1% - - Operating profit - 1,107 519 560 308 -65 22 242 -281 -725 -431 64 106 213 213 YoY -- -53.1% 7.9% -45.0% --1,019.9% - - - - 65.6% 100.9% - OPM - 34.8% 14.9% 18.6% 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% 3.9% 7.6% 7.5% LME lead price (a) (USD/t) 1,362 2,783 1,801 1,905 2,203 2,319 2,102 2,102 2,046 1,767 1,960 2,365 2,420 2,420 2,420 USD/JPY forex (b) (JPY) 117.0 115.8 101.0 93.6 86.5 79.0 81.9 99.6 108.2 120.8 108.4 111.5 108.0 108.0 108.0 (a) × (b) (JPY/kg) 159 322 182 178 191 183 172 209 221 213 212 264 261 261 261 YoY 38.9% 102.3% -43.6% -2.0% 6.9% -3.8% -6.0% 21.5% 5.8% -3.6% -0.5% 24.1% -0.9% -- Lead price in Japan (JPY/kg) 202 362 231 225 238 234 224 270 281 274 271 323 - - - YoY 27.3% 79.3% -36.2% -2.5% 5.6% -1.5% -4.1% 20.1% 4.1% -2.4% -1.2% 19.4% - - - Lead price a month earlier (c) 197 352 249 218 236 238 219 270 280 275 266 322 - - - YoY 27.9% 78.4% -29.3% -12.5% 8.1% 1.1% -8.0% 23.3% 3.8% -1.9% -3.2% 20.9% - - - Sales / (c) - 9.03 13.97 13.78 13.72 13.00 12.74 11.53 11.17 10.72 8.07 8.84 - - - Sales / (c) (FY02/15 avg. as 100) - 0.81 1.25 1.23 1.23 1.16 1.14 1.03 1.00 0.96 0.72 0.79 - - - YoY --54.7%-1.4% -0.4% -5.2% -2.0% -9.5% -3.1% -4.0% -24.7% 9.5% - - - Daiseki MCR FY02/16 FY02/17 FY02/18 FY02/19 Initial Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 799 809 676 666 565 474 515 596 614 650 805 776 667 683 728 661 YoY 16.3% 19.1% -22.4% -25.7% -29.3% -41.4% -23.8% -10.5% 8.7% 37.1% 56.3% 30.2% 8.6% 5.1% -9.6% -14.8% Gross profit 148 -141 -172 -151 -95 -169 115798697112---- GPM 18.5% -17.4% -25.4% -22.7% -16.8% -35.7% 2.1%9.6%16.0%0.9%12.0%14.4%---- SG&A expenses2006767736558595360557658---- YoY 48.1% -75.5% -44.6% -67.7% -67.5% -13.4% -11.9% -27.4% -7.7% -5.2% 28.8%9.4%---- SG&A ratio 25.0% 8.3% 9.9% 11.0% 11.5% 12.2% 11.5% 8.9% 9.8% 8.5% 9.4% 7.5% ---- Operating profit -52 -208 -239 -224 -160 -227 -48 438-49 21 54 32 -11 65 20 YoY ------1,250.0% -15.8% - 209.5% -63.0% OPM -6.5% -25.7% -35.4% -33.6% -28.3% -47.9% -9.3% 0.7% 6.2% -7.5% 2.6% 7.0% 4.8% -1.6% 8.9% 3.0% LME lead price (a) (USD/t) 1,924 1,767 1,675 1,707 1,748 1,794 2,051 2,254 2,211 2,250 2,446 2,561 2,420 2,420 2,420 2,420 USD/JPY forex (b) (JPY) 120.2 123.4 120.9 118.5 110.8 103.7 104.7 114.6 111.9 111.1 112.2 110.7 108.0 108.0 108.0 108.0 (a) × (b) (JPY/kg) 231 218 203 202 194 186 215 258 247 250 274 284 261 261 261 261 YoY 8.9% -2.1% -10.8% -8.5% -16.3% -14.7% 6.0% 27.8% 27.7% 34.4% 27.8% 9.7% 5.7% 4.6% -4.8% -7.8% Lead price in Japan (JPY/kg) 291281263262252244269318307308335343---- YoY 7.0% -0.4% -8.2% -7.4% -13.3% -12.9% 2.1%21.5%21.8%26.2%24.6%7.8%---- Lead price a month earlier (c) 283291268259260244254306315302327343---- YoY 3.8% 5.4% -6.4% -9.8% -8.0% -16.1% -5.0% 18.3%21.0%23.8%28.6%12.1%---- Sales / (c) 2.832.782.522.572.171.942.021.951.952.152.462.26 Sales / (c) (FY02/15 avg. as 100) 1.011.000.910.920.780.700.730.700.700.770.880.81 YoY 12.1% 13.0% -17.0% -17.6% -23.2% -30.1% -19.8% -24.4% -10.2% 10.8%21.5%16.2%---- Source: Shared Research based on company data Operating profit forecasts for FY02/19 and FY02/20 are unchanged from the medium-term targets in April 2017; look for increase in demand prompted by revisions to the Basel Convention Act In June 2015, Daiseki MCR closed its old factory six months behind schedule and went to full-scale operations at the new factory approximately one year behind the medium-term plan, marking the delayed completion of its move to a new production platform. The new factory has been in stable operation since 2H FY02/16. In FY02/19, depreciation is expected to decline about JPY100mn.

In Q4 FY02/17, the company realized operating profit since Q4 FY02/14 due partly to inventory valuation profit (about JPY75mn). For FY02/18, it forecasted an operating loss of JPY55mn in part owing to a recovery in lead prices, but posted an operating profit of JPY64mn. In FY02/19, the company sees sales declining 3.8% and forecasts operating profit of JPY42mn (JPY106mn). Profitability seems to be declining after factoring in the roughly JPY100mn in depreciation costs, but this is because the operating profit targets for FY02/19 and FY02/20 have not been changed from the medium-term targets formulated a year ago. The company’s sales forecast is underpinned by volume and price assumptions that are on par with FY02/18. Taking also into account expectations for higher demand prompted by revisions to the Basel Convention Act, Shared Research believes results may exceed forecasts.

30/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

System Kikou System Kikou FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Init. Est. Target Target Sales - - - - 961 2,539 2,244 2,963 3,145 2,800 2,061 2,627 2,500 - - YoY -----164.2%-11.6% 32.0% 6.1% -11.0% -26.4% 27.5% -4.8% -- Gross profit - - - - 155 431 279 452 446 548 254 503 432 - - GPM - - - - 16.1% 17.0% 12.4% 15.3% 14.2% 19.6% 12.3% 19.1% 17.3% - - SG&A expenses - - - - 172 309 374 331 307 360 320 285 314 - - YoY - - - - - 79.7% 21.0% -11.5% -7.3% 17.3% -11.1% -10.9% 10.2% - - SG&A ratio - - - - 17.9% 12.2% 16.7% 11.2% 9.8% 12.9% 15.5% 10.8% 12.6% - - Operat ing profit ---- -17 122 -95 121 139 188 -66 218 118 - - YoY ------14.9%35.3%---45.9% -- OPM -----1.8% 4.8% -4.2% 4.1% 4.4% 6.7% -3.2% 8.3% 4.7% - - System Kikou FY02/16 FY02/17 FY02/18 FY02/19 Initial Est. (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 360 608 925 905 507 884 322 348 888 839 495 405 569 938 610 383 YoY -39.4% -44.3% 60.9% 2.3% 40.8% 45.4% -65.2% -61.5% 75.1% -5.1% 53.7% 16.4% -35.9% 11.8% 23.2% -5.4% Gross profit -1 33181335361620565423615756---- GPM -0.3% 5.4%19.6%37.0%7.1%18.3%0.0%16.1%6.1%28.1%31.7%13.8%---- SG&A expenses7978831208481787766657480---- YoY 9.7% -2.5% 13.7% 46.3% 6.3% 3.8% -6.0% -35.8% -21.4% -19.8% -5.1% 3.9%---- SG&A ratio 21.9% 12.8% 9.0% 13.3% 16.6% 9.2% 24.2% 22.1% 7.4% 7.7% 14.9% 19.8%---- Operating profit -80 -45 98 215 -48 81 -78 -21 -12 171 83 -24 30 82 46 -40 YoY --988.9%305.7%-----111.1% - - - -52.0% -44.6% - OPM -22.2% -7.4% 10.6% 23.8% -9.5% 9.2% -24.2% -6.0% -1.4% 20.4% 16.8% -5.9% 5.3% 8.7% 7.5% -10.4% Source: Shared Research based on company data Demand for the mainstay large tank cleaning business targeting oil companies to continue driving high capacity utilization rates; contract with Abu Dhabi Oil uncertain (not factored into forecasts) In the company’s System Kikou segment, operating rates at its tank cleaning business remained high, with this trend expected to continue into FY02/19. Although deficit contracts slightly hurt profitability in FY02/17, such impact was absent in FY02/18, when profit rose JPY284mn YoY (another contributing factor was the roughly JPY70mn draw-down of loss reserves in FY02/17). In FY02/19, the company forecasts a JPY100mn decline in operating profit to JPY118mn. As for MCR, there is no change from the medium-term targets formulated in April 2017. Plans to increase technicians by passing on knowledge are also proceeding smoothly. A contract with Abu Dhabi Oil in the UAE has been pushed back since FY02/17, and the company has indicated it is unclear whether it will be booked as sales in FY02/19. It has not factored the contract into its forecasts.

With its strategy to shift the sales composition in the direction of higher profitability, the company is beginning to see changes in the content of orders it receives. Whereas cleaning services for domestic oil refineries and storage tanks used to comprise about 90% of sales, the ratio declined to about 70% by FY02/16. This change was due to a business shift to high-margin fields such as the cleaning of pipes. That said, many of the cleaning services for tanks and pipes are offered in regional areas, where there is a shortage of qualified workers. It is worth noting that this fact may negatively impact profitability.

Passing on knowledge to increase technicians and moving into the small and mid-size tank market: securing sales and increasing profitability The company defines the two major issues facing System Kikou as the transfer of knowledge to young employees and future volume reduction in oil refinery operations. The company aims to increase sales by shifting to supplying waste materials to Daiseki Co. (parent) and cleaning small and mid-size tanks for Daiseki Co.’s clients. Under the current personnel structure, oil refinery operations have left Daiseki with no capacity for the small and mid-size tank market. The company has not been able to bid on these contracts (as it lacks the necessary free capacity in personnel and facilities). The company aims to solve the issue by continuing to employ more personnel and transferring knowledge in FY02/19. The plan is to secure sales and increase profitability by moving into this market.

31/81 Daiseki / 9793

RCoverage LAST UPDATE: 2019.01.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Outlook

Announced on April 11, 2012 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 - - - (JPYmn) Act. Act. Act. Est. Est. Est. - - - Sales 29,080 31,477 36,513 39,350 43,800 48,000 - - - YoY -21.9% 8.2% 16.0% 7.8% 11.3% 9.6% - - - Gross profit 8,841 9,686 10,502 11,320 12,850 14,300--- GPM 30.4% 30.8% 28.8% 28.8% 29.3% 29.8% - - - SG&A expenses 3,976 4,296 4,752 4,810 5,250 5,750--- YoY -4.4% 8.0%10.6%1.2%9.1%9.5%- - - Operating profit 4,865 5,390 5,750 6,510 7,600 8,550 - - - YoY -35.5% 10.8% 6.7% 13.2% 16.7% 12.5% - - - OPM 16.7% 17.1% 15.7% 16.5% 17.4% 17.8% - - - Announced on April 10, 2013 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 - - (JPYmn) Act. Act. Act. Act. Est. Est. Est. - - Sales 29,080 31,477 36,513 36,013 39,500 43,800 48,000 - - YoY -21.9% 8.2% 16.0% -1.4% 9.7% 10.9% 9.6% - - Gross profit 8,841 9,686 10,502 10,275 11,580 12,850 14,300 - - GPM 30.4% 30.8% 28.8% 28.5% 12.7% 11.0% 11.3% - - SG&A expenses 3,976 4,296 4,752 4,870 4,980 5,250 5,750 - - YoY -4.4% 8.0%10.6%2.5%2.3%5.4%9.5%- - Operating profit 4,865 5,390 5,750 5,404 6,600 7,600 8,550 - - YoY -35.5% 10.8% 6.7% -6.0% 22.1% 15.2% 12.5% - - OPM 16.7% 17.1% 15.7% 15.0% 16.7% 17.4% 17.8% - - Announced on April 9, 2014 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 - (JPYmn) Act. Act. Act. Act. Act. Est. Est. Est. - Sales 29,080 31,477 36,513 36,013 42,100 45,000 48,000 50,500 - YoY -21.9% 8.2% 16.0% -1.4% 16.9% 6.9% 6.7% 5.2% - Gross profit 8,841 9,686 10,502 10,275 12,298 12,640 13,725 15,034 - GPM 30.4% 30.8% 28.8% 28.5% 29.2% 28.1% 28.6% 29.8% - SG&A expenses 3,976 4,296 4,752 4,870 4,999 5,200 5,475 5,684 - YoY -4.4% 8.0%10.6%2.5%2.6%4.0%5.3%3.8%- Operating profit 4,865 5,390 5,750 5,404 7,298 7,440 8,250 9,350 - YoY -35.5% 10.8% 6.7% -6.0% 35.0% 1.9% 10.9% 13.3% - OPM 16.7% 17.1% 15.7% 15.0% 17.3% 16.5% 17.2% 18.5% - Announced on April 7, 2015 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 (JPYmn) Act. Act. Act. Act. Act. Act. Est. Est. Est. Sales 29,080 31,477 36,513 36,013 42,100 45,738 47,200 50,500 53,500 YoY -21.9% 8.2% 16.0% -1.4% 16.9% 8.6% 3.2% 7.0% 5.9% Gross profit 8,841 9,686 10,502 10,275 12,298 12,908 13,210 14,000 15,000 GPM 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 28.0% 27.7% 28.0% SG&A expenses 3,976 4,296 4,752 4,870 4,999 5,605 5,430 5,500 5,400 YoY -4.4% 8.0% 10.6% 2.5% 2.6% 12.1% -3.1% 1.3% -1.8% Operating profit 4,865 5,390 5,750 5,404 7,298 7,302 7,780 8,500 9,600 YoY -35.5% 10.8% 6.7% -6.0% 35.0% 0.1% 6.5% 9.3% 12.9% OPM 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 16.5% 16.8% 17.9% Announced on April 6, 2016 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Est. Est. Est. Sales 29,080 31,477 36,513 36,013 42,100 45,738 50,809 47,490 52,200 56,500 YoY -21.9% 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -6.5% 9.9% 8.2% Gross profit 8,841 9,686 10,502 10,275 12,298 12,908 13,088 12,850 14,240 15,470 GPM 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 27.1% 27.3% 27.4% SG&A expenses 3,976 4,296 4,752 4,870 4,999 5,605 5,238 5,160 5,240 5,470 YoY -4.4% 8.0% 10.6% 2.5% 2.6% 12.1% -6.5% -1.5% 1.6% 4.4% Operating profit 4,865 5,390 5,750 5,404 7,298 7,302 7,849 7,690 9,000 10,000 YoY -35.5% 10.8% 6.7% -6.0% 35.0% 0.1% 7.5% -2.0% 17.0% 11.1% OPM 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.2% 17.2% 17.7% Announced on April 6, 2017 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Est. Est. Est. Est. Sales 29,080 31,477 36,513 36,013 42,100 45,738 50,809 44,232 48,800 53,300 57,500 YoY -21.9% 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 10.3% 9.2% 7.9% Gross profit 8,841 9,686 10,502 10,275 12,298 12,908 13,088 12,367 13,730 14,900 16,170 GPM 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 28.1% 28.0% 28.1% SG&A expenses 3,976 4,296 4,752 4,870 4,999 5,605 5,238 5,247 5,350 5,500 5,720 YoY -4.4% 8.0% 10.6% 2.5% 2.6% 12.1% -6.5% 0.2% 2.0% 2.8% 4.0% Operating profit 4,865 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,380 9,400 10,450 YoY -35.5% 10.8% 6.7% -6.0% 35.0% 0.1% 7.5% -9.3% 17.7% 12.2% 11.2% OPM 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.2% 17.6% 18.2% Announced on April 5, 2018 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Est. Est. Est. Sales 29,080 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 50,200 53,000 56,500 YoY -21.9% 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2% 2.1% 5.6% 6.6% Gross profit 8,841 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 15,050 15,800 17,150 GPM 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% 30.0% 29.8% 30.4% SG&A expenses 3,976 4,296 4,752 4,870 4,999 5,605 5,238 5,247 5,707 5,950 5,700 5,950 YoY -4.4% 8.0% 10.6% 2.5% 2.6% 12.1% -6.5% 0.2% 8.8% 4.3% -4.2% 4.4% Operating profit 4,865 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,100 10,100 11,200 YoY -35.5% 10.8% 6.7% -6.0% 35.0% 0.1% 7.5% -9.3% 23.3% 3.7% 11.0% 10.9% OPM 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 18.1% 19.1% 19.8% Source: Shared Research based on company data

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DES

Announced on April 10, 2013 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 (JPYmn) Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 YoY -22.7% -25.2% 38.2%3.9% Gross profit 1,308 733 1,085 1,392 GPM 18.7% 14.0% 15.0% 18.5% SG&A expenses 615605677801 YoY -0.4% -1.5% 11.8%18.3% Operating profit 693 128 408 592 YoY -31.0% -81.6% 219.6% 45.0% OPM 9.9% 2.4% 5.6% 7.9% Announced on April 9, 2014 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 (JPYmn) Act.Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 10,586 11,810 12,992 14,291 YoY -22.7% -25.2% 38.2% 3.9% 41.0% 11.6% 10.0% 10.0% Gross profit 1,308 733 1,085 1,392 2,120 2,237 GPM 18.7% 14.0% 15.0% 18.5% 20.0% 18.9% SG&A expenses 615 605 677 801 823 828 YoY -0.4% -1.5% 11.8% 18.3% 2.7% 0.7% Operating profit 693 128 408 592 1,298 1,409 1,609 1,855 YoY -31.0% -81.6% 219.6% 45.0% 119.4% 8.6% 14.2% 15.3% OPM 9.9% 2.4% 5.6% 7.9% 12.3% 11.9% 12.4% 13.0% Depreciation 360 298 259 338 305 287 300 260 Capital expenditures 514 112 216 921 775 1,389 300 300 EBITDA 1,054 426 667 929 1,603 1,696 1,909 2,115 YoY -20.6% -59.6% 56.6% 39.3% 72.4% 5.8% 12.6% 10.8% EBITDA margin 15.1% 8.1% 9.2% 12.4% 15.1% 14.4% 14.7% 14.8% Announced in April 2015 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 (JPYmn) Act.Act.Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 10,586 12,843 13,187 14,534 16,020 YoY -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 2.7% 10.2% 10.2% Gross profit 1,308 733 1,085 1,392 2,120 2,100 GPM 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% SG&A expenses 615 605 677 801 823 874 YoY -0.4% -1.5% 11.8% 18.3% 2.7% 6.3% Operating profit 693 128 408 592 1,298 1,226 1,344 1,539 1,825 YoY -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 9.6% 14.5% 18.6% OPM 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 10.2% 10.6% 11.4% Depreciation 360 298 259 338 305 313 563 507 456 Capital expenditures 514 112 216 921 775 775 607 300 300 EBITDA 1,054 426 667 929 1,603 1,539 1,907 2,046 2,281 YoY -20.6% -59.6% 56.6% 39.3% 72.4% -3.9% 23.9% 7.3% 11.5% EBITDA margin 15.1% 8.1% 9.2% 12.4% 15.1% 12.0% 14.5% 14.1% 14.2% Announced in April 2016 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 10,586 12,843 19,086 15,116 17,500 20,200 YoY -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -20.8% 15.8% 15.4% Gross profit 1,308 733 1,085 1,392 2,120 2,100 3,603 2,741 3,344 3,957 GPM 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.1% 19.1% 19.6% SG&A expenses 615 605 677 801 823 874 1,086 1,147 1,202 1,261 YoY -0.4% -1.5% 11.8% 18.3% 2.7% 6.3% 24.3% 5.6% 4.8% 4.9% Operating profit 693 128 408 592 1,298 1,226 2,517 1,594 2,142 2,696 YoY -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -36.7% 34.4% 25.9% OPM 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 12.2% 13.3% Depreciation 360 298 259 338 305 313 524 561 950 1,050 Capital expenditures 514 112 216 921 775 775 735 4,050 1,960 300 EBITDA 1,054 426 667 929 1,603 1,539 3,041 2,155 3,092 3,746 YoY -20.6% -59.6% 56.6% 39.3% 72.4% -3.9% 97.5% -29.1% 43.5% 21.2% EBITDA margin 15.1% 8.1% 9.2% 12.4% 15.1% 12.0% 15.9% 14.3% 17.7% 18.5% Announced in April 2017 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 10,586 12,843 19,086 14,373 16,600 19,086 21,005 YoY -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 15.5% 15.0% 10.1% Gross profit 1,308 733 1,085 1,392 2,120 2,100 3,603 2,696 3,159 3,577 3,943 GPM 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.8% 19.0% 18.7% 18.8% SG&A expenses 615 605 677 801 823 874 1,086 1,188 1,265 1,333 1,399 YoY -0.4% -1.5% 11.8% 18.3% 2.7% 6.3% 24.3% 9.4% 6.5% 5.4% 5.0% Operating profit 693 128 408 592 1,298 1,226 2,517 1,508 1,894 2,244 2,544 YoY -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% 25.6% 18.5% 13.4% OPM 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 11.4% 11.8% 12.1% Depreciation 360 298 259 338 305 313 524 524 757 1,040 1,250 Capital expenditures 514 112 216 921 775 775 735 735 6,500 1,600 300 EBITDA 1,054 426 667 929 1,603 1,539 3,041 2,032 2,651 3,284 3,794 YoY -20.6% -59.6% 56.6% 39.3% 72.4% -3.9% 97.5% -33.2% 30.4% 23.9% 15.5% EBITDA margin 15.1% 8.1% 9.2% 12.4% 15.1% 12.0% 15.9% 14.1% 16.0% 17.2% 18.1% Announced in April 2018 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 15,010 16,650 19,230 YoY -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% 0.6% 10.9% 15.5% Gross profit 1,308 733 1,085 1,392 2,120 2,100 3,603 2,696 2,659 2,870 3,281 4,063 GPM 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.8% 17.8% 19.1% 19.7% 21.1% SG&A expenses 615 605 677 801 823 874 1,086 1,188 1,320 1,415 1,502 1,536 YoY -0.4% -1.5% 11.8% 18.3% 2.7% 6.3% 24.3% 9.4% 11.1% 7.2% 6.1% 2.3% Operating profit 693 128 408 592 1,298 1,226 2,517 1,508 1,339 1,455 1,779 2,527 YoY -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% -11.2% 8.6% 22.3% 42.0% OPM 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 9.7% 10.7% 13.1% Depreciation 360 298 259 338 305 313 525 526 822 680 989 826 Capital expenditures 469 112 217 1,343 776 1,625 739 2,710 4,479 3,750 300 300 EBITDA 1,054 426 667 929 1,603 1,539 3,042 2,035 2,161 2,135 2,768 3,353 YoY -20.6% -59.6% 56.6% 39.3% 72.4% -3.9% 97.6% -33.1% 6.2% -1.2% 29.6% 21.1% EBITDA margin 15.1% 8.1% 9.2% 12.4% 15.1% 12.0% 15.9% 14.2% 14.5% 14.2% 16.6% 17.4% Source: Shared Research based on company data

An overview of the medium-term plan announced in April 2017 follows.

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Earnings breakdown (Left: sales; Right: operating profit)

(JPYbn) Daiseki DES Other YoY (right axis) (JPYbn) Daiseki DES Other OPM (right axis) 60 56.5 50% 12 11.2 24% 53.0 50.8 49.250.2 10.1 40% 50 45.7 44.2 10 9.1 2.5 22% 42.1 8.8 8.2 7.8 1.8 37.2 36.5 19.2 30% 7.5 7.3 7.3 40 35.2 36.0 16.7 8 7.1 1.3 1.5 20% 15.0 2.5 31.5 19.1 14.9 1.2 1.5 29.1 12.8 14.4 20% 5.7 1.0 1.0 5.8 1.3 27.0 10.6 5.4 5.4 30 9.0 6 4.9 0.4 18% 21.6 7.8 7.2 7.5 0.6 0.1 0.6 19.1 5.6 5.2 10% 4.1 17.0 7.0 20 15.4 3.2 4 3.1 0.2 0.7 8.1 8.5 16% 2.5 2.5 2.7 7.2 7.5 2.6 1.5 28.830.031.232.2 0% 0.1 6.2 6.2 5.9 6.4 6.0 6.1 25.6 25.126.526.025.7 0.0 0.2 5.1 5.2 5.5 5.3 10 20.823.9 21.924.023.8 2 14% 16.217.8 19.2 3.8 3.8 14.415.0 -10% 2.5 2.5 3.0 0 -20% 0 12%

-10 -30% -2 10% FY02/03 FY02/07 FY02/11 FY02/15 FY02/19Est. FY02/03 FY02/07 FY02/11 FY02/15 FY02/19Est. (As of April, 2016) FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 3-year (JPYmn) Act.Act.Act.Act.Act.Act.Est.Est.Est. CAGR Sales 31,477 36,513 36,013 42,100 45,738 50,809 47,490 52,200 56,500 3.6% Daiseki Co. 21,856 24,011 23,808 25,074 26,459 26,016 26,760 Increase Increase Increase DES 5,230 7,227 7,509 10,586 12,843 19,086 15,116 17,500 20,200 1.9% MCR 3,234 3,097 2,791 3,113 3,133 2,951 2,846 Increase Increase Increase Yo Y 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% 7.0% 5.9% Daiseki Co. 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% 2.9% Increase Increase DES -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -20.8% 15.8% 15.4% MCR 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -3.6% Operating profit 5,390 5,750 5,404 7,298 7,302 7,849 7,690 9,000 10,000 8.4% Daiseki Co. 5,197 5,475 5,263 5,866 6,434 6,035 6,390 Increase Increase Increase DES 128 408 592 1,298 1,226 2,517 1,594 2,142 2,696 2.3% MCR 308 -65 22 242 -281 -725 -317 Narrow er loss Profit Profit Recurring profit 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.2% 17.2% 17.7% Daiseki Co. 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.9% DES 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 12.2% 13.3% MCR 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -11.1% Recurring profit 5,587 5,901 5,554 7,400 7,436 7,955 7,720 9,100 10,100 8.3% Net income 3,114 3,194 3,024 3,942 4,035 3,847 4,120 5,200 5,720 14.1% (As of April, 2017) FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 3-year (JPYmn) Act.Act.Act.Act.Act.Act.Act.Est.Est.Est. CAGR Sales 31,477 36,513 36,013 42,100 45,738 50,809 44,232 48,800 53,300 57,500 9.1% Daiseki Co. 21,856 24,011 23,808 25,074 26,459 26,016 25,746 27,230 Increase Increase Increase DES 5,230 7,227 7,509 10,586 12,843 19,086 14,373 16,600 19,086 21,005 13.5% MCR 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,515 Increase Yo Y 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 10.3% 9.2% 7.9% Daiseki Co. 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 5.8% Increase Increase DES -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 15.5% 15.0% 10.1% MCR 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 17.0% Operating profit 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,380 9,400 10,450 13.6% Daiseki Co. 5,197 5,475 5,263 5,866 6,434 6,035 6,137 6,620 Increase Increase Increase DES 128 408 592 1,298 1,226 2,517 1,508 1,894 2,244 2,544 19.0% MCR 308 -65 22 242 -281 -725 -431 -55 Profit Increase Profit Recurring profit 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.2% 17.6% 18.2% Daiseki Co. 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.3% DES 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 11.4% 11.8% 12.1% MCR 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% -2.2% Recurring profit 5,587 5,901 5,554 7,400 7,436 7,955 7,228 8,460 9,450 10,500 13.3% Net income 3,114 3,194 3,024 3,942 4,035 3,847 4,132 4,980 5,500 6,200 14.5% (As of April, 2017) FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 3-year (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Est.Est.Est.CAGR Sales 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 50,200 53,000 56,500 4.7% Daiseki Co. 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 30,000 31,200 32,200 3.8% DES 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 15,010 16,650 19,230 8.8% MCR 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,739 2,815 2,854 0.1% 2,451 2,335 2,216 -5.6% Yo Y 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2% 2.1% 5.6% 6.6% Daiseki Co. 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8% 4.2% 0 0 DES -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% 0.6% 10.9% 15.5% MCR 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% -3.8% 2.8% 1.4% -7.0% -4.7% -5.1% Operating profit 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,100 10,100 11,200 8.5% Daiseki Co. 5,197 5,475 5,263 5,866 6,434 6,035 6,137 7,170 7,460 8,100 8,500 5.8% DES 128 408 592 1,298 1,226 2,517 1,508 1,339 1,455 1,779 2,527 23.6% MCR 308 -65 22 242 -281 -725 -431 64 106 213 213 49.3% 79 8 -40 -158.1% Recurring profit 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 18.1% 19.1% 19.8% Daiseki Co. 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.9% 24.9% 26.0% 26.4% DES 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 9.7% 10.7% 13.1% MCR 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% 3.9% 7.6% 7.5% Recurring profit 733 1,085 1,392 2,120 2,100 3,603 2,696 2,659 9,220 10,200 11,300 62.0% Net income 605 677 801 823 874 1,086 1,188 1,320 6,000 6,400 7,000 74.4% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

Medium-term OP outlook lowered on downward revision for DES; non-DES forecasts raised on upward revision for Daiseki Co. Daiseki makes rolling announcements each year about its medium-term management plan. In the revisions in April 2018, the company lowered its forecasts on operating profit as it did in 2015, 2016, and 2017. This mainly reflected a downward revision to

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the profit outlook for DES, but the forecasts excluding DES were raised. Since forecasts at MCR and SKK were left unchanged, this suggests the forecast at the mainstay Daiseki Co. was revised up.

However, the company’s basic outlook remains unchanged. This reflects 1) an expanded market share and acquisition of land in south Kanto at Daiseki Co.; 2) full-scale operation at the new factory at MCR (increased volume); and 3) initiatives geared toward securing large infrastructure projects and the establishment of new businesses at DES.

Daiseki Co.

On a non-consolidated basis, Daiseki seems to be aiming at higher growth rates than domestic industrial production by increasing its market share. A factor not included in the medium-term plan is demand in the southern Kanto and the Tokyo/Yokohama areas.

Long-held issue—facility in Southern Kanto In sales by its facility (in FY02/18), Nagoya recycling works accounted for 31.1%, Kanto (mainly operating in Northern Kanto) for 20.5%, Kansai for 17.1%, Kyushu for 16.8%, Hokuriku for 11.5% and Chiba (focusing on recycled fuel) for 3.1%.

Parent sales breakdown by facility (Nagoya may count soil processing contracts for DES in its sales) 100% 9.3% 9.5% 90% 9.8% 10.8% 11.5% 11.8% 13.0% 13.9% 13.7% 16.1% 18.1% 18.5% 21.5% 21.2% 20.6% 20.5% 20.5% 20.8% 20.5% 20.5% 12.2% 12.6% 80% 12.8% 13.0% 15.1% 14.6% 14.5% 14.8% 13.4% 12.9% 9.6% 9.7% 14.7% 15.2% 70% 10.2% 11.9% 14.4% 15.1% 15.6% 16.0% 16.7% 18.1% 16.8% 17.6% 11.0% 11.2% 12.2% 60% 14.1% 17.2% 17.0% 19.4% 18.9% 18.0% 18.4% 16.3% 18.2% 17.3% 16.7% 50% 16.0% 16.5% 15.7% 17.4% 16.8% 16.7% 16.3% 17.1% 16.2% 14.9% 13.5% 12.9% 40% 12.2% 13.0% 11.6% 11.7% 12.4% 12.1% 12.5% 11.5% 11.5% 12.0% 30% 47.8% 46.4% 45.5% 44.6% 20% 43.4% 42.7% 41.5% 38.8% 37.4% 38.4% 33.8% 32.0% 32.1% 31.4% 31.4% 31.1% 30.6% 30.1% 31.1% 30.4% 10% 0% FY02/00 FY02/03 FY02/06 FY02/09 FY02/12 FY02/15 FY02/18

Nagoya Hokuriku Kansai Kyushu Kanto Chiba Source: Shared Research based on company data Demand in Southern Kanto equals that in Northern Kanto (operating area of Kanto works) However, in use of materials by Japanese manufacturers by areas in 2012, the Chubu area (Gifu, Shizuoka, Aichi, Mie and Shiga Prefectures) accounted for 27%, northern Kanto (Ibaraki, Tochigi, Gunma and Saitama Prefectures) for 13%, southern Kanto (Chiba, Tokyo and Kanagawa Prefectures) for 14% and Kinki (Kyoto, Osaka, Hyogo, Nara and Wakayama Prefectures) for 13%. Processing demand by region is shown in the table below.

The figures show a rough trend despite differences from operating areas of Daiseki’s facilities and those of industrial structures by areas.

Demand for industrial waste processing by region FY2012 North Kanto South Kanto Central Japan West Japan Kyushu Nationwide Ibaraki, Tochigi Chiba Tokyo, A ichi, Gifu Shiga, Kyoto, Osaka ('000 tons) Gunma, Saitama Kanagawa Mie, Shizuoka Hyogo, Nara, Wakayama Waste oil, acid, alkali 593 864 537 1,479 1,236 1,241 7,585 % of total 7.8% 11.4% 7.1% 19.5% 16.3% 16.4% 100.0% Source: Shared Research based on company data Some action expected during medium-term plan, large synergies with subsidiaries Daiseki failed to cope with large demand in southern Kanto. Developing a facility in southern Kanto is an issue that the company has long needed to address. The company has for some time had its sights set on entering the southern Kanto market, and in light of the length of time required to receive permission for a facility to handle industrial waste, it had been considering acquiring an existing facility through an M&A deal to achieve an early entry. However, as time wore on Daiseki changed tack and has been focused on acquiring land on which to develop its own facility. The company has already appointed an executive officer in charge of this initiative, and established a framework for acquiring land quickly.

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If the company were to acquire land, it would likely take several years to receive permission for an industrial waste-handling facility. Based on this, there is no impact on short-term earnings performance, but since a medium-term contribution may be anticipated, Shared Research is paying close attention to the situation.

Daiseki Eco. Solution

Announced in April 2016 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 10,586 12,843 19,086 15,116 17,500 20,200 YoY -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -20.8% 15.8% 15.4% Gross profit 1,308 733 1,085 1,392 2,120 2,100 3,603 2,741 3,344 3,957 GPM 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.1% 19.1% 19.6% SG&A expenses 615 605 677 801 823 874 1,086 1,147 1,202 1,261 YoY -0.4% -1.5% 11.8% 18.3% 2.7% 6.3% 24.3% 5.6% 4.8% 4.9% Operating profit 693 128 408 592 1,298 1,226 2,517 1,594 2,142 2,696 YoY -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -36.7% 34.4% 25.9% OPM 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 12.2% 13.3% Depreciation 360 298 259 338 305 313 524 561 950 1,050 Capital expenditures 514 112 216 921 775 775 735 4,050 1,960 300 EBITDA 1,054 426 667 929 1,603 1,539 3,041 2,155 3,092 3,746 YoY -20.6% -59.6% 56.6% 39.3% 72.4% -3.9% 97.5% -29.1% 43.5% 21.2% EBITDA margin 15.1% 8.1% 9.2% 12.4% 15.1% 12.0% 15.9% 14.3% 17.7% 18.5% Announced in April 2017 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 10,586 12,843 19,086 14,373 16,600 19,086 21,005 YoY -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 15.5% 15.0% 10.1% Gross profit 1,308 733 1,085 1,392 2,120 2,100 3,603 2,696 3,159 3,577 3,943 GPM 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.8% 19.0% 18.7% 18.8% SG&A expenses 615 605 677 801 823 874 1,086 1,188 1,265 1,333 1,399 YoY -0.4% -1.5% 11.8% 18.3% 2.7% 6.3% 24.3% 9.4% 6.5% 5.4% 5.0% Operating profit 693 128 408 592 1,298 1,226 2,517 1,508 1,894 2,244 2,544 YoY -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% 25.6% 18.5% 13.4% OPM 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 11.4% 11.8% 12.1% Depreciation 360 298 259 338 305 313 524 524 757 1,040 1,250 Capital expenditures 514 112 216 921 775 775 735 735 6,500 1,600 300 EBITDA 1,054 426 667 929 1,603 1,539 3,041 2,032 2,651 3,284 3,794 YoY -20.6% -59.6% 56.6% 39.3% 72.4% -3.9% 97.5% -33.2% 30.4% 23.9% 15.5% EBITDA margin 15.1% 8.1% 9.2% 12.4% 15.1% 12.0% 15.9% 14.1% 16.0% 17.2% 18.1% Announced in April 2018 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Est.Est.Est. Sales 6,991 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 15,010 16,650 19,230 YoY -22.7% -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% 0.6% 10.9% 15.5% Gross profit 1,308 733 1,085 1,392 2,120 2,100 3,603 2,696 2,659 2,870 3,281 4,063 GPM 18.7% 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.8% 17.8% 19.1% 19.7% 21.1% SG&A expenses 615 605 677 801 823 874 1,086 1,188 1,320 1,415 1,502 1,536 YoY -0.4% -1.5% 11.8% 18.3% 2.7% 6.3% 24.3% 9.4% 11.1% 7.2% 6.1% 2.3% Operating profit 693 128 408 592 1,298 1,226 2,517 1,508 1,339 1,455 1,779 2,527 YoY -31.0% -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% -11.2% 8.6% 22.3% 42.0% OPM 9.9% 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 9.7% 10.7% 13.1% Depreciation 360 298 259 338 305 313 525 526 822 680 989 826 Capital expenditures 469 112 217 1,343 776 1,625 739 2,710 4,479 3,750 300 300 EBITDA 1,054 426 667 929 1,603 1,539 3,042 2,035 2,161 2,135 2,768 3,353 YoY -20.6% -59.6% 56.6% 39.3% 72.4% -3.9% 97.6% -33.1% 6.2% -1.2% 29.6% 21.1% EBITDA margin 15.1% 8.1% 9.2% 12.4% 15.1% 12.0% 15.9% 14.2% 14.5% 14.2% 16.6% 17.4% Source: Shared Research based on company data Aiming for accelerated growth driven by large infrastructure projects amid favorable market conditions In the medium-term plan of Daiseki Eco. Solution Co., Ltd. (DES), the company aims at 10% growth on the whole in expectation that the business environment will remain favorable until the 2020 Tokyo Olympics. Given the 2027 partial opening of the Linear Chuo Shinkansen Line (which fully opens in 2037), the company: 1) aims for 10% growth in the existing cleanup business of soil contamination derived from pollution caused by human agency; 2) works on winning large orders (some hundreds to thousands of millions of yen per order) for treatment of soil contamination derived from pollution due to natural causes; and 3) plans to raise DES’ sales composition ratio to 50% in the medium term by developing new operations. Compared to a year ago, there was no change for new businesses, but the company adopted a more specific approach toward large-scale infrastructure projects (such as the Linear Chuo Shinkansen Line). The two new facilities (Gifu and Kanto) are slated to start operations in early FY02/20, and management unveiled related targets in the earnings briefing (utilization rate of 40% and sales of about JPY800mn for each facility in FY02/20, and corresponding targets of 80% and about JPY1.0bn in FY02/21). It is not clear if these have been factored into the company’s forecasts.

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Sales and project snapshot

Category Industrial waste Related market Examples Market size FY02/16 sales FY02/17 sales FY02/18 sales Target

Treatment: JPY100bn/year Real estate development Developed land (approx. 2,000 projects） Soil contamination Soil contamination JPY12.7bn Annual growth of 10%+ countermeasures (a) by humans Research: JPY10bn/year Domestic capital expenditures Factory sites JPY12.1bn JPY12.5bn (approx. 6,000 projects)

Soil contamination Soil contamination Public w orks and civil Excavation of deep strata Several projects per year × Demand changes from year to year JPY6.4bn countermeasures (b) by natural causes engineering projects Boring through mountains JPY100mn–10bn/project Step up efforts to acquire projects Plaster board Housing re al e st at e Building demolit ion sit es JPY 1.2bn JPY1.3bn JPY 1.5bn recycling Revised PCB Special Measures Transformer equipment, PCB New businesses to handle Approx. JPY160mn New business Law others 50% of sales in the long-term environmental problems BDF W aste oil Tempura oil Approx. JPY200mn JPY929mn JPY914mn Other environment - solution business Source: Shared Research based on company data

The company plans to invest JPY4.4bn in the three years from FY02/19 to FY02/21. It targets JPY10.0bn in capital investment, including investment in major projects (two new facilities and Yatomi Recycling Center). Yatomi Recycling Center, in which the company invested about JPY2.5bn in FY02/17, started operating in March 2017. Completion of the two new facilities was pushed back about six months and is now expected in FY02/19. Accordingly, the total capital investment amount (JPY8.1bn) has not changed from last year (FY02/18: JPY6.5bn, FY02/19: JPY1.6bn), but spending was delayed (FY02/18: JPY4.5bn, FY02/19: JPY3.8bn). From FY02/20, the company looks to spend JPY300mn per year on maintenance, but plans no major investment.

In addition to capital investment, the company is also interested in securing high-margin brownfield projects, if such opportunities arise (projects acquired in FY02/18–FY02/19 brought in sales of JPY2.5bn).

Capital expenditures

(JPYmn) Capital expenditures Depreciation 5,000 4,479 4,500 4,000 Nagoya RC 147 3,750 Yatomi RC 1,790 3,500 Yokohama RC 140 GAC Second factory 555 3,000 Nagoya RC 182 Osaka RC 1,487 PCB site 704 2,710 2,500 Yokohama RC 803 GAK 660 Osaka RC 853 2,000 Nagoya RC 395 1,715 1,625 1,500 1,343 1,053 1,009 989 776 739 822 826 1,000 595 620 680 519 469 525 526 300 321 360 298 259 338 305 313 300 300 500 138 128 157 217 3 1 83 6 11947 44 63 92 112 0 FY02/00 FY02/02 FY02/04 FY02/06 FY02/08 FY02/10 FY02/12 FY02/14 FY02/16 FY02/18 FY02/20 Est. Source: Shared Research based on company data

Soil contamination research and cleanup business DES expects that demand for its mainstay soil contamination research and cleanup business will remain firm until the 2020 Tokyo Olympics. However, as recognition of proper management and proper processing of slightly contaminated soil is insufficient, slightly contaminated soil tends to be processed in a similar way to healthy soil, leading to a continually lower unit processing prices than fair prices. But as demand for proper management and proper processing of seriously contaminated soil remains strong, the company receives appropriately priced orders. Avoiding price competition in the market for processing slightly contaminated soil, the company intends to focus on projects involving serious contamination that require advanced technologies and knowledge (including brownfield contracts), in a bid to boost sales while placing emphasis on profitability.

The new facility in Yatomi started operation in March 2017, adding a cleaning capacity of 200,000 tons/year (formerly 50,000 tons at Nagoya). This facility is expected to contribute to higher added value going forward. The company struggled with the startup in FY02/18 (loss of JPY380mn). However, it gained expertise as a result and aims to reduce the loss (target of JPY60mn) by raising the capacity utilization rate in FY02/19, achieve monthly profitability for the facility in Q4, and have it operate in the black from FY02/20.

Soil processing has recently gathered attention because of a land transaction by a school in Osaka, which caused a scandal in the first half of 2017, and due to an issue with the relocation of a wholesale market to Toyosu, Tokyo. If awareness of the Soil Contamination Countermeasures Act spreads further, the downtrend of overall processing prices may stop. Shared Research keeps an eye on it.

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Active capital investments Through active capital investments, as we have seen above, Daiseki has moved on to an aggressive growth phase. Working in its favor are two positive factors: stable order receipts for soil contamination cleanup services from existing customers, and an expected increase in the number of large orders.

Shared Research will closely monitor: 1) the industry environment regarding the demand and unit price per order of existing soil contamination treatment contracts, 2) the cost structure surrounding value-added work such as costs of outsourcing to cement companies (where rising prices lead to worsening costs) and tank cleaning processes, 3) where large-scale orders stand, and 4) timing of new facilities going online.

New businesses As of FY02/16, new businesses comprised 11% of overall sales. In April 2016, Daiseki indicated it aimed to bring the weighting up to 50% in the medium term. If soil contamination treatment sales were JPY20.0bn at the time of attaining 50% sales composition, new businesses would need to contribute the same amount, JPY20.0bn. As of April 2018, sales from businesses other than soil processing included: a) the plasterboard recycling business (sales of JPY1.5bn in FY02/18), b) the PCB consulting business and biodiesel fuel (BDF) business (about JPY914mn). In addition, it also plans to use FY02/19 to examine new businesses driven by alliances with other companies, although the establishment of such businesses is more of a longer-term target.

The plasterboard recycling business established Green Arrows Holdings through joint capital investment with TAKEEI CORPORATION (equity stake: 32.1%), Daiei Kankyo Holdings (19.7%), DES (19.7%) OBAYASHI CORPORATION (9.5%), TAISEI CORPORATION (9.5%), and Yoshino Gypsum Co., Ltd. (9.5%), with the agreement that they would co-fund the operating company in each region. DES established and manages the regional operating companies in Chubu and Kyushu as the largest financier, whereas TAKEEI founded and runs the companies in the Kanto and Tohoku regions as the largest investor. Although the companies have undertaken initiatives to expand their commercial areas in the Chubu, Chugoku, and Kyushu areas, the business format does not support a vision to multiply sales down the line. However, initiatives to expand value added such as efforts to strengthen sales of solidifying agents are proceeding smoothly.

In the PCB consulting business, the transformer equipment containing PCB waste are mostly those owned by electric utilities, used on overhead poles. The market is dominated by the affiliates of power companies and the subsidiary of Dowa Holdings Co., Ltd., and, as such, it is not a focus area of DES, which uses PCB-containing transformer equipment and condensers used by the electric facilities of general corporations. In view of the market size and the volume of management resources invested to increase the company’s market share, the prospect of this segment attaining a 50% sales composition ratio does not seem promising either.

With regard to the BDF business, Daiseki stresses its corporate social responsibility and hence does not count on volume contributions from it to overall earnings. This is owing to the declining profitability caused by rising costs involved in collecting waste oil and falling crude oil prices. The flip side is that even when profits take a hit, the projected loss will be no more than about JPY10mn.

Alternative new businesses needed to be in full operation soon In light of these considerations, the segment is in need of an additional set of new businesses in order to achieve the 50% sales ratio benchmark. As the business development department works on scheming and developing new businesses, Daiseki will hopefully start seeing tangible results before long. It is worth noting that at the April 2018 briefing, management indicated it will explore new businesses driven by alliances with other companies in FY02/19. The following is an outline of new businesses currently in operation.

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Plaster board recycling business Plasterboard FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Init. Est. Target Target Sales ------659 732 769 1,191 1,320 1,483 1,620 - - GAC ------662 732 769 814 782 959 1,060 - - GAK ------128 293 376 538 521 560 - - YoY ------11.1% 5.1% 54.8% 10.9% 12.4% 9.2% - - GAC ------10.6% 5.0% 5.9% -3.9% 22.6% 10.5% - - GAK ------128.9%28.3%43.1%-3.2% 7.5% - - Operating profit ------127 194 174 82 125 263 - - - YoY ------53.1%-10.4% -52.6% 51.2% 111.0% - - - OPM ------19.2% 26.5% 22.6% 6.9% 9.4% 17.7% - - - EBITDA ------223 267 256 356 394 487 - - - YoY ------19.7%-3.8% 38.8% 10.6% 23.7% - - - EBITDA margin ------33.8% 36.4% 33.3% 29.9% 29.8% 32.8% - - - Capit al expenditures ------97 134 583 409 104 45 - - - Depreciation ------96 72 82 274 269 224 - - - Collect ion volume (t) (a) ----16,446 23,545 31,223 42,767 57,092 60,718 69,087 74,422 - - - GAC ----16,446 23,545 31,223 34,144 38,411 37,660 40,049 43,623 - - - GAK ------8,623 18,681 23,058 29,038 30,799 - - - YoY - - - - - 43.2% 32.6% 37.0% 33.5% 6.4% 13.8% 7.7% - - - GAC - - - - - 43.2% 32.6% 9.4% 12.5% -2.0% 6.3% 8.9% - - - GAK ------116.6%23.4%25.9%6.1%--- Sales / Collection volume ------21.1 17.1 13.5 19.6 19.1 19.9 - - - GAC ------21.2 21.4 20.0 21.6 19.5 22.0 - - - GAK ------14.8 15.7 16.3 18.5 16.9 - - - YoY ------18.9% -21.3% 45.6% -2.5% 4.3% - - - GAC ------1.2%-6.7% 8.0% -9.7% 12.6% - - - GAK ------5.7%4.0%13.6%-8.7% --- Source: Shared Research based on company data

Key points based on past performance trends Until FY02/15, most of the performance of DES’ plasterboard waste recycling business lends itself to be covered by Green Arrows Central (GAC). Starting FY02/16, earnings by Green Arrows Kyushu (GAK) are included. It deserves noting that DES has been working on increasing its capacity by opening a second plant at GAC in Nagoya specializing in solidifying agents and soil stabilization agents (April 2015) and by adding a second production line at GAK (August 2015).

In FY02/18, the segment showed sales of JPY1.5bn and operating profit of JPY263mn (with an OPM of 17.7%), revealing higher profitability than in other segments (However, as DES holds 54% of GAC, net income is slashed by minority interests). The OPM is affected by an increase in depreciation costs stemming from new plants and production lines, but the OPM before depreciation has held at around 30%. It rose 3.0pp to 32.8% in FY02/18. The higher sales of solidifying agents (transportation volume up 56%) look to have been a contributing factor.

GAC: GAC’s capacity to crush plasterboard waste is 543 tons/day on a full 24-hour operation, which translates into 3,621 tons/month on an 8-hour daily operation for 20 days per month. While it has maintained a high operating rate, this can be raised further by using a double shift system and overtime work (The company estimates that it can operate at 150% with a full double shift system). The second factory went into full-scale operation in April 2015. It will not be one for plasterboard waste like the first factory, but one for solidifying agents and soil stabilization agents. By specializing for those agents, the factory is to contribute more in terms of profits than sales. According to the company’s data, whereas the older factory had capacity for processing 240 tons of solidifying agents per day (on a 24-hour operation), the new one is capable of processing 540 tons/day. Solidifying agents are used to improve the quality of soil that is generated as surplus at construction sites. As the agents mainly consist of recycled materials, their prices are low and demand is high.

GAK: Since it started operations in March 2013, Green Arrows Kyushu’s (GAK) has steadily ramped up input volumes, and by Q3 FY02/15 the monthly average volume had grown to almost 2,000 tons. GAK’s crushing capacity is 78.2 tons/day (based on 16 hours/day operations), and so based on 25 operating day per month, the monthly capacity is around 2,000 tons. Since demand is strong, the company will likely need to increase its capacity. In FY02/15, the company made a decision to add a second production line. The new line started operations in August 2015. Its capacity is 132.4 tons/day (operation hours per day not disclosed). GAK is a subsidiary of DES, which holds 58.0%, and Green Arrows Holdings owns the remaining 42.0%. DES is also a shareholder of Green Arrows Holdings.

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GAC and GAK: Input volume (tons) of plasterboard (industrial waste)

4,500 GAC (monthly) GAC (quarterly average) GAK (quarterly average) 4,500 4,000 4,000 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 - - (MT) Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 (MT) Source: Shared Research based on company data

Biodiesel Fuel and PCB businesses In the biodiesel fuel business, DES recorded an operating loss of around JPY30mn for FY02/14. FY02/15 saw a smaller loss of about JPY15mn on sales of about JPY150mn. The segment turned an operating profit of about JPY4mn in FY02/16 on sales of around JPY200mn, and has continued to operate in the black since. A steady rise in waste oil collection volume has been offset by a drop in the selling price owing to falling crude oil prices. As a result, efforts at improving earnings have been stifled. The break-even selling price is approximately JPY100-110/L.

Biodiesel fuel to make small contribution to corporate performance In the business, the company receives waste oil from major logistics and restaurant companies and recycles the oil for sale to major transport and construction companies. The business has a structure that customers increase gradually. Once the business surpasses its break-even point, operating profit will be accumulated. Formerly, the break-even point was set at about 450 tons/quarter. However, a drop in the selling price due to falling crude oil prices has pushed up the point to around 500 tons/quarter at the selling price of JPY100-110/L. In FY02/16 and beyond, the business is likely to contribute to corporate results though profits will be small.

PCB business division The company has started the PCB (polychlorinated biphenyl) waste business in FY02/15. It built a PCB storage facility for JPY723mn in June 2015 and launched full-fledged sales activity. Customers are ordinary businesses, not electricity companies. Sales in FY02/15 were JPY185mn, and were about JPY160mn in FY02/16. Figures for FY02/17 and beyond have not been disclosed, but this division looks to have received more contracts due to the new storage facility’s opening. The company says sales also continue to be solid. We understand it has built and gradually strengthened ties with the Chubu Electrical Safety Inspection Association, which operates electricity security management operations covering the supply network of Chubu Electric Power.

Daiseki MCR

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Daiseki MCR in FY02/16 put the new factory in full-scale operation and went on to shut down the old one. Thereafter, it took time to get operations at the new plant fully off the ground, and earnings deteriorated in part owing to a decline in the lead price. In FY02/18, operations at the new plant stabilized and the price of lead turned upward, pushing operating profit back into the black. Areas to watch going forward are 1) the increase in utilization rates at the new facilities, 2) demand prompted by revisions to the Basel Convention Act (from June 2018), and 3) trends in the lead price (including currency fluctuations).

Higher capacity utilization rate at new plant The annual manufacturing capacity of the old Hiraide and Shinoi factories together was 12,420 tons. The two factories were mostly in full operation since joining the Daiseki group. The new main factory has a capacity of 16,512 tons with one rotary furnace. The company closed the old factories at end June 2015, as the new one went online.

The production volume in FY02/16 was 11,700 tons. This fell short of the volume under the old plant, but it was due to the fact that it took time to bring the new plant into full operation. However, the utilization rate remained at about 70% in FY02/18, leaving room for a further increase. Raising the utilization rate will be an important objective from FY02/19. It intends to boost production volume while gauging lead prices and increasing material purchase volume without affecting the markets.

Expansion of collection routes Admittedly Daiseki will need to expand collection routes for batteries, but it intends to focus more on collecting industrial batteries from telephone carriers’ communication base stations and uninterruptible power supply (UPS) systems. It is working on expanding geographical routes by opening a Tokyo office in May 2014. In addition, Daiseki Co.’s new target customers, such as gas stations, car dealers and chain stores for car accessories, can be collection bases for batteries.

From June 2018, the company looks for an increase in demand prompted by revisions to the Basel Convention Act promulgated in June 2017. We understand no brokers have received new export permits following the revisions to the act, and the previously issued permits will expire in September at the latest. Accordingly, exports of lead-acid storage batteries (118,000 tons in 2016, all bound for South Korea) are expected to return to Japan between June and September 2018. The company is receiving growing inquiries from export brokers, and will pay attention to related developments.

Operation of main factory to lift amount of lead collectible from batteries by 10% In addition to the expected rise in production efficiency due to the integrated manufacturing, the new main factory will be able to collect and recycle soot, which includes lead that has been sold at low prices. The cupola furnace at the Shinoi plant produces ashes, which include lead, in the smelting process and around 10% of the total amount of lead has not been recycled. That kind of lead will be recyclable on the manufacturing lines of the main factory, improving the yield (increasing sales of lead by around 10%). Higher capacity utilization rates also deliver major profit contributions.

Others In addition to the demand prompted by the revisions to the Basel Convention Act, there are some items that are not included in the medium-term plan. Shielding materials of nuclear power plant effluent and an additional rotary furnace are projected to expand capacity. These factors should be noted as they are likely to boost performance.

Trial production of value-added goods The company has worked to boost its value-added product lineup from Q2 FY02/16. As a first step, it received orders for shielding materials of nuclear power plant effluent. After test runs in Q2, the company began shipping samples from 2H. As of FY02/18, however, the increase in the lead price has eroded the relative appeal of such products. When the lead price declines again, these initiatives may be resumed.

Doubling production capacity with another rotary furnace Daiseki MCR’s new plant has room for an additional rotary furnace. Such an addition is to double the manufacturing capacity of the plant. The company plans to use the added rotary furnace not only to produce lead, but also to manufacture other metals like

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copper, to be collected by Daiseki Co. in its effort to boost the metal collection business. Though collected metals have been sold to external companies, the Daiseki group hopes to retain them in the group for added values. When the new plant’s operation becomes stabilized, with projected expansion of production volume in the future, the company may decide to invest in further additions.

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Business

Business description

Daiseki is an environmental specialist focusing on recycling industrial waste. The main business for the parent company is intermediate processing of liquid waste (waste oil, wastewater, sludge) and separation into reusable components that are then resold. The subsidiaries focus on lead recycling (automobile and industrial batteries) as well as soil treatment and environmental consulting.

Main segments

The company has one division: Environmental Division. The company’s main activities are processing (recycling) of industrial waste and services related to contaminated soil. Waste processing is the company’s core competence and earnings driver. Daiseki Co., which is mainly involved with industrial waste processing (recycling), is the overwhelming contributor to company performance. Daiseki group companies have the following functions;

The Daiseki Group (April 2016)

Source: Shared Research based on Daiseki Eco. Solution data

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Daiseki consolidated earnings and earnings by subsidiary

The general approach to handling industrial waste is making it as small as possible before final disposal (landfills, typically). This can be achieved in multiple ways, typically involving crushing, burning, or shredding; burning is the most popular method in Japan. Daiseki specializes in treating liquid industrial waste (such as sludge, waste oil, waste water and special control industrial liquid wastes), but also provides some solid waste recycling (specifically automobile and industrial batteries) through subsidiary Daiseki MCR. Daiseki’s approach to waste processing is to recycle as much as possible, and it has developed technological expertise to capture reusable components. Daiseki does not use incinerators at any of its facilities.

Daiseki Co.’s recycling rate

Daiseki FY2/05 FY2/06 FY2/07 FY2/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 ('000 tons) Industrial waste collection 645 719 827 897 850 709 854 868 909 953 970 974 1,000 Recycled fuels 147 163 189 199 190 166 176 188 192 203 217 227 254 Recycled materials 74 77 106 117 106 115 147 160 193 210 222 237 244 Recycling rate 1 (recycled volume basis) 68.5% 73.0% 77.6% 80.5% 82.5% 81.9% 79.2% 79.5% 80.9% 81.4% 83.6% 85.3% 87.5% Recycling rate 2 (waste disposal basis) 84.2% 87.7% 89.7% 91.5% 91.2% 91.2% 89.6% 89.6% 90.0% 90.1% 91.1% 91.8% 92.9%

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Recycling rate 1 (recycled volume basis) Recycling rate 2 (waste disposal basis) 92.9% 95% 91.5% 91.2% 91.2% 91.1% 91.8% 89.7% 89.6% 89.6% 90.0% 90.1% 90% 87.7% 84.2% 85% 80.8% 87.5% 80.0% 85.3% 83.6% 80% 82.5% 81.9% 80.5% 80.9% 81.4% 79.2% 79.5% 75% 77.6% 70% 73.0% 65% 68.5%

60% 62.8% 60.0% 55% FY2/03 FY2/04 FY2/05 FY2/06 FY2/07 FY2/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 Source: Shared Research based on company data Recycling rate 1: Recycled volume ÷ (Recycled volume + Outsourced intermediate treatment residues (not recycled) Recycling rate 2: (Waste - Outsourced intermediate treatment residues (not recycled)) ÷ Waste

The breakdown of waste and other materials (10 million tons) processed by Daiseki (parent basis) in FY02/17:

▷ Waste oil: 32% ▷ Waste alkali: 23% ▷ Waste acid: 19% ▷ Sludge: 21%

Waste oil processing can take three main forms, based on the type of oil to be processed and desired output.

◤ Lubricant oil. Impurities, degraded oil components, and other contaminants are filtered out of the oil, with only lubricant oil remaining for resale.

◤ Recycling into fuel oil. Waste oil is treated to separate oil, water, and other particles, resulting in waste water (processed separately), sludge (semi-solid mixture of particles, also processed separately), and oil - free of contaminants and ready for sale as fuel.

◤ Supplementary fuel. Waste oil that can’t be recycled into lubricant or fuel oil undergoes a process (additional ingredients, etc.) rendering it fit for use as a secondary fuel (to be burned as a coal alternative or supplement).

Wastewater processing refers to the separation of water from oil and other contaminants. It’s a key step in the company’s other waste recycling activities (oil, sludge). Processing involves three steps:

◤ Any oil in the mixture is separated, processed as waste oil, and made into fuel.

◤ Collected waste water undergoes neutralization process followed by coagulation and dehydration. It is then biologically treated with activated sludge and released into river or municipal sewage system.

◤ The sludge resulting in the process of neutralization is dehydrated (dewatered), leaving a solid cake-like material which is recycled as a cement raw material.

Specific steps for sludge processing depend on the contents (sludge from construction activities is different from industrial sludge). After analysis and classification, different treatment options are:

▷ Mixing in additional compounds to create supplementary fuel. ▷ Dehydration to separate water and solid material (typically destined for cement manufacturers). ▷ Kneading in chemical compounds to transform the sludge into raw material for cement manufacturers.

Processing can involve an additional step: reclaiming certain recyclable matter, depending on the source and contents of the sludge.

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Lead recycling Daiseki MCR FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Init. Est. TargetTarget Sales 3,182 3,479 3,003 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,739 2,815 2,854 YoY - 9.3% -13.7% 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% -3.8% 2.8% 1.4% Gross profit 1,330 778 841 615 380 373 617 475 -316 -196 313 329 - - GPM 41.8% 22.4% 28.0% 19.0% 12.3% 13.4% 19.8% 15.2% -10.7% -9.1% 11.0% 12.0% - - SG&A expenses 223 259 281 307 445 351 375 756 409 235 249 223 - - YoY - 16.1% 8.5% 9.3% 45.0% -21.0% 6.7% 101.5% -45.9% -42.5% 6.0% -10.4% -- SG&A ratio 7.0% 7.4% 9.4% 9.5% 14.4% 12.6% 12.1% 24.1% 13.9% 10.9% 8.7% 8.1%-- Operating profit 1,107 519 560 308 -65 22 242 -281 -725 -431 64 106 213 213 YoY - -53.1% 7.9% -45.0% --1,019.9% - - - - 65.6% 100.9% - OPM 34.8% 14.9% 18.6% 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% 3.9% 7.6% 7.5% LME lead price (a) (USD/t) 1,362 2,783 1,801 1,905 2,203 2,319 2,102 2,102 2,046 1,767 1,960 2,365 2,420 2,420 2,420 USD/JPY forex (b) (JPY) 117.0 115.8 101.0 93.6 86.5 79.0 81.9 99.6 108.2 120.8 108.4 111.5 108.0 108.0 108.0 (a) × (b) (JPY/kg) 159 322 182 178 191 183 172 209 221 213 212 264 261 261 261 YoY 38.9% 102.3% -43.6% -2.0% 6.9% -3.8% -6.0% 21.5% 5.8% -3.6% -0.5% 24.1% -0.9% -- Lead price in Japan (JPY/kg) 202 362 231 225 238 234 224 270 281 274 271 323 - - - YoY 27.3% 79.3% -36.2% -2.5% 5.6% -1.5% -4.1% 20.1% 4.1% -2.4% -1.2% 19.4% - - - Lead price a month earlier (c) 197 352 249 218 236 238 219 270 280 275 266 322 - - - YoY 27.9% 78.4% -29.3% -12.5% 8.1% 1.1% -8.0% 23.3% 3.8% -1.9% -3.2% 20.9% - - - Sales / (c) - 9.03 13.97 13.78 13.72 13.00 12.74 11.53 11.17 10.72 8.07 8.84 - - - Sales / (c) (FY02/15 avg. as 100) - 0.81 1.25 1.23 1.23 1.16 1.14 1.03 1.00 0.96 0.72 0.79 - - - YoY --54.7%-1.4% -0.4% -5.2% -2.0% -9.5% -3.1% -4.0% -24.7% 9.5% - - - The lead recycling business is the main focus of Daiseki MCR. Most of the batteries are from automobiles, the others mostly from industrial equipment like backup generators, telecommunication equipment, etc. Processing involves separating lead from other parts of the battery (such as plastic and internal liquid), most of which can be recycled. The liquid waste (acidic wastewater) is processed and treated. Lead and plastic are then resold.

The company estimates Daiseki MCR’s share at approximately 5% of the domestic market. The new plant going into full-scale operation in FY02/16 led to capacity expansion. As there is room for an additional rotary furnace in the new plant, the company is taking measures for further capacity expansion. Unlike the main waste recycling business, battery recycling is not seasonal. On the other hand, battery recycling is prone to the changes in inventor due to fluctuations in lead prices and the gross profit margin.

Contaminated soil Daiseki Eco. Solution FY2/05 FY2/06 FY2/07 FY2/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 (JPYmn) Soil contamination research and cleanup 2,227 2,943 5,396 7,525 8,819 6,791 5,046 7,001 6,556 9,500 11,520 16,966 12,123 YoY 32.2% 83.4% 39.5% 17.2% -23.0% -25.7% 38.7% -6.4% 44.9% 21.3% 47.3% -28.5% Soil research Research sales 355 408 414 409 403 265 516 387 437 370 Number of research cases 223 328 503 459 563 372 455 559 580 553 Research sales per case 1.6 1.2 0.8 0.9 0.7 0.7 1.1 0.7 0.8 0.7 YoY -21.9% -33.8% 8.3% -19.7% -0.5% 59.2% -39.0% 8.8% -11.2% Soil cleanup Soil cleanup sales 1,869 2,534 4,981 7,116 8,338 6,497 4,530 6,614 6,118 9,129 Number of soil cleanup cases 142 264 516 844 999 898 891 1,130 1,254 1,326 Soil cleanup sales per case 13.2 9.6 9.7 8.4 8.3 7.2 5.1 5.9 4.9 6.9 YoY -27.1% 0.6% -12.7% -1.0% -13.3% -29.7% 15.1% -16.6% 41.1% Cleanup volume ('000 tons) 572.7 710.4 470.6 391.8 602.9 534.9 660.2 818.9 1,090.1 843.2 YoY 24.0%-33.8% -16.7% 53.9% -11.3% 23.4% 24.0% 33.1% -22.6% Cleanup sales per volume (JPY'000/ton) 12.4 11.7 13.8 11.6 11.0 11.4 13.8 YoY -5.5% 17.6% -16.3% -5.1% 4.3% 20.9% Research and cleanup sales per volume (JPY'000/ton) 13.1 12.4 14.4 12.9 11.6 12.3 14.4 14.1 15.6 14.4 YoY -5.5% 16.2% -10.7% -9.8% 5.5% 17.4% -2.2% 10.6% -7.6% Figures may differ from company materials due to differences in rounding methods. Source: Shared Research based on company data

The company provides services related to contaminated soil through subsidiary Daiseki Eco. Solution (DES). Services include site analysis, testing, decontaminating affected soil, and recycling contaminated soil. Environmental surveys are typically required when factories close or relocate (ensuring no contaminants are left behind), property is redeveloped, etc. The company has recycling centers in Nagoya, Yokohama, and Osaka, together capable of handling a total of 1 million tons of soil per year.

Daiseki Eco. Solution’s soil processing techniques include recycling (components from contaminated soil become raw material for cement manufacturers), hot soil remediation (removing contaminants via heat exposure at the company’s Nagoya center), and on-site remediation (decontaminating soil without extraction).

Tank cleaning The company via its System Kikou unit offers cleaning services for large tanks, pipes and various plant facilities. It has developed a washing technology for large oil tanks called COW (Crude Oil Washing) that is improved from traditional manual methods for cleaning tanks, and as of FY02/13 System Kikou boasted nearly 60% of the large tank washing market in Japan.

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System Kikou became a fully owned subsidiary in September 2010 and the company expects to be able reap the following synergies from the unit:

◤ System Kikou will complement Daiseki's small and medium-sized fuel storage tank washing business.

◤ System Kikou will be able to offer VOC gas recovery services (collection of large quantities of VOC gases which are released while large tanks are open) to Daiseki's existing customers (electric power companies, iron producers, etc.).

◤ Daiseki Co. will be able to recycle sludge produced by System Kikou’s tank cleaning into fuel.

◤ Daiseki Eco. Solution will be able to carry out soil contamination surveys and treatment on sites after removing old oil tanks.

◤ System Kikou should see its overseas business strengthen, either by exporting cleaning equipment to China and oil-producing countries, or by providing large-tank cleaning services directly in those markets.

Main facilities Daiseki parent has six main recycling facilities, located near the major industrial areas (Kanto, Chubu, Kinki, and Kyushu). All facilities are ISO 14001 certified and licensed to recycle and treat major types of industrial waste. Daiseki (parent) FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Init. Est. Target Target Sales 20,799 23,859 25,614 19,209 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 30,000 31,200 32,200 Nagoya8,080 8,935 9,841 6,488 6,986 7,705 7,487 7,881 8,233 7,962 7,761 8,937 9,150 - - Hokuriku 3,096 3,219 3,307 2,345 2,834 2,781 2,793 3,104 3,197 3,249 2,955 3,303 3,600 - - Kansai 2,943 4,107 4,355 3,462 3,985 4,147 4,142 4,190 4,434 4,332 4,188 4,909 5,050 - - Kyushu 3,081 3,201 3,312 2,831 3,312 3,448 3,597 3,915 4,236 4,356 4,651 4,836 5,050 - - Kanto 2,890 3,276 4,126 3,471 4,040 5,170 5,045 5,157 5,424 5,344 5,357 5,904 6,150 - - Chiba 706 667 672 610 698 756 742 825 933 769 832 888 1,000 - - YoY 16.6% 14.7% 7.4% -25.0% 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8% 4.2% 4.0% 3.2% Nagoya 9.2% 10.6% 10.1% -34.1% 7.7% 10.3% -2.8% 5.3% 4.5% -3.3% -2.5% 15.2% 2.4% - - Hokuriku 10.7% 4.0% 2.7% -29.1% 20.9% -1.9% 0.4% 11.1% 3.0% 1.6% -9.0% 11.8% 9.0% - - Kansai 35.3% 39.6% 6.0% -20.5% 15.1% 4.1% -0.1% 1.2% 5.8% -2.3% -3.3% 17.2% 2.9% - - Kyushu 18.9% 3.9% 3.5% -14.5% 17.0% 4.1% 4.3% 8.8% 8.2% 2.8% 6.8% 4.0% 4.4% - - Kanto 24.8% 13.4% 25.9% -15.9% 16.4% 28.0% -2.4% 2.2% 5.2% -1.5% 0.2% 10.2% 4.2% - - Chiba 26.5% -5.5% 0.7% -9.2% 14.4% 8.3% -1.9% 11.2% 13.1% -17.6% 8.2% 6.7% 12.6% - - Gross profit 7,823 9,042 9,167 6,567 8,035 8,453 8,278 8,942 9,699 9,068 9,433 10,800 11,240 - - GPM 37.6% 37.9% 35.8% 34.2% 36.8% 35.2% 34.8% 35.7% 36.7% 34.9% 36.6% 37.5% 37.5% - - SG&A expenses 2,768 2,882 3,009 2,785 2,838 2,978 3,015 3,076 3,265 3,033 3,296 3,630 3,780 - - YoY 11.9% 4.1% 4.4% -7.4% 1.9% 4.9% 1.2% 2.0% 6.1% -7.1% 8.7% 10.1% 4.1% - - SG&A ratio 13.3% 12.1% 11.7% 14.5% 13.0% 12.4% 12.7% 12.3% 12.3% 11.7% 12.8% 12.6% 12.6% - - Operating profit 5,055 6,160 6,158 3,782 5,197 5,475 5,263 5,866 6,434 6,035 6,137 7,170 7,460 8,100 8,500 YoY 31.5% 21.9% -0.0% -38.6% 37.4% 5.3% -3.9% 11.5% 9.7% -6.2% 1.7% 16.8% 4.0% 8.6% 4.9% OPM 24.3% 25.8% 24.0% 19.7% 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.9% 24.9% 26.0% 26.4% WTI crude oil (USD/bbl)65789168819793988546475260~6560~6560~65 YoY 10.0% 20.2% 16.8% -25.9% 20.3% 19.0% -3.9% 5.7% -13.3% -46.1% 1.8% 11.9% - - - USD/JPY 117 116 101 94 87 79 82 100 108 121 108 111 108 108 108 YoY 4.2% -1.0% -12.8% -7.4% -7.5% -8.7% 3.7% 21.5% 8.7% 11.7% -10.3% 2.8% -3.1% -- Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

The company’s plants are highly accessible by major transport links; additionally, four of the company’s six main facilities (Kyushu, Kansai, Hokuriku, and Chiba) are directly accessible by water.

◤ Nagoya recycling works—opened in 1963 (oldest facility), handles the most waste in the company’s facility network (quantity and variety). Serves the Chubu area (processed 16.6% of total industrial waste in FY10).

◤ Kansai recycling works—opened in 2002; wastewater, waste oil, and sludge capabilities. Serves the Kinki area (processed 14.3% of total industrial waste in FY10).

◤ Kyushu recycling works—opened in 1982; equipped to handle both liquid waste and sludge. Serves the Kyushu area (processed 14.3% of total industrial waste in FY10).

◤ Hokuriku recycling works—opened in 1973; handles multiple types of industrial waste (liquids, some solids such as glass and concrete). Along with the Nagoya recycling works, serves the Chubu area.

◤ Kanto recycling works—opened in 1990; equipped to recycle liquid and some solid waste. Serves the Kanto area (processed 25.6% of total industrial waste in FY10).

◤ Chiba recycling works—opened 1997; focuses on oil recycling. Along with the Kanto recycling works, serves Kanto.

The average facility cost for industrial waste processing is about 1 billion yen (with smaller facilities costing from 500 million yen and larger–up to 2 billion yen). Facilities are typically profitable within the first three years of use; with a payback period of less than seven years (15-18% ROI). The company uses the payback period as a decision-making criterion.

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Daiseki Eco. Solution Facilities Recycling centers (soil contamination treatment) in Nagoya, Yokohama, Osaka, and Sendai, and Yatomi (Aichi Pref.); Nagoya Transshipment Center in Nagoya for temporary storage of PCB (online in June 2015); and Bioenergy Center in Nagoya for recycling waste oil into BDF (online in March 2012). In March 2017, the company established the cleaning facility Yatomi Recycling Center (Aichi Prefecture), and it plans to open two new facilities in Gifu and Kanto at end-FY02/19.

In addition, subsidiary Green Arrows Central has two plasterboard recycling plants in Nagoya (one of which, specializing in producing solidifying agents, went online in April 2015) and another subsidiary Green Arrows Kyushu has a plasterboard recycling plant in Fukuoka (addition of a second production line in August 2015).

Daiseki MCR Facilities Headquarters and factories in Tochigi prefecture

System Kikou facilities Tomakomai, Kanto, Chubu, Kansai, Shikoku are operation centers and Yokkaichi is a materials center

Research and development Daiseki parent has R&D facilities in its entire works; research focuses on improving the recycling (recovery) technology and expansion of treatment methods for handling complex industrial waste. The facilities employ many graduates of universities and graduate schools of chemistry.

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Business model

The main components of sales are recycling and waste processing (minor revenue streams include product sales in the petroleum products business). Prices that Daiseki parent charges for recycling vary for each client, and are largely based on treatment costs (easily recyclable materials cost less). Due to the individual characteristics of manufacturers’ waste, the company doesn’t have a general price list; contract prices are negotiated case by case. Once set, processing prices are changed infrequently (vs. the company’s petroleum products, which are influenced by market prices of oil). According to the company, recycling prices had broadly been increasing from about 2005 until the 2008 global financial crisis (waste becoming increasingly complex). Post financial crisis, prices have declined about 7%, but have stabilized to some extent.

Number of Daiseki accounts

6,500 6,352 1,000 6,000 Full-year No. of new accounts (right axis) 6,268 1H

4,000 0 4,000 FY02/06 FY02/08 FY02/10 FY02/12 FY02/14 FY02/16 FY02/18 FY02/08 FY02/10 FY02/12 FY02/14 FY02/16 FY02/18

Source: Shared Research based on company data Note: Number of accounts: accounts that generated revenue during the year under review

The company has been growing its market share consistently. (See the graph above.) The company attributes its success to four factors: price (processing price varies depending on the types of wastes), reliability (strict environmental laws in Japan hold manufacturers responsible to the point of final disposal, making hiring a reliable waste disposal company a necessity), convenience (fast response), and recycling per se (reputation and similar intangible benefits; e.g., manufacturers seeking ISO process certification benefit from participating in waste recycling).

Industrial production and Daiseki Co. sales

(JPYmn) (JPYmn) Daiseki Corp. sales (excl. DES) Industrial production index (right axis) 8,000 160 3,500 140 130 7,000 140 3,000 120 110 6,000 120 2,500 100 5,000 100 90 2,000 80 4,000 80 Daiseki Corp. sales (Nagoya and Hokuriku) 70 1,500 60 3,000 60 Industrial production index: Chubu region (right axis) Transportation equipment industry (Chubu; right axis) 50 2,000 40 1,000 40 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 (JPYmn) (JPYmn) (JPYmn) Daiseki Corp. sales (Kansai) Daiseki Corp. sales (Kanto and Chiba) Daiseki Corp. sales (Kyushu) 1,400 140 2,100 140 1,400 140 Industrial production index: Kinki region (right axis) Industrial production index: Kanto region (right axis) Industrial production index: Kyushu region (right axis)

1,200 120 1,800 120 1,200 120

1,000 100 1,500 100 1,000 100

800 80 1,200 80 800 80

600 60 900 60 600 60

400 40 600 40 400 40

200 20 300 20 200 20

The main driver of the revenues is industrial production levels—recycling volumes that drive revenues directly depend on the amount of waste that industry generates. Volumes lag behind industrial production by approximately three to six months, especially during the recovery phase. One reason is that manufacturers tend to ship in fewer lots during recessions, producing

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less waste and holding more waste at their facilities to minimize transportation costs––leading to an initial lag in waste shipment when recovery starts.

Other minor revenue drivers include market prices for lead and petroleum (Daiseki MCR sells recycled lead ingots at market prices trailing by one month and petroleum products are directly influenced by oil prices). Daiseki MCR doesn’t hedge price risk for lead due to the relative illiquidity in the commodity market and the cost of hedging.

Cost structure

Costs are mostly fixed, the largest being labor. Gross profit margins for industrial waste production are relatively stable at approximately 35% (mostly costs for chemicals and other treatments as well as variable costs such as transportation and final disposal).

Daiseki’s revenues are driven by volume of processed waste, and profitability is driven by facility utilization rates. The company estimates that a ‘best case’ scenario of full utilization would result in OPMs (at the parent basis) in the area of 30%.

Two variables define the company’s existing business growth: increases in either processing volume driven by an upswing in industrial production or market share. The company has been taking share from local competitors who either use less sophisticated processing methods (emphasizing the cost and other benefits of recycling vs. burning) or have insufficient scale to provide regulatory compliance with changing legislation.

Group companies

◤ Daiseki: main group company, engaged in intermediate treatment of industrial waste.

◤ Daiseki Eco. Solution (TSE 1712): specializes in soil contamination: surveys, analysis, and treatment. The company has two subsidiaries for the treatment and recycling of plasterboard (Green Arrows Central and Green Arrows Kyushu).

◤ Hokuriku Daiseki: manufactures and sells lubricant oil and other petroleum products.

◤ Daiseki MCR: refines lead recovered from batteries for resale.

◤ System Kikou: washing large fuel tanks and associated pipework and plant equipment.

Group strategy

The company’s strategy has been to develop as a specialist environmental group, with industrial waste recycling at the core. Subsidiary businesses are closely aligned to the core recycling business. Daiseki parent and Hokuriku Daiseki buy petroleum products from each other; Daiseki MCR generates wastewater (battery fluid) which is processed by Daiseki; and Daiseki Eco. Solution captures environmental response projects from currently active manufacturing plants thanks to close cooperation with Daiseki parent. Residues produced during System Kikou’s tank-cleaning operations are processed by Daiseki Co. The group structure is appropriate for the company due to the alignment of input and output materials from the different businesses.

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Strengths and weaknesses

Strengths

◤ Reputation built on experience, status as listed company. Daiseki has been involved in industrial waste processing and recycling for nearly 40 years. Typically experience alone in an industry isn’t a strength, as any company that has managed to survive can cite “experience” as an attribute. In industrial waste processing, however, experience and a solid reputation are important. Waste producers are liable for their waste until its final disposal, making the choice of a processing company an important one (if a disposal company does anything improper, the manufacturer could be subject to fines, legal action, etc.). Daiseki’s approach minimizes this risk for companies, and its experience in processing different waste types means its services can be used by different industries. The compliance system Daiseki has to abide by as a listed company also goes a long way toward engendering trust among clients.

◤ Pragmatic management focused on medium-term earnings growth. In Shared Research's view, this helps, if not drives, high profitability as the company has avoided expanding too rapidly–focusing instead on steadily gaining market share and building client relationships. This translates directly into shareholder value and substantially lower cost of capital, creating a cycle of high returns and steady growth.

◤ Specialist focus on liquid waste (the parent company). Daiseki operates in a narrow niche where it can leverage technical expertise and the trust and name-recognition stemming from its position as a TSE-listed company to maximize its competitive advantage. It has been applying the same approach to other areas, buying other specialist firms and combining their focus with Daiseki’s core strengths to grow.

Weaknesses

◤ Market bound by mining and manufacturing production. Daiseki’s business is bound by domestic mining and manufacturing production––the number and output of manufacturing companies (a mature and shrinking market). Although Daiseki has taken share from competitors in the past, this is not guaranteed in the future.

◤ Permits for new plants and expansion of existing plants can take a long time. When it comes to making new investment in processing plants, permitting alone can take a long time. This naturally adds to the uncertainty surrounding the return on investment, since the operating environment could change while the company is waiting for its application to be approved. And while the difficulty of building up a business quickly (except through M&A) is a barrier to entry, it must also be counted as one of Daiseki's weaknesses.

◤ Limited available M&A opportunities. The company says that most M&A opportunities presenting themselves involve rescuing troubled companies and are generally unattractive. This limits growth opportunities to organic growth and may lead to less efficient use of the balance sheet. The company’s ROE and ROA have been nearly equivalent due in part to the fact that about 1/3 of total assets were kept in cash as of FY02/13, sitting on the sidelines waiting for the next capex increase or a low probability M&A event.

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Market and value chain

Market overview

The key market for Daiseki is industrial waste processing in Japan. Industrial waste in Japan is classified in two main categories: industrial waste (a broad term for waste created through commercial activity; examples include wood chips, paper, textiles, and organic waste), and special control industrial waste (hazardous waste which requires special treatment, such as oil, acid, medical waste, asbestos, and waste with toxic heavy metals like mercury and cadmium). Generally speaking, processing special control industrial waste requires more sophisticated techniques than less dangerous forms of waste.

Creation of industrial waste is driven by industrial activity. Data from the Ministry of the Environment indicates that total levels of industrial waste have been mostly stable from 1999 to 2007. However, from 2008 total levels of industrial waste have been declining due to economic slowdown.

Industrial waste emissions: breakdown by industry Waste by industry FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 5-year 10-year ('000 tons) CAGR CAGR Total 421,677 418,497 419,425 403,661 389,746 385,988 381,206 379,137 384,642 392,840 391,185 - - Elect ricit y, gas, w at er supplies 97,068 97,080 95,810 96,283 96,371 95,572 95,576 96,473 97,936 101,032 100,543 - - Agriculture 87,543 87,924 87,811 87,974 88,410 85,090 84,710 85,721 82,963 81,902 80,949 - - Construction 76,466 77,534 77,253 76,465 73,640 73,211 75,395 74,124 80,348 81,614 81,845 - - Pulp, paper, paper products 35,493 33,872 35,479 33,583 34,170 33,405 29,895 28,996 30,441 32,612 31,761 - - Steel 43,176 38,375 38,265 31,955 24,898 28,634 28,249 28,655 30,755 28,637 29,757 - - Chemicals manufacturing 16,796 17,209 17,578 14,216 13,253 13,890 13,373 12,193 12,807 11,896 9,974 - - Mining 14,039 13,947 12,509 12,866 13,865 11,577 10,466 9,481 8,785 9,086 9,766 -- Ceramics & pottery manufacturing 9,949 9,594 10,097 8,529 8,510 8,987 8,779 7,129 7,603 8,941 9,348 - - Food processing 9,805 9,720 9,811 9,041 9,135 8,524 8,626 8,484 8,650 9,178 9,096 - - Electronics machinery 3,856 4,768 5,149 4,823 4,067 4,339 4,106 3,625 3,341 4,061 3,657 - - Others 27,486 28,474 29,663 27,926 23,427 22,759 22,031 24,256 21,013 23,881 24,489 - -

YoY 1.1% -0.8% 0.2% -3.8% -3.4% -1.0% -1.2% -0.5% 1.5% 2.1% -0.4% 0.3% -0.7% Elect ricit y, gas, w at er supplies 5.1% 0.0% -1.3% 0.5% 0.1% -0.8% 0.0% 0.9% 1.5% 3.2% -0.5% 1.0% 0.4% Agriculture -2.0% 0.4% -0.1% 0.2% 0.5% -3.8% -0.4% 1.2% -3.2% -1.3% -1.2% -1.0% -0.8% Construction -3.3% 1.4% -0.4% -1.0% -3.7% -0.6% 3.0% -1.7% 8.4% 1.6% 0.3% 2.3% 0.7% Pulp, paper, paper products -3.5% -4.6% 4.7% -5.3% 1.7% -2.2% -10.5% -3.0% 5.0% 7.1% -2.6% -1.0% -1.1% Steel 15.8% -11.1% -0.3% -16.5% -22.1% 15.0% -1.3% 1.4% 7.3% -6.9% 3.9% 0.8% -3.7% Chemicals manufacturing -0.5% 2.5% 2.1% -19.1% -6.8% 4.8% -3.7% -8.8% 5.0% -7.1% -16.2% -6.4% -5.1% Mining 4.8% -0.7% -10.3% 2.9% 7.8% -16.5% -9.6% -9.4% -7.3% 3.4% 7.5% -3.3% -3.6% Ceramics & pottery manufacturing 4.1% -3.6% 5.2% -15.5% -0.2% 5.6% -2.3% -18.8% 6.7% 17.6% 4.6% 0.8% -0.6% Food processing 0.2% -0.9% 0.9% -7.8% 1.0% -6.7% 1.2% -1.6% 2.0% 6.1% -0.9% 1.3% -0.7% Electronics machinery 3.5% 23.7% 8.0% -6.3% -15.7% 6.7% -5.4% -11.7% -7.8% 21.6% -9.9% -3.4% -0.5% Others -5.3% 3.6% 4.2% -5.9% -16.1% -2.8% -3.2% 10.1% -13.4% 13.6% 2.5% 1.5% -1.1% Source: Shared Research, based on data from Ministry of the Environment

In terms of specific materials in industrial waste processing, the largest single component has historically been sludge (see table below).

Industrial waste emissions: breakdown by type Types of material FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 5 year 10 year (mn tons) CAGR CAGR Total 421,677 418,497 419,425 403,661 389,746 385,988 381,206 379,137 384,642 392,840 391,185 Liquid 8,027 11,372 12,050 8,985 7,457 8,297 7,759 7,586 7,933 8,541 8,456 Plastic 6,052 6,094 6,428 6,445 5,665 6,185 5,710 5,691 6,120 6,509 6,823 Sludge187,688 185,327 185,305 176,114 173,629 169,885 166,132 164,638 164,169 168,821 169,318 Other 219,910 215,704 215,642 212,117 202,995 201,621 201,605 201,222 206,420 208,969 206,588 YoY 1.1% -0.8% 0.2% -3.8% -3.4% -1.0% -1.2% -0.5% 1.5% 2.1% -0.4% 0.3% -0.7% Liquid -0.7% 41.7% 6.0% -25.4% -17.0% 11.3% -6.5% -2.2% 4.6% 7.7% -1.0% 0.4% 0.5% Plastic 1.9% 0.7% 5.5% 0.3% -12.1% 9.2% -7.7% -0.3% 7.5% 6.4% 4.8% 2.0% 1.2% Sludge -0.3% -1.3% -0.0% -5.0% -1.4% -2.2% -2.2% -0.9% -0.3% 2.8% 0.3% -0.1% -1.0% Other 102,268.0% -1.9% -0.0% -1.6% -4.3% -0.7% -0.0% -0.2% 2.6% 1.2% -1.1% 0.5% -0.6% Types of liquid FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 5 year 10 year (mn tons) CAGR CAGR Total 8,027 11,372 12,050 8,985 7,457 8,297 7,759 7,586 7,933 8,541 8,456 Oil 3,471 3,406 3,610 3,617 3,048 3,251 3,118 3,212 2,912 3,044 2,953 Acid 2,477 5,405 5,662 2,721 2,542 2,483 2,752 2,595 2,778 3,191 2,826 Alkali 2,079 2,561 2,777 2,648 1,867 2,563 1,889 1,778 2,243 2,306 2,677 % of total ------Oil 43.2% 30.0% 30.0% 40.3% 40.9% 39.2% 40.2% 42.3% 36.7% 35.6% 34.9% -1.9% -1.6% Acid 30.9% 47.5% 47.0% 30.3% 34.1% 29.9% 35.5% 34.2% 35.0% 37.4% 33.4% 2.6% 1.3% Alkali 25.9% 22.5% 23.0% 29.5% 25.0% 30.9% 24.3% 23.4% 28.3% 27.0% 31.7% 0.9% 2.6% The market for industrial waste is highly regulated. The first law outlining specific waste types and stipulating appropriate disposal practices was promulgated in 1970, with additional recycling and waste related laws coming into effect in the early and mid-2000s. In 1998 a manifest system to track waste from its origin through final processing was established. The purpose of the manifest system seems to be increased scrutiny and accountability for waste generators (waste generators are required to submit

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completed manifests within 10 days after final disposal). The ramifications for waste generators are substantial: if an intermediate processor makes a mistake, disposes of the waste improperly, etc. the ultimate responsibility (liability) rests with the company that created the waste.

Companies competing in industrial waste processing must have specific licenses to process different types of industrial waste. The licensing process is lengthy and requirements are relatively strict (obtaining a license can take several years, limiting market growth and reducing mobility of entrants and exits). Although the company provides collection services, Daiseki’s business is predominantly involved with intermediate treatment. Data regarding the number of competing collection and intermediate waste processing firms is highlighted below:

Industrial waste disposal industry: number of permits Industrial waste processing companies Nu mb er o f p ermit s FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Industrial waste processing companies Collection, transportation, transshipment 243,792 246,669 256,796 271,222 281,158 274,899 197,524 193,459 188,475 185,427 Transshipments 11,587 8,183 8,543 8,528 8,590 8,571 8,648 8,601 8,567 8,461 Excluding transshipments 232,205 238,486 248,253 262,694 272,568 266,328 188,876 184,858 179,908 176,966 Disposal 13,155 12,934 13,368 13,737 13,985 13,902 13,538 13,477 13,400 13,221 Intermediate treatment 11,895 11,818 12,273 12,663 12,917 12,878 12,585 12,564 12,491 12,350 Final disposal 529 540 426 428 417 401 352 332 346 319 Intermediate treatment and final disposal 71 576 669 646 651 623 601 581 563 552 Sum 256,947 259,603 27,164 284,959 295,143 288,801 211,062 206,936 201,875 198,648 Special cont rol indust rial w ast e Collection, transportation, transshipment 24,769 26,654 28,862 30,064 31,184 30,921 22,004 21,490 19,782 19,260 Transshipments 1,367 1,156 1,079 1,144 1,166 1,148 1,197 1,201 1,210 1,184 Excluding transshipments 23,402 25,498 27,783 28,920 30,018 29,773 20,807 20,289 18,572 18,076 Disposal 902 844 867 882 893 893 864 863 842 766 Intermediate treatment 824 775 797 814 815 815 784 780 766 720 Final disposal 50 47 44 45 53 54 52 56 51 53 Intermediate treatment and final disposal 28 22 26 23 25 24 28 27 25 23 Sum 25,671 27,498 29,729 30,946 32,077 31,814 22,868 22,353 20,624 20,056 Total 282,618 287,101 56,893 315,905 327,220 320,615 233,930 229,289 222,499 218,704 Source: Shared Research, based on data from Ministry of the Environment

The total number of intermediate treatment facilities has been increasing since 1992; however the number of facilities using dehydration (used by Daiseki for sludge and wastewater processing) technologies has declined approximately 47% during FY98-FY09. The company suggests that as manufacturers have been creating more complex and technologically advanced products, industrial waste has also become more complicated, increasing processing difficulty. Given increased regulatory pressure on treatment companies and more complex waste types, the contraction of dehydration treatment companies could be interpreted as a “survival of the fittest”.

The increase in the number of processing facilities under "other" stems largely from increases in (1) facilities used to reduce the size of scrap wood and various kinds of rubble, and (2) facilities for shredding waste plastic. Shared Research believes that the increase in capacity in these two particular areas represents the first steps by general industrial waste processors, construction waste processors, and waste collection companies toward entering the intermediate waste processing market.

Number of intermediate treatment facilities

20,000 Incineration Dehydration Other

15,000 7,752 10,005 9,278 8,597 5,776 10,452 11,631 10,954 11,677 11,969 12,102 12,196 12,334 12,399 12,555 10,000 6,653 6,631 6,724 6,715 6,708 6,646 6,440 6,690 6,666 6,416 6,250 6,193 4,810 5,985 4,221 6,109 3,935 3,774

5,000 3,532 3,383 3,208 3,125 3,063 2,994 6,482 5,870 5,549 5,296 5,080 4,125 4,041 3,948 3,942 3,902 3,901 3,878 3,894 3,833 3,819 3,662 3,590 3,476 3,370 3,376 3,229 3,182 3,131 0 2,901 Apr 1992 Apr 1996 Apr 2000 Apr 2004 Apr 2008 Apr 2012 Source: Shared Research based on the Ministry of the Environment

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Intermediate processing facilities for industrial waste: breakdown by type of waste Tot al Incinerat ion Dehydrat ion Other Waste Waste Scrap wood and Waste plastic Sludge Other Other oil plastic rubble facilit ies facilit ies Apr-92 10,440 2,901 6,109 1,430 Apr-93 10,579 3,182 5,985 1,412 Apr-94 11,018 3,376 6,193 1,449 Apr-95 11,226 3,590 6,250 1,386 Apr-96 11,683 3,833 6,416 1,434 Apr-97 16,101 4,125 569 583 2,445 528 6,440 1,411 372 1,039 Apr-98 21,107 6,482 706 670 2,575 2,531 6,653 1,490 418 1,072 Apr-99 14,007 5,870 739 686 2,002 2,443 6,631 1,506 464 1,042 Apr-00 13,854 5,549 721 667 1,848 2,313 6,724 1,581 528 1,053 Apr-01 17,787 5,296 709 646 1,708 2,233 6,715 5,776 4,091 617 1,068 Apr-02 19,540 5,080 717 646 1,572 2,145 6,708 7,752 5,970 703 1,079 Apr-03 19,284 4,041 644 629 1,125 1,643 6,646 8,597 6,684 832 1,081 Apr-04 19,916 3,948 650 637 1,066 1,595 6,690 9,278 7,248 958 1,072 Apr-05 20,613 3,942 654 635 1,076 1,577 6,666 10,005 7,765 1,161 1,079 Apr-06 19,164 3,902 679 639 1,052 1,532 4,810 10,452 8,135 1,286 1,031 Apr-07 19,076 3,901 691 668 1,009 1,533 4,221 10,954 8,529 1,411 1,014 Apr-08 19,444 3,878 696 691 980 1,511 3,935 11,631 9,061 1,575 995 Apr-09 19,345 3,894 683 699 983 1,529 3,774 11,677 9,056 1,649 972 Apr-10 19,320 3,819 680 680 956 1,503 3,532 11,969 9,283 1,738 948 Apr-11 19,147 3,662 666 675 899 1,422 3,383 12,102 9,365 1,777 960 Apr-12 18,880 3,476 631 694 820 1,331 3,208 12,196 9,457 1,792 947 Apr-13 18,829 3,370 621 687 792 1,270 3,125 12,334 9,594 1,813 927 Apr-14 18,691 3,229 623 664 755 1,187 3,063 12,399 9,615 1,869 915 May-14 18,680 3,131 618 613 750 1,150 2,994 12,555 9,711 1,924 920 Source: Shared Research based on the Ministry of the Environment

Industrial waste processing volume: Rubble and waste plastic (FY2015) Construction Manufacturing Waste ('000 t) Total (%) (%) indust ry indust ry Scrap wood 6,991 5,460 78% 1,264 18% Rubble 63,233 61,072 97% 1,359 2% Waste plastic 6,120 1,212 20% 3,139 51% Source: Shared Research based on the Ministry of the Environment

The main forces shaping the market are the number of manufacturers (level of output) and legal constraints (specific treatments for certain wastes, etc.). The company expects regulatory standards to continue tightening in terms of processing requirements and increased pressure on manufacturers to achieve “zero emission” targets (emphasizing recycling and minimized resource consumption). With respect to the quantity of waste generated by factories, the company expects the number of factories to continue a declining trend which began in the mid-1990s as production moved offshore to minimize costs.

Market growth

In terms of the core business (industrial waste recycling), important variables for Daiseki are the total quantity of industrial waste and legal requirements for waste treatment. It seems unlikely that Japanese companies will reverse the off-shoring trend and return to using factories located in Japan, therefore a sideways volume outlook for the market could be considered optimistic. Therefore growth for recyclers is more likely to occur from regulatory changes (higher degrees of quality for final output, more stringent recyclable components, etc.) that could increase the need for recycling expertise.

In this context, Daiseki’s growth opportunities are mostly limited to taking share from other companies (including substitute solutions), something that stricter regulations and growing social and corporate environmental awareness probably make easier.

For Daiseki Eco Solution, the company estimates the total market potential to be about 100 billion yen. The market for soil survey and treatment services is driven substantially by the housing and construction industries, and given the declining demographic trends, a long-run increase in market size seems unlikely. Regulatory changes could add uncertainty. Short-term opportunities could develop for soil processing companies as licensing requirements change (changes in April 2010 are expected to weaker, smaller companies are expected to exit the market as the burden on companies providing the services increases).

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Customers

Producers of industrial waste are the customer of Daiseki parent. As the processing price changes depending on content of waste, prices are determined individually with each customer. When costs of outsourced final disposal (landfill) increase, it impacts the processing prices set by the company. Collection, treatment, and disposal of industrial waste are governed by Japanese Law. The company’s largest customers account for approximately 2-3% of total sales, meaning that no single client is big enough to cause significant fluctuations in the company’s sales.

Daiseki MCR buys recycled batteries. The recycled components are commodities (lead, plastic, etc.) which prices are determined on the open market.

Suppliers

Daiseki does not have any critical suppliers for its main waste recycling business. The company’s technology and experience are the key processes ingredients. Core suppliers for the lead recycling business are battery brokers and automobile dealerships. The company commented that success in the battery recycling business hinges on keeping utilization levels high to minimize costs; emphasizing the importance of effective sourcing. The balance of power between suppliers and recyclers of batteries seems roughly equal: battery brokers seek the best prices and biggest buyers, whereas recyclers seek to boost utilization through larger quantities.

Barriers to entry

High. The main limiting factors are licenses, land, and equipment. Obtaining licenses can take 2-3 years or longer for specific treatment types (incineration licenses are more complicated, for example) and types of services offered (collection and transport, different types of industrial waste etc. all require separate licenses). Land and equipment require capital outlays, which can be significant.

An intangible barrier to entry could include building credibility with waste producers to win business. Incumbents have the advantage of track record and experience; new entrants would need a compelling reason for manufacturers to take on the risk of new waste processors - producers are legally liable for their waste from generation through final processing.

Competition

Transportation costs can have significant influences on waste disposal costs so the competitive landscape is determined more by geography than capabilities. The company claims that it has no peers in terms of similar capacities and treatment methods (recycling). The largest waste disposal competitor is Dowa Holdings (TSE 5714), which offers waste recycling (focusing on solid waste such as electronics, metal scrap, vehicles, etc.), waste treatment (using incineration), and operates final disposal facilities (landfills). Other competitors that offer recycling include Kureha Corporation (TSE 4023), Nihon Chemtech (Unlisted), and Towa Oil (Unlisted).

Competing firms for Daiseki MCR include Toho Zinc (TSE 5707), Mitsubishi Materials (TSE 5711), and Mitsui Mining and Smelting (TSE 5706). In addition to listed competitors, the company commented that there are numerous smaller companies that provide similar services; there were over 10,000 companies licensed to perform intermediate treatment of industrial waste as of 2013 (see Market overview).

Daiseki Eco. Solution’s most notable competitor is Dowa Holdings (TSE 5714). Dowa has two soil remediation facilities, and offers both on-site and off-site treatment.

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Substitutes

Substitutes for waste recycling include a reduction of total waste output (increased material and production engineering to reduce waste), waste minimization before final disposal (through shrinking, crushing, burning, etc.), and illegally dumping waste. R&D specifically for waste reduction seems unlikely unless recycling costs become otherwise prohibitive. Recycling waste can be cheaper than other treatment methods and provide an element of PR for manufacturers (as eco-friendly companies), so the relative attractiveness of recycling vs. alternative seems to be in favor of recycling. Illegal dumping (which is more typical for solid waste), although technically a substitute for waste treatment, is probably irrelevant for blue chip clients of Daiseki.

Strategy

The company’s strategy has been to increase its range of services and geographies where it competes. The company has historically competed in Chubu area (which generated 16.6% of total industrial waste in Japan in FY2010); however nearly twice as much waste is generated in Kanto (25.6% of total industrial waste in FY2010, according to the Ministry of the Environment). Daiseki has suggested it intends to increase utilization of its Kanto facility. Based on its market size and share, the company considers the Kanto (centered on Tokyo) and Kansai (centered on Osaka) regions, followed by Kyushu, to have the most potential growth potential, while they expect Nagoya and Hokuriku to have relatively weak growth.

The factors controlling growth are salespeople and industrial production cycles (essentially, time). The company doesn’t expect any sudden explosive growth, suggesting that low double-digit (steady between 10% and 15%) rates are more reasonable. Daiseki’s business developed as a liquid waste treatment specialist, but has used M&A to expand into other areas (e.g. Daiseki MCR, then Tamura Sangyo, acquisition in 2007 for battery recycling and its 2010 acquisition of System Kikou for is large fuel storage tank cleaning business). The company indicated that other possible options would be other materials such as plastics and industrial (non-precious) metals.

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Financial statements Income statement

Income statement FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total sales 26,968 35,160 37,224 29,080 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 YoY 24.6% 30.4% 5.9% -21.9% 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2% Cost of sales 18,009 23,148 25,524 20,239 21,790 26,010 25,737 29,801 32,830 37,721 31,865 34,700 Gross profit 8,959 12,011 11,699 8,841 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 GPM 33.2% 34.2% 31.4% 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% SG&A expenses 3,261 3,809 4,159 3,976 4,296 4,752 4,870 4,999 5,605 5,238 5,247 5,707 SG&A ratio 12.1% 10.8% 11.2% 13.7% 13.6% 13.0% 13.5% 11.9% 12.3% 10.3% 11.9% 11.6% Operating profit 5,697 8,201 7,539 4,865 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 YoY 39.6% 44.0% -8.1% -35.5% 10.8% 6.7% -6.0% 35.0% 0.1% 7.5% -9.3% 23.3% OPM 21.1% 23.3% 20.3% 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% Non-operating income (expenses) 4 -10 134 121 197 151 150 102 134 106 108 137 Recurring profit 5,701 8,191 7,673 4,986 5,587 5,901 5,554 7,400 7,436 7,955 7,228 8,914 YoY 39.2% 43.7% -6.3% -35.0% 12.1% 5.6% -5.9% 33.2% 0.5% 7.0% -9.1% 23.3% RPM 21.1% 23.3% 20.6% 17.1% 17.7% 16.2% 15.4% 17.6% 16.3% 15.7% 16.3% 18.1% Extraordinary gains (losses) -15 776 -98 -203 -80 -14 22 -187 45 -58 52 33 Pre-tax profit 5,686 8,967 7,575 4,783 5,506 5,888 5,576 7,213 7,481 7,897 7,281 8,948 Income taxes 2,333 3,358 3,183 2,059 2,368 2,614 2,434 2,889 3,060 3,238 2,584 2,592 Implied tax rate -41.0% -37.4% -42.0% -43.0% -43.0% -44.4% -43.7% -40.1% -40.9% -41.0% -35.5% -29.0% Minority interests 132 549 369 176 22 79 116 381 385 721 489 521 Net income 3,220 5,060 4,022 2,547 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833 YoY 36.7% 57.1% -20.5% -36.7% 22.3% 2.6% -5.3% 30.4% 2.4% -4.7% 7.4% 41.2% Net margin 11.9% 14.4% 10.8% 8.8% 9.9% 8.7% 8.4% 9.4% 8.8% 7.6% 9.3% 11.9% Source: Shared Research based on company data

Consolidated sales are accounted for mostly by the main business of the parent company (industrial waste recycling). The company commented that demand for its services can be driven by domestic industrial production (more production means more waste). However sales were on a generally increasing trend during FY02/01-FY02/09 thanks to an increase in market share (Recycled fuel’s higher demand and prices owing to a rise in crude oil prices contributed to sales in the latter half of the 2000s). Growth in parent-level sales has outpaced growth in industrial production since the effects of sluggish industrial production in FY02/10 and the Great East Japan Earthquake in 2011 (FY02/12) wore off.

Gross profit margins were largely stable at between 28-35% during FY02/01-FY02/13, with GPM at the parent level at about 34-36% from FY02/06 onward. GPM is affected by changes in high-margin recycled fuel’s share of total sales, and the recycled heavy fuel oil market.

Operating profit margins have been on an increasing trend during FY02/01-FY02/08, from 18.0% in FY02/01 to a peak of 23.3% in FY02/08. In FY02/16 onward, recycled heavy oil’s demand and margin significantly deteriorated due to lower crude oil prices. Though this had a high impact as the recycled heavy oil business is highly profitable, the severe environment bottomed out in FY02/17, then heading for recovery.

Financial ratios Profitability and ratios FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 (JPYmn) Gross profit 6,953 8,959 12,011 11,699 8,841 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 GPM 32.1% 33.2% 34.2% 31.4% 30.4% 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% Operating profit 4,082 5,697 8,201 7,539 4,865 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 OPM 18.9% 21.1% 23.3% 20.3% 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% EBITDA 5,312 7,045 10,115 9,721 7,110 7,229 7,478 7,219 9,066 8,929 10,599 9,535 8,777 EBITDA margin 24.5% 26.1% 28.8% 26.1% 24.4% 23.0% 20.5% 20.0% 21.5% 19.5% 20.9% 21.6% 17.8% Financial ratios ROA (RP-based) 13.6% 16.4% 18.5% 15.0% 9.8% 10.7% 10.6% 9.5% 11.9% 11.0% 11.3% 10.1% 11.9% ROE 10.1% 12.5% 15.8% 10.5% 6.2% 7.3% 7.1% 6.4% 7.9% 7.6% 7.0% 7.4% 9.9% Total asset turnover 71.9% 77.5% 79.4% 72.9% 57.3% 60.1% 65.5% 61.8% 67.9% 67.6% 72.1% 62.0% 65.8% Inventory turnover 63.2 57.3 20.0 14.1 14.3 17.5 17.8 18.7 19.8 17.9 21.7 13.6 11.5 Days in inventory 5.8 6.4 18.2 25.8 25.5 20.9 20.5 19.5 18.4 20.4 16.8 26.9 31.7 Working capital (JPYmn) 3,567 3,898 6,206 5,553 4,589 4,909 5,373 5,151 6,417 7,289 7,157 7,294 7,552 Current ratio 270.6% 251.4% 355.4% 385.7% 476.1% 377.8% 387.4% 383.3% 430.6% 367.7% 439.4% 425.2% 452.1% Quick ratio 262.7% 242.2% 327.4% 350.8% 444.4% 348.1% 362.0% 364.0% 404.6% 345.6% 416.8% 385.5% 414.0% OCF / Current liabilities 66.3% 73.6% 71.5% 91.1% 80.9% 91.7% 69.2% 68.4% 78.6% 56.5% 76.5% 63.3% 110.2% Net debt / Equity 34.2% 36.4% 44.2% 42.3% 38.9% 38.9% 41.6% 39.9% 45.4% 45.7% 45.5% 40.2% 42.4% OCF / Total liabilities 52.5% 56.7% 54.0% 71.7% 65.2% 66.3% 57.4% 58.4% 64.6% 43.5% 67.9% 53.4% 94.0% Cash cycle (days) 44.8 40.6 47.0 56.3 61.2 50.6 47.1 48.2 44.9 49.3 47.1 55.3 53.1 Changes in working capital 613 331 2,308 -653 -964 320 464 -222 1,266 872 -132 137 258 Source: Shared Research based on company data

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ROE, ROA, ROIC

FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ROE 12.5% 15.8% 10.5% 6.2% 7.3% 7.1% 6.4% 7.9% 7.6% 7.0% 7.4% 9.9% Net margin 11.9% 14.4% 10.8% 8.8% 9.9% 8.7% 8.4% 9.4% 8.8% 7.6% 9.3% 11.9% Total asset turnover 0.77 0.79 0.73 0.57 0.60 0.65 0.62 0.68 0.68 0.72 0.620.66 Financial leverage 1.35 1.38 1.33 1.24 1.22 1.24 1.23 1.24 1.27 1.29 1.29 1.27 ROA (RP-based) 16.4% 18.5% 15.0% 9.8% 10.7% 10.6% 9.5% 11.9% 11.0% 11.3% 10.1% 11.9% ROIC 13.4% 16.9% 12.1% 6.5% 7.1% 7.3% 6.6% 8.9% 8.4% 8.7% 7.9% 9.7% NOPAT 3,379 4,864 4,471 2,885 3,197 3,410 3,205 4,524 4,527 5,052 4,766 6,068 Interest-bearing debt＋Net assets 25,202 28,708 37,106 44,075 44,995 46,500 48,603 50,886 54,107 58,057 60,633 62,590 ROIC (before tax) 22.6% 28.6% 20.3% 11.0% 12.0% 12.4% 11.1% 14.3% 13.5% 13.5% 11.7% 14.0% OPM 21.1% 23.3% 20.3% 16.7% 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% Sales / Invested capital 1.07 1.22 1.00 0.66 0.70 0.79 0.74 0.83 0.85 0.880.730.79 ROE, ROA, ROIC

20% ROE ROA (RP-based) ROIC

15.8% 15% 16.9% 12.5% 13.4% 10.5% 9.9% 10% 12.1% 7.9% 7.6% 7.3% 7.1% 7.0% 7.4% 9.7% 6.2% 6.4% 8.9% 8.7% 8.4% 7.9% 7.1% 7.3% 5% 6.5% 6.6%

0% FY02/07 FY02/12 FY02/17 ROE

25% ROE Net margin Total asset turnover (right axis) Financial leverage (right axis) 1.5 1.4 1.3 1.3 1.3 1.3 1.3 1.3 20% 1.2 1.2 1.2 1.2 1.2 1.3

14.4% 15% 1.1 11.9% 15.8% 11.9% 10.8% 9.9% 9.4% 9.3% 12.5% 8.8% 8.7% 8.4% 8.8% 10% 7.6% 0.9 10.5% 9.9% 7.9% 7.3% 7.1% 7.6% 7.0% 7.4% 5% 6.2% 6.4% 0.7

0% 0.5 FY02/07 FY02/12 FY02/17 ROIC 35% 1.3 1.2 ROIC (before tax) OPM Sales / Invested capital (right axis) 30% 1.2

25% 1.1 1.1 1.0 23.3% 20% 21.1% 1.0 20.3% 15% 17.1% 17.3% 17.8% 0.9 16.7% 16.0% 15.4% 16.1% 15.7% 15.0% 0.9 10% 0.8 0.8 0.8 0.8 0.8 5% 0.7 0.7 0.7 0.7 0% 0.7 0.6 FY02/07 FY02/12 FY02/17

(JPYbn) (JPYbn) Net assets Interest-bearing debt Operating profit (right axis) 8.8 90 8.2 9 7.8 7.5 80 7.3 7.3 7.1 8 70 7 5.7 5.8 2.5 60 5.4 5.4 1.5 1.9 6 4.9 0.9 50 1.4 5 1.5 1.0 1.8 1.4 40 3.6 4

30 2.9 58.6 59.3 61.5 3 1.8 55.1 46.2 48.5 50.8 20 39.9 42.8 44.0 2 27.8 10 24.9 1 0 0 FY02/07 FY02/12 FY02/17 Source: Shared Research based on company data

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Balance sheet

Balance sheet FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and cash equivalents 9,814 12,548 20,716 18,440 17,015 17,917 19,723 20,174 24,416 26,763 28,830 27,256 28,183 Accounts receivable 4,870 5,532 6,609 5,743 5,279 5,966 6,452 6,616 7,887 9,256 9,048 8,098 8,020 Allowance for doubtful accounts -8 -6 -13 -13 -14 -20 -17 -13 -55 -30 -35 -9 -6 Inventories 249 380 1,932 1,680 1,145 1,346 1,571 1,186 1,826 1,844 1,630 3,073 2,952 Deferred tax assets 143 214 278 222 165 263 271 265 423 245 284 224 293 Other current assets 59 97 134 511 294 717 277 248 275 475 436 597 405 Total current assets 15,129 18,766 29,658 26,584 23,885 26,191 28,277 28,477 34,773 38,554 40,194 39,240 39,849 Buildings and structures 3,512 4,273 5,053 4,804 4,586 4,412 4,152 3,976 3,877 4,520 5,413 4,981 6,402 Machinery, equipment and vehicles 2,093 3,212 3,404 3,170 2,374 1,804 1,754 1,567 1,611 2,332 4,196 3,618 3,709 Land 6,732 7,992 8,465 8,905 9,298 10,047 10,254 11,704 12,181 12,907 12,904 13,442 16,083 Other fixed assets 1,499 422 366 572 246 357 959 2,180 2,461 3,242 353 2,130 1,257 Fixed assets 13,836 15,899 17,288 17,451 16,504 16,620 17,119 19,427 20,130 23,001 22,866 24,171 27,451 Goodw ill --899 1,097 1,329 2,241 1,970 1,699 1,428 1,157 725 649 572 Other 290 286 292 298 290 285 276 268 262 265 295 289 277 Total intangible assets 290 286 1,192 1,395 1,619 2,527 2,247 1,967 1,690 1,422 1,021 938 850 Investment securities 972 878 728 2,585 5,359 5,811 6,283 6,439 4,786 4,498 4,673 6,453 6,350 Long-term time deposit 500 500 500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 - - 1,000 Deferred tax assets 225 280 428 585 545 674 647 615 694 648 623 541 584 Allowance for doubtful accounts -5 -4 -4 -31 -16 -7 -28 -13 -43 -45 -42 -73 -73 Other 1,039 1,045 1,163 1,087 985 1,116 1,060 1,055 1,040 1,097 1,012 1,130 1,191 Investments and other assets 2,731 2,699 2,815 5,726 8,373 9,094 9,463 9,595 7,977 7,699 6,267 8,052 9,053 Total fixed assets 16,858 18,886 21,295 24,573 26,497 28,243 28,831 30,991 29,798 32,122 30,155 33,163 37,354 Total assets 31,987 37,652 50,955 51,158 50,383 54,435 57,108 59,468 64,571 70,677 70,350 72,403 77,203 ------LIABILITIES ------Accounts payable 1,552 2,014 2,335 1,870 1,835 2,403 2,650 2,651 3,296 3,811 3,521 3,877 3,420 Short-term debt 958 1,244 1,694 1,223 876 1,120 845 1,372 860 1,500 1,139 2,099 449 Income taxes payable 1,071 1,595 2,098 1,577 709 1,521 1,447 1,183 1,946 1,529 2,038 1,121 1,664 Allowance for bonus payable 140 163 179 210 216 221 259 261 277 284 307 304 315 Other 1,868 2,448 2,040 2,013 1,381 1,667 2,099 1,960 1,695 3,359 2,140 1,823 2,964 Total current liabilities 5,590 7,466 8,346 6,893 5,017 6,932 7,300 7,429 8,075 10,485 9,147 9,228 8,814 Long-term debt 840 1,695 1,893 602 523 353 182 10 - - 725 425 500 Provision for retirement benefits 445 535 581 612 666 718 776 827 870 1,010 765 812 876 Provision for directors' retirement benefits 190 187 208 228 216 244 265 277 292 309 305 318 243 Other 3335975688196253123110135 Total fixed liabilities 1,480 2,421 2,687 1,448 1,415 1,324 1,279 1,203 1,360 1,573 1,919 1,666 1,755 Total liabilities 7,071 9,888 11,033 8,341 6,432 8,257 8,580 8,632 9,435 12,058 11,067 10,895 10,570 Net assets ------Capital stock 3,701 3,701 6,382 6,382 6,382 6,382 6,382 6,382 6,382 6,382 6,382 6,382 6,382 Capital surplus 4,369 4,369 7,051 7,051 7,051 7,051 7,051 7,051 7,051 7,051 7,051 7,051 7,068 Retained earnings 16,091 18,878 23,396 26,626 28,273 30,532 32,803 34,926 37,955 40,955 43,873 46,705 47,684 Treasury stock -46 -70 -95 -122 -125 -126 -127 -128 -132 -135 -2,804 -4,022 -429 Valuation and translation adjustments 331 285 159 40 187 170 167 231 283 413 143 280 276 Minority interests 469 599 3,027 2,838 2,181 2,168 2,251 2,373 3,596 3,951 4,636 5,111 5,651 Total net assets 24,915 27,764 39,921 42,816 43,950 46,177 48,528 50,835 55,136 58,618 59,283 61,508 66,633 Working capital 3,567 3,898 6,206 5,553 4,589 4,909 5,373 5,151 6,417 7,289 7,157 7,294 7,552 Total interest-bearing debt 1,798 2,939 3,587 1,825 1,399 1,473 1,027 1,382 860 1,500 1,864 2,524 949 Net cash 8,516 10,109 17,629 18,115 17,116 17,944 20,196 20,292 25,056 26,763 26,966 24,732 28,234 Figures may differ from company materials due to differences in rounding methods. Source: Shared Research based on company data Per share data (JPY) FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons. Shares issued (year end; '000) 32,077 41,022 45,124 45,124 45,124 45,124 45,125 45,125 45,125 45,125 45,125 43,000 EPS 100.5 124.8 89.3 56.6 69.2 70.9 67.2 87.5 89.6 85.8 95.8 136.5 Dividend per share 14.0 17.0 19.0 19.0 20.0 20.0 21.0 22.0 24.0 28.0 29.0 40.0 Book value per share 848 901 888 927 977 1,027 1,076 1,144 1,214 1,261 1,319 1,427 Source: Shared Research based on company data

Cash flow statement

Cash flow statement FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 2,583 3,305 4,805 5,650 6,944 4,817 5,476 4,922 5,041 6,093 5,241 7,509 5,813 9,938 Cash flows from investing activities (2) -2,200 -3,643 -2,805 -4,729 -6,551 -4,873 -3,324 -1,709 -6,019 933 -2,493 -2,829 -4,452 -6,237 Free cash flow (1+2) 383 -338 2,000 921 393 -56 2,152 3,213 -978 7,026 2,748 4,680 1,361 3,701 Cash flows from financing activities 1,173 506 738 7,206 -2,629 -1,367 -1,258 -1,396 -577 -841 -484 -3,702 -1,934 -2,957 Depreciation and amortization (A) 1,101 1,230 1,348 1,914 2,182 2,245 1,839 1,728 1,815 1,768 1,627 2,750 2,415 2,495 Capital expenditures (B) -2,805 -3,731 -3,573 -2,839 -2,235 -1,047 -1,701 -1,979 -3,917 -2,367 -4,239 -2,092 -3,662 -5,748 Working capital changes (C) 366 613 331 2,308 -653 -964 320 464 -222 1,266 872 -132 137 258 Simple FCF (NI + A + B - C) -133 -758 664 1,827 4,622 4,709 2,932 2,479 1,144 2,077 551 4,637 2,748 2,322 Source: Shared Research based on company data Cash flows from operating activities Daiseki’s cash flows from operating activities are dominated by net income and depreciation; accounting earnings reflect the actual cash performance of the business. The ratio of net income + depreciation to cash flows from operating activities has averaged over 100% during FY02/01-FY02/13.

Cash flows from investing activities Cash for investments have been dominated by tangible fixed asset purchases. See major capex items below for detail.

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Cash flows from financing activities Cash flows from financing activities in FY02/05 were from bank debt (JPY300mn short-term bank loans, JPY700mn long-term bank loans). The FY02/08 increase in cash flow from financing activities were a combination of debt (JPY250mn of short-term bank loans, JPY800mn of long-term bank loans) and equity (JPY7.1bn related to the acquisition of Daiseki MCR).

Simple free cash flow Simple free cash flows during FY02/01-FY02/12 have been on an increasing trend, with some volatility. The company’s business is mainly driven by tangible fixed assets, which can create lumpy capex spending requirements which can push simple free cash flow into negative territory. The company’s capex during most of FY02/02-FY02/12 appears largely expansionary (see below).

Major capital expenditure items:

◤ FY02/01: Kansai facility (land, JPY918mn), Nagoya (expansion, JPY564mn)

◤ FY02/02: Kyushu (land, JPY656mn), Nagoya (water treatment facility, JPY539mn), Hokuriku (sludge drying facility, JPY498mn)

◤ FY02/03: Kansai (new establishment, JPY1.3bn), Hokuriku (water treatment facility, JPY230mn), Kyushu (sludge processing, JPY218mn)

◤ FY02/04: Nagoya (Daiseki Eco. Solution Nagoya recycling center—land, JPY395mn)

◤ FY02/05: Kyushu (water treatment facility, JPY730mn), Nagoya (sludge processing, JPY678mn), vehicles and equipment (JPY233mn). Daiseki Eco. Solution—Nagoya recycling center (JPY182mn), Yokohama land and factory (JPY803mn)

◤ FY02/06: Kanto (land, JPY1.4bn; construction JPY1.2bn), vehicles and equipment (JPY282mn)

◤ FY02/07: Kanto (plant, JPY970mn), Osaka (Daiseki Eco. Solution Osaka recycling center—land JPY1.3bn)

◤ FY02/08: Nagoya (fuel recycling facility, JPY327mn), Kansai (water treatment JPY500mn), Kanto (construction JPY212mn), vehicles and equipment (JPY270mn)

◤ FY02/09: Nagoya (fuel and other recycling, JPY337mn; Kanto (fuel recycling, JPY314mn), vehicles and equipment (JPY298mn). Daiseki Eco. Solution—land and soil treatment JPY557mn)

◤ FY02/10: Vehicles and equipment (JPY103mn), Daiseki MCR (land, JPY401mn)

◤ FY02/01: Kansai facility (land, JPY801mn), vehicles and equipment (JPY124mn)

◤ FY02/12: Vehicles (JPY314mn), Daiseki MCR (land JPY823mn)

◤ FY02/13: Nagoya facility (land, JPY901mn), Vehicles (JPY416mn), Daiseki Eco. Solution’s Green Arrows Kyushu unit (JPY660mn)

◤ FY02/14: Vehicles (JPY309mn), Daiseki Eco. Solution (JPY775mn), new main factory for Daiseki MCR (JPY769mn)

◤ FY02/15: Nagoya Recycling Plant (JPY1.4bn), vehicles (JPY165mn), Daiseki Eco. Solution and GAC Second Factory (JPY555mn), land for a PCB site (JPY704mn).

◤ FY02/16: Kansai facility (fuel recycling facility, JPY316mn), vehicles (JPY388mn), DES (JPY735mn: PCB transshipment/storage facility, JPY110mn; addition of GAK production line, JPY153mn)

◤ FY02/17: Vehicles (JPY393mn), DES (JPY2.7bn: construction of Yatomi Recycling Center, JPY1.8bn; renewal of soil cleaning facility of Nagoya Recycling Center, JPY110mn)

◤ FY02/18: Vehicles (JPY325mn, 20 transportation vehicles (JPY300mn)), DES (JPY4.5bn)

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Other information

History

Timeline

▷ 1945 Founded as a petrol refiner in Mie Prefecture ▷ 1958 Constructed a plant for lubricating oil refining in Nagoya city, Aichi Prefecture ▷ 1958 Established Daido Petrochemical Industry Co., Ltd (Common stock: 2,000,000JPY, as of October 1) ▷ 1963 Opened Nagoya Work in Nagoya city ▷ 1966 Opened Kyushu Work in Kita-Kyushu city, Fukuoka Prefecture ▷ 1970 Opened Hokuriku Daiseki Co., Ltd. in Kanazawa city, Ishikawa Prefecture ▷ 1972 Qualified as an industrial waste disposer in Nagoya city ▷ 1973 Opened Hokuriku Work in Hakusan city, Ishikawa Prefecture ▷ 1980 Opened Osaka Work in Amagasaki city, Hyogo Prefecture ▷ 1982 Opened Kyushu Work in Kita-Kyushu city ▷ 1983 Awarded a prize by the Clean Japan Center Foundation for our contribution to resource recycling ▷ 1984 Changed corporate name to Daiseki Co., Ltd. ▷ 1990 Opened Kanto Work in Sano city, Tochigi Prefecture ▷ 1995 Listed on OTC market (July 27, 1995; Common stock: 1,207,000,000 yen) ▷ 1997 Opened Chiba Work in Sodegaura City, Chiba Prefecture ▷ 1997 Received the Secretary of the Minister of Health and Welfare Prize for improvement of the environment ▷ 1998 Received the Secretary of the Maritime Safety Agency Prize and the Governor of the Maritime Disaster Prevention Center Prize for our restoration work on the fuel oil spill from a Russian tanker in the Sea of Japan ▷ 1999 Changed corporate name of Daiseki Plant Co., Ltd. to Daiseki Kankyo Eng. Co., Ltd. ▷ 1999 Listed in the second section of the Tokyo Stock Exchange, Inc. and Nagoya Stock Exchange (Common stock: 1,381,473,500 yen, as of August 5) ▷ 2000 Listed in the First Section of the Tokyo Stock Exchange, Inc. and the Nagoya Stock Exchange (Common stock: 2,575,458,956 yen, as of August 1) ▷ 2000 Offered for public subscription (Common stock: 3,701,058,956 yen, as of September 1) ▷ 2002 Opened Kansai Work in Akashi city, Hyogo Prefecture ▷ 2004 Changed corporate name of Daiseki Kankyo Eng. Co., Ltd. to Daiseki Eco. Solution Co., Ltd. ▷ 2004 Daiseki Eco Solution Co., Ltd. was listed in the MOTHERS of Tokyo Stock Exchange ▷ 2005 Nagoya Recycle Center of Daiseki Eco Solution Co., Ltd. was accredited as a contaminated soil purification facility by Nagoya Prefecture. ▷ 2007 Offered for public subscription 2,200,000 shares and third-party allocation 330,000 shares (as of April 25 and May 22, Common stock 6,382,605,956 yen) ▷ 2007 Acquired Tamura Sangyo Co., Ltd. (Utsunomiya city, Tochigi Prefecture） ▷ 2008 Daiseki Eco Solution Co., Ltd. was listed in the First Section of the Tokyo Stock Exchange and the Nagoya Stock Exchange ▷ 2008 Changed corporate name of Tamura Sangyo Co., Ltd. to Daiseki MCR Co., Ltd. ▷ 2008 Established Green Arrows Central Co., Ltd. ▷ 2010 Acquired System Kikou shares

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▷ 2012 Established Green Arrows Kyushu Co., Ltd.

Daiseki did not start out as an environmental services company; the company’s roots began in 1945 as a gasoline refiner. The company initially started recycling in order to cut costs, but developed expertise which created the platform for a business which it formally entered in 1958 when Daido Petrochemical Industry Ltd. was founded. The first recycling plant was established in Nagoya in 1963, later followed by steady expansion across Japan. The company received a license to recycle in 1972. The company’s name changed to Daiseki in 1984. Over the counter trading of the company’s shares began in 1995, with a listing on the Tokyo Stock Exchange 2nd section in 1999 (transferring to the 1st section in 2000).

Top management Chairman Hiroyuki Ito (born April 5, 1943) After joining the company in 1963, Ito was appointed as a director in 1975, senior managing director in 1978, representative director and vice president in 1990, and president in 1996. He was appointed chairman of the board of directors in March 2015. (Shares held as of end-February 2018: 1.0mn.)

President Hideki Hashira (born December 18, 1960) Hashira joined The Tokai Bank, Ltd. (now The Bank of Tokyo-Mitsubishi UFJ, Ltd.) in April 1984, after graduating from the School of Economics, Osaka University in March of that year. He joined Daiseki in April 1990 and became director in August of the same year. He was appointed managing director in October 1995, representative director and vice president in 1999, and president in March 2015. (Shares held as of end-February 2018: 302,000.)

Directors and corporate auditors As of May 26, 2016, Daiseki has become a company with audit and supervisory committee. The purpose is to strengthen the audit function of the board of directors and to improve the health and transparency of management. The company has 13 directors (of whom three are corporate auditors). Two of the directors are from outside the organization (corporate auditors). As a rule, the board meets once a month, the managing directors meet once a week, management meeting (attended by the directors, facility managers, and directors of consolidated subsidiaries) is held on a monthly basis, and the audit and supervisory committee likewise meets once a month.

Employees

Employee count 1,000 908 900 865 834 60 818 66 800 770 778 61 72 742 56 60 722 51 57 75 65 700 659 65 148 657 56 66 65 138 631 119 62 68 69 73 104 600 67 87 94 524 85 86 88 84 473 73 500 443 59 403 47 379 41 400 343 33 322 25 21 300 12 595 612 548 556 569 578 499 498 508 453 479 494 200 391 414 345 360 301 313 100 - FY02/01FY02/02FY02/03FY02/04FY02/05FY02/06FY02/07FY02/08FY02/09FY02/10FY02/11FY02/12FY02/13FY02/14FY02/15FY02/16FY02/17FY02/18 Daiseki Co. Hokuriku Daiseki Daiseki Eco Solution Daiseki MCR System Kikou Source: Shared Research based on company data

FY02/01 FY02/02 FY02/03 FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16Y02/17Y02/18 Employees (cons.) 322 343 379 403 443 473 524 631 657 659 722 742 770 778 818 834 865 908 Daiseki Co. 301 313 345 360 391 414 453 479 499 494 498 508 548 556 569 578 595 612 Hokuriku Daiseki91010101112121211111112121214141416 Daiseki Eco Solution 12 21 25 33 41 47 59 73 85 86 88 84 87 94 104 119 138 148 Daiseki MCR 67 62 68 69 73 66 65 75 65 60 72 System Kikou 56 65 57 51 56 61 66 60 Source: Shared Research based on company data

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Major shareholders

Top shareholders Shareholding ratio Japan Trustee Services Bank, Ltd. 12.81% Goldman Sachs & Co. Reg 9.24% State Street Bank and Trust Company 7.51% The Master Trust Bank of Japan, Ltd. 6.27% JP Morgan Chase Bank, N.A. 4.96% Kodomo Mirai Kenkyujo Limited 3.07% The Bank of Tokyo-Mitsubishi UFJ, Ltd. 3.07% Tetsuya Yamamoto 3.00% Hiroyuki Ito 2.43% Kiyoko Ito 2.42% Source: Shared Research based on company data (As of end-February 2018)

Dividends and shareholder returns

Dividends Daiseki’s dividend policy is to ensure stable shareholder returns, placing top priority on dividend payment and shareholder returns in line with earnings results. The company adopts a policy of determining the dividends in view of earnings, the market environment, and payout ratio. In addition, it takes into consideration the need to strengthen its management base and financial position, as well as to retain sufficient internal reserves in preparation for medium-term growth.

Daiseki’s basic policy is to pay interim and year-end dividends from its capital surplus, at; pay out 30% or higher of the parent company’s earnings; and ensure shareholder return in line with improved earnings in the form of increased dividend per share or stock splits.

FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total dividends a) 222 267 320 448 696 855 855 900 900 945 990 1,080 1,234 1,248 1,248 Total treasury stock acquired b) 106142325273111442,669 1,217 1,217 Total returns to shareholders c) = a) + b) 232 273 334 471 721 882 858 901 901 946 994 1,084 3,903 2,465 2,465 Net income attributable to parent company shareholders d) 1,438 1,937 2,356 3,220 5,060 4,022 2,547 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833

Dividend payout ratio a) / d) 15.4% 13.8% 13.6% 13.9% 13.8% 21.3% 33.6% 28.9% 28.2% 31.3% 25.1% 26.8% 32.1% 30.2% 21.4% Total shareholder return ratio c) / d) 16.1% 14.1% 14.2% 14.6% 14.2% 21.9% 33.7% 28.9% 28.2% 31.3% 25.2% 26.9% 101.5% 59.7% 42.3%

Net assets available to common 19,254 20,546 22,277 24,446 27,165 36,894 39,978 41,769 44,009 46,277 48,462 51,540 54,667 54,647 56,397 shareholders (year end) Average year-end balance for f) 18,702 19,900 21,412 23,362 25,806 32,030 38,436 40,874 42,889 45,143 47,370 50,001 53,104 54,657 55,522 current and previous periods Before deducting assets available to 19,254 20,546 22,277 24,446 27,165 36,894 39,978 41,769 44,009 46,277 48,462 51,540 54,667 54,647 56,397 holders of Class A preferred shares EPS (JPY) 62.5 84.8 86.2 100.5 124.8 89.3 56.6 69.2 70.9 67.2 87.5 89.6 85.8 95.8 136.5 Dividend per share (JPY) 10.0 12.0 12.0 14.0 17.0 19.0 19.0 20.0 20.0 21.0 22.0 24.0 28.0 29.0 40.0 DOE a) / f) 1.2% 1.3% 1.5% 1.9% 2.7% 2.7% 2.2% 2.2% 2.1% 2.1% 2.1% 2.2% 2.3% 2.3% 2.2% 120% 3% 2.7% 2.7% Payout ratio Total shareholder return ratio DOE

100% 2.3% 2.3% 2.2% 2.2% 2.2% 2.1% 2.1% 2.1% 2.2% 1.9% 80% 2%

60%

40% 1%

33.6% 32.1% 28.9% 31.3% 30.2% 20% 28.2% 25.1% 26.8% 21.3% 21.4% 13.9% 13.8% 0% 0% FY02/07 FY02/12 FY02/17 Source: Shared Research based on company data

Investor relations

Result meetings are held after the announcement of interim and fiscal year-end results. The company maintains a comprehensive IR site, with detailed information in both English and Japanese.

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Historical performance and news Historical performance

1H FY02/19 results (out October 1, 2018)

▷ 1H: Operating profit up 5.4% YoY as gains at parent company offset lower earnings at subsidiaries; DES hit by decline in order unit prices (and has already issued downward revision), MCR hit by lower lead prices. Operating profit fell short of forecast by 3.5% due to the impact of completed-contract accounting at SKK, but SKK performed strong. Parent sales and earnings were up YoY and also above plan.  Versus 1H FY02/18: Consolidated operating profit up JPY242mn YoY, reflecting JPY509mn increase at parent, JPY60mn increase at DES, JPY105mn decline at MCR, and JPY231mn decline at SKK.  Versus plan: Consolidated operating profit came in JPY176mn below plan. If not for SKK's move to completed-contract accounting, which left its operating profit JPY184mn below plan, the above-plan gains of JPY351mn at parent would have been enough to offset shortfalls of JPY228mn at DES and JPY137mn at MCR. Company sees earnings at MCR bouncing back in 2H but expects weakness at DES to remain a drag on overall earnings. ▷ Parent: Growth in volumes and rise in recycled fuel margins continued to drive growth in gross profit. Price negotiations helped the company absorb rise in transportation costs. Due to a recovery in industrial production, previous measures to win clients (rise in market share) showed results, and led to an expansion in the collection volume. This positive momentum is expected to

continue into 2H. ▷ DES: With no large, long-term projects to underpin earnings and a bearish market environment, DES was hurt by declining unit prices on orders; company looking to take steps to improve unit pricing in FY02/20. ▷ MCR: Declining lead prices weighed on earnings as the company finished writing down inventories. The company plans 20% increase in production capacity in December (Q4) to capture increase in demand following changes to Basel Convention Act ▷ 60-year anniversary: The company observed the 60-year anniversary of its founding on October 1, 2018 ▷ FY02/19 outlook: DES issued a downward revision to its sales and earnings estimates on September 14, 2018, lowering its full-year estimate for operating profit from JPY1.5bn to JPY740mn. Citing above-plan results at the parent, Daiseki has not revised its own forecast for full-year consolidated results ▷ FY02/20 outlook: Company sees favorable trends continuing at parent as macro environment holds steady and earnings at MCR getting boost from capacity expansion and lower depreciation. At DES, company is looking for startup of new recycling center in Yokohama to add to sales while group-wide efforts to raise unit prices and improved profitability at Yatomi recycling center to offset JPY200–300mn increase in depreciation burden.

Results overview 1H FY02/19: Operating profit up 5.4% YoY as gains at parent offset lower earnings at subsidiaries. Excluding the impact of the move to completed-contract accounting at SKK, consolidated earnings finished in line with plan For 1H FY02/19, the company reported a 5.3% YoY increase in consolidated sales and a 5.4% (JPY242mn) increase in consolidated operating profit. Results at the parent company were up YoY and also above plan but results at three subsidiaries lagged badly, with operating profit down YoY at two of the three (the exception was DES) and below plan at all three subsidiaries. It was only because the parent accounts for the majority of sales and earnings that the company was able to offset most of the decline in earnings at its subsidiaries.

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Quarterly operating profit by subsidiary

2,088 2,343 2,361 2,500 2,164 2,011 2,300 2,258 Daiseki DES MCR SKK Eliminations, other 2,134 2,162 1,917 324 1,835 1,840 2,057 273 1,849 1,956 1,873 345 1,834 1,647 1,795 409 1,778 702 2,000 1,698 278 693 697 1,586 193 646 1,632 479 376 156 1,524 204 1,473 392 1,572 1,470 1,407 1,431 299 245 255 276 95 194 1,238 1,500 1,300 108 499 262 2 30 1,096 151 1,088 262 425 25 877 96 71 11 2,126 2,165 1,000 140 1,931 1,800 1,783 1,851 1,799 1,637 1,576 1,651 1,626 1,581 1,574 1,596 1,629 1,588 1,425 1,491 1,468 1,559 1,551 1,519 1,328 1,380 1,408 1,302 1,357 1,275 1,338 1,106 1,235 1,177 500 1,062 965

-500 (JPYmn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data

Results versus year-earlier Compared with the same period last year, operating profit at the parent company got a boost from higher volumes and higher selling prices for recycled heavy oil*. This drove the gains at the consolidated level, offsetting the decline in earnings at subsidiaries. At Daiseki Eco. Solution (DES), earnings were hurt by a lack of large, long-term projects and falling unit prices on orders (unit prices were roughly 10% lowered than expected). DES was able to log higher earnings, though, as it was finally able to book the sales and earnings from brownfield projects that had been previously delayed. At Daiseki MCR (MCR), the drop in earnings stemmed from lower-than-expected lead prices*. At System Kikou (SKK), capacity utilization rates and order bookings were good, but the switch to completed-contract accounting pushed more sales out into the second half of the fiscal year. In this relation, we would also note that SKK earnings tend to swing sharply from quarter to quarter.

* Crude oil prices: In 1H, the price of WTI crude hit USD67.5/bbl (+40.1% YoY) while Dubai crude hit USD70.5/bbl (+41.8% YoY). Lead prices: At the end of August 2018, the LME cash price of USD2,057.50/MT was down 15.9% from USD2,446.0/MT at the end of May.

Versus plan Aided by strong top-line gains, parent company Daiseki saw earnings finish above plan. In contrast, DES not only saw unit prices decline 10% more than expected as it battled competitors for market share, volumes were down, and the boost to earnings from the improvement in the capacity utilization rate at the Yatomi Recycling Center was less than expected. Earnings at MCR were hurt by a larger-than-expected decline in lead price, which were down 15% more than expected by August, forcing DES to write down inventories. At SKK, facilities were running at full capacity and order bookings were favorable, but the majority of sales are due to be booked in 2H.

DES announced a downward revision to its sales and earnings forecast on September 14, 2018, but Daiseki did not make any changes to its own forecast at the consolidated level. The company said there were a number of factors influencing its decision not to change its consolidated forecast for FY02/19. First, at parent company Daiseki, the favorable trends in the external operating environment (including domestic industrial production, crude oil prices, and foreign exchange rates) bode well for above-plan results again in 2H. Second, at DES, the company said there is little chance that results will be any worse than already indicated by the downward revision issued in September since it made the revision with the aim of avoiding a situation where it was forced to issue a second downward revision and order unit prices have been largely flat since then. Third, since MCD has already booked valuation losses on inventories, if lead prices do not to drop any further its earnings should start to improve from Q3. Also, improvements in procurement of raw materials and increases in production are expected from Q4 onward following changes in the Basel Convention Act. And finally, at SKK, order bookings have been favorable and sales and earnings are expected to be booked as projects are completed during the second half of the year.

Outlook for Q2 onward (for reference, as of Q1) Core company Daiseki Co.’s businesses have been doing favorably in Q1, providing a sense of stability, and the outlook for Q2 is similar. DES, which saw a drop in sales in Q1, booked sales in June from brownfield projects that had been pushed back to Q2, so the outlook is for improvement versus Q1. At MCR, there will be a decrease in high-cost inventory compared to Q1, but there will be expenses related to periodic maintenance in August. Demand related to the revised Basel Convention Act should appear from 2H onward, and the company plans to increase production capacity by 20% by shifting from five days of operation per week to six, while maintaining the same staffing system.

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In Q1, consolidated operating profit fell short of the initial forecast by JPY37mn with the impact of a JPY94mn shortfall at System Kikou (SKK). Although utilization rates at SKK are favorable, sales tend to swing sharply from quarter to quarter due to use of the completed-contract method. Since completion was pushed back to 2H more than anticipated by initial FY02/19 forecasts, there ended up being a shortfall in Q1. A similar situation is likely in Q2. However, the order status appears favorable, and as of June 2018 SKK has already taken orders amounting to JPY2.2–2.3bn against the full-year sales target of JPY2.5bn, so there is little concern about full-year earnings as long as no further delays arise.

Outlook for FY02/20 Under its rolling three-year plan released at the beginning of FY02/09, Daiseki projected an operating profit of JPY10.1bn in FY02/20, representing a JPY1.0bn increase over its operating profit forecast for FY02/19. Assuming no changes in the macroeconomic environment, the forecast sees parent Daiseki continuing to benefit from the increase in processing volumes that will go along with the expected increase in its market share as well as higher unit prices (as it expects to be able to pass along increases in transportation costs and the cost of the used oil that is used to make recycled fuel). At MCR, the company sees sales and earnings benefiting from the 20% increase in its processing capacity (scheduled for December 2018) and a normalization of procurement prices for spent lead batteries following changes in the Basel Convention Act (which will take effect from 2H FY02/19), both of which will make full-year contributions to sales and earnings in FY02/20.

DES: Focus on trends at three new recycling centers, especially startup of a new facility in Yokohama At DES, there are still some dark clouds on the horizon, including the lack of prospects for higher unit prices on orders, an increase of JPY200–300mn in its depreciation burden resulting from the startup of two new recycling centers, and the lack of any new orders for high-margin brownfield projects like the ones that were completed and booked to sales in Q2.

With regard to unit prices on orders, the company stated it is looking to realize higher unit prices by avoiding going through general contractors and using combined strengths of the Daiseki group to consult directly with customers, present its proposals, and win orders at better prices. Regarding the startup of the new recycling center in Yokohama, the company sees plenty of demand even after the Tokyo Olympics and says the marked expansion of processing and storage capacity will make the new facility stand out in competition for large-scale projects. Concerning the Yatomi Recycling Center, the company said operating losses are expected in FY02/19, but once the trial-and-error period is over and it has found the best processing method for particular types of soils, it will start looking to put Yatomi into the black by accepting only those soils best suited for cleaning (mainly from Western Japan). With this, the company hopes to generate enough profit from Yatomi to cover the JPY200–300mn increase in depreciation and the loss of brownfield projects, and contribute to higher earnings.

In particular, Shared Research will be watching closely to see how the three recycling centers (in Yatomi, Gifu, and the new facility in Yokohama) into which Daiseki has poured roughly JPY10bn over the last three years are faring and how their performances affects the base business of DES over the medium term.

Industrial Production Index (left), Crude oil prices (right)

20% 12 (USD/bbl) (USD/bbl) Daiseki Co. Industrial production index (right axis) Dubai Fateh Crude Oil Price(USD/bbl) Quarterly average 10 110 120 15% 8 100 110 6 10% 90 100 4 90 5% 2 80 80 0 70 0% 70 -2 60 60 -5% -4 50 -6 50 -10% 40 -8 40 -15% -10 30 30 Mar Mar Mar Mar Mar Mar 20 20 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Source: Shared Research, based on company data

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Daiseki Co. (parent)

FY02/17 FY02/18 FY02/19 Vs. Est. FY02/19 Initial Est. FY02/17 FY02/18 FY02/19 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q1 Q2 Q3 Q4 Act. Act. Init. Est. Sales 6,425 6,632 6,563 6,126 7,232 7,209 7,226 7,110 7,918 8,126 +296 +466 7,622 7,660 7,587 7,131 25,746 28,778 30,000 Nagoya1,882 1,987 2,005 1,885 2,351 2,279 2,179 2,126 2,302 2,381 -11 +61 2,313 2,320 2,327 2,190 7,761 8,937 9,150 Hokuriku 717 790 769 677 793 830 880 797 960 986 +43 +44 917 942 905 836 2,955 3,303 3,600 Kansai 1,067 1,113 1,010 996 1,180 1,235 1,234 1,259 1,348 1,453 +93 +135 1,255 1,318 1,264 1,213 4,188 4,909 5,050 Kyushu 1,192 1,216 1,149 1,093 1,217 1,206 1,203 1,209 1,440 1,375 +120 +112 1,320 1,263 1,274 1,193 4,651 4,836 5,050 Kanto 1,367 1,299 1,407 1,282 1,481 1,402 1,490 1,529 1,650 1,657 +89 +99 1,561 1,558 1,562 1,469 5,357 5,904 6,150 Chiba 198 223 219 190 207 254 238 188 215 272 -41 +13 256 259 255 230 832 888 1,000 Yo Y -5.8% -3.1% 2.2% 3.3% 12.6% 8.7% 10.1% 16.1% 9.5% 12.7% 5.4% 6.3% 5.0% 0.3% -1.0% 11.8% 4.2% Nagoya -9.2% -3.7% -2.3% 6.3% 24.9% 14.7% 8.7% 12.8% -2.1% 4.5% -1.6% 1.8% 6.8% 3.0% -2.5% 15.2% 2.4% Hokuriku -14.4% -12.3% -0.3% -8.4% 10.6% 5.1% 14.4% 17.7% 21.1% 18.8% 15.6% 13.5% 2.8% 4.9% -9.0% 11.8% 9.0% Kansai -3.6% -3.7% -5.8% - 10.6% 11.0% 22.2% 26.4% 14.2% 17.7% 6.4% 6.7% 2.4% -3.7% -3.3% 17.2% 2.9% Kyushu 2.1% 14.3% 6.6% 4.5% 2.1% -0.8% 4.7% 10.6% 18.3% 14.0% 8.5% 4.7% 5.9% -1.3% 6.8% 4.0% 4.4% Kanto -4.5% -10.0% 11.0% 6.9% 8.3% 7.9% 5.9% 19.3% 11.4% 18.2% 5.4% 11.1% 4.8% -3.9% 0.2% 10.2% 4.2% Chiba -2.5% 4.7% 25.1% 8.0% 4.5% 13.9% 8.7% -1.1% 3.8% 7.1% 23.7% 2.0% 7.1% 22.3% 8.2% 6.7% 12.6% Gross profit 2,392 2,435 2,459 2,147 2,856 2,745 2,723 2,476 3,077 3,145 +137 +245 2,940 2,900 - - 9,433 10,800 11,240 GPM 37.2% 36.7% 37.5% 35.0% 39.5% 38.1% 37.7% 34.8% 38.9% 38.7% +0.3pp +0.8pp 38.6% 37.9% - - 36.6% 37.5% 37.5% SG&A expenses 818 839 830 809 925 894 924 888 951 980 -9 +40 960 940 3,296 3,630 3,780 SG&A ratio 12.7% 12.7% 12.6% 13.2% 12.8% 12.4% 12.8% 12.5% 12.0% 12.1% -0.6pp -0.2pp 12.6% 12.3% - - 12.8% 12.6% 12.6% Operating profit 1,574 1,596 1,629 1,338 1,931 1,851 1,799 1,588 2,126 2,165 +146 +205 1,980 1,960 1,910 1,610 6,137 7,170 7,460 YoY -4.7% -1.8% 3.0% 13.7% 22.7% 16.0% 10.4% 18.7% 10.1% 17.0% 2.5% 5.9% 6.2% 1.4% 1.7% 16.8% 4.0% OPM 24.5% 24.1% 24.8% 21.8% 26.7% 25.7% 24.9% 22.3% 26.9% 26.6% +0.9pp +1.1pp 26.0% 25.6% 25.2% 22.6% 23.8% 24.9% 24.9% WTI crude oil (USD/barrel) 42 46 47 53 50 47 53 61 66 69 47 52 60~65 YoY -22.1% -10.1% 4.5% 57.9% 18.7% 1.1% 12.3% 16.2% 33.6% 46.9% 1.8% 11.9% 14.4~23.9% USD/JPY 111 104 105 115 112 111 112 111 108 111 108 111 108 YoY -7.8% -16.0% -13.4% -3.2% 1.0% 7.1% 7.2% -3.4% -3.7% -0.2% -10.3% 2.8% -3.1% Source: Shared Research based on company data

Daiseki parent: number of accounts (accounts that generated revenue during the year under review)

6,500 Full-year 6,352 1,000 6,000 No. of new accounts (right axis) 6,268 1H 6,013 5,558 6,000 5,826 800 5,514 5,715 5,500 789 658 5,693 795 5,307 769 777 608 698 5,407 5,135 5,500 690 673 664 600 5,256 617 626 5,014 584 5,123 5,072 5,000 4,841 4,884 4,953 5,000 400 4,6914,742 4,589 4,495 4,500 4,386 4,500 200 4,286 4,221

4,000 0 4,000 FY02/06 FY02/08 FY02/10 FY02/12 FY02/14 FY02/16 FY02/18 FY02/08 FY02/10 FY02/12 FY02/14 FY02/16 FY02/18 Source: Shared Research based on company data

Index of industrial production and Daiseki parent sales

20% Daiseki Co. Industrial production index (right axis) 20 15% 15

10% 10

5% 5

0% 0

-5% -5

-10% -10

-15% -15 Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data

Growth in volumes and rise in recycled fuel prices underpin continued growth in gross profit. Price negotiations conducted in advance absorb rise in transportation costs The parent reported a 11.1% (JPY1.6bn) YoY increase in sales and 13.5% (JPY509mn) rise in operating profit, with both sales and earnings coming in higher than expected. The above-plan results reflect an increase in gross profit stemming from successful measures to increase market share, and rising industrial production and an accompanying increase in both handling volumes and prices for recycled heavy oil. Operations in Hokuriku (except for Nagoya), Kanto, Kansai, Kyushu, and Chiba all logged record-high sales for 1H.

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and overall accounts has been steadily increasing. Since Q4 FY02/17, the industrial production index has been increasing YoY—combined with effects from winning clients, this resulted in earnings growth from Q1 FY02/18.

There appears to have been no particular change to the company's cost structure. The GPM fell 0.6pp YoY in Q1, but this was because the Nagoya facility had a large, highly profitable project in FY02/18. Excluding this factor, the GPM remains favorable. In Q2, the GPM rose 0.6pp, aided by solid top-line growth and rising fuel prices. Recycled fuel sales increased by nearly 20%, easily outpacing the 3% increase in volume of recycled heavy oil as prices rose and margins improved along with a rise in the price of crude oil. Furthermore, despite a rise in transportation costs related to collection of industrial waste (part of CoGS) and higher SG&A expenses incurred in relation to sales of recycled fuel and other products, the company still managed to increase its OPM by 0.6pp to 26.7% by negotiating higher prices to help absorb the higher costs.

Decline in number of accounts appears to be temporary We would note, however, that the number of active client accounts (which generated sales during 1H) suffered a temporary decline in 1H, falling 44 versus the end of FY02/18 to 5,514. This is the first time the company has seen a decline in its account numbers since 1H FY02/10 (when the number of accounts fell to 4,286, down 104 versus the end of FY02/09). The decline is due not so much to a loss of market share but rather a temporary shift in the focus of the company's sales team to price negotiations during 2H FY02/18. The price negotiations were successful, allowing Daiseki to raise recycled fuel selling price enough to cover the increases in transportation costs and the cost of raw materials (used oil). Now that this round of price negotiations has wound down, during 2H the company will refocus its efforts on winning new accounts with the aim of realizing a net increase in accounts by the end of FY02/19.

Transportation costs: Daiseki Co. handles roughly 60% of its transportation in-house, but outsourced transportation has increased in tandem with volume growth, and labor shortages at outside contractors have also had an impact. Considering the government’s policy, Daiseki believes that transportation costs, including personnel for the tasks, are likely to rise going forward. However, in FY02/18, the company reviewed its pricing structure to reflect increases in distribution costs heading into FY02/19. It has conducted related negotiations, and as of the beginning of FY02/19 believed it could pass on most of this increase to prices. The company's current forecast assumes a 0.1pp decline in the gross profit margin in FY02/19.

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Crude Oil CIF price trends 100,000 200

80,000 150

60,000 100 40,000

50 20,000

- CIF price (JPY/kl) CIF price (USD/barrael, right axis) - Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Shared Research based on Ministry of Economy, Trade and Industry data

Index of industrial production and Daiseki parent sales (excluding sales to DES) Daiseki Co. sales (Nagoya, Hokuriku) (JPYmn) (JPYmn) Daiseki Co. sales (ex. DES) Industrial prod. index (right axis) Industrial prod. index: Chubu (right axis) 8,000 160 3,500 Transportation equip. industry (Chubu; right axis) 140

7,000 140 3,000 120

6,000 120 2,500 100 5,000 100 2,000 80 4,000 80

1,500 60 3,000 60

2,000 40 1,000 40 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17

1,400 120 1,800 120 1,400 120 1,200 1,200 100 1,500 100 100 1,000 1,000 80 1,200 80 80 800 800 60 900 60 60 600 600 40 600 40 40 400 400

200 20 300 20 200 20

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Daiseki Eco. Solution (DES)

Daiseki Eco. Solution FY02/17 FY02/18 FY02/19 Rev. Est. Vs. Initial Est. FY02/19 Initial Est. FY02/17 FY02/18 FY02/19 FY02/19 FY02/20 FY02/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 Est.Q4 Est.Q1Q2Q3Q4Q1Q2Q3Q4Act.Act. Rev. Est. Init. Est. MTP MTP Sales 4,149 3,277 3,547 3,399 3,984 3,482 2,859 4,601 3,332 4,475 3,234 3,600 -12 -359 -69 +72 3,344 4,834 3,303 3,528 14,373 14,926 14,640 15,010 16,650 19,230 Soil contamination research and cleanup 3,699 2,861 2,961 2,603 3,417 2,907 2,185 4,020 2,787 3,948 2,781 3,048 -20 -352 +50 +437 2,807 4,300 2,731 2,611 12,123 12,529 12,444 12,449 - - Nagoya 1,444 977 1,012 1,010 1,696 1,098 861 752 800 704 940 940 -261 -457 -264 -177 1,061 1,161 1,204 1,117 4,443 4,407 3,265 4,543 - - Tokyo 1,592 1,071 975 795 1,130 1,220 910 2,353 957 2,669 1,084 1,290 -14 +138 +167 +404 971 2,531 917 886 4,433 5,613 6,000 5,305 - - Kansai 492 762 964 774 586 570 399 831 977 542 740 800 +231 -50 +147 +210 746 592 593 590 2,992 2,386 3,059 2,521 - - Tohoku 168 52 11 25 4 20 16 82 53 32 17 18 +24 +16 - - 29 16 17 18 256 122 120 80 - - Plasterboard recycling 323 304 343 350 353 363 395 373 393 374 434 399 -5 -19 -+4 398 393 434 395 1,320 1,483 1,600 1,620 - - GAC 200 177 200 205 226 234 254 245 253 247 286 263 -7 -7 -+3 260 254 286 260 782 959 1,049 1,060 - - GAK 126 126 141 145 128 128 138 127 140 127 148 136 +2 -12 -+1 138 139 148 135 538 521 551 560 - - Others 127 112 243 447 214 212 280 209 151 153 139 152 +12 +12 - -370 139 141 139 522 929 914 594 941 - - Yo Y -28.4% -34.5% -22.4% -8.4% -4.0% 6.3% -19.4% 35.4% -16.4% 28.5% 13.1% -21.8% -16.1% 38.8% 15.5% -23.3% -24.7% 3.9% -1.9% 0.6% 10.9% 15.5% Soil contamination research and cleanup -31.9% -35.5% -23.0% -20.1% -7.6% 1.6% -26.2% 54.4% -18.4% 35.8% 27.3% -24.2% -17.9% 47.9% 25.0% -35.0% -28.5% 3.3% -0.7% -0.6% Nagoya -9.6% -27.0% -30.1% -22.2% 17.5% 12.4% -14.9% -25.5% -52.8% -35.9% 9.2% 25.0% -37.4% 5.7% 39.8% 48.5% -21.8% -0.8% -25.9% 3.1% Tokyo -29.3% -46.0% -12.1% -35.1% -29.0% 13.9% -6.7% 196.0% -15.3% 118.8% 19.1% -45.2% -14.1% 107.5% 0.8% -62.3% -32.5% 26.6% 6.9% -5.5% Kansai -67.3% -21.1% -18.4% 27.5% 19.1% -25.2% -58.6% 7.4% 66.7% -4.9% 85.5% -3.7% 27.3% 3.9% 48.6% -29.0% -29.8% -20.3% 28.2% 5.7% Tohoku 115.4% -63.9% -90.4% -82.6% -97.6% -61.5% 45.5% 228.0% 1,225.0% 60.0% 6.3% -78.0% 625.0% -20.0% 6.3% -78.0% -46.7% -52.3% -1.6% -34.4% Plasterboard recycling 27.1% 12.2% 4.9% 3.5% 9.2% 19.5% 15.1% 6.4% 11.4% 3.0% 10.0% 7.1% 12.7% 8.2% 10.0% 6.0% 10.9% 12.4% 7.9% 9.2% GAC 14.3% -4.8% -11.5% -9.7% 13.0% 32.2% 27.0% 19.5% 11.9% 5.6% 12.6% 7.3% 15.0% 8.5% 12.6% 6.1% -3.9% 22.6% 9.4% 10.5% GAK 55.6% 48.2% 42.4% 30.6% 1.6% 1.6% -2.1% -12.4% 9.4% -0.8% 7.2% 7.1% 7.8% 8.6% 7.2% 6.3% 43.1% -3.2% 5.8% 7.5% Others 13.5% -62.4% -39.5% 279.7% 68.0% 88.8% 15.2% -53.2% -29.2% -27.9% -50.3% -27.2% -34.9% -33.5% -50.3% 149.8% -0.0% -1.6% Gross profit 781 663 694 558 683 530 437 1,010 623 683 460 427 -70 -139 693 822 2,696 2,659 2,193 2,870 3,281 4,063 Gross margin 18.8% 20.2% 19.6% 16.4% 17.1% 15.2% 15.3% 21.9% 18.7% 15.3% 14.2% 11.9% -2.0pp -1.8pp 20.7% 17.0% 18.8% 17.8% 15.0% 19.1% 19.7% 21.1% Cost ratio 81.2% 79.8% 80.4% 83.6% 82.9% 84.8% 84.7% 78.1% 81.3% 84.7% 85.8% 88.1% +2.0pp +1.8pp 79.3% 83.0% 81.2% 82.2% 85.0% 80.9% 80.3% 78.9% SG&A expenses 302 271 318 296 338 337 282 364 350 359 393 351 +4 +15 346 344 1,188 1,320 1,453 1,415 1,502 1,536 YoY 8.8% 0.6% 26.3% 3.3% 11.8% 24.0% -11.4% 22.6% 3.6% 6.5% 39.5% -3.4% 2.3% 2.2% 9.4% 11.1% 10.1% 7.2% 6.1% 2.3% SG&A ratio 7.3% 8.3% 9.0% 8.7% 8.5% 9.7% 9.9% 7.9% 10.5% 8.0% 12.2% 9.8% +0.2pp +0.9pp +12.2pp +9.8pp 10.3% 7.1% 8.3% 8.8% 9.9% 9.4% 9.0% 8.0% Operating profit 479 392 376 262 345 193 156 646 273 324 67 76 -74 -154 -216 -269 347 478 283 345 1,508 1,339 740 1,455 1,779 2,527 YoY -31.7% -43.5% -46.1% -38.3% -28.0% -50.8% -58.6% 146.8% -20.8% 68.0% -57.0% -88.2% 0.7% 147.8% 81.7% -46.6% -40.1% -11.2% -44.7% 8.6% 22.3% 42.0% Soil contamination research and cleanup 563 500 453 315 445 280 134 728 341 402 1,832 1,587 - - - Plasterboard recycling 51 25 22 27 52 65 83 63 84 78 2,022 125 263 - - - Others 23 -7 44 82 38 14 83 31 18 18 142 167 - - - Adjustments -158 -126 -143 -162 -191 -166 -145 -176 -170 -173 -590 -678 --- OPM 11.5% 12.0% 10.6% 7.7% 8.7% 5.5% 5.4% 14.0% 8.2% 7.2% 2.1% 2.1% -2.2pp -2.6pp -6.5pp -7.7pp 10.4% 9.9% 8.6% 9.8% 10.5% 9.0% 5.1% 9.7% 10.7% 13.1% Soil contamination research and cleanup 15.2% 17.5% 15.3% 12.1% 13.0% 9.6% 6.1% 18.1% 12.2% 10.2% 15.1% 12.7% - Plasterboard recycling 15.8% 8.1% 6.5% 7.7% 14.7% 17.8% 21.1% 16.9% 21.4%20.7% 9.4% 17.7% - Treatment volume (MT) 196,187 182,296 204,965 260,039 226,968 203,540 167,204 312,269 217,403 164,307 843,487 909,981 YoY -39.4% -35.9% -21.5% 17.9% 15.7% 11.7% -18.4% 20.1% -4.2% -19.3% -22.6% 7.9% Cleanup volume (MT) 12,418 5,656 8,882 15,125 9,675 39,714 31,693 38,70642,99730,046 42,081 119,788 YoY -31.2% -67.0% -21.9% 14.8% -22.1% 602.2% 256.8% 155.9% 344.4% -24.3% -29.6% 184.7% Capital expenditures 2,710 4,479 3,750 300 300 Depreciation 124 126 136 140 197 200 211 214 526 822 680 989 826 Soil contamination research and cleanup 190 544 - - - Plasterboard recycling 269 224 - - - Others 46 38 - - - Adjustments 21 16 - - - EBITDA 603 518 512 402 541 393 367 860 2,035 2,161 2,135 2,768 3,353 Soil contamination research and cleanup 2,021 2,131 - - - Plasterboard recycling 394 487 - - - Others 188 204 - - - EBITDA margin 14.5% 15.8% 14.4% 11.8% 13.6% 11.3% 12.8% 18.7% 14.2% 14.5% 14.2% 16.6% 17.4% Soil contamination research and cleanup 16.7% 17.0% - Plasterboard recycling 29.8% 32.8% -

Plasterboard recycling FY02/17 FY02/18 FY02/19 Vs. Initial Est. FY02/19 Init ial Est . FY02/17 FY02/18 FY02/19 FY02/19 FY02/20 FY02/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 Est.Q4 Est.Q1Q2Q3Q4Q1Q2Q3Q4Act.Act.ev. Est.nit. Est. MTP MTP Sales 323 304 343 350 353 363 395 373 393 374 434 399 -5 -19 -+4 398 393 434 395 1,320 1,483 1,600 1,620 GAC 200 177 200 205 226 234 254 245 253 247 286 263 -7 -7 -+3 260 254 286 260 782 959 1,049 1,060 GAK 126 126 141 145 128 128 138 127 140 127 148 136 +2 -12 -+1 138 139 148 135 538 521 551 560 YoY 27.1% 12.2% 4.9% 3.5% 9.2% 19.5% 15.1% 6.4% 11.4% 3.0% 10.0% 7.1% 12.7% 8.2% 10.0% 6.0% 10.9% 12.4% 7.9% 9.2% GAC 14.3% -4.8% -11.5% -9.7% 13.0% 32.2% 27.0% 19.5% 11.9% 5.6% 12.6% 7.3% 15.0% 8.5% 12.6% 6.1% -3.9% 22.6% 9.4% 10.5% GAK 55.6% 48.2% 42.4% 30.6% 1.6% 1.6% -2.1% -12.4% 9.4% -0.8% 7.2% 7.1% 7.8% 8.6% 7.2% 6.3% 43.1% -3.2% 5.8% 7.5% Collection volume (tons) 16,608 16,307 18,554 17,618 18,419 18,489 19,300 18,214 20,121 18,829 69,087 74,422 - GAC 9,630 9,243 10,693 10,483 10,523 11,041 11,233 10,826 11,635 11,656 40,049 43,623 - （GAC processing volume） ------GAK 6,978 7,064 7,861 7,135 7,896 7,448 8,067 7,388 8,486 7,173 29,038 30,799 - Sales per collection volume 19191820192020202020 19 20 - GAC 21191920212123232221 20 22 - （GAC processing volume） -- - GAK 18181820161717171618 19 17 - YoY 7.1% -5.5% -3.4% -6.6% -1.5% 5.4% 10.7% 2.9% 2.0% 1.1% -2.5% 4.1% - GAC -0.4% -8.0% -12.2% -16.2% 3.4% 10.7% 20.9% 15.7% 1.2% -0.0% -9.7% 12.6% - （GAC processing volume） ------GAK 25.0% 0.7% 17.5% 12.9% -10.2% -3.7% -4.6% -15.4% 1.8% 3.0% 13.6% -8.7% - Operating profit 51 25 22 27 52 65 83 63 84 78 125 263 - YoY 218.8% 210.4% -27.8% -3.1% 1.7% 163.6% 274.8% 134.8% 62.1% 19.9% 51.2% 111.0% - OPM 15.8% 8.1% 6.5% 7.7% 14.7% 17.8% 21.1% 16.9% 21.4% 20.7% 9.4% 17.7% - Depreciation and amortization 269 224 - EBITDA 394 487 - YoY 10.6% 23.7% - EBITDA margin 29.8% 32.8% - Sales, GPM, and OPM

6,000 30% Sales GPM (right axis) OPM (right axis)

5,000 21.9% 25% 21.2% 20.7% 20.1% 19.6%20.3%20.3% 19.9% 20.2%19.6% 19.3%18.8% 19.4% 19.3% 19.2%18.8% 18.7% 17.8% 18.0% 4,000 16.9% 17.3% 17.2% 16.9% 17.1% 20% 16.1% 16.4% 15.5% 15.2% 15.2%15.3% 15.3% 14.6% 14.6%14.4% 14.5% 14.7% 13.6% 13.9% 13.7% 13.9% 14.0% 3,000 13.1% 13.2% 12.9% 15% 11.7% 12.1% 12.0% 10.9% 11.4%11.5% 10.4% 10.1% 10.8% 10.6% 9.1% 9.7% 8.6% 8.7% 8.2% 2,000 7.2% 7.8%7.8% 7.2% 7.7% 7.2% 10% 5.4% 5.9% 5.5% 5.5% 5.1% 4.7%5.3% 1,000 2.0%2.1% 5% 0.2% 0.7% 0 0% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 (JPYmn) FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research, based on company data

With no large, long-term projects to underpin earnings, DES was hurt by declining unit prices on orders and its failure to meet profit target at the Yatomi Recycling Center despite a rise in capacity utilization rate With no large, long-term projects to underpin earnings and sales and earnings hit by an increased in competition for orders and a resulting decline in unit prices, Daiseki Eco. Solution (DES) was forced to issue a downward revision to its 1H and full-year forecasts on September 14, 2018. Not only were unit prices roughly 10% lower than expected, volumes were also down. DES was still able to report gains versus the same period last year, though, thanks to JPY1.4bn worth of brownfield projects whose completion had been expected last year but was pushed out into this year. As a result, 1H sales at DES finished up 4.6%

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(JPY340mn) YoY and 4.5% (JPY372mn) below plan while operating profit was up 11.1% YoY (+JPY60mn) and 27.6% (JPY228mn) below plan.

The shortfall versus forecast was attributed to an absence of large, long-term projects and a decline in demand that led to heightened competition for medium and small projects and pushed unit prices down roughly 10% more than initially expected; a decline in processing volumes; and an ongoing decline in unit prices on orders, leaving the Yatomi Recycling Center with an operating loss despite a 10pp increase in its capacity utilization rate. The drop in unit prices on orders placed since 2H FY02/18 weighed especially heavily on earnings. With transportation costs going up as carriers hike rates and no way to bring down raw materials procurement costs, the full impact of the decline in unit prices fell directly on earnings.

Breakdown of cost of goods sold: The detailed breakdown of cost of goods sold released by Daiseki for FY02/14 shows outsourcing costs (processing fees paid to cement makers) accounting for 47% of the costs of goods sold at the soil contamination and cleanup business operated by the parent (which accounts for the largest part of sales) and transportation costs 15%. These are both variable costs. As all of the other costs were largely fixed costs, like depreciation, the company has very little room to reduce the cost of goods sold.

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operating profit level thanks to higher operating rates and lower depreciation (because the capital expenditures associated with the Yatomi facility were very large, for most of the equipment the company is using fixed-rate declining-balance depreciation.)

Revised forecast DES's revised forecast is shown below. There is no major change in the outlook for sales, but the GPM projections reflect recent results. The GPM forecast of 14.2% for Q3 assumes that order unit prices will remain depressed. On the surface, it looks like the GPM will come down to 11.9% in Q4; we would note, however, that depreciation charges are slated to increase in Q4 along with the start of two new recycling centers. Assuming the company is budgeting for a JPY100mn increase in depreciation in Q4, the GPM without the additional depreciation would be 14.6%. We note that the Q3 forecast shows SG&A spending increasing by JPY50mn, but that JPY44mn of this is one-time expenditures related to the relocation of the company's head office. With the move, rent expenses will go up (DES plans to sell its old head office to the parent company); however, the new head office is expected to boost efficiency because the old head office was cramped and split between three different locations. The Q3 forecast also includes some added charges stemming from the property damages and temporary work stoppages at some of the company's recycling centers resulting from the typhoon that hit Western Japan in early September.

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Revised forecast

Daiseki Eco. Solut ion FY02/18 FY02/19 Rev. Est . Vs. Init ial Est. FY02/19 Initial Est. FY02/17 FY02/18 FY02/19 FY02/19 FY02/20 FY02/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3 Est.Q4 Est.Q1Q2Q3Q4Q1Q2Q3Q4Act.Act.Rev. Est. Init. Est. MTP MTP Sales 3,984 3,482 2,859 4,601 3,332 4,475 3,234 3,600 -12 -359 -69 +72 3,344 4,834 3,303 3,528 14,373 14,926 14,640 15,010 16,650 19,230 Soil contamination research and cleanup 3,417 2,907 2,185 4,020 2,787 3,948 2,781 3,048 -20 -352 +50 +437 2,807 4,300 2,731 2,611 12,123 12,529 12,444 12,449 - - Nagoya 1,696 1,098 861 752 800 704 940 940 -261 -457 -264 -177 1,061 1,161 1,204 1,117 4,443 4,407 3,265 4,543 - - Tokyo 1,130 1,220 910 2,353 957 2,669 1,084 1,290 -14 +138 +167 +404 971 2,531 917 886 4,433 5,613 6,000 5,305 - - Kansai 586 570 399 831 977 542 740 800 +231 -50 +147 +210 746 592 593 590 2,992 2,386 3,059 2,521 - - Tohoku 420168253321718 +24 +16 - - 29 16 17 18 256 122 120 80 - - Plasterboard recycling 353 363 395 373 393 374 434 399 -5 -19 -+4 398 393 434 395 1,320 1,483 1,600 1,620 - - GAC 226 234 254 245 253 247 286 263 -7 -7 -+3 260 254 286 260 782 959 1,049 1,060 - - GAK 128 128 138 127 140 127 148 136 +2 -12 -+1 138 139 148 135 538 521 551 560 - - Others 214 212 280 209 151 153 139 152 +12 +12 - -370 139 141 139 522 929 914 594 941 - - YoY -4.0% 6.3% -19.4% 35.4% -16.4% 28.5% 13.1% -21.8% -16.1% 38.8% 15.5% -23.3% -24.7% 3.9% -1.9% 0.6% 10.9% 15.5% Soil cont aminat ion research and cleanup -7.6% 1.6% -26.2% 54.4% -18.4% 35.8% 27.3% -24.2% -17.9% 47.9% 25.0% -35.0% -28.5% 3.3% -0.7% -0.6% Plasterboard recycling 9.2% 19.5% 15.1% 6.4% 11.4% 3.0% 10.0% 7.1% 12.7% 8.2% 10.0% 6.0% 10.9% 12.4% 7.9% 9.2% Others 68.0% 88.8% 15.2% -53.2% -29.2% -27.9% -50.3% -27.2% -34.9% -33.5% -50.3% 149.8% -0.0% -1.6% Gross profit 683 530 437 1,010 623 683 460 427 -70 -139 693 822 2,696 2,659 2,193 2,870 3,281 4,063 Gross margin 17.1% 15.2% 15.3% 21.9% 18.7% 15.3% 14.2% 11.9% -2.0pp -1.8pp 20.7% 17.0% 18.8% 17.8% 15.0% 19.1% 19.7% 21.1% Cost ratio 82.9% 84.8% 84.7% 78.1% 81.3% 84.7% 85.8% 88.1% +2.0pp +1.8pp 79.3% 83.0% 81.2% 82.2% 85.0% 80.9% 80.3% 78.9% SG&A expenses 338 337 282 364 350 359 393 351 +4 +15 346 344 1,188 1,320 1,453 1,415 1,502 1,536 YoY 11.8% 24.0% -11.4% 22.6% 3.6% 6.5% 39.5% -3.4% 2.3% 2.2% 9.4% 11.1% 10.1% 7.2% 6.1% 2.3% SG&A ratio 8.5% 9.7% 9.9% 7.9% 10.5% 8.0% 12.2% 9.8% +0.2pp +0.9pp +12.2pp +9.8pp 10.3% 7.1% 8.3% 8.8% 9.9% 9.4% 9.0% 8.0% Operating profit 345 193 156 646 273 324 67 76 -74 -154 -216 -269 347 478 283 345 1,508 1,339 740 1,455 1,779 2,527 YoY -28.0% -50.8% -58.6% 146.8% -20.8% 68.0% -57.0% -88.2% 0.7% 147.8% 81.7% -46.6% -40.1% -11.2% -44.7% 8.6% 22.3% 42.0% OPM 8.7% 5.5% 5.4% 14.0% 8.2% 7.2% 2.1% 2.1% -2.2pp -2.6pp -6.5pp -7.7pp 10.4% 9.9% 8.6% 9.8% 10.5% 9.0% 5.1% 9.7% 10.7% 13.1% Soil cont aminat ion research and cleanup 13.0% 9.6% 6.1% 18.1% 12.2% 10.2% 15.1% 12.7% - Plasterboard recycling 14.7% 17.8% 21.1% 16.9% 21.4% 20.7% 9.4% 17.7% - Treatment volume (MT) 226,968 203,540 167,204 312,269 217,403 164,307 843,487 909,981 YoY 15.7% 11.7% -18.4% 20.1% -4.2% -19.3% -22.6% 7.9% Cleanup volume (MT) 9,675 39,714 31,693 38,706 42,997 30,046 42,081 119,788 YoY -22.1% 602.2% 256.8% 155.9% 344.4% -24.3% -29.6% 184.7% Capit al expendit ures (increase in fixed assets) 2,710 4,479 3,750 300 300 Depreciation 197 200 211 214 174 526 822 680 989 826 EBITDA 541 393 367 860 447 2,035 2,161 2,135 2,768 3,353 EBITDA margin 13.6% 11.3% 12.8% 18.7% 13.4% 14.2% 14.5% 14.2% 16.6% 17.4% Source: Shared Research based on company data

Outlook for FY02/20 However, if the gross profit margin in Q4 FY02/19 finishes at 11.9% (assuming order unit prices are flat and another two months’ worth of depreciation adds about JPY100mn to costs) and the operating profit margin comes in at 2.1% as the company is projecting, we would be concerned about the outlook for FY02/20. At the beginning of this year when the company updated its rolling three-year plan, the company said that the picture for FY02/20 was essentially a blank slate because the downward revision to the forecast for FY02/19 had been so large (cutting the operating profit forecast from JPY1.5bn to JPY740mn). In FY02/20 there will be a number of factors weighing on profit, including a net increase in depreciation of some JPY200–300mn as new recycling center gets up and running while depreciation charges associated with the Yatomi Recycling Center decline, and the current lack of orders for high-margin brownfield projects. Assuming sales of JPY16.0bn, a gross profit margin in line with the Q3 forecast of 14.2%, and a JPY200–300mn increase in depreciation, gross profit in FY02/20 would come in at JPY2.0bn. Assuming four quarters worth of SG&A spending (using the level in Q4 FY02/19) brings the operating profit in at JPY600mn. Clearly, if DES is aiming at increasing operating profit it must increase sales and gross profit margin.

In particular, Shared Research will be watching closely to see how the three recycling centers (in Yatomi, Gifu, and the new facility in Yokohama) into which Daikei has poured roughly JPY10bn over the last three years are faring and how their performances affects the base business of DES over the medium term.

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Supplementary information At the soil contamination research and cleanup business, conditions were as described above. At its plasterboard recycling business, DES saw solid gains in processing volumes in the Chubu region and this together with increased marketing of solidified materials and new product development led to higher sales. In other businesses, the polychlorinated biphenyl (PCB) related sales remained firm covering for the decline in waste processing work stemming from the Kumamoto earthquake.

Soil contamination treatment volume

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GAC, GAK plasterboard collection volumes

Soil contamination sales by region

3,000 Nagoya Kansai Tokyo Tohoku

2,500

2,000

1,500

1,000

500

0 (JPYmn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data

Daiseki MCR FY02/17 FY02/18 FY02/19 Vs. Est. FY02/19 Initial Est. FY02/17 FY02/18 FY02/19 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q1 Q2 Q3 Q4 Act. Act. Init. Est. Sales 565 474 515 596 614 650 805 776 741 778 +74 +95 667 683 728 661 2,150 2,846 2,739 YoY -29.3% -41.4% -23.8% -10.5% 8.7% 37.1% 56.3% 30.2% 20.7% 19.7% 8.6% 5.1% -9.6% -14.8% -27.1% 32.4% -3.8% Gross profit -95 -169 11 57 98 6 97 112 63 -63 -24 -108 8745- - -196 313 329 GPM -16.8% -35.7% 2.1% 9.6% 16.0% 0.9% 12.0% 14.4% 8.5% -8.1% -4.5pp -14.7pp 13.0% 6.6% - - -9.1% 11.0% 12.0% SG&A expenses 65585953605576585760 +2+4 5556-65 -20 235 249 223 Operating profit -160 -227 -48 438-49 21 54 6 -123 -26 -112 32-11 65 20 -431 64 106 YoY ------1,250.0% -84.2% - -15.8% -209.5% -63.0% - - 65.6% OPM -28.3% -47.9% -9.3% 0.7% 6.2% -7.5% 2.6% 7.0% 0.8% -15.8% -4.0pp -14.2pp 4.8%-1.6% 8.9% 3.0% -20.0% 2.2% 3.9% LME Lead (USD/t) (a) 1,748 1,794 2,051 2,254 2,211 2,250 2,446 2,560 2,368 2,306 2,300 2,300 2,300 2,300 1,960 2,365 2,420 Exchange rate (JPY/USD) (b) 110.8 103.7 104.7 114.6 111.9 111.1 112.2 110.7 107.8 110.8 113.0 113.0 113.0 113.0 108.4 111.5 108.0 (a) x (b) (JPY'000/kg) 194 186 215 258 247 250 274 283 255 256 260 260 260 260 212 264 261 YoY -16.3% -14.7% 6.0% 27.8% 27.7% 34.4% 27.8% 9.7% 3.2% 2.3% 5.1% 4.0% -5.3% -8.3% -0.5% 24.1% -0.9% Lead mark et price in Japan (JPY/k g) (c) 252 244 269 318 307 308 335 343 317 312 315 315 315 315 271 323 - YoY -13.3% -12.9% 2.1% 21.5% 21.8% 26.2% 24.6% 7.8% 3.1% 1.3% 2.4% 2.1% -6.0% -8.3% -1.2% 19.4% - Sales /(c) (FY02/15 average=100) 80 70 69 67 72 2,1098681842,493 76788375 7179 YoY -18.4% -32.7% -25.3% -26.4% -10.8% 7,570.6% 25.4% 20.7% 17.0% 8,948.2% 6.1% 2.9% -3.8% -7.1% -26.3% 10.9% Source: Shared Research based on company data Note: The domestic lead price in FY02/17 is an estimate by Shared Research based on projected LME lead prices and exchange rates.

▷ 1H: Lead prices fell in Q1, pushing up the percentage of sales from high-cost inventory and the CoGS-to-sales ratio. In Q2 lead prices declined further in July, forcing the company to book roughly JPY80mn in inventory valuation losses, and earnings were further depressed by three-week long planned maintenance in August. The company aims to get back into the black in Q3 and expects to benefit from the 20% increase in processing capacity in Q4. ▷ Basel Convention Act: The focus is on an increase in demand from October, when export permits expire. Exports were already down by 50% YoY in August and expected to drop to nearly zero in October. The company plans to increase production capacity by 20% by shifting from five days of operation per week to six from December onward, which will require only three or four more employees. In the future the company is planning to operate seven days a week.

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 As brokers will no longer be able to export to South Korea, the company expects improved margins as procurement prices fall  With buying by brokers and fluctuations in the foreign exchange rate (with the South Korean won) no longer driving swings in lead prices, there is a good chance that MCR's costs will more directly reflect prices in the lead market. ▷ FY02/19: MCR is expected to finish the full year in the black but may finish roughly JPY30mn below plan, though this shortfall is expected to be fully offset by strong results at parent Daiseki.

Lead price trends LME lead prices in yen (JPY/kg) LME spot prices (USD/MT; right axis) 290 2,900

270 2,700

250 2,500

230 2,300

210 2,100

190 1,900

170 1,700

150 1,500 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Source: Shared Research based on Bloomberg and Mizuho Bank data

System Kikou FY02/17 FY02/18 FY02/19 Vs. Est. FY02/19 Init. Est. FY02/17 FY02/18 FY02/19 (JPYmn)Q1Q2Q3Q4Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q1 Q2 Q3 Q4 Act. Act. Init. Est. Sales 507 884 322 348 888 839 495 405 406 509 -163 -429 569 938 610 383 2,061 2,627 2,500 YoY 40.8% 45.4% -65.2% -61.5% 75.1% -5.1% 53.7% 16.4% -54.3% -39.3% -35.9% 11.8% 23.2% -5.4% -26.4% 27.5% -4.8% Gross profit361620565423615756366 -102 -93 105 159 - - 254 503 432 GPM 7.1% 18.3% 0.0% 16.1% 6.1% 28.1% 31.7% 13.8% 0.7% 13.0% -17.7pp -4.0pp 18.5% 17.0% - - 12.3% 19.1% 17.3% Operating profit -48 81 -78 -21 -12 171 83 -24 -64 -7 -94 -89 308246-40 -66 218 118 YoY-----111.1%------52.0% -44.6% - - --45.9% OPM -9.5% 9.2% -24.2% -6.0% -1.4% 20.4% 16.8% -5.9% -15.8% -1.4% -21.0pp -10.1pp 5.3% 8.7% 7.5% -10.4% -3.2% 8.3% 4.7% Source: Shared Research based on company data

▷ 1H: SKK saw sluggish 1H results as the amount of sales bookings pushed out to 2H as a result of its switch to completed-contract accounting exceeded expectations. Business itself was good, with plants running at full capacity and SKK constantly short of capacity and people. The earthquake that hit the Iburi region in eastern Hokkaido forced local operations to shut down for two to three weeks.

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News

September 2018 On September 14, 2018, the company announced that its subsidiary Daiseki Eco. Solution announced downward revisions to its 1H FY02/19 and full-year earnings forecasts.

Shared Research sees a possibility that the reduction in Daiseki Eco. Solution Co., Ltd. (“DES”; TSE 1712) operating profit could be offset by Daiseki’s non-consolidated performance. The reasons for the downward revisions are a) 1H: Sales and profit in the soil contamination research and cleanup business being affected by a 10% decline (versus estimate) in unit prices per order due to competition, despite an increase in construction work in Greater Tokyo heading toward the 2020 Tokyo Olympics; and b) Full-year: Unit prices per order expected to remain at 1H levels, results affected by an unexpected increase in depreciation costs from early completion of new processing facilities under construction.

In the revised plan, sales in 1H declined JPY378mn and remain at nearly the same level in 2H. Operating income is revised down by JPY235mn in 1H and JPY480mn in 2H, with revisions being particularly significant in 2H. In Shared Research’s view, in 1H the decline in unit prices per order had more of an effect on operating profit than the decrease in sales. In 2H, the increase in depreciation costs on top of the drop in unit prices per order will have a strong impact.

Revisions

Daiseki Eco. Solution FY02/18 FY02/19 Vs. Init. Est. FY02/19 Est. FY02/19 Initial Est. FY02/17 FY02/18 FY02/19 FY02/19 FY02/20 FY02/21 (JPYmn) Q1Q2Q3Q4Q1Q2 Est.Q1Q2Rev. 1H Rev. 2H Init. 1H Init. 2H Q1 Q2 Q3 Q4 Act. Act. Rev. Est. Init. Est. MTP MTP Sales 3,984 3,482 2,859 4,601 3,332 4,468 99.6% 92.4% 7,800 6,840 8,178 6,832 3,344 4,834 3,303 3,528 14,373 14,926 14,640 15,010 16,650 19,230 Soil contamination research and cleanup 3,417 2,907 2,185 4,020 2,787 99.3% - 7,107 5,342 2,807 4,300 2,731 2,611 12,123 12,529 12,449 - - Nagoya 1,696 1,098 861 752 800 75.4% - 2,222 2,321 1,061 1,161 1,204 1,117 4,443 4,407 4,543 - - Tokyo 1,130 1,220 910 2,353 957 98.6% - 3,502 1,803 971 2,531 917 886 4,433 5,613 5,305 - - Kansai 586 570 399 831 977 131.0% - 1,338 1,183 746 592 593 590 2,992 2,386 2,521 - - Tohoku 420168253 182.8% - 45 35 29 16 17 18 256 122 80 - - Plasterboard recycling 353 363 395 373 393 98.9% - 791829 398 393 434 395 1,320 1,483 1,620 - - GAC 226 234 254 245 253 97.3% - 514546 260 254 286 260 782 959 1,060 - - GAK 128 128 138 127 140 101.4% - 277283 138 139 148 135 538 521 560 - - Others 214 212 280 209 151 108.8% - 280661 139 141 139 522 929914 --- Yo Y -4.0% 6.3% -19.4% 35.4% -16.4% 28.3% 4.5% -8.3% 9.5% -8.4% -16.1% 38.8% 15.5% -23.3% -24.7% 3.9% -1.9% 0.6% 10.9% 15.5% Soil contamination research and cleanup -7.6% 1.6% -26.2% 54.4% -18.4% -17.9% 47.9% 25.0% -35.0% -28.5% 3.3% -0.6% Nagoya 17.5% 12.4% -14.9% -25.5% -52.8% -37.4% 5.7% 39.8% 48.5% -21.8% -0.8% 3.1% Tokyo -29.0% 13.9% -6.7% 196.0% -15.3% -14.1% 107.5% 0.8% -62.3% -32.5% 26.6% -5.5% Kansai 19.1% -25.2% -58.6% 7.4% 66.7% 27.3% 3.9% 48.6% -29.0% -29.8% -20.3% 5.7% Tohoku -97.6% -61.5% 45.5% 228.0% 1,225.0% 625.0% -20.0% 6.3% -78.0% -46.7% -52.3% -34.4% Plasterboard recycling 9.2% 19.5% 15.1% 6.4% 11.4% 12.7% 8.2% 10.0% 6.0% 10.9% 12.4% 9.2% GAC 13.0% 32.2% 27.0% 19.5% 11.9% 15.0% 8.5% 12.6% 6.1% -3.9% 22.6% 10.5% GAK 1.6% 1.6% -2.1% -12.4% 9.4% 7.8% 8.6% 7.2% 6.3% 43.1% -3.2% 7.5% Others 68.0% 88.8% 15.2% -53.2% -29.2% -34.9% -33.5% -50.3% 149.8% -0.0% -1.6% Gross profit 683 530 437 1,010 623 -- 2,696 2,659 2,870 3,281 4,063 Gross margin 17.1% 15.2% 15.3% 21.9% 18.7% 18.8% 17.8% 19.1% 19.7% 21.1% Cost ratio 82.9% 84.8% 84.7% 78.1% 81.3% 81.2% 82.2% 80.9% 80.3% 78.9% SG&A expenses 338 337 282 364 350 -- 1,188 1,320 1,415 1,502 1,536 YoY 11.8% 24.0% -11.4% 22.6% 3.6% 9.4% 11.1% 7.2% 6.1% 2.3% SG&A ratio 8.5% 9.7% 9.9% 7.9% 10.5% 8.3% 8.8% 9.4% 9.0% 8.0% Operating profit 345 193 156 646 273 317 78.7% 66.3% 590 150 825 630 347 478 283 345 1,508 1,339 740 1,455 1,779 2,527 YoY -28.0% -50.8% -58.6% 146.8% -20.8% 64.3% 9.8% -81.3% 53.5% -21.4% 0.7% 147.8% 81.7% -46.6% -40.1% -11.2% -44.7% 8.6% 22.3% 42.0% Soil contamination research and cleanup 445 280 134 728 341 1,832 1,587 - - - Plasterboard recycling 52 65 83 63 84 125263 --- Others 38 14 83 31 18 142167 --- Adjustments -191 -166 -145 -176 -170 -590 -678 --- OPM 8.7% 5.5% 5.4% 14.0% 8.2% 7.1% 7.6% 2.2% 10.1% 9.2% 10.4% 9.9% 8.6% 9.8% 10.5% 9.0% 9.7% 10.7% 13.1% Soil contamination research and cleanup 13.0% 9.6% 6.1% 18.1% 12.2% -- 15.1% 12.7% - Plasterboard recycling 14.7% 17.8% 21.1% 16.9% 21.4% -- 9.4% 17.7% - Capital expenditures 2,710 4,479 3,750 300 300 Depreciation 197 200 211 214 526 822 680 989 826 Soil contamination research and cleanup 190544 --- Plasterboard recycling 269224 --- Others 46 38 - - - Adjustments 21 16 - - - EBITDA 541 393 367 860 2,035 2,161 2,135 2,768 3,353 Soil contamination research and cleanup 2,021 2,131 - - - Plasterboard recycling 394487 --- Others 188204 --- EBITDA margin 13.6% 11.3% 12.8% 18.7% 14.2% 14.5% 14.2% 16.6% 17.4% Soil contamination research and cleanup 16.7% 17.0% - Plasterboard recycling 29.8% 32.8% - Source: Shared Research based on company data

January 2018 On January 9, 2018, the company announced a revision of its dividend forecast.

September 2017 On September 19, 2017, the company announced revisions to its 1H and full-year earnings forecasts for FY02/18.

Reasons for revisions (consolidated basis) Daiseki’s performance during 1H FY02/18 was robust owing to 1) price stability of the Group’s recycled products backed by stable forex rates and bounce back of commodities prices that had been on a downtrend until FY02/17, and 2) an increase in market share for its mainstay industrial waste processing business. While consolidated subsidiary Daiseki Eco. Solution Co., Ltd.

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(DES) announced a downward revision to its 1H and full-year forecasts on September 15, strong performances of the other businesses were enough to offset shortfalls at the Soil contamination cleanup business, and overall results have exceeded plans. As such, the company revised up consolidated earnings forecasts for 1H and full-year FY02/18. According to the new forecasts, operating profit, recurring profit, and net income attributable to owners of the parent are all expected to mark record highs.

Forecast revisions (consolidated) FY02/17 FY02/18 Revised Est. FY02/18 Initial Est. Difference (JPYmn) 1H2HFY1H2HFY1H2HFY1H2HFY Sales 22,868 27,941 50,809 24,910 24,930 49,840 23,870 24,930 48,800 1,040 0 1,040 YoY -15.2% 17.2% 0.0% 8.9% -10.8% -1.9% 4.4% -10.8% -4.0% Operating profit 4,175 3,674 7,849 4,460 4,260 8,720 4,120 4,260 8,380 340 0 340 YoY 0.0% 0.0% 0.0% 6.8% 15.9% 11.1% -1.3% 15.9% 6.8% OPM 18.3% 13.1% 15.4% 17.9% 17.1% 17.5% 17.3% 17.1% 17.2% Recurring profit 3,717 3,511 7,228 4,550 4,300 8,850 4,160 4,300 8,460 390 0 390 YoY -12.1% -5.7% -9.1% 22.4% 22.5% 22.4% 11.9% 22.5% 17.0% RPM 16.3% 12.6% 14.2% 18.3% 17.2% 17.8% 17.4% 17.2% 17.3% Net in co me 2 ,045 2,087 4,132 2,960 2,540 5,500 2,440 2,540 4,980 520 0 520 YoY -2.2% 18.8% 7.4% 44.7% 21.7% 33.1% 19.3% 21.7% 20.5% Source: Shared Research based on company data

Reasons for revisions (parent company) The parent Daiseki expects its sales and profits to exceed initial forecasts on robust performance supported by 1) steady collection volume of industrial waste amid strong domestic industrial production, 2) regained stability in prices of petroleum products (that continued to fall until mid-FY02/17) and the company’s recycled fuel, and 3) increase in user numbers at all of its recycling facilities. As such, the company revised up parent company earnings forecasts for 1H and full-year FY02/18.

Forecast revisions (parent) FY02/17 FY02/18 Revised Est. FY02/18 Initial Est. Difference (JPYmn) 1H2HFY1H2HFY1H2HFY1H2HFY Sales 13,057 12,689 25,746 14,440 13,440 27,880 13,790 13,440 27,230 650 0 650 YoY -4.4% 2.7% -1.0% 10.6% 5.9% 8.3% 5.6% 5.9% 5.8% Recurring profit 3,238 3,041 6,279 3,850 3,200 7,050 3,500 3,200 6,700 350 0 350 YoY -3.9% 7.3% 1.2% 18.9% 5.2% 12.3% 8.1% 5.2% 6.7% RPM 3.0% 24.0% 24.4% 26.7% 23.8% 25.3% 25.4% 23.8% 24.6% Net in co me 2 ,103 2,036 4,139 2,700 2,070 4,770 2,260 2,070 4,330 440 0 440 YoY -0.7% 275.0% 55.5% 28.4% 1.7% 15.2% 7.5% 1.7% 4.6% Source: Shared Research based on company data

On September 15, 2017, the company consolidated subsidiary Daiseki Eco. Solution Co., Ltd. (TSE: 1712; “DES”) announced revisions to its 1H and full-year earnings forecasts for FY02/18.

Reasons for revisions at DES 1H sales were robust in the Soil contamination research and cleanup business despite sluggishness in Eastern Japan, as Greater Tokyo has seen an increase in construction work heading toward the 2020 Tokyo Olympics. The Plaster board recycling business also showed steady performance with sales slightly exceeding forecast. However, at the Yatomi Recycling Center (contaminated soil processing facility) completed in April 2017, processing volume during 1H significantly fell short of target due to a longer than expected trial run period that pushed overall processing operations behind schedule. As a result, fixed costs including depreciation weighed down profits, causing DES to revise down 1H and full-year forecasts. Forecasts for 2H remain unchanged.

Daiseki is analyzing the impact of DES’s forecast revisions on consolidated earnings, and will disclose any relevant information as soon as possible in the case revisions on the consolidated level become necessary.

Forecast revisions FY02/17 FY02/18 Revised Est. FY02/18 Init ial Est . Difference (JPYmn) 1H2HFY1H2HFY1H2HFY1H2HFY Sales 7,426 6,946 14,373 7,466 9,234 16,700 7,366 9,234 16,600 100 0 100 YoY -31.2% -16.2% -24.7% 0.5% 32.9% 16.2% -0.8% 32.9% 15.5% Operating profit 871 638 1,508 537 1,157 1,694 737 1,157 1,894 -200 0 -200 YoY -37.6% -43.2% -40.1% -38.3% 81.4% 12.3% -15.4% 81.4% 25.6% OPM 11.7% 9.2% 10.5% 7.2% 12.5% 10.1% 10.0% 12.5% 11.4% Recurring profit 873 660 1,534 577 1,159 1,736 741 1,159 1,900 -164 0 -164 YoY -37.6% -41.1% -39.2% -33.9% 75.6% 13.2% -15.2% 75.6% 23.9% RPM 11.8% 9.5% 10.7% 7.7% 12.6% 10.4% 10.1% 12.6% 11.4% Net income 565 390 955 376 707 1,083 450 707 1,157 -74 0 -74 YoY -36.1% -38.3% -37.0% -33.4% 81.4% 13.5% -20.3% 81.4% 21.2% Source: Shared Research based on company data

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February 2017 On February 2, 2017, the company announced that it acquired a JIS (Japanese Industrial Standards) certificate for recycled heavy oil at its Nagoya plant on January 27, 2017. Through this certification, the company can provide even higher quality JIS-certified products.

January 2017 On January 6, 2017, the company announced earnings results for Q3 FY02/17, a revision to its full-year forecasts, and an increase of a year-end dividend.

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Company profile

Company Head office 1-86 Funamicho Minato-ku Nagoya-shi Daiseki Co Ltd Aichi, Japan 455-8505 Phone Listed Tokyo Stock Exchange 1st Section, +81-52-611-6322 Nagoya Stock Exchange 1st Section Established Exchange listing October 1, 1958 July 27, 1995 Website Financial year-end http://www.daiseki.co.jp/english/index.html February IR Web http://www.daiseki.co.jp/english/IR/index.html -

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