18 May 2016 Asia Pacific/ Equity Research Product Marketing / Strategy

Japan Earnings Product Manager EARNINGS

Daisuke Takato 813 4550 9671 [email protected] Guidance misses by 10%; buybacks offer hope

Figure 1: Corporate profit guidance misses by 10% 10% 8.7% 5% 0% -5% -1.4% -2.3% -3.3% -10% -15% -9.7% -10.6% Guid YoY Guid Guid YoY Guid Guid YoY Guid Growth vs Cons Growth vs Cons Growth vs Cons Sales Operating Profit Net Profit

Source: Bloomberg, Credit Suisse

■ Disappointments all around: Jan–Mar quarter earnings were disappointing, as the yen's 4% gain versus the USD during the period battered corporate profits and dulled company outlooks. FY3/17 OP and NP guidance fell 10% short of consensus, with the likes of Fanuc (6954), (7203) and tech companies expecting a weak year ahead. Companies project sales and OP to fall 1.4% and 3%, respectively, a prognostication from which there may be no respite if our house view is correct that the USD/JPY could strengthen to ¥105. The median company forex assumption is ¥110, slightly weaker than current spot rates. Meanwhile, NP is forecast to increase YoY, but only because of a low base set by (6502), trading companies, and refiners, who booked large write-downs last . Domestic stocks such as Ono Pharmaceutical (4528) and PALTAC (8283) provided some optimism with strong results and guidance. ■ Consensus cuts coming, but downside could be limited: The Japanese market has been volatile year-to-date, and while valuations are near 2011 earthquake levels, the 14% decline in TOPIX and the 10% decline in P/E could suggest that consensus revisions may be partially priced in. ■ Buybacks are up: One benefit of the stock market weakness has been that companies are buying back stock at a record pace. In fact, midway through May, we are on track to see the biggest month of buybacks in a decade, owing to Toyota, NTT (9432), KDDI (9433), and even surprise announcements from (8303) and Taisei (1801).

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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18 May 2016

Profit guidance 10% lower than street Guidance was 10% lower than consensus estimates for both OP and NP, falling short at 27 out of 29 industrial sectors (Figure 2). Almost half of the companies we tracked announced guidance that missed consensus by 5% or more (outnumbering positive surprises by 5:1), with tech, autos and chemicals the weakest links. There were only two sectors where guidance beat consensus: (1) oil & coal products, which saw margins finally improve at refiners and (2) pulp & paper, which is typically a yen-strength beneficiary as a net importer of raw materials.

Figure 2: Guidance weak, with almost all sectors missing consensus Sales Operating Profit Net Profit

No of Sector cos Mkt Cap YoY % Surprise # Beat # Miss YoY % Surprise # Beat # Miss YoY % Surprise # Beat # Miss Information & Communication 24 49,735 1.5% -0.6% 1 1 7.4% -1.0% 2 11 6.4% -0.5% 3 10 Transportation Equipment 24 47,217 -4.6% -4.5% 0 10 -22.4% -22.2% 0 16 -20.6% -21.8% 0 15 Electric Appliances 47 46,857 -3.4% -4.0% 1 9 9.5% -16.2% 4 26 17.5% -15.7% 4 29 Pharmaceutical 22 26,389 -2.4% -2.5% 0 5 -11.0% -9.5% 2 13 -8.9% -8.2% 4 10 Chemicals 41 25,796 -0.9% -2.6% 0 5 -2.6% -5.0% 4 17 5.8% -4.7% 4 14 Foods 25 25,191 1.4% 0.2% 0 0 1.4% -4.2% 2 11 -1.1% -6.6% 2 18 Services 20 20,318 -2.9% -3.5% 0 3 2.4% -8.5% 0 11 -8.5% -12.9% 0 14 Land Transportation 23 19,544 1.5% -0.1% 1 0 -4.4% -4.4% 1 13 5.3% -1.8% 4 13 Retail Trade 30 19,068 4.2% -0.1% 2 1 3.6% -2.6% 2 6 0.6% -8.9% 3 10 Machinery 30 18,112 2.2% -1.8% 1 6 -3.0% -6.7% 2 12 2.2% -12.1% 3 19 Wholesale Trade 19 14,055 -0.8% -4.6% 0 3 -0.6% -9.4% 2 6 277.4% -7.2% 4 7 Real Estate 12 10,653 7.3% 1.9% 1 1 5.4% -0.3% 1 2 5.5% 0.9% 3 4 Construction 20 9,488 2.2% -0.4% 2 6 -3.3% -4.1% 1 8 7.6% -3.5% 3 7 Electric Power & Gas 13 8,358 -7.2% -0.3% 1 2 -50.8% -19.3% 0 2 -40.7% -8.1% 1 3 Precision Instruments 7 6,226 0.4% -3.0% 0 0 -2.4% -11.4% 0 4 8.4% -2.4% 1 2 Other Products 9 5,889 1.0% -2.4% 0 2 7.1% -7.8% 2 5 17.3% 1.0% 3 3 Iron & Steel 8 4,659 -4.8% -4.4% 0 2 -5.2% -7.1% 2 3 63.8% -14.3% 2 4 Rubber Products 4 3,836 -0.2% -0.4% 0 0 -0.7% -2.4% 0 1 12.1% -3.5% 1 1 Glass & Ceramics Products 8 3,585 1.0% -0.1% 1 0 3.0% -10.8% 1 4 18.1% -14.0% 0 5 Nonferrous Metals 8 3,022 -2.7% -4.2% 1 2 0.0% -6.4% 1 5 13.6% -18.4% 1 6 Air Transportation 2 2,549 0.8% -0.4% 0 0 0.1% -8.2% 0 2 7.7% -6.1% 0 1 Textiles & Apparel 6 2,457 2.9% -0.3% 0 0 2.7% -3.1% 1 2 15.5% 0.9% 0 3 Oil & Coal Products 5 2,275 -4.1% 6.7% 3 2 514.2% 17.7% 3 1 173.8% 12.7% 2 2 Metal Products 6 2,237 0.0% -3.4% 0 0 -1.6% -22.5% 0 4 127.1% -19.7% 1 3 Mining 2 1,324 -19.8% -8.7% 0 2 -40.2% -16.8% 0 2 0.6% -70.8% 0 2 Pulp & Paper 4 1,002 1.2% -1.4% 0 0 16.3% 1.4% 2 1 130.2% 6.9% 3 0 Marine Transportation 3 810 -8.3% -9.8% 0 3 -21.8% -49.4% 0 2 100.0% -100.0% 0 3 Warehousing & Harbor Transport 3 635 1.9% -1.2% 0 0 4.1% -1.0% 0 0 1.6% 0.5% 0 0 Fishery, Agriculture & Forestr 1 132 1.7% 0 0 -8.7% 0 0 70.9% 0 0 Banks 35 23,934 -5.0% -1.7% 6 9 Other Financing Business 9 5,905 24.6% -5.9% 0 4 Insurance 3 3,625 6.0% -7.8% 0 2 Securities & Commodity Futures 7 3,725 0 0 Industrials 426 381,418 -1.4% -2.3% 15 65 -3.3% -9.7% 35 190 8.7% -10.6% 52 208 Financials 54 37,189 -2.0% -2.9% 6 15 Note: Surprise = Guidance / Consensus; # of beat/misses are ones that exceed ±5%. Source: Bloomberg, Credit Suisse

Japan Earnings 2 18 May 2016

Another "shock" The overall impressions from Credit Suisse Japan analysts were negative due to the weak guidance from several high-profile companies. Fanuc delivered "another shock", analyst Shinji Kuroda said, with FY3/17 OP guidance roughly 40% below his forecast (guidance ¥105/$ and ¥115/€); the stock was down 10% the following day. Kuroda reiterated his UNDERPERFORM several days after the announcement and cut his target price 15%, as he factored in cost increases, stronger yen, slowing machine tool orders, and weak smartphone investment. He finds Fanuc's 1.6% dividend yield and valuations unattractive. In the tech sector, (6963), (4062), NEC (6701), (6702), and (6952) were among the names that our analysts had negative impressions of, also battered by the yen and rising costs. Toyota's FY3/17 OP forecast for ¥1.7tn was 36% below consensus—though the company's conservative forex forecast of ¥105/$, ¥120/€ accounts for most of the miss—analyst Masahiro Akita also points out an unexpected increase in operating expenses. Elsewhere in the autos space, 's (7201) capital alliance with (7211), which is struggling under falsified emissions data news, stole headlines. There were also significant write-downs at trading companies, which were pounded by the decline in resource prices throughout the year that pushed down NP. Glimmers of hope Much of the bright news came from domestic companies, such as Ono Pharmaceutical (4528) owing to the strength of its high-profile cancer drug Opdivo and the possibility that the melanoma and lung cancer drug could see expanded use to treat other cancers including gastric and esophageal cancer. Analyst Fumiyoshi Sakai also reiterated his OUTPERFORM and raised his TP on Chugai Pharmaceutical (4519), as he expects several catalysts ahead at drug-related events confirming advances in new drug development. Sales are also brisk for Chugai’s mainstay oncology products (Avastin, Herceptin, Alecensa, etc.) and for bone and joint disease products including the antirheumatic Actemra and osteoporosis treatment Edirol. Drug and cosmetic wholesaler PALTAC (8283) reported record sales and profits in FY3/16, as it continued to cut costs and benefited from demand from inbound tourists; it anticipates RP rising 5% YoY to ¥19.5bn, which is 6% above analyst Masashi Mori's estimate of ¥18.4bn. Lion (4912), which reported 1Q earnings, already raised its FY12/16 OP target from ¥18bn to ¥19bn, owing to brisk sales at home and abroad. Other companies such as Daito Trust (1878) are expecting higher profits owing to yen appreciation and falling material costs, and are offering high dividend yields as well; these factors prompted Masahiro Mochizuki to raise his TP for Daito Trust on 16 May. Bearings-maker NSK (6471) also announced more favorable shareholder return policies, lifting its FY3/17 DPS outlook to ¥38 from ¥34 last year and boosting its dividend yield to an attractive 4.0%. The company also announced a share buyback totaling 3.0% of total outstanding shares, leaving analyst Shinji Kuroda with a positive impression. Please see more on the following page in our section on share repurchases.

Japan Earnings 3 18 May 2016

Buybacks on record pace Japanese corporates seem to have taken advantage of the market sell-off by buying back their own stock. As many as 377 companies have announced buybacks so far this year, on pace to hit an eight-year high. More importantly, the average size of the buybacks has been remarkably large, led by autos (Toyota, Nissan, Fuji Heavy (7270)) and telcos (Softbank (9984), NTT, NTT DoCoMo, KDDI). Even companies such as Shinsei Bank (8303), which analyst Takashi Miura believed would not buy back shares until it repaid public funds, announced a ¥10bn buyback, and general contractor Taisei (1801) announced its first buyback in 12 years.

Figure 3: Total and average size of buybacks at time of announcement # of Total Size (JPY mn) Avg Size announcements (at announcement) 1998 519 876,361 1,689 1999 521 751,814 1,443 2000 719 813,954 1,132 2001 769 1,692,758 2,201 2002 1,880 9,788,757 5,207 2003 1,878 7,654,089 4,076 2004 898 3,438,970 3,830 2005 1,016 5,901,198 5,808 2006 1,018 7,345,927 7,216 2007 1,179 5,529,330 4,690 2008 1,828 5,175,495 2,831 2009 861 855,830 994 2010 815 1,221,062 1,498 2011 753 2,056,950 2,732 2012 719 1,779,719 2,475 2013 731 2,632,270 3,601 2014 626 4,916,316 7,854 2015 709 4,828,022 6,810 2016 annualized 1,012 12,251,769 12,109 2014 (to May 15) 287 2,648,393 9,228 2015 (to May 15) 166 2,089,786 12,589 2016 (to May 15) 377 4,565,043 12,109 Note: Total size is calculated by multiplying the stock price at the time of buyback announcement by the number of shares being bought back due to limited data availability. This figure does not match the actual announced amount. Source: Bloomberg, Credit Suisse

Japan Earnings 4 18 May 2016

Consensus cuts starting; how much downside? As our quants strategist Masataka Kurita points out, sell-side revisions have started with four downward revisions for every one upward revision in the past week (Figures 4–6). In his "dual smart revisions" strategy, he tracks both the direction and dispersion of consensus operating profit for FY1 and FY2 to determine whether the analyst forecast revisions are coming from active/leader analysts (diverging from the mean) or passive/follower analysts (converging). Historically, the strategy has been most effective in the three-month period of May–Jul, with the line graph to the right of Figure 4 showing the performance if one went long the active upward revisions and short the active downward revisions. At the same time, the impact on the overall market could be muted. Japan has underperformed global markets by about 14% YTD, and the recent sell-off has pushed the TOPIX 12-month forward P/E to 13x, a 10% decline from 15x (suggesting simply that the market may have already partially priced in a 10% decline in profits).

Figure 4: Seasonality and performance of long-short strategy based on Dual Smart Revision Long short pfm by Dual 25.0 Name of Smart Revision 20.1 FY2013 Month Return Obs Rank 20.0 18.9 Avg(%) (Weeks) FY2015 Jan 1.69 41 6 16.9 FY2014 15.0 Feb 1.05 41 11 15.5 FY2012 Mar 1.94 43 2 Apr 1.31 46 9 10.0 May 1.42 47 7 Jun 1.77 43 5 Jul 1.79 44 3 5.0 Aug 1.12 45 10 FY2016 Sep 2.56 42 1 0.0 Oct 1.78 45 4 Nov 1.39 43 8 Dec 0.84 47 12 -5.0 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AVG 1.55 527 Source: Factset, Credit Suisse estimates

Figure 5: Japan has underperformed 13.7% YTD Figure 6: P/E's have fallen 10% YTD to 13x 1.05 16 S&P 500 Forward P/E 1.00 MSCI World 15 0.95 -10% drop Topix (USD): -5% YTD 0.90 14

0.85 13 Topix (JPY): -14% 0.80 12 0.75

0.70 11 1/1/2016 1/31/2016 3/1/2016 3/31/2016 4/30/2016 Jan Feb Mar Apr Source: Bloomberg, Credit Suisse Source: Bloomberg, Credit Suisse

Japan Earnings 5 18 May 2016

Earnings upside/downside at current exchange rates The median USD/JPY forex assumption from corporates is ¥110—half of companies we track use this rate, while 17% use ¥105 or below. While 33% of companies are at ¥115 or above, most of the companies are not March-end companies and simply have not adjusted their forex assumptions. Below, we look for where the upside (or downside) to corporate guidance is at ¥110 (about the current exchange rate) by looking at profit sensitivities.

Figure 7: Companies with guidance upside Companies with guidance downside

Company Impact of 1 Company Impact of 1 USD yen weaker Earnings Profit USD yen weaker Earnings Profit Ticker Name Assumption move upside Type Ticker Name Assumption move upside Type 6976 Taiyo Yuden Co Ltd 105 600 30.0% OP * 4004 KK 119 600 -15.0% OP 7270 Fuji Heavy Industries Ltd 105 10,400 12.4% OP * 7272 Yamaha Motor Co Ltd 117 1,600 -9.3% OP 5334 NGK Spark Plug Co Ltd 105 960 11.3% OP 5714 Co Ltd 115 380 -6.6% OP 7203 Toyota Motor Corp 105 37,870 11.1% OP * 2914 Inc 118 3,000 -4.2% OP 6995 Tokai Rika Co Ltd 105 558 10.7% OP 6326 Corp 115 1,800 -4.0% OP 7267 Motor Co Ltd 105 12,600 10.5% OP * 5108 Corp 115 3,800 -3.7% OP 6301 Komatsu Ltd 105 2,900 9.7% OP 4272 Co Ltd 115 110 -3.1% OP 6472 NTN Corp 105 600 8.6% OP 8002 Corp 113 1,300 -3.0% NP 7201 Nissan Motor Co Ltd 105 10,600 7.5% OP 6273 SMC Corp/Japan 120 300 -2.8% OP 4205 Zeon Corp 105 400 7.1% OP 8316 Sumitomo Financial Grou 120 1,600 -2.3% NP 3863 Co Ltd 115 -400 6.3% OP * 3405 Co Ltd 120 140 -2.0% OP 7282 Toyoda Gosei Co Ltd 105 413 5.7% OP 6923 Co Ltd 115 150 -1.8% OP 7205 Ltd 105 860 5.4% OP 6268 Nabtesco Corp 115 85 -1.7% OP 5938 LIXIL Group Corp 115 -600 5.4% OP 4911 Co Ltd 115.5 100 -1.4% OP * 5201 Asahi Glass Co Ltd 120 -400 5.3% OP * 2587 Suntory Beverage & Food Ltd 118 150 -1.3% OP 6473 JTEKT Corp 105 600 5.0% OP 6752 Corp 115 800 -1.3% OP * 4578 Otsuka Holdings Co Ltd 120 -300 4.3% OP * 5110 Sumitomo Rubber Industries Ltd 115 150 -0.9% OP 6503 Corp 105 2,000 3.8% OP 3116 Toyota Boshoku Corp 105 -50 -0.5% OP 6471 NSK Ltd 105 500 3.8% OP 6701 NEC Corp 115 -700 3.5% OP 6361 Ebara Corp 105 250 3.4% OP 6201 Toyota Industries Corp 105 800 3.3% OP 6806 Hirose Electric Co Ltd 108 360 2.7% OP 4523 Co Ltd 113 -440 2.5% OP 6103 OKUMA Corp 109 360 2.1% OP 7276 Koito Manufacturing Co Ltd 105 300 1.9% OP 7988 Nifco Inc/Japan 105 100 1.8% OP 3402 Inc 105 600 1.8% OP 5333 NGK Insulators Ltd 108 450 1.5% OP 6481 THK Co Ltd 105 60 1.4% OP 7269 Motor Corp 105 400 1.1% OP 7735 SCREEN Holdings Co Ltd 107 100 1.1% OP 4061 Co Ltd 109 200 0.6% OP 8136 Sanrio Co Ltd 109.66 50 0.1% OP Note: Companies denoted with an asterisk have December fiscal year-ends. Source: Company data, Credit Suisse estimates

Japan Earnings 6 18 May 2016 Guidance YoY growth rankings Top 20 YoY guidance forecasts

Figure 8: Sales Operating Profit Net Profit Sales OP NP Guid Guid Guid Ticker Name YoY % Ticker Name YoY % Ticker Name YoY % 4528 Ono Pharmaceutical Co Ltd 61.6% 5012 TonenGeneral Sekiyu KK 2279.8% 5012 TonenGeneral Sekiyu KK 60684.3% 3092 Start Today Co Ltd 26.8% 5019 Idemitsu Kosan Co Ltd 675.3% 5713 Sumitomo Metal Mining Co Ltd 7543.4% 3064 MonotaRO Co Ltd 23.5% 5020 JX Holdings Inc 469.6% 4004 Showa Denko KK 1964.0% 8905 Aeon Mall Co Ltd 21.9% 5002 Showa Shell Sekiyu KK 394.9% 7013 IHI Corp 1862.1% 9684 Square Enix Holdings Co Ltd 21.4% 5021 Cosmo Energy Holdings Co Ltd 360.6% 5105 Toyo Tire & Rubber Co Ltd 1333.7% 2810 House Foods Group Inc 19.5% 5202 Co Ltd 296.5% 9006 Keikyu Corp 1262.4% 4751 CyberAgent Inc 17.9% 7013 IHI Corp 194.8% 3116 Toyota Boshoku Corp 643.6% 3668 COLOPL Inc 17.4% 3608 TSI Holdings Co Ltd 182.8% 3863 Nippon Paper Industries Co Ltd 642.6% 2371 Kakaku.com Inc 16.3% 5413 Nisshin Steel Co Ltd 152.8% 4544 Miraca Holdings Inc 365.7% 2413 M3 Inc 16.0% 4528 Ono Pharmaceutical Co Ltd 137.7% 8031 Mitsui & Co Ltd 339.8% 4555 Sawai Pharmaceutical Co Ltd 15.8% 6502 Toshiba Corp 116.7% 5413 Nisshin Steel Co Ltd 319.3% 2127 Nihon M&A Center Inc 14.2% 9861 Yoshinoya Holdings Co Ltd 110.8% 5019 Idemitsu Kosan Co Ltd 294.5% 6268 Nabtesco Corp 13.8% 9006 Keikyu Corp 99.2% 8058 Mitsubishi Corp 267.3% 4681 Resorttrust Inc 12.8% 5706 Mitsui Mining & Smelting Co Lt 88.6% 8015 Corp 260.1% 5021 Cosmo Energy Holdings Co Ltd 12.3% 7003 Mitsui Engineering & Shipbuild 86.2% 5938 LIXIL Group Corp 250.0% 6674 GS Yuasa Corp 12.1% 9107 Kawasaki Kisen Kaisha Ltd 80.3% 6995 Tokai Rika Co Ltd 230.9% 4911 Shiseido Co Ltd 12.1% 1911 Sumitomo Forestry Co Ltd 52.9% 2503 Kirin Holdings Co Ltd 226.8% 4704 Inc/Japan 11.7% 3941 Rengo Co Ltd 52.6% 5021 Cosmo Energy Holdings Co Ltd 194.6% 8801 Co Ltd 11.6% 2501 Sapporo Holdings Ltd 51.3% 5406 Ltd 192.8% 2331 Sohgo Security Services Co Ltd 11.3% 2768 Corp 50.5% 1911 Sumitomo Forestry Co Ltd 177.6% Source: Bloomberg, Credit Suisse

Bottom 20 YoY guidance forecasts

Figure 9: Sales Operating Profit Net Profit Sales OP NP Guid Guid Guid Ticker Name YoY % Ticker Name YoY % Ticker Name YoY % 5002 Showa Shell Sekiyu KK -22.9% 1662 Japan Petroleum Exploration Co -95.2% 4062 Ibiden Co Ltd -139.8% 1605 Corp -20.0% 9531 Gas Co Ltd -75.0% 2810 House Foods Group Inc -76.6% 1662 Japan Petroleum Exploration Co -19.0% 4062 Ibiden Co Ltd -73.4% 6976 Taiyo Yuden Co Ltd -72.9% 6954 FANUC Corp -18.9% 9533 Gas Co Ltd -62.1% 9531 Co Ltd -68.7% 1963 JGC Corp -18.2% 6963 Rohm Co Ltd -58.4% 6963 Rohm Co Ltd -61.1% 9531 Tokyo Gas Co Ltd -16.1% 6976 Taiyo Yuden Co Ltd -57.2% 9533 Toho Gas Co Ltd -60.5% 9766 Holdings Corp -16.0% 4578 Otsuka Holdings Co Ltd -53.9% 5711 Corp -59.2% 9533 Toho Gas Co Ltd -15.6% 4536 Santen Pharmaceutical Co Ltd -51.7% 4536 Santen Pharmaceutical Co Ltd -49.6% 4967 Kobayashi Pharmaceutical Co Lt -14.5% 9502 Co Inc -47.4% 8078 Hanwa Co Ltd -49.0% 5713 Sumitomo Metal Mining Co Ltd -14.3% 6954 FANUC Corp -45.6% 9024 Seibu Holdings Inc -48.4% 4578 Otsuka Holdings Co Ltd -13.5% 9101 KK -43.8% 4523 Eisai Co Ltd -46.8% 5012 TonenGeneral Sekiyu KK -12.5% 9532 Co Ltd -41.7% 4151 Co Ltd -46.3% 6448 Ltd -11.9% 7203 Toyota Motor Corp -40.4% 9983 Co Ltd -45.5% 9107 Kawasaki Kisen Kaisha Ltd -11.6% 1605 Inpex Corp -39.0% 5201 Asahi Glass Co Ltd -41.7% 9532 Osaka Gas Co Ltd -11.5% 4186 Tokyo Ohka Kogyo Co Ltd -38.1% 1963 JGC Corp -41.6% 9104 Mitsui OSK Lines Ltd -11.5% 5334 NGK Spark Plug Co Ltd -35.9% 6954 FANUC Corp -41.3% 4182 Mitsubishi Gas Chemical Co Inc -10.7% 6395 Tadano Ltd -35.6% 4578 Otsuka Holdings Co Ltd -40.5% 8015 Toyota Tsusho Corp -10.7% 8129 Toho Holdings Co Ltd -34.7% 6471 NSK Ltd -40.4% 5444 Yamato Kogyo Co Ltd -10.6% 4534 Mochida Pharmaceutical Co Ltd -34.2% 4182 Mitsubishi Gas Chemical Co Inc -38.5% 6501 Ltd -10.3% 5444 Yamato Kogyo Co Ltd -33.1% 9532 Osaka Gas Co Ltd -38.3% Source: Bloomberg, Credit Suisse

Japan Earnings 7 18 May 2016 Consensus beat/miss rankings Top 20 guidance beats (vs. consensus)

Figure 10: Sales Operating Profit Net Profit Sales OP NP Guid Guid Guid Ticker Name vs Cons Ticker Name vs Cons Ticker Name vs Cons 5021 Cosmo Energy Holdings Co Ltd 20.7% 5021 Cosmo Energy Holdings Co Ltd 46.1% 5021 Cosmo Energy Holdings Co Ltd 105.7% 5019 Idemitsu Kosan Co Ltd 11.2% 3941 Rengo Co Ltd 29.3% 6502 Toshiba Corp 71.0% 5020 JX Holdings Inc 9.0% 5019 Idemitsu Kosan Co Ltd 26.2% 9502 Chubu Electric Power Co Inc 62.6% 9042 Hankyu Hanshin Holdings Inc 8.2% 2768 Sojitz Corp 23.7% 9006 Keikyu Corp 51.3% 5703 Holdings Co 7.7% 4676 Fuji Media Holdings Inc 21.2% 5019 Idemitsu Kosan Co Ltd 32.3% 1812 Corp 7.6% 4523 Eisai Co Ltd 18.4% 3941 Rengo Co Ltd 30.5% 1893 Penta-Ocean Construction Co Lt 7.0% 5020 JX Holdings Inc 15.9% 4676 Fuji Media Holdings Inc 28.0% 9684 Square Enix Holdings Co Ltd 7.0% 4004 Showa Denko KK 14.5% 8086 Nipro Corp 27.2% 9508 Kyushu Electric Power Co Inc 5.8% 4530 Hisamitsu Pharmaceutical Co In 14.1% 7951 Yamaha Corp 26.8% 6460 Sammy Holdings Inc 5.8% 3291 Iida Group Holdings Co Ltd 13.7% 3291 Iida Group Holdings Co Ltd 24.3% 8035 Ltd 5.8% 6857 Corp 12.8% 8031 Mitsui & Co Ltd 21.7% 3291 Iida Group Holdings Co Ltd 5.6% 5413 Nisshin Steel Co Ltd 12.2% 4004 Showa Denko KK 21.0% 2651 Lawson Inc 5.3% 4091 Taiyo Nippon Sanso Corp 11.9% 4967 Kobayashi Pharmaceutical Co Lt 17.9% 8219 Aoyama Trading Co Ltd 5.2% 7966 Lintec Corp 11.9% 3863 Nippon Paper Industries Co Ltd 17.4% 5201 Asahi Glass Co Ltd 5.0% 5463 Maruichi Steel Tube Ltd 10.6% 5901 Group Holdings Ltd 16.5% 8933 NTT Urban Development Corp 4.9% 6971 Corp 8.8% 2810 House Foods Group Inc 15.2% 3289 Tokyu Fudosan Holdings Corp 4.7% 9072 Nikkon Holdings Co Ltd 8.5% 7912 Co Ltd 15.0% 2768 Sojitz Corp 4.6% 2501 Sapporo Holdings Ltd 8.2% 1911 Sumitomo Forestry Co Ltd 13.5% 2206 Ezaki Glico Co Ltd 4.6% 5703 Nippon Light Metal Holdings Co 8.0% 4911 Shiseido Co Ltd 13.4% 3092 Start Today Co Ltd 4.4% 2282 NH Foods Ltd 7.4% 6857 Advantest Corp 12.4% Source: Bloomberg, Credit Suisse

Bottom 20 guidance misses (vs. consensus)

Figure 11: Sales Operating Profit Net Profit Sales OP NP Guid Guid Guid Ticker Name vs Cons Ticker Name vs Cons Ticker Name vs Cons 8088 Iwatani Corp -19.9% 1662 Japan Petroleum Exploration Co -93.5% 9107 Kawasaki Kisen Kaisha Ltd -483.5% 9107 Kawasaki Kisen Kaisha Ltd -14.0% 9104 Mitsui OSK Lines Ltd -84.2% 4062 Ibiden Co Ltd -203.6% 9766 Konami Holdings Corp -13.3% 9531 Tokyo Gas Co Ltd -59.7% 9783 Benesse Holdings Inc -100.0% 9513 Electric Power Development Co -13.3% 6963 Rohm Co Ltd -57.6% 1662 Japan Petroleum Exploration Co -80.6% 6366 Chiyoda Corp -13.1% 6762 TDK Corp -56.7% 6366 Chiyoda Corp -72.6% 7974 Co Ltd -12.4% 4062 Ibiden Co Ltd -54.9% 1605 Inpex Corp -69.0% 6954 FANUC Corp -12.3% 9783 Benesse Holdings Inc -52.4% 8267 Aeon Co Ltd -68.8% 8015 Toyota Tsusho Corp -12.2% 9101 Nippon Yusen KK -51.9% 6976 Taiyo Yuden Co Ltd -66.3% 4182 Mitsubishi Gas Chemical Co Inc -12.1% 6976 Taiyo Yuden Co Ltd -45.4% 6305 Hitachi Construction Machinery -60.1% 6479 Minebea Co Ltd -11.4% 4186 Tokyo Ohka Kogyo Co Ltd -43.0% 6762 TDK Corp -59.0% 1662 Japan Petroleum Exploration Co -10.6% 5938 LIXIL Group Corp -41.4% 9531 Tokyo Gas Co Ltd -58.6% 9104 Mitsui OSK Lines Ltd -10.0% 6954 FANUC Corp -37.9% 6963 Rohm Co Ltd -58.2% 4528 Ono Pharmaceutical Co Ltd -10.0% 6366 Chiyoda Corp -36.7% 9101 Nippon Yusen KK -57.6% 6501 Hitachi Ltd -9.4% 7203 Toyota Motor Corp -36.0% 5706 Mitsui Mining & Smelting Co Lt -56.1% 5713 Sumitomo Metal Mining Co Ltd -9.3% 5334 NGK Spark Plug Co Ltd -34.0% 5938 LIXIL Group Corp -49.1% 6724 Corp -9.3% 3591 Wacoal Holdings Corp -32.9% 4186 Tokyo Ohka Kogyo Co Ltd -41.7% 1963 JGC Corp -9.1% 9601 Shochiku Co Ltd -31.4% 5711 Mitsubishi Materials Corp -40.3% 5486 Hitachi Metals Ltd -8.9% 7003 Mitsui Engineering & Shipbuild -30.8% 5713 Sumitomo Metal Mining Co Ltd -39.0% 5012 TonenGeneral Sekiyu KK -8.8% 1963 JGC Corp -30.4% 9104 Mitsui OSK Lines Ltd -38.2% 2127 Nihon M&A Center Inc -8.7% 8002 Marubeni Corp -29.1% 9031 Nishi-Nippon Railroad Co Ltd -37.8% Source: Bloomberg, Credit Suisse

Japan Earnings 8 18 May 2016

Companies Mentioned (Price as of 17-May-2016) Casio (6952.T, ¥1,720) Chugai Pharmaceutical (4519.T, ¥3,720) Daito Trust Construction (1878.T, ¥16,190) Fanuc (6954.T, ¥16,385) Fuji Heavy Industries (7270.T, ¥3,895) Fujitsu (6702.T, ¥389) IBIDEN (4062.T, ¥1,324) KDDI (9433.T, ¥3,185) Lion (4912.T, ¥1,617) Mitsubishi Motors (7211.T, ¥535) NEC (6701.T, ¥250) NSK (6471.T, ¥1,036) NTT (9432.T, ¥4,880) Nissan Motor (7201.T, ¥1,050) Ono Pharmaceutical (4528.T, ¥5,157) PALTAC (8283.T, ¥2,146) ROHM (6963.T, ¥4,305) Shinsei Bank (8303.T, ¥161) SoftBank Group Corp. (9984.T, ¥5,928) Taisei Corp (1801.T, ¥803) Toshiba (6502.T, ¥224) Toyota Motor (7203.T, ¥5,533) Further companies mentioned in figures 8-11.

Disclosure Appendix Important Global Disclosures I, Daisuke Takato, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, N eutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

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

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

Japan Earnings 9 18 May 2016

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

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 57% (37% banking clients) Neutral/Hold* 33% (24% banking clients) Underperform/Sell* 9% (44% banking clients) Restricted 1% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. This material is intended for your use only and not for general distribution. This material is not intended to promote or procure a particular outcome in the UK referendum on membership of the European Union (the “Referendum”). Credit Suisse does not promote or endorse either campaign in the Referendum. This material does not constitute, and should not be interpreted as, a recommendation by Credit Suisse as to the merits of a particular outcome of the Referendum. See the Companies Mentioned section for full company names The subject company (4519.T, 4912.T, 6502.T, 6701.T, 6702.T, 6952.T, 7203.T, 8303.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (4519.T) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (8303.T) within the past 12 months Credit Suisse has received investment banking related compensation from the subject company (4519.T) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (4519.T, 4528.T, 4912.T, 6471.T, 6502.T, 6701.T, 6702.T, 6952.T, 6963.T, 7201.T, 7203.T, 7211.T, 8303.T, 7270.T) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (8303.T) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (6502.T, 6701.T, 6702.T, 7201.T, 7203.T). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (4062.T, 8303.T). Credit Suisse has a material conflict of interest with the subject company (6502.T) . Credit Suisse Securities (USA) LLC is acting as an advisor to Landis+Gyr on the announced acquisition by Toshiba Corporation. This acquisition remains subject to regulatory approvals and other customary closing conditions.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (6701.T, 7201.T). As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Japan Earnings 10 18 May 2016

Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Daisuke Takato

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

Japan Earnings 11 18 May 2016

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