13 January 2017 Asia Pacific/Japan Equity Research Chemicals

Chemical sector Research Analysts SECTOR REVIEW Masami Sawato 81 3 4550 9729 [email protected] Outlook, key themes, and investment strategy for 2017 Chemical sector outlook and key themes With the North American oil shale chemicals and Chinese petrochemical ramp-up slipping into 2018 and beyond, we see sustained high operating rates in 2017 for Japanese petrochemical makers. In electronics materials, we expect process migration and NAND demand growth to lead to a tighter supply-demand balance in high precision wafers and look for a genuine growth in OLED (Organic Light Emitting Diode) uptake. ■ 1) Restructuring of agrochemical mega-companies: With Germany’s Bayer AG and the US-based Monsanto reaching a merger agreement in 2016, the global agrochemical/seed industry is poised for domination by businesses from Europe, US, and China. To prevail in a globally competitive environment, companies will need solid development capabilities. We focus on Mitsui Chemicals (4183), Sumitomo Chemical (4005), and Nippon Soda (4041), which are primed to benefit from the pipeline of next-generation products heading into 2020. ■ 2) Auto weight reduction, EVs: As environmental regulations are tightened through 2020, we anticipate greater momentum in automobile weight reduction and a movement towards electrification. In automobile weight reduction, we focus on Mitsui Chemicals (4183) for its metal-resin composite molding technology and on Teijin (3401), Toray (3402), and Mitsubishi Chemical (4188) for carbon fibers. In lithium-ion battery (LiB) materials, a key to electrification, we focus on Asahi Kasei (3407), Toray (3402), Sumitomo Chemical (4005), and Ube Industries (4208) for battery separators. We also focus on Hitachi Chemical (4217) for anode materials and Mitsubishi Chemical (4188) for three key raw materials. ■ 3) OLEDs: We look for greater OLED use in high-end smartphones in 2017. In addition to Mitsubishi Chemical and Sumitomo Chemical, which manufacture OLED materials, we focus on Ube Industries which makes polyimide for flexible displays. ■ 4) Tighter wafer supplies: We see a tighter silicon wafer supply-demand balance in mid-2017 and anticipate wafer price hikes to gain momentum. We focus on SUMCO (3436) and Shin-Etsu Chemical (4063). Earnings outlook We look for a strong performance overall at 3Q FY3/17 results and see a high likelihood of profit boosts in FY3/18 from a weaker yen. We also revised our estimates and target prices for 23 companies in our chemical sector since October.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 13 January 2017

Stock picks ■ Mitsui Chemicals (4183, OUTPERFORM, TP ¥780): Record profits likely driven by three growth areas. Our top pick for 2017. ■ Toray (3402, OUTPERFORM, TP ¥1,360): Carbon fiber inventory adjustments to end in 4Q. We await demand growth for automotive-use carbon fiber-reinforced polymers (CFRP). ■ Mitsubishi Chemical (4188, OUTPERFORM, TP ¥1,030): Poised to benefit from the merger of three chemicals units in 2017; strong development capabilities in LiB and OLED materials. ■ Hitachi Chemical (4217, OUTPERFORM, TP ¥3,380): Set for record profits driven by growth in advanced semiconductors, LiB materials, and storage batteries. Our top pick in electronic materials.

Chemical sector2 13 January 2017

2017 outlook Petrochemical sector to remain robust in 2017 due to delays in shale products

Low material prices and high product prices drove margin improvement in 2016

We believe 2016 was a favorable year for the Japanese petrochemical sector. In addition to lower crude and naphtha prices, a tighter supply-demand balance due to issues at overseas plants and a sharp increase in product prices led to wider spreads. The Japanese petrochemical sector also benefitted from a volume effect as domestic plants managed to avoid major problems and maintain high operating rates.

Ethylene production is likely to decline in 2016 by roughly 9% YoY, or 630,000 tonnes to around 6.25mn tonnes. Aggregate production through November totaled 5.699mn tonnes as operations continued at full capacity (97.8% in November). We also believe December output surpassed 550,000 tonnes as no periodic maintenance was scheduled for the month. Although the demand environment was favorable in 2016, total output declined due to Asahi Kasei halting production at Mizushima facilities (annual capacity 504,000 tonnes without scheduled maintenance) and as more plants held scheduled maintenance than a year earlier. We anticipate ethylene output to decline to levels slightly above that seen in 2012 (6.145mn tonnes).

Asahi Kasei’s stoppage of the Mizushima cracker facility in February 2016 marked the third such stoppage in Japan following Mitsubishi Chemical’s May 2014 closure of Kashima No. 1 Plant (392,000 tonnes) and Sumitomo Chemical’s closure of its Chiba facilities in May 2015 (415,000 tonnes). The above stoppages may have brought large- scale ethylene center restructuring to a close. Due to these stoppages, domestic ethylene production capacity fell by 15%, from 8.019mn tonnes in 2013 to 6.832mn tonnes. Output fell in 2016 due to scheduled maintenance at more plants (five plants at five companies) than in 2015 (three plants at three companies).

Operating rates continue at high levels, surpassing 95% for 13 consecutive months and 90% for 36 consecutive months starting in November 2015 following the stoppage of production facilities (figures as of November 2016). Previously, the companies maintained operating rates by raising exports, but exports registered a double-digit percentage decline in 2016 (as of November). Although the yen’s advance probably had an impact, the companies appear to have succeeded in narrowing down domestic capacity and building a framework for maintaining operating rates driven solely by domestic demand.

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Figure 1: Domestic ethylene production Figure 2: Domestic naphtha price and operation rate for ethylene plants (000t) (%) (¥/kl) (%) 700 98 75,000 100.0 70,000 600 95.0 96 65,000

500 60,000 94 90.0 400 55,000 92 50,000 85.0 300 45,000 90 80.0 200 Exports 40,000 Domestic Demand 35,000 100 88 Domestic naphtha price (LHS) 75.0 Operating Rate (%, RHS) 30,000 Estimated operation rates for ethylene plants (RHS) 0 86 25,000 70.0 10/14 1/15 4/15 7/15 10/15 1/16 4/16 7/16 10/16 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016

Source: The Heavy & Chemical Industries News Agency Source: The Heavy & Chemical Industries News Agency

Tight supply-demand to continue in 2017 due to delays in shale products

We do not anticipate major changes in supply-demand conditions and the industry’s environment in 2017. With the likelihood of North American oil shale chemicals and Chinese petrochemical ramp-ups slipping into 2018 and beyond, we see prospects for sustained high operating rates for Japanese petrochemical makers in 2017. The underlying domestic production capacity is likely to total 6.672mn tonnes in 2017 given the impact from scheduled maintenance at three plants by three different companies (two units fewer than in 2016; Idemitsu Kosan: Chiba, Mitsui Chemical: Ichihara, and Asahi Kasei Mitsubishi Chemical Ethylene-Mizushima). Although margin improvement comparable to 2016 is probably unlikely as crude and naphtha prices have been on a recent uptrend and issues at overseas facilities have been resolved, we nonetheless look for stable domestic demand to help in maintaining high operating rates. Assuming all ethylene center facilities maintain operating rates of 95% through 2017, we see prospects for ethylene output to reach 6.30mn tonnes, slightly above our 6.25mn tonne outlook for 2016.

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Figure 3: Production capacity and 2017 periodic repair schedule for ethylene production sites

Production capacity 2017 Next Years for Company name Site Non-periodic production periodic continuous Periodic repair repair capacity repair run Idemitsu Kosan Chiba 374,000 414,000 374,000 2019 2 Tokuyama 623,000 689,000 689,000 2020 4 Keiyo Ethylene Chiba 690,000 768,000 768,000 2018 4 JX Energy Kawasaki 404,000 460,000 460,000 2020 4

Showa Denko Oita 615,000 691,000 691,000 2018 4 Tosoh Yokkaichi 493,000 527,000 527,000 2018 2 Tonen Chemical Kawasaki 491,000 540,000 540,000 2018 4 Maruzen Petrochemical Chiba 480,000 525,000 525,000 2020 4 Mitsui Chemicals Ichihara 553,000 612,000 553,000 2021 4

Osaka 455,000 500,000 500,000 2018 4 Mitsubishi Chemical Kashima No.2 471,000 539,000 539,000 2018 2 Asahi Kasei Mitsubishi Mizushima 496,000 567,000 506,000 2019 2 Chemical Ethylene Total 6,145,000 6,832,000 6,672,000

Source: The Heavy & Chemical Industries News Agency

Figure 4 depicts new capacity for ethylene and derivatives due to greater shale oil output in the US. As shown in Figure 4, ethylene capacity totaling 6.07mn tonnes is due for completion within 2017 (10.4mn tonnes in 2018 and beyond), but a breakdown by downstream products shows just 1.42mn tonnes of capacity for low-density polyethylene (LDPE), 1.42mn tonnes for linear low-density polyethylene (LLDPE), 4.03mn tonnes for high-density polyethylene (HDPE), and 3.10mn tonnes for mono-ethylene glycol (MEG), a key input for PET. Out of the above, only some polyethylene is likely to ship within 2017. We understand that MEG shipments are unlikely before 2019. Considering that polyethylene capacity due for completion within 2017 will be limited to Dow’s LDPE (375,000 tonnes) and LLDPE (650,000 tonnes) and Exxon Mobil’s HDPE and other polyethylene densities (650,000 tonnes each), we look for full-fledged polyethylene shipments to total 2.325mn tonnes from 2018. At this level, we expect most of the volume to be absorbed by the natural growth of demand in the Americas and anticipate a limited impact on global supply-demand.

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Figure 4: New production expansion plans for ethylene and ethylene derivatives in the U.S. New production Company name Site Completion capacity Ingleside Ethylene Ingleside, TX 550 2017/1Q Chevron Phillips Chemical Cedar Bayou, TX 1,500 2017/3Q Dow Chemical Freeport, TX 1,500 2017/4Q Plaquemine, LA 410 2018 ExxonMobil Chemical Baytown, TX 1,500 2017/4Q LyondellBasell Industries Corpus Christi, TX 363 2016/2H Channelview, TX 250 2017 Around 2018 6,073 Shintech Plaquemine, LA 500 2018/summer Indorama Ventures Clear Lake, TX 1,300 2018 Formosa Plastics USA Point Comfort, TX 1,200 2018 Baton Rouge, LA 1,200 2020 Baton Rouge, LA 1,200 2022 Sasol Lake Charles, LA 1,500 2019 Lotte Chemical / Axiall Lake Charles, LA 1,000 2020 PTTGC America Dilles Bottom, OH 1,000 2021 Shell Chemicals Beaver County, PA 1,500 2022 After 2018 10,400 Total capacity 16,473

Source: The Heavy & Chemical Industries News Agency

In electronic materials, process migration in semiconductors, growth in OLED demand

In electronic materials in 2017, we forecast process migration in semiconductors and growth in demand for OLED. We expect migration from 20nm to 18nm in DRAM and from 2D to 3D in NAND. In NAND, we look for migration from 16nm down to 13 or 12 nm. As a result, we anticipate wafer demand to grow due to a need for high-purity silicon wafers and other precision products. We estimate worldwide 300mm wafer capacity at around 5.1– 5.2mn wafers, but expect demand in 2017 to exceed this at around 5.2–5.3mn wafers.

In display materials, we think major smartphone makers' migration to OLED will get fully under way. In OLED, the advent of flexible OLED panels, the next-generation display, will likely result in adoption of “window film” resins in place of cover glass. We think this will boost demand for materials from chemical manufacturers.

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Main themes in 2017 1) Restructuring of agrochemical mega-companies

In 2016, Bayer AG of Germany agreed to merge with US-based Monsanto. This will result in a tri-polar agrochemicals/seed industry driven by companies in Europe, the US, and China. To win in international competition, these companies will need development capabilities. We are focusing on Mitsui Chemicals (4183), Sumitomo Chemical (4005), and Nippon Soda (4041), which will likely contribute to the pipeline of next-generation products heading toward 2020. 2) Automobile weight reduction, electrification

As environmental regulations are tightened through 2020, efforts to reduce vehicle weight and the movement towards electrification in autos will likely accelerate. In automobile weight reduction, we focus on Mitsui Chemicals (4183) for its metal-resin composite molding technology in addition to Toray (3402), Teijin (3401), and Mitsubishi Chemical (4188) for carbon fibers. In LiB materials, which are key to electrification, we focus on Asahi Kasei (3407), Toray (3402), Sumitomo Chemical (4005), and Ube Industries (4208) for battery separators. We also focus on Hitachi Chemical (4217) for anode materials and Mitsubishi Chemical (4188) for three key raw materials. 3) OLED

We think OLED will proliferate in earnest in high-end smartphones in 2017. We are focusing on Ube Industries (4208), which makes polyimide for flexible displays, and Mitsubishi Chemical and Sumitomo Chemical, which manufacture OLED materials. 4) Tighter wafer supply-demand

We think the silicon wafer supply-demand balance could tighten in mid-2017 and that wafer price increase negotiations could begin in earnest. We are focusing on SUMCO (3436) and Shin-Etsu Chemical (4063).

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Figure 5: Main themes in 2017 Changes in the external climate Tightening of Growth in Growth in High-end environmental semiconductor demand for food smartphones regulations demand

Event Event Event Event . Acceleration in . Curbs on CO2 emissions . Adoption of OLED in new . Process migration restructuring of through 2020 agrochemical majors models . Resumption of price . Faster introduction of light- . Flexible displays increase negotiations . Ramp-up in business weight materials acquisitions . Progress in replacing glass . Heading for excess wafer . Growth in sales of auto LiB with plastic demand . Growth in biological materials pesticides demand

Key themes Automobile weight Wafer supply– Restructuring of reduction agrochemical demand Increasing use of OLED mega-companies tightening electronic Focus stocks Toray, Teijin, Asahi Kasei Mitsui Chemicals Sumitomo Chemical Mitsui Chemicals Shin-Etsu Chemical Sumitomo Chemical Ube Industries Ube Industries Mitsubishi Chemical SUMCO Nippon Soda Mitsubishi Chemical Hitachi Chemical

Source: Credit Suisse

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2017 stock picks

Mitsui Chemicals (4183, OUTPERFORM, TP ¥780)

Mitsui Chemicals has restructured its petrochemicals business, accelerated its shift into three growth areas (mobility, healthcare, and food & packaging), and substantially improved its business portfolio. We think the share price does not reflect these structural changes. Due to growth in sales in the three growth areas, we expect operating margin to rise from 5.3% in FY3/16 to 8.3% in FY3/19 and ROE to improve from 5.8% to 12.8% over the same period. We expect the valuation to rise due to the shift from standard to high- value-added business. This name is our top pick for 2017.

Toray (3402, OUTPERFORM, TP ¥1,360)

Toray is strengthening its automotive CFRP business, and we expect its supply to European automakers will increase from 2017 onward. We look for automotive-use carbon fiber sales to rise from over ¥30bn in FY3/16 to ¥100bn in FY3/20. Toray is our top pick in the synthetic fiber sector due to its medium-term growth potential.

Mitsubishi Chemical (4188, OUTPERFORM, TP ¥1,030)

We look for profit growth in FY3/18 due to the merger of three chemicals units expected in April 2017 and petrochemicals business restructuring. The total market capitalization (Mitsubishi Chemical’s stake) of two listed subsidiaries (Taiyo Nippon Sanso (4091) and Mitsubishi Tanabe Pharma (4508)) based on their 12 January closing prices was ¥931.3bn. Subtracting this from Mitsubishi Chemical’s market capitalization (¥1,183.3bn) gives a value for the parent of ¥252.1bn or only ¥172.1/share and suggests the parent is undervalued.

Hitachi Chemical (4217, OUTPERFORM, TP ¥3,380)

We expect the company to post record-high OP of ¥61bn in FY3/19 due to acquisition of lead-acid batteries business in addition to growth in advanced semiconductor materials such as die bonding materials, where the company commands a high market share, LiB materials, and energy storage devices. We expect growth in global demand for hybrid storage systems (HSS), which we see as highly cost competitive over the long term as renewable energy storage systems for wind and solar power.

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Earnings, investment strategy 3Q earnings forecasts

Expecting solid results at integrated chemicals makers

We look for generally solid 3Q results at integrated chemicals makers due to higher volumes resulting from firm demand and solid margins. We expect guidance beats at Mitsubishi Chemical, Mitsui Chemicals, and Tosoh. At mid-size chemicals makers, amid concerns about weaker margins due to higher crude oil and coal prices, we expect results at Mitsubishi Gas Chemical (4182) to beat the company's cautious guidance.

Semiconductor materials should offset weaker display materials margins at electronic materials makers

We think 3Q results at manufacturers of electronic materials will be boosted by semiconductor demand but will also be depressed by weaker margins on display materials. We expect guidance beats at all four sector companies in our coverage: Shin-Etsu Chemical (4063), JSR (4185), Zeon (4205), and Hitachi Chemical (4217).

Expecting results at synthetic fiber makers to hit guidance

We think 3Q results at synthetic fiber makers will be broadly in line with guidance. The stronger yen will likely have an impact, but firm margins and higher volumes in specialty business should help to offset this.

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Figure 6: Credit Suisse coverage – FY3/17 3Q consensus forecast and full year forecasts

Operating profit FY2015 FY2016 1Q 2Q 1H 3Q 4Q 2H Full 1Q 2Q 1H 3Q %2H 2H Full year (Ybn, %) A A A A A A A A A A QUICK E Co. E Co. E Co.E IBES CSE Shikiho A Integrated chemicals 7 companies Asahi Kasei 3407 35.5 48.9 84.4 42.2 38.5 80.8 165.2 29.9 40.9 70.8 41.6 56% 74.2 145.0 149.8 148.0 145.0 Showa Denko 4004 3.9 12.3 16.1 9.4 8.2 17.6 33.7 2.9 8.7 11.5 13.9 57% 24.5 36.0 34.9 36.0 30.0 Sumitomo Chemical 4005 33.2 41.1 74.2 37.8 52.4 90.2 164.4 25.3 21.9 47.3 30.0 41% 72.7 120.0 125.3 125.0 120.0 Tosoh 4042 15.4 16.8 32.2 16.1 21.2 37.3 69.4 17.6 23.7 41.3 24.9 57% 43.7 85.0 90.3 90.0 85.0 Mitsui Chemical 4183 22.7 18.7 41.4 15.0 14.5 29.5 70.9 25.5 19.8 45.4 23.3 55% 42.6 88.0 90.5 92.0 88.0 Mitsubishi Chemical HD 4188 71.0 65.4 136.4 91.9 51.7 143.7 280.0 66.9 53.2 120.1 76.6 70% 108.9 229.0 248.8 250.0 229.0 Ube Industries 4208 9.6 10.9 20.5 10.8 10.2 20.9 41.4 1.6 9.9 11.5 12.2 52% 23.5 35.0 34.9 35.0 34.0 Integrated chemicals total 191.2 214.0 405.2 223.2 196.7 419.9 825.1 169.7 178.1 347.8 222.5 390.2 738.0 774.5 776.0 731.0 Middle-sized chemicals 6 companies Kureha 4023 1.5 3.5 5.0 4.3 3.3 7.6 12.6 0.9 3.6 4.5 3.0 67% 4.5 9.0 9.9 10.0 9.0 Tokuyama 4043 2.9 4.6 7.5 5.4 10.1 15.5 23.1 9.5 8.5 18.0 7.8 52% 15.0 33.0 34.6 35.0 34.5 Denka 4061 5.9 8.7 14.6 8.7 7.3 16.0 30.6 4.3 5.5 9.8 9.1 64% 14.2 24.0 26.5 25.5 24.0 Nippon Shokubai 4114 9.0 7.4 16.4 8.4 6.5 14.9 31.2 5.6 4.0 9.6 - - 12.4 22.0 23.3 24.0 20.0 Mitsubishi Gas Chemical 4182 7.6 7.7 15.3 11.8 6.9 18.7 34.0 9.9 9.3 19.3 - - 10.7 30.0 31.3 31.0 33.0 Sanyo Chemical 4471 3.2 2.8 6.0 3.3 3.2 6.5 12.5 4.0 3.5 7.5 - - 6.3 13.8 14.8 14.8 14.8 Middle-sized chemicals Total 30.2 34.7 64.9 41.9 37.2 79.1 144.0 34.3 34.5 68.7 - 63.1 131.8 140.4 140.3 135.3 Electronics materials 5 companies SUMCO 3436 8.9 9.5 18.4 7.2 3.9 11.1 29.4 3.6 2.6 6.2 2.4 38% 6.3 12.5 13.0 12.5 13.0 Shin-Etsu Chemical 4063 51.4 58.4 109.8 52.6 46.1 98.7 208.5 60.0 62.0 122.0 59.1 57% 103.0 225.0 235.9 230.0 225.0 JSR 4185 7.4 11.7 19.1 10.3 4.9 15.3 34.4 5.6 6.7 12.3 8.1 59% 13.7 26.0 28.5 27.5 26.0 Zeon 4205 7.8 8.7 16.5 7.7 5.6 13.3 29.9 7.1 6.2 13.2 8.0 54% 14.8 28.0 28.4 28.0 28.0 Hitachi Chemical 4217 11.0 12.4 23.3 13.9 15.8 29.7 53.0 12.0 13.4 25.4 13.3 54% 24.6 50.0 51.1 52.0 51.0 Electronics materials Total 86.5 100.7 187.1 91.8 76.3 157.0 355.3 88.4 356.9 350.0 343.0

18 companies Total 307.9 349.4 657.3 357.0 310.2 656.1 1,324.4 1,271.8 1,266.3 1,287.4

Textiles 3 companies Teijin 3401 16.4 18.9 35.3 20.1 11.6 31.8 67.1 15.7 11.3 27.0 16.9 65% 26.0 53.0 57.6 58.0 53.0 Toray 3402 37.0 38.1 75.1 43.0 36.4 79.4 154.5 41.0 35.3 76.3 42.0 53% 78.7 155.0 158.0 160.0 155.0 Kuraray 3405 15.9 15.7 31.6 17.7 16.8 34.5 66.1 17.1 17.5 34.6 17.9 51% 35.4 70.0 69.4 69.0 70.0 Textiles total 69.4 72.7 142.1 80.8 64.8 145.6 287.7 73.8 64.1 137.9 76.8 140.1 278.0 285.0 287.0 278.0 Agrochemical Nippon Soda 4041 1.9 1.4 3.3 1.1 3.0 4.1 7.4 1.3 0.1 1.4 - - 2.6 4.0 4.3 4.3 4.0 Agrochemicals total 1.9 1.4 3.3 1.1 3.0 4.1 7.4 1.3 0.1 1.4 - 2.6 4.0 4.3 4.3 4.0 Pharmaceuticals Nippon Kayaku 4272 5.7 5.5 11.2 5.4 5.2 10.5 21.7 4.9 4.3 9.2 5.1 58% 8.8 18.0 18.7 18.0 18.0 Pharmaceuticals total 5.7 5.5 11.2 5.4 5.2 10.5 21.7 4.9 4.3 9.2 5.1 8.8 18.0 18.7 18.0 18.0

Source: Company data, Nikkei QUICK, I/B/E/S, Toyo Keizai Shikiho, Credit Suisse estimates

Chemical sector 11 13 January 2017

FY3/17 outlook

Revising our forecasts and target prices for covered companies

We revise our FY3/17–3/19 forecasts and target prices for the 23 companies in our chemical and synthetic fiber sector coverage to reflect 2Q FY3/17 results (Figure 7, 8). After 2Q results, we downgraded Mitsubishi Gas Chemical from Neutral to UNDERPERFORM in November 2016, but made no other adjustments.

We lower our FY3/17 OP forecasts for nine companies: Toray (3402), Sumitomo Chemical (4005), Kureha (4023), Nippon Soda (4041), Denka (4061), Nippon Shokubai (4114), JSR (4185), Zeon (4205), and Hitachi Chemical (4217). We raise our forecasts for 11 companies: Teijin (3401), Kuraray (3405), Asahi Kasei (3407), SUMCO (3436), Showa Denko (4004), Tosoh (4042), Shin-Etsu Chemical (4063), Mitsubishi Gas Chemical (4182), Mitsui Chemicals (4183), Mitsubishi Chemical (4188), and Sanyo Chemical (4471). We reiterate our forecasts for three companies: Tokuyama (4043), Ube Industries (4208), and Nippon Kayaku (4272).

The cuts in our estimates come mainly from higher prices for raw materials (particularly crude oil and coal) starting in 2H FY3/17. The increases mainly reflect higher margins and capacity utilization due to tight supply-demand conditions arising from problems at petrochemical product facilities in Japan and overseas.

Figure 7: Credit Suisse coverage – OP estimate change for FY17/3 (¥bn)

Company Code From To or Teijin 3401 56.0 58.0 ↑ Toray 3402 172.0 160.0 ↓ Kuraray 3405 68.0 69.0 ↑ Asahi Kasei 3407 145.0 148.0 ↑ SUMCO 3436 10.5 12.5 ↑ Showa Denko 4004 30.0 36.0 ↑ Sumitomo Chemical 4005 135.0 125.0 ↓ Kuraha 4023 11.0 10.0 ↓ Nippon Soda 4041 5.3 4.3 ↓ Tosoh 4042 75.0 90.0 ↑ Tokuyama 4043 35.0 35.0 → Denka 4061 29.5 25.5 ↓ Shin-Etsu Chemical 4063 225.0 230.0 ↑ Nippon Shokubai 4114 25.0 24.0 ↓ Mitsubishi Gas Chemical 4182 27.5 31.0 ↑ Mitsui Chemicals 4183 86.0 92.0 ↑ JSR 4185 30.0 27.5 ↓ Mitsubishi Chemical Holdings 4188 230.0 250.0 ↑ Zeon 4205 30.0 28.0 ↓ Ube Industries 4208 35.0 35.0 → Hitachi Chemical 4217 53.0 52.0 ↓ Nippon Kayaku 4272 18.0 18.0 → Sanyo Chemical 4471 14.0 14.8 ↑

Note: For details, please refer to the company reports in the last section Source: Credit Suisse estimates

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Figure 8: Credit Suisse coverage – Target price change (¥) Company Code From To or Teijin 3401 2,100 2,550 ↑ Toray 3402 1,470 1,360 ↓ Kuraray 3405 1,530 1,690 ↑ Asahi Kasei 3407 820 1,000 ↑ SUMCO 3436 560 1,000 ↑ Showa Denko 4004 1,350 1,700 ↑ Sumitomo Chemical 4005 480 600 ↑ Kuraha 4023 4,100 5,000 ↑ Nippon Soda 4041 460 540 ↑ Tosoh 4042 700 900 ↑ Tokuyama 4043 420 480 ↑ Denka 4061 460 550 ↑ Shin-Etsu Chemical 4063 7,200 8,700 ↑ Nippon Shokubai 4114 6,700 7,260 ↑ Mitsubishi Gas Chemical 4182 1,240 1,280 ↑ Mitsui Chemicals 4183 660 780 ↑ JSR 4185 1,640 1,640 → Mitsubishi Chemical Holdings 4188 820 1,030 ↑ Zeon 4205 910 900 ↓ Ube Industries 4208 200 280 ↑ Hitachi Chemical 4217 2,600 3,380 ↑ Nippon Kayaku 4272 960 1,450 ↑ Sanyo Chemical 4471 5,450 6,440 ↑

Note: For details, please refer to the company reports in the last section Source: Credit Suisse estimates

FY3/18 outlook

Further increases in profits due to weaker yen possible

On 4 January, we revised our JPY/USD assumption to ¥115/$. However, our forecasts for chemical sector companies in our coverage after 2Q results assumed ¥108/$. Thus for forecast revisions to reflect 3Q results, we believe the weaker yen that we assume could raise profits. For FY3/18 estimates, we expect consensus forecasts to rise as the weaker yen to reflect a full-year contribution from the weaker yen.

Strategy heading toward 3Q results

Investors could focus more on shares of companies with high forex sensitivity

The yen has weakened since the US presidential election. Companies will announce 3Q results with this trend probably still in place. We therefore think investors will increasingly focus on shares of companies with high forex sensitivity. Figure 9 shows forex assumptions and forex sensitivity of companies in our chemical sector coverage. The weaker yen has the largest impact on our FY3/17 OP forecasts for SUMCO (3436). We estimate a one-yen weakening of the yen against the USD boosts OP at the company by 5.6%. The other companies with high forex sensitivity are JSR (2.5%), Nippon Soda

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(2.1%), Zeon (1.8%), Sumitomo Chemical (1.6%), Mitsubishi Gas Chemical (1.6%), Showa Denko (1.4%), Denka (1.0%), and Hitachi Chemical (1.0%).

Figure 9: Credit Suisse coverage - Forex and naphtha sensitivity Impact of 1 ¥ / $ Impact of 1 ¥ / Co's naptha Naptha Co's USD Fx As % of CS Co's EUR Fx As % of CS Code Company weaker move EUR weaker move assumption (¥ sensitivity (¥ assumption estimate assumption estimate (¥ mn) (¥ mln) /kL) mn/¥1,000 per kL) 3401 Teijin 103 450 0.8% 115 3402 Toray Industries 100 1,200 0.8% 3405 Kuraray 105 220 0.3% 115 180 33,000 800 1.2% 3407 Asahi Kasei 103 900 0.6% 114 100 33,225 900 0.6% 3436 SUMCO 104 700 5.6% 4004 Showa Denko 100 500 1.4% 32,200 4005 Sumitomo Chemical 105 2,000 1.6% 32,700 4023 Kureha 105 80 0.8% 115 30 4041 Nippon Soda 100 90 2.1% 50 4042 Tosoh 103 500 0.6% 114 200 33,650 900 1.0% 4043 Tokuyama 103 0 0.0% 32,200 550 1.6% 4061 Denka 104 250 1.0% 32,300 350 1.4% 4063 Shin-Etsu Chemical 100 2,000 0.9% 113 100 4114 Nippon Shokubai 105 0 0.0% 115 80 35,000 120 0.5% 4182 Mitsubishi Gas Chemical 100 500 1.6% 110 0 4183 Mitsui Chemicals 103 600 0.7% 32,200 4185 JSR 103 700 2.5% 32,650 4188 Mitsubishi Chemical Holdings 103 1,500 0.6% 150 31,800 4205 Zeon 105 500 1.8% 120 100 35,000 800 2.9% 4208 Ube Industries 105 100 0.3% 33,100 300 0.9% 4217 Hitachi Chemical 103 500 1.0% 4272 Nippon Kayaku 102 130 0.7% 4471 Sanyo Chemical 105 100 0.7% 35,000

Source: Company data, Credit Suisse estimates

Chemical sector 14 13 January 2017

Upside/downside catalysts/risks

Figure 10 lists upside and downside catalysts and risks for companies in our coverage, including factors in FY3/17 3Q results and 2H forecasts that might impact share prices.

Figure 10: Upside/downside catalysts and risks Target Rating Upside catalysts / risks Downside catalysts / risks (¥bn) Price Major Chemicals Evidence of YoY growth in housing orders, increased demand Acrylonitrile margin deterioration, slowing demand for electronic 3407 Asahi Kasei N 1,000 for LiB materials. components and materials. Stronger demand and improved margins for graphite Narrower margins on petrochemicals, weaker hard disk 4004 Showa Denko N 1,700 electrodes, hard disks. demand, deteriorating supply–demand for graphite electrodes. Petrochemical margin improvement, increased demand for Worsening supply–demand for LCD panels, petrochemical price 4005 Sumitomo Chemical N 600 FPD materials, higher prices for methionine. declines, downward revision to full-year guidance. Improved margins for urethane materials and ethylamines, Deteriorating supply–demand for urethane materials, yen 4042 Tosoh N 900 upward revision to full-year guidance. appreciation, slowing demand for advanced materials. Stronger earnings in three growth areas, improving margins Worsening supply–demand for petrochemicals, decreased auto 4183 Mitsui Chemical O 780 on petrochemicals, upward revision to full-year guidance. output, yen appreciation. Radical reforms for PTA business, expansion of environment Deteriorating supply–demand for petrochemicals, delays in 4188 Mitsubishi Chemical O 1,030 and alternative energy businesses. petrochemical business restructuring, yen appreciation. Caprolactam margin improvement, growth in LiB and OLED Caprolactam margin contraction, fiercer competition in LiB 4208 Ube Industries N 280 materials. materials. Middle-sized Chemicals Greater-than-expected growth in demand for PGA molded Decline in crude oil prices and accompanying slump in PGA 4023 Kureha N 5,000 products used in shale gas extraction. demand, stiffer competition in pharmaceuticals. Improved profitability at chemicals segment, supported by Slowing demand for semiconductor-grade polysilicon, 4043 Tokuyama N 480 decline in petrochemical prices; growth in cement demand. chemicals segment margin deterioration. Chloroprene rubber (CR) price rises, diagnostic reagent Decreased demand for CR and electronic materials, yen 4061 Denka N 550 marketing authorization. appreciation, higher naphtha prices. SAP share growth and improved margins on SAP and acrylic SAP price declines caused by escalating competition, also 4114 Nippon Shokubai N 7,260 acid. margin deterioration owing to higher input costs. Higher methanol prices, increased shipments of BT Lower methanol prices caused by deteriorating supply–demand 4182 Mitsubishi Gas Chemical U 1,280 materials, improved profitability in petrochemicals. balance, demand weakness in electronic materials. SAP demand growth, increased sales of automotive lubricant Worsening supply–demand for SAP, yen appreciation, margin 4471 Sanyo Chemical O 6,440 additives. deterioration caused by higher input costs. Electronic Materials 300mm wafer price hikes prompted by tightening supply– Wafer inventory corrections and price declines, caused by 3436 SUMCO U 1,000 demand. deceleration in semiconductor demand. 300mm wafer price hikes, upward revision to full-year Protracted slowdown in semiconductor market, yen 4063 Shin-Etsu Chemical N 8,700 guidance. appreciation, lackluster PVC demand. Growth in advanced semiconductor materials, profit Slowing demand in synthetic rubber, semiconductor, and LCD 4185 JSR N 1,640 contributions from medical materials. markets; downward revision to full-year guidance. Synthetic rubber demand recovery, growth in optical film Slump in automobile and tire production, loss of momentum in 4205 Zeon N 900 shipments. optical film demand. Stronger shareholder returns, earlier-than-expected Slowing demand for electronic materials, tardy earnings 4217 Hitachi Chemical O 3,380 profitability at storage device business. contributions from new products, yen appreciation. Textiles Announcements concerning carbon fiber contract with GM, Delays in development of carbon fiber composite materials for 3401 Teijin N 2,550 exit from home health care business in US. automotive use. deteriorating margins on chemical products. Evidence of stronger demand for carbon for use in mass- Slowing demand and lower prices for electronic materials, 3402 Toray O 1,360 produced cars, expansion in garment business. higher input costs, yen appreciation. LCD market slowdown, earlier-than-expected expansion of Increase in PVA sales driven by stronger demand for LCD 3405 Kuraray N 1,690 OLED business, growing contribution from PVA coating TVs, growth in non-LCD businesses. materials. Agro Chemical Upward revision to full-year guidance, announcement on Greater-than-anticipated deterioration in methionine supply– 4041 Nippon Soda N 540 dividend hike, upturn in methionine market. demand, slowing demand for agrochemicals. Pharmaceuticals Growth in monthly sales of biosimilars, increasing uptake of Sluggish sales of biosimilars, slower growth in automotive 4272 Nippon Kayaku N 1,450 automotive safety components. industry.

Note: O＝OUTPERFORM、N＝NEUTRAL、U＝UNDERPERFORM

Source: Credit Suisse estimates

Chemical sector 15 13 January 2017

Figure 11: Chemical sector stock performance Figure 12: Chemical sector stock performance relative to TOPIX (3 months) relative to TOPIX (6 months)

Mitsubishi Gas Chemical Mitsubishi Gas Chemical Ube Industries Showa Denko Shin-Etsu Chemical Zeon Showa Denko Tosoh Nippon Soda Tokuyama Tosoh Mitsubishi Chemical Zeon Hitachi Chemical Nippon Kayaku Shin-Etsu Chemical Hitachi Chemical Nippon Kayaku Teijin Ube Industries Asahi Kasei Kuraray Denka Mitsui Chemicals Kureha Asahi Kasei Mitsubishi Chemical JSR Kuraray Nippon Soda JSR Teijin Sumitomo Chemical Sumitomo Chemical Nippon Shokubai Nippon Shokubai Sanyo Chemical Kureha Mitsui Chemicals Sanyo Chemical Toray Industries Denka Tokuyama Toray Industries -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% -15% -5% 5% 15% 25% 35% 45% 55%

* Share price as of 12 Jan. * Share price as of 12 Jan.

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Figure 13: Credit Suisse coverage - Earnings outlook (¥bn) Code Price Rating Con. Sales Con. OP Con. RP Con. NP (¥bn) No. 1/12 16E 17E 18E 16E 17E 18E 16E 17E 18E 16E 17E 18E Integrated chemicals Asahi Kasei 3407 1,037 NEUTRAL 1,835.0 1,890.0 1,930.0 148.0 160.0 170.0 147.0 160.0 171.0 101.0 107.5 116.0 Showa Denko 4004 1,756 NEUTRAL 673.0 695.0 720.0 36.0 38.0 43.0 30.0 36.0 41.0 12.0 20.7 23.7 Sumitomo Chemical 4005 558 NEUTRAL 1,960.0 2,050.0 2,075.0 125.0 145.0 150.0 135.0 168.0 177.0 66.0 87.0 93.5 Tosoh 4042 833 NEUTRAL 700.0 713.0 725.0 90.0 85.0 88.0 85.0 85.0 88.0 56.5 56.0 58.0 Mitsui Chemicals 4183 539 OUTPERFORM 1,178.0 1,215.0 1,260.0 92.0 98.0 105.0 84.0 92.5 100.0 52.5 58.5 64.0 Mitsubishi Chemical HD 4188 786 OUTPERFORM 3,280.0 3,380.0 3,460.0 250.0 270.0 290.0 235.0 255.0 275.0 141.0 113.0 126.0 Ube Industries 4208 264 NEUTRAL 610.0 632.0 656.0 35.0 40.0 45.0 33.0 38.0 44.0 20.0 22.0 26.5 Middle-sized chemicals Kureha 4023 4,660 NEUTRAL 133.0 143.0 153.0 10.0 12.0 14.0 9.5 12.0 14.0 7.2 8.7 10.2 Tokuyama 4043 464 NEUTRAL 292.0 282.0 287.0 35.0 36.0 37.0 29.0 31.0 32.0 21.5 19.5 20.2 Denka 4061 528 NEUTRAL 364.0 376.0 390.0 25.5 28.5 32.0 23.5 27.0 30.5 18.0 20.0 22.5 Nippon Shokubai 4114 7,510 NEUTRAL 281.0 296.0 305.0 24.0 28.0 30.0 27.0 31.0 33.0 20.0 22.0 23.5 Mitsubishi Gas Chemical 4182 2,090 UNDERPERFORM 512.0 525.0 541.0 31.0 33.0 35.0 38.5 43.0 45.0 26.5 29.4 31.0 Sanyo Chemical 4471 5,110 OUTPERFORM 160.0 165.0 172.0 14.8 15.6 16.5 15.8 16.6 17.5 10.1 10.6 11.2 Electronics materials SUMCO 3436 1,537 UNDERPERFORM 208.5 221.0 236.0 12.5 29.0 39.0 9.0 26.0 36.0 6.0 19.7 27.5 Shin-Etsu Chemical 4063 9,440 NEUTRAL 1,232.0 1,295.0 1,350.0 230.0 257.0 282.0 233.0 267.0 292.0 163.0 184.5 201.0 JSR 4185 1,950 NEUTRAL 367.0 382.0 402.0 27.5 33.0 37.0 29.5 34.0 38.0 21.7 23.0 25.5 Zeon 4205 1,187 NEUTRAL 280.0 292.0 301.0 28.0 31.0 34.0 28.0 32.5 35.5 19.5 22.5 24.6 Hitachi Chemical 4217 3,020 OUTPERFORM 525.0 590.0 610.0 52.0 61.0 65.0 51.0 63.5 67.5 36.7 45.7 48.5 Textiles Teijin 3401 2,410 NEUTRAL 734.0 823.0 843.0 58.0 64.0 68.0 58.0 64.5 68.5 38.0 41.5 44.5 Toray 3402 965 OUTPERFORM 2,060.0 2,170.0 2,260.0 160.0 175.0 190.0 160.0 176.0 191.0 98.5 109.0 118.0 Kuraray 3405 1,795 NEUTRAL 495.0 513.0 525.0 69.0 75.0 79.0 67.0 73.5 77.5 39.5 44.7 47.3 Agrochemicals Nippon Soda 4041 562 NEUTRAL 130.0 135.0 140.0 4.3 5.3 6.0 8.2 9.3 10.1 7.3 7.3 7.8

Pharmaceuticals Nippon Kayaku 4272 1,437 NEUTRAL 159.2 168.3 176.5 18.0 20.5 22.5 18.5 21.0 23.0 12.5 14.0 15.5

Source: Company data, Credit Suisse estimates

Chemical sector 16 13 January 2017

Figure 14: Credit Suisse coverage - Valuations

(¥, x, ¥bn, %) Code Price Rating Target EPS PER PCFR PBR EV/EBITDA Mkt Cap Performance of Share price Dividend ROE Dividend Payout No. 1/12 price 16E 17E 18E 16E 17E 18E 16E 17E 18E 16E 17E 18E 16E 16E 1 year 6mons yield ratio Integrated chemicals Asahi Kasei 3407 1,037 NEUTRAL 1,000 72.3 77.0 83.1 14.3 13.5 12.5 7.1 6.8 6.4 1.3 1.2 1.1 7.0 1,449.2 22.5% 16.3% 1.9% 8.6% 20.0 28% Showa Denko 4004 1,756 NEUTRAL 1,700 84.2 145.2 166.3 20.9 12.1 10.6 4.8 3.9 3.7 0.8 0.8 0.7 7.4 250.8 24.0% 47.5% 1.7% 3.3% 30.0 36% Sumitomo Chemical 4005 558 NEUTRAL 600 40.4 53.2 57.2 13.8 10.5 9.8 4.8 4.2 4.1 1.1 1.0 1.0 6.4 911.9 -11.3% 6.1% 2.5% 9.7% 14.0 35% Tosoh 4042 833 NEUTRAL 900 87.0 86.2 89.3 9.6 9.7 9.3 6.5 6.4 6.0 1.4 1.2 1.1 5.4 540.3 37.0% 39.3% 1.8% 12.8% 15.0 17% Mitsui Chemicals 4183 539 OUTPERFORM 780 52.5 58.5 64.0 10.3 9.2 8.4 5.5 5.0 4.6 1.3 1.1 1.0 6.5 540.0 0.8% 17.9% 2.0% 12.1% 11.0 21% Mitsubishi Chemical HD 4188 786 OUTPERFORM 1,030 96.3 77.1 86.0 8.2 10.2 9.1 3.4 3.6 3.5 1.1 1.1 1.0 5.2 1,156.9 4.9% 27.9% 2.0% 9.5% 16.0 17% Ube Industries 4208 264 NEUTRAL 280 18.9 20.8 25.0 14.0 12.7 10.5 5.1 4.7 4.3 1.0 0.9 0.9 6.4 279.4 3.3% 24.4% 2.3% 7.3% 6.0 32% Integrated chemicals Average 64.5 74.0 81.6 13.0 11.1 10.0 5.3 4.9 4.6 1.1 1.1 1.0 6.3 732.6 11.6% 25.6% 2.0% Middle-sized chemicals Kureha 4023 4,660 NEUTRAL 5,000 418.9 506.2 593.5 11.1 9.2 7.9 4.6 4.1 3.7 0.6 0.6 0.6 9.2 80.1 1.3% 2.0% 1.2% 6.9% 11.0 3% Tokuyama 4043 464 NEUTRAL 480 61.8 56.1 58.1 7.5 8.3 8.0 4.5 4.7 4.5 1.8 1.5 1.3 5.7 161.4 79.3% 37.7% 0.0% 27.0% 0.0 0% Denka 4061 528 NEUTRAL 550 40.7 45.2 50.9 13.0 11.7 10.4 5.6 5.3 5.0 1.0 1.0 0.9 6.9 233.6 -2.0% -1.5% 2.7% 8.9% 14.0 34% Nippon Shokubai 4114 7,510 NEUTRAL 7,260 492.8 542.1 579.1 15.2 13.9 13.0 8.1 7.5 7.4 1.0 1.0 0.9 7.0 304.8 -11.8% 2.1% 2.0% 7.3% 150.0 30% Mitsubishi Gas Chemical 4182 2,090 UNDERPERFORM 1,280 122.8 136.2 143.6 17.0 15.3 14.6 8.6 7.7 7.4 1.1 1.1 1.0 9.6 451.1 72.2% 55.1% 0.9% 6.0% 16.0 13% Sanyo Chemical 4471 5,110 OUTPERFORM 6,440 458.1 480.7 508.0 11.2 10.6 10.1 6.2 6.0 5.7 0.9 0.9 0.8 4.8 112.7 6.5% 1.8% 1.8% 8.0% 18.0 4% Middle-sized chemicals Average 265.9 294.4 322.2 12.5 11.5 10.6 6.3 5.9 5.6 1.1 1.0 0.9 7.2 223.9 24.3% 16.2% 1.4% Electronics materials SUMCO 3436 1,537 UNDERPERFORM 1,000 20.5 67.2 93.8 75.1 22.9 16.4 15.2 10.3 8.6 2.2 2.1 1.9 16.9 450.8 76.7% 91.4% 0.7% 1.8% 20.0 98% Shin-Etsu Chemical 4063 9,440 NEUTRAL 8,700 382.6 433.1 471.9 24.7 21.8 20.0 15.6 13.9 12.9 1.9 1.8 1.7 10.1 4,021.2 40.9% 25.7% 1.3% 7.7% 110.0 29% JSR 4185 1,950 NEUTRAL 1,640 97.5 103.4 114.6 20.0 18.9 17.0 11.8 11.0 9.9 1.2 1.2 1.1 9.0 433.8 5.4% 12.1% 2.6% 6.1% 50.0 51% Zeon 4205 1,187 NEUTRAL 900 87.8 101.4 110.8 13.5 11.7 10.7 5.9 5.4 5.0 1.2 1.1 1.0 5.8 263.5 26.0% 41.6% 1.3% 9.8% 16.0 18% Hitachi Chemical 4217 3,020 OUTPERFORM 3,380 176.2 219.5 232.9 17.1 13.8 13.0 9.0 7.8 7.5 1.6 1.5 1.4 7.0 628.9 57.6% 26.2% 1.7% 10.5% 50.0 28% Electronics materials Average 152.9 184.9 204.8 30.1 17.8 15.4 11.5 9.7 8.8 1.6 1.5 1.4 9.8 1,159.6 41.3% 39.4% 1.5% 45% Chemical sector Average 156.2 178.3 196.0 17.6 13.1 11.7 7.3 6.6 6.1 1.3 1.2 1.1 7.6 681.7 24.1% 26.3% 1.7% Textiles Teijin 3401 2,410 NEUTRAL 2,550 193.2 211.0 226.3 12.5 11.4 10.7 6.3 5.7 5.3 1.4 1.3 1.2 7.1 473.9 10.1% 6.6% 2.1% 11.6% 10.0 5% Toray 3402 965 OUTPERFORM 1,360 61.6 68.2 73.8 15.7 14.2 13.1 7.9 7.4 7.0 1.5 1.4 1.3 8.3 1,542.3 -13.1% -13.1% 1.5% 10.8% 14.0 23% Kuraray 3405 1,795 NEUTRAL 1,690 112.4 127.2 134.6 16.0 14.1 13.3 7.8 7.3 7.1 1.2 1.1 1.1 5.7 629.8 19.7% 18.0% 2.2% 7.7% 40.0 36% Textiles Average 122.4 135.5 144.9 14.7 13.2 12.4 7.3 6.8 6.5 1.4 1.3 1.2 7.0 882.0 5.6% 3.8% 1.9% Agrochemicals Nippon Soda 4041 562 NEUTRAL 540 48.2 48.2 51.5 11.7 11.7 10.9 6.0 6.0 5.7 0.6 0.6 0.6 10.3 85.0 -22.4% 6.9% 2.1% 7.0% 12.0 25%

Pharmaceuticals Nippon Kayaku 4272 1,437 NEUTRAL 1,450 72.2 80.8 89.5 19.9 17.8 16.1 10.0 9.3 8.9 1.3 1.3 1.2 7.8 248.8 11.5% 25.1% 1.7% 6.9% 25.0 35%

Source: Credit Suisse estimates

Figure 15: Credit Suisse coverage - Earnings estimates

Share price Target FY2016 OP estimates FY2017 OP estimates FY2018 OP estimates EPS CSE PER CSE Rating (¥bn) 12-Jan-17 Price CSE Co.E IBESE CSE IBESE CSE IBESE FY16 FY17 FY18 FY16 FY17 FY18 Major Chemicals 3407 Asahi Kasei 1,037 NEUTRAL 1,000 148.0 145.0 149.8 160.0 161.3 170.0 171.3 72.3 77.0 83.1 14.3 13.5 12.5 4004 Showa Denko 1,756 NEUTRAL 1,700 36.0 36.0 34.9 38.0 38.1 43.0 38.9 84.2 145.2 166.3 20.9 12.1 10.6 4005 Sumitomo Chemical 558 NEUTRAL 600 125.0 120.0 125.3 145.0 145.6 150.0 155.8 40.4 53.2 57.2 13.8 10.5 9.8 4042 Tosoh 833 NEUTRAL 900 90.0 85.0 90.3 85.0 91.8 88.0 94.0 87.0 86.2 89.3 9.6 9.7 9.3 4183 Mitsui Chemical 539 OUTPERFORM 780 92.0 88.0 90.5 98.0 92.1 105.0 97.0 52.5 58.5 64.0 10.3 9.2 8.4 4188 Mitsubishi Chemical 786 OUTPERFORM 1,030 250.0 229.0 248.8 270.0 269.5 290.0 286.1 96.3 77.1 86.0 8.2 10.2 9.1 4208 Ube Industries 264 NEUTRAL 280 35.0 35.0 34.9 40.0 40.1 45.0 42.9 18.9 20.8 25.0 14.0 12.7 10.5 Integrated chemicals total 776.0 738.0 774.5 836.0 838.5 891.0 885.9 64.5 74.0 81.6 13.0 11.1 10.0 Middle-sized Chemicals 4023 Kureha 4,660 NEUTRAL 5,000 10.0 9.0 9.9 12.0 10.5 14.0 11.7 418.9 506.2 593.5 11.1 9.2 7.9 4043 Tokuyama 464 NEUTRAL 480 35.0 33.0 34.6 36.0 36.8 37.0 38.0 61.8 56.1 58.1 7.5 8.3 8.0 4061 Denka 528 NEUTRAL 550 25.5 24.0 26.5 28.5 29.9 32.0 32.9 40.7 45.2 50.9 13.0 11.7 10.4 4114 Nippon Shokubai 7,510 NEUTRAL 7,260 24.0 22.0 23.3 28.0 26.7 30.0 29.3 492.8 542.1 579.1 15.2 13.9 13.0 4182 Mitsubishi Gas Chem. 2,090 UNDERPERFORM 1,280 31.0 30.0 31.3 33.0 32.6 35.0 34.7 122.8 136.2 143.6 17.0 15.3 14.6 4471 Sanyo Chemical 5,110 OUTPERFORM 6,440 14.8 13.8 14.8 15.6 15.6 16.5 16.5 458.1 480.7 508.0 11.2 10.6 10.1 Middle-sized Chemicals total 140.3 131.8 140.4 153.1 152.0 164.5 163.0 265.9 294.4 322.2 12.5 11.5 10.6 Electronic Materials 3436 SUMCO 1,537 UNDERPERFORM 1,000 12.5 12.5 13.0 29.0 27.1 39.0 37.4 20.5 67.2 93.8 75.1 22.9 16.4 4063 Shin-Etsu Chemical 9,440 NEUTRAL 8,700 230.0 225.0 235.9 257.0 262.9 282.0 287.8 382.6 433.1 471.9 24.7 21.8 20.0 4185 JSR 1,950 NEUTRAL 1,640 27.5 26.0 28.5 33.0 32.5 37.0 35.6 97.5 103.4 114.6 20.0 18.9 17.0 4205 Zeon 1,187 NEUTRAL 900 28.0 28.0 28.4 31.0 31.8 34.0 35.2 87.8 101.4 110.8 13.5 11.7 10.7 4217 Hitachi Chemical 3,020 OUTPERFORM 3,380 52.0 50.0 51.1 61.0 56.0 65.0 60.6 176.2 219.5 232.9 17.1 13.8 13.0 Electronic Materials total 350.0 341.5 356.9 411.0 410.3 457.0 456.7 152.9 184.9 204.8 30.1 17.8 15.4 Total 1,266.3 1,211.3 1,271.8 1,400.1 1,400.8 1,512.5 1,505.6 161.1 184.4 202.8 18.5 13.5 12.0 Textiles 3401 Teijin 2,410 NEUTRAL 2,550 58.0 53.0 57.6 64.0 64.1 68.0 66.6 193.2 211.0 226.3 12.5 11.4 10.7 3402 Toray 965 OUTPERFORM 1,360 160.0 155.0 158.0 175.0 172.1 190.0 184.1 61.6 68.2 73.8 15.7 14.2 13.1 3405 Kuraray 1,795 NEUTRAL 1,690 69.0 70.0 69.4 75.0 73.5 79.0 76.2 112.4 127.2 134.6 16.0 14.1 13.3 Total 287.0 278.0 285.0 314.0 309.7 337.0 327.0 122.4 135.5 144.9 14.7 13.2 12.4 Agro Chemical 4041 Nippon Soda 562 NEUTRAL 540 4.3 4.0 4.3 5.3 5.3 6.0 5.8 48.2 48.2 51.5 11.7 11.7 10.9

Pharmaceuticals 4272 Nippon Kayaku 1,437 NEUTRAL 960 18.0 18.0 18.7 20.5 20.3 22.5 21.5 72.2 80.8 89.5 19.9 17.8 16.1

Source: Company data, I/B/E/S, Credit Suisse estimates

Chemical sector 17 13 January 2017

Figure 16: Chemicals/textiles sector - scheduled results announcements and investor briefings Result Announcement Result Meeting Code Company Name Venue Date Time Date Time

25-Jan 16:00 4217 Hitach Chemical 25-Jan 18:00 Conference call

27-Jan 15:00 4063 Shin-Etsu Chemical 27-Jan 16:00 Conference call

30-Jan 12:00 4205 Zeon 30-Jan 15:30 HQ, Marunouchi

30-Jan 15:00 4185 JSR 30-Jan 17:00 Conference call

30-Jan 4005 Sumitomo Chemical 30-Jan 18:00 Conference call

31-Jan 14:00 4471 Sanyo Chemical Not scheduled

31-Jan 15:00 4043 Tokuyama 31-Jan 16:15 Conference call

31-Jan 15:00 6988 Nitto Denko 31-Jan 18:00 Conference call

31-Jan 16:00 4272 Nippon Kayaku 31-Jan 18:00 Conference call

1-Feb 15:00 4208 Ube Industries 1-Feb 17:30 Conference call

2-Feb 13:00 4042 Tosoh 2-Feb 16:00 Conference call

2-Feb 13:00 4183 Mitsui Chemicals 2-Feb 17:00 Conference call

2-Feb 15:30 4202 Daicel Chemical Ind. 2-Feb 18:30 Conference call

3-Feb 14:00 4182 Mitsubishi Gas Chemical Not scheduled

3-Feb 15:00 4114 Nippon Shokubai Not scheduled

6-Feb 3401 Teijin 6-Feb 13:30 Keidanren Kaikan, Otemachi

7-Feb 11:00 4061 Denka Not scheduled

7-Feb 13:00 3407 Asahi Kasei 7-Feb 15:00 Conference call

7-Feb 14:00 4045 Toagosei 14-Feb 13:30 HQ, Shinbashi

7-Feb 15:00 4041 Nippon Soda Not scheduled

7-Feb 15:00 4091 Taiyo Nippon Sanso 7-Feb 17:00 Conference call

8-Feb 11:00 3405 Kuraray 8-Feb 14:30 Sun Sky Room, Otemachi

8-Feb 13:30 4188 Mitsubishi Chemical Holdings 8-Feb 17:30 Conference call

8-Feb 15:00 3436 SUMCO 8-Feb 16:00 Mitsubishi Bldg., Marunouchi

8-Feb 15:00 6619 W-Scope 8-Feb 16:00 Otemachi First Square Conference

9-Feb 13:00 3402 Toray 9-Feb 15:00 HQ, Nihonbashi

10-Feb 4088 Air Water 10-Feb 18:00 Conference call

13-Feb 15:00 4023 Kureha Not scheduled

14-Feb 15:00 4004 Showa Denko 15-Feb 10:00 LEVEL XXI, Otemachi

Note: As of 13 January 2017. This schedule is subject to change.

Source: Company data, Credit Suisse

Chemical sector 18 13 January 2017

Company reports

Teijin (3401), NEUTRAL, TP change (¥2,100 → ¥2,550) Await growth in composite materials, restructuring of US home healthcare (22 December)

Toray (3402), OUTPERFORM, TP change (¥1,470 → ¥1,360) Stock could rebound if 3Q results show progress with inventory corrections (21 December)

Kuraray (3405), NEUTRAL, TP change (¥1,530 → ¥1,690) Await growth in high-margin businesses other than poval film (26 December)

Asahi Kasei (3407), NEUTRAL, TP change (¥820 → ¥1,000) Housing orders recovery a share price positive, but valuations still not attractive (19 December)

SUMCO (3436), UNDERPERFORM, TP change (¥560 → ¥1,000) Share price already reflects wafer price hike of 5–10% (17 November)

Showa Denko (4004), NEUTRAL, TP change (¥1,350 → ¥1,700) Expecting impact from graphite electrode business acquisition from mid-2017 (19 December)

Sumitomo Chemical (4005), NEUTRAL, TP change (¥480 → ¥600) Weak yen a plus but 2019 patent cliff a concern (20 December)

Kureha (4023), NEUTRAL, TP change (¥4,100 → ¥5,000) PGA and LiB binder growth potential catalysts (20 December)

Nippon Soda (4041), NEUTRAL, TP change (¥460 → ¥540) Bottom for methionine prices, upside from new agrochem products in 2017 (20 December)

Tosoh (4042), NEUTRAL, TP change (¥700 → ¥900) Expecting record profits in FY3/17, but profit decline likely in FY3/18 due to urethane slump (19 December)

Tokuyama (4043), NEUTRAL, TP change (¥420 → ¥480) Expecting growth in semiconductor polysilicon earnings (26 December) Denka (4061), NEUTRAL, TP change (¥460 → ¥550)

Chemical sector 19 13 January 2017

Awaiting approval for cholesterol testing reagent as potential catalyst (20 December)

Shin-Etsu Chemical (4063), NEUTRAL, TP change (¥7,200 → ¥8,700) Share price already reflects yen weakness, brisk wafer and PVC shipments (12 December)

Nippon Shokubai (4114), NEUTRAL, TP change (¥6,700 → ¥7,260) SAP Survival Project and growth for new units could drive upside (11 January)

Mitsubishi Gas Chemical (4182), UNDERPERFORM, TP change (¥1,240 → ¥1,280) Downgrading to UNDERPERFORM due to positives dropping out (2 November)

Mitsui Chemicals (4183), OUTPERFORM, TP change (¥660 → ¥780) Looks undervalued considering outlook for record-high profit in FY16 (16 December)

JSR (4185), NEUTRAL、TP ¥1,640 Lower estimates due to worse synthetic-rubber margins, fiercer competition in LCD materials (25 October)

Mitsubishi Chemical (4188), OUTPERFORM, TP change (¥820 → ¥1,030) Upside potential in new growth strategies, integration effects (16 December)

Zeon (4205), NEUTRAL, TP change (¥910 → ¥900) Sooner or later market will start pricing in outlook for double-digit OP growth in FY17 (7 November)

Ube Industries (4208), NEUTRAL, TP change (¥200 → ¥280) LiB/OLED materials taking over from CPL as potential catalysts (20 December)

Hitachi Chemical (4217), OUTPERFORM, TP change (¥2,600 → ¥3,380) Raise TP on lead-acid battery business acquisition, yen downswing (13 December)

Nippon Kayaku (4272), NEUTRAL, TP change (¥960 → ¥1,450) NK105’s fail priced in; await biosimilar growth (21 December)

Sanyo Chemical (4471), OUTPERFORM, TP change (¥5,450 → ¥6,440) Profit to continue scaling new heights on growth in SAP capacity, automotive materials (11 January)

Chemical sector 20 13 January 2017

Chemical sector 21 13 January 2017

Companies Mentioned (Price as of 12-Jan-2017) Asahi Kasei (3407.T, ¥1,037) Asahi Kasei Mitsubishi Chemical Ethylene Corporation (Unlisted) Bayer (BAYGn.DE, €100.0) Denka (4061.T, ¥528) Exxon Mobil (XON.BA, $285.0) Hitachi Chemical (4217.T, ¥3,020, OUTPERFORM, TP ¥3,380) Idemitsu Kosan (5019.T, ¥3,295) JSR (4185.T, ¥1,950) Kuraray (3405.T, ¥1,795) Kureha (4023.T, ¥4,660) Mitsubishi Chemical (4188.T, ¥786, OUTPERFORM, TP ¥1,030) Mitsubishi Gas Chemical (4182.T, ¥2,090, UNDERPERFORM, TP ¥1,280) Mitsubishi Tanabe Pharma (4508.T, ¥2,259) Mitsui Chemicals (4183.T, ¥539) Monsanto Company (MON.N, $107.33) Nippon Kayaku (4272.T, ¥1,437) Nippon Shokubai (4114.T, ¥7,510) Nippon Soda (4041.T, ¥562) SUMCO (3436.T, ¥1,537) Sanyo Chemical (4471.T, ¥5,110) Shin-Etsu Chemical (4063.T, ¥9,440) Showa Denko (4004.T, ¥1,756) Sumitomo Chemical (4005.T, ¥558) Taiyo Nippon Sanso (4091.T, ¥1,378) Teijin (3401.T, ¥2,410) Tokuyama (4043.T, ¥464) Toray Industries (3402.T, ¥965, OUTPERFORM, TP ¥1,360) Tosoh (4042.T, ¥833) Ube Industries (4208.T, ¥264) Zeon (4205.T, ¥1,187) Please see Figure 3, 4 and 16 for other companies mentioned.

Disclosure Appendix Analyst Certification I, Masami Sawato, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Hitachi Chemical (4217.T)

4217.T Closing Price Target Price Target Price Closing Price 4217.T Date (¥) (¥) Rating 3,500 28-Jan-14 1,490 1,620 N 12-Aug-14 1,837 2,250 O 3,000 11-Mar-15 2,612 3,200 2,500 01-Sep-15 1,789 2,900 07-Jan-16 1,801 2,700 2,000 13-Jun-16 1,955 2,400 1,500 15-Sep-16 2,206 2,600 1,000 13-Dec-16 2,824 3,380 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 * Asterisk signifies initiation or assumption of coverage. N EU T RA L O U T PERFO RM

3-Year Price and Rating History for Mitsubishi Chemical (4188.T)

4188.T Closing Price Target Price Target Price Closing Price 4188.T Date (¥) (¥) Rating 1,150 21-Jan-14 470 530 N 14-Apr-14 406 490 12-May-14 403 520 900 10-Oct-14 511 600 09-Mar-15 700 900 O 650 23-Jun-15 797 1,000 14-Sep-15 654 1,030 400 15-Jun-16 499 820 01- Jan- 2014 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 16-Dec-16 784 1,030

N EU T RA L * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM

Chemical sector 22 13 January 2017

3-Year Price and Rating History for Mitsubishi Gas Chemical (4182.T)

4182.T Closing Price Target Price Target Price Closing Price 4182.T Date (¥) (¥) Rating 2,500 06-Feb-14 1,318 2,100 O 28-Feb-14 1,298 1,940 08-May-14 1,102 1,880 2,000 24-Oct-14 1,230 1,760 13-Jan-15 1,162 1,400 1,500 14-May-15 1,428 1,480 N 08-Sep-15 1,086 1,120 1,000 08-Jul-16 1,012 1,000 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 02-Sep-16 1,368 1,240 02-Nov-16 1,557 1,280 U O U T PERFO RM N EU T RA L * Asterisk signifies initiation or assumption of coverage. U N D ERPERFO RM

3-Year Price and Rating History for Toray Industries (3402.T)

3402.T Closing Price Target Price Target Price Closing Price 3402.T Date (¥) (¥) Rating 1,600 17-Jan-14 699 850 O 02-Dec-14 936 1,240 1,400 23-Apr-15 1,033 1,470 1,200 21-Dec-16 965 1,360 1,000 * Asterisk signifies initiation or assumption of coverage. 800

600 01- Jan- 2014 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017

O U T PERFO RM The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a 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. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. 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. Chemical sector 23 13 January 2017

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Hitachi Chemical (4217.T) Method: We base our ¥3,380 TP on our FY3/18 EPS estimate of ¥219.5 and an average P/E of FY3/08 (15.4x, when the company reported record high profits). We derive our target price considering that the valuation to rise as a result of earnings expansion in the energy storage devices business, which we see as having high medium-term growth potential and to which investors have assigned high valuations. In addition, we take into account a possible valuation rise for makers of high-function products as electronic materials production corrections come to an end. We base our OUTPERFORM rating on our expectations for total returns and comparisons with our coverage universe over the next 12 months. Risk: Risks to our ¥3,380 target price and OUTPERFORM rating for Hitachi Chemical include yen restrengthening and a slowdown in demand for electronic materials including die bonding materials. Target Price and Rating Valuation Methodology and Risks: (12 months) for Mitsubishi Chemical (4188.T) Method: We base our ¥820 target price for Mitsubishi Chemical Holdings using an implied FY3/18 P/E of 12x derived from an SOTP valuation (Electronics applications 9.8x, Designed materials 9.8x, Health care 25x, Chemicals 8.4x, Polymers 8.2x) applied to forecast EPS of ¥68.3. We assign our 12x valuation multiple in the expectation that it will rise from the current level as the profit weighting increases for added- value products with high margins and high market expectations, including environment-friendly and energy-saving products. We also expect valuations for the sector will rise as the three Japanese integrated chemical majors' earnings look to come in above the targets set out in their new medium-term business plans, and that the market will take a more favorable view of the petrochemicals business. We base our OUTPERFORM rating on our expectations for total returns and comparisons with our coverage universe over the next 12 months. Risk: Risks to our ¥820 target price and OUTPERFORM rating for Mitsubishi Chemical Holdings include sliding margins on terephthalic/methyl methacrylate (MMA)/other products, yen strengthening. Target Price and Rating Valuation Methodology and Risks: (12 months) for Mitsubishi Gas Chemical (4182.T) Method: We derive our ¥1,280 target price for Mitsubishi Gas Chemical (MGC) by applying a P/E of 9.4x to FY3/18E EPS of ¥136.2. We derive this multiple from the product of the average P/E for the six mid-tier chemical sector companies under our coverage (10.3x as of November 2016, Mitsubishi Gas Chemical, Kureha, Tokuyama, Denka, Nippon Shokubai and Sanyo Chemical) and the average relative P/E over the past ten years for our coverage universe (0.91x). We think methanol supply–demand is unlikely to tighten given potential excess capacity, and that prices will remain around current levels. Accordingly, we think share price valuation upside also looks unlikely without a substantial rise in prices. We rate the company UNDERPERFORM on the basis of 12-month expected total return relative to our sector coverage.

Chemical sector 24 13 January 2017

Risk: The main risks that could cause the share price to diverge from our ¥1,280 target price and UNDERPERFORM rating for Mitsubishi Gas Chemical are: Upside - higher-than-expected methanol prices and confirmation of growth in exports of bismaleimide/triazine (BT) materials. Target Price and Rating Valuation Methodology and Risks: (12 months) for Toray Industries (3402.T) Method: Our ¥1,360 target price for Toray Industries is based on our EPS forecast of ¥61.6 for FY3/17 and a P/E of 22x (the average multiple in 2006, when Toray secured an order from Boeing to supply B787 aircraft parts). We derive our target price considering that the valuation may rise as a result of earnings expansion in carbon fiber composite materials for automotive use. We base our OUTPERFORM rating on our expectations for total returns and comparisons with our coverage universe over the next 12 months. Risk: Risks that may impede achievement of our ¥1,360 target price and OUTPERFORM rating for Toray Industries include a slowdown in demand for or decline in prices of display and/or semiconductor materials, a relative increase in the price of raw materials including naphtha, and yen appreciation.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (4217.T, 3401.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 expects to receive or intends to seek investment banking related compensation from the subject company (4217.T, 4188.T, 3401.T, 3405.T, 3407.T, 4004.T, 4005.T, 4042.T, 4043.T, 4061.T, 4063.T, 4114.T, 4183.T, 4208.T) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (3401.T, 4023.T). 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. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=278160&v=6cc51qhib0i279hyodr5iltax . Important Regional Disclosures Singapore 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: (3407.T). Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (Japan) Limited...... Masami Sawato 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...... Masami Sawato 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.

Chemical sector 25 13 January 2017

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Chemical sector 26