Mitsui Chemicals (4183)

16 December 2016 Asia Pacific/Japan Equity Research Major Chemicals (Chemicals/Textiles (Japan))

Mitsui Chemicals (4183) Rating OUTPERFORM Price (15 Dec 16, ¥) 543 INCREASE TARGET PRICE FOCUS LIST STOCK Target price (12-mth, ¥) (from 660) 780 Chg to TP (%) 43.6 Market cap (¥ bn) 543.99 (US$ 4.63) Looks undervalued considering outlook for Enterprise value (¥ bn) 901.44 Number of shares (mn) 1,001.82 record-high profit in FY16 Free float (%) 75.0 ■ Action: We revise up our estimates, also raising our target price from ¥660 52-week price range 553–326 *Stock ratings are relative to the coverage universe in each to ¥780 (43.6% potential upside) We maintain our OUTPERFORM rating, analyst's or each team's respective sector. and Mitsui Chemicals remains our top pick within the chemical sector. ¹Target price is for 12 months. Research Analysts ■ Investment case: In our Ideas Engine report on 26 September, we noted Masami Sawato that Mitsui Chemicals has three growth fields (mobility, healthcare, and food 81 3 4550 9729 & packaging), and potential for growth in these areas does not seem [email protected] adequately reflected in the share price. Supported by growth in these three fields, we forecast that the OPM will improve from 5.3% in FY3/16 to 8.3% in FY3/19, and that ROE will rise from 5.8% to 12.8% in the same timeframe. The stock is trading on a P/E of 9.3x FY3/18E EPS, the lowest since 2011 and below the 11.7x average for the seven diversified chemical companies. The P/E is also below the low of 9.7x in FY3/07, when Mitsui reported record profits and the petrochemical business generated close to 100% of OP. This is despite company estimates that petrochemicals will account for only around 25% of OP in FY3/17, when record-high profits are expected. We think the valuation discount is excessive and likely reflects a prevailing view among investors that commodity chemicals still account for a high proportion of profits at Mitsui. ■ Catalysts/risks: Upside risks include the possibility of an upward revision to FY3/17 guidance when 3Q results come out, and swifter-than-expected expansion in earnings in the three growth areas. Downside risks include erosion in the supply-demand balance for phenols and urethane feedstock, delays with the start of new healthcare projects, and a shift to yen strengthening. ■ Valuation: Our ¥780 TP is based on a fair-value P/E of 13.3x (previously 12.1x) applied to FY3/18E EPS of ¥58.5 (previously ¥54.5). Our multiple is derived from an SOTP model using P/Es for each segment. Share price performance Financial and valuation metrics Pr ice (LH S) Reb ased Rel (RH S) Year 3/16A 3/17E 3/18E 3/19E Sales (¥ bn) 1,343.9 1,178.0 1,215.0 1,260.0 7 0 0 1 3 0 Operating profit (¥ bn) 70.9 92.0 98.0 105.0 Recurring profit (¥ bn) 63.2 84.0 92.5 100.0 5 0 0 1 0 5 Net income (¥ bn) 23.0 52.5 58.5 64.0 EPS (¥) 23.0 52.5 58.5 64.0 IBES Consensus EPS (¥) n.a. 50.9 50.9 52.6 3 0 0 8 0 EPS growth (%) 33.1 128.6 11.4 9.4 Jan - 1 5 Ju l- 1 5 Jan - 1 6 Ju l- 1 6 P/E (x) 16.3 10.3 9.3 8.5 The price relative chart measures performance against the Dividend yield (%) 2.1 2.0 2.2 2.4 TOPIX which closed at 1,542.72 on 15-Dec-2016 EV/EBITDA (x) 6.4 6.5 6.1 5.7 On 15-Dec-2016 the spot exchange rate was P/B (x) 1.0 1.3 1.1 1.0 ¥117.41/US$1 ROE(%) 5.8 13.0 13.0 12.8 Performance 1M 3M 12M Net debt/equity (%) 102.7 83.9 75.1 67.3

Absolute (%) 9.9 17.5 3.8 Source: Company data, Thomson Reuters, Credit Suisse estimates Relative (%) -0.0 -0.1 3.7

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. 16 December 2016

Mitsui Chemicals (4183) Price (15 Dec 2016): ¥543 (upside: 43.65%); Rating: OUTPERFORM; Target Price: (from ¥660) ¥780; Analyst: Masami Sawato Income statement (¥ bn) 3/16A 3/17E 3/18E 3/19E Key ratios 3/16A 3/17E 3/18E 3/19E Sales 1,343.9 1,178.0 1,215.0 1,260.0 Growth (%) EBITDA 119.5 138.0 147.0 157.0 Sales (13.3) (12.3) 3.1 3.7 Operating profit 70.9 92.0 98.0 105.0 Operating profit 68.7 29.7 6.5 7.1 Recurring profit 63.2 84.0 92.5 100.0 EPS 33.1 128.6 11.4 9.4 Extraordinary gain & loss (21.9) (7.0) (5.0) (5.0) Margins (%) Profit before tax 41.3 77.0 87.5 95.0 Gross margin 20.4 22.9 23.1 23.4 Net income 23.0 52.5 58.5 64.0 EBITDA margin 8.9 11.7 12.1 12.5 Cash flow (¥ bn) 3/16A 3/17E 3/18E 3/19E OP margin 5.3 7.8 8.1 8.3 Operating cash flow 262.8 125.6 102.4 108.7 DuPont analysis Depreciation & Amortization 48.6 46.0 49.0 52.0 ROE (%) 5.8 13.0 13.0 12.8 Financing cash flow (79.0) (46.0) (41.0) (42.0) Net profit margin (%) 1.7 4.5 4.8 5.1 Issuance (retirement) of stock - - - - Sales/Assets 1.1 1.0 1.0 0.9 Dividends paid (5.0) (8.0) (11.0) (12.0) Assets/Equity 3.3 2.8 2.7 2.5 Investing cash flow (36.4) (66.0) (60.0) (60.0) Credit ratios (%) Capex (43.4) (54.0) (60.0) (60.0) Equity ratio 30.3 35.2 37.3 39.4 Free cash flow 226.5 59.6 42.4 48.7 Net D/E ratio 1.0 0.8 0.8 0.7 Net change in cash 147.4 13.6 1.4 6.7 Per share data (¥) Number of shares (mn) 1,000.5 1,000.5 1,000.5 1,000.5 Balance sheet (¥ bn) 3/16A 3/17E 3/18E 3/19E EPS 23.0 52.5 58.5 64.0 Cash & cash equivalents 79.6 69.8 71.9 74.6 BPS 381.8 425.6 472.5 523.8 Current receivable 245.3 215.1 221.8 230.0 DPS 8.0 11.0 12.0 13.0 Inventories 240.7 211.0 217.6 225.7 Dividend payout ratio (%) 34.9 21.0 20.5 20.3 Other current assets 62.6 66.9 91.0 121.0 Current assets 628.2 562.7 602.4 651.3 Valuation (x) 3/16A 3/17E 3/18E 3/19E Property, plant & equipment 413.4 425.0 436.0 444.0 P/E 16.3 10.3 9.3 8.5 Investments 177.2 182.5 188.0 193.6 P/B 1.0 1.3 1.1 1.0 Intangibles 40.2 40.2 40.2 40.2 EV/EBITDA 6.4 6.5 6.1 5.7 Other non-current assets 177.2 182.5 188.0 193.6 Dividend yield (%) 2.1 2.0 2.2 2.4 Total assets 1,258.9 1,210.3 1,266.5 1,329.0 FCF yield (%) 58.5 13.2 7.8 9.0 Payables 118.3 103.7 107.0 110.9 Short term debt 132.5 136.0 151.7 151.9 Other current liabilities 115.7 71.5 61.4 67.9 Current liabilities 366.6 311.2 320.1 330.8 Long term debt 339.3 291.2 275.4 275.3 Other non-current liabilities 109.9 120.1 135.7 135.8 Total liabilities 815.7 722.5 731.2 741.8 Shareholders' equity 382.0 425.9 472.7 524.1 Minority interests 61.3 61.9 62.5 63.1 Source: Company data, Thomson Reuters, Credit Suisse estimates

Mitsui Chemicals (4183)2 16 December 2016

Overview of changes to earnings estimates We raise our FY3/17 OP estimate from ¥86.0bn to ¥92.0bn, based on 2Q results and the company’s upward revision to full-year guidance. Of the ¥6.0bn increase in our OP forecast, ¥0.5bn is for the mobility segment, and the remaining ¥5.5bn is for the basic materials segment. At the latter segment (encompassing petrochemicals, basic chemicals, and urethane feedstock), margins have improved by more than we anticipated, as has capacity utilization. The mobility segment, too, has seen greater-than-expected benefits from lower input costs. In projecting FY3/17 OP of ¥92.0bn, we are expecting profit to beat the ¥91.7bn record set in FY3/07, amid a buoyant petrochemical market. For FY3/18, we raise our OP forecast from ¥90.0bn to ¥98.0bn, an increase of ¥8.0bn. For the most part this is due to a ¥5.0bn increase in our OP estimate for basic materials, from ¥17.0bn to ¥22.0bn. In projecting a ¥1.5bn YoY decline from the ¥23.5bn OP we forecast for FY3/17, we are factoring in margin deterioration stemming from a combination of higher input costs, and lower urethane and phenol prices. Mitsui Chemicals halted production equipment for MDI (methylene diphenyl diisocyanate, a urethane feedstock) at Kashima in March 2016 and at Omuta in May 2016, and we expect a full contribution from this restructuring measure in FY3/18. However, we think the impact of margin deterioration will be greater. On this occasion, we change our USD/JPY assumption from 103 to 108. It seems that every ¥1 decline against the dollar buoys Mitsui Chemicals’ OP by ¥0.6bn annually. We also raise our FY3/19 OP forecast by ¥5.0bn, from ¥100.0bn to ¥105.0bn, primarily to reflect an increase in our OP estimate for the basic materials segment, from ¥16.5bn to ¥21.0bn. Valuation We use FY3/18E P/Es of 12.9x for the mobility segment (previously 12x), 13.9x for the healthcare segment (10.8x), 10.9x for food & packaging (9.4x), and 11.3x for basic materials (12x). Our SOTP-based (weighted average) P/E comes to 13.3x (12.1x), which when applied to FY3/18E EPS yields a target price of ¥780.

Mitsui Chemicals (4183)3 16 December 2016

Figure 1: Mitsui Chemicals (4183) – Valuations (Mar-18, SOTP basis)

Applied P/E Segment EPS Mobility 12.7 x 26.8 ----- 4185 JSR 17.5 x 3402 Toray 13.2 x 4188 Mitsubishi Chemical HD 10.2 x 4217 Hitachi Chemical 13.1 x LYB.N LyondellBasell 9.3 x Healthcare 13.9 x 10.1 ----- 3401 Teijin 12.0 x 3407 Asahi Kasei 15.5 x 4182 Mitsubishi Gas Chemical 14.4 x Food & packaging 10.9 x 13.1 ----- 3402 Toray 13.2 x 4005 Sumitomo Chemical 10.3 x 4041 Nippon Soda 8.9 x 4061 Denka 11.2 x Basic materials 10.9 x 13.1 4188 Mitsubishi Chemical HD 10.2 x 6505.TW Formosa Petrochemical 10.9 x DOW.N DOW Chemical 13.4 x LYB.N LyondellBasell 9.3 x

T/P 780

Implied P/E 13.3 x

* Share price as of 15 December

Source: I/B/E/S, Credit Suisse estimates Scenario analysis We modeled the impact on Mitsui Chemicals’ profits of different scenarios for petrochemical supply–demand. We also conducted a scenario analysis of the share price impact from these earnings fluctuations. The base scenario underlying our target price calculation is outlined immediately below. In our base scenario, crude oil prices hold at low levels, supply-demand for petrochemicals is firm, and operating rates at petrochemical facilities trend at 90%. In addition, earnings in the three growth areas gradually expand. Under these circumstances, we would expect FY3/18 OP to increase 6.5% YoY to ¥98bn. On this basis, our EPS forecasts are ¥52.5 for FY3/17, ¥58.5 for FY3/18, and ¥64 for FY3/19. Our ¥780 target price uses a P/E of 13.3x, derived with a sum-of-the-parts model based on segment P/Es, and FY3/18E EPS of ¥58.5. Assumptions in our bullish scenario include a tight supply-demand balance for petrochemicals and high (full) operating rates for petrochemical plants. In this scenario, too, earnings in the three growth areas gradually expand. The above leads us to FY3/18 OP of ¥104bn and EPS of ¥61.0 in FY3/17, ¥69.1 in FY3/18, and ¥74.6 in FY3/19. These inputs generate a FY3/18 P/E of 15x and a theoretical share price of ¥1,040. In our bearish scenario the supply-demand balance for petrochemicals weakens and operating rates slip to 80%. Expansion in the three growth areas also slackens. Our

Mitsui Chemicals (4183)4 16 December 2016

bearish inputs suggest EPS of ¥42.3 in FY3/17, ¥45.6 in FY3/18, and ¥51.0 in FY3/19. Under this scenario our model points to a FY3/18 P/E of 11x and a theoretical share price of ¥500.

Figure 2: Mitsui Chemicals (4183) – Scenario analysis 1 (¥) 1,100 Best-case scenario ¥1,040 1,000

900

Base scenario 800 ¥780

700

600

500 ¥500 Worst-case scenario

400

300

200 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17

Source: Thomson Reuters Datastream, Credit Suisse estimates

Mitsui Chemicals (4183)5 16 December 2016

Figure 3: Mitsui Chemicals (4183) – Scenario analysis 2 Best-case scenario ¥1,040 Tighter petrochemical supply-demand trend and 3 growth fields expect high growth. FY16 (E) FY17(E) FY18 (E) Operating profits: ¥103.0 bn ¥112.0 bn ¥119.0 bn EPS: ¥61.0 ¥69.1 ¥74.6 Theoretical price: FY17 PER 15x = ¥1,040

Base scenario ¥780 Petrochemical supply-demand to track firm and 3 growh fields expect moderate growth. FY16 (E) FY17(E) FY18 (E) Operating profits: ¥92.0 bn ¥98.0 bn ¥105.0 bn EPS: ¥52.5 ¥58.5 ¥64.0 Theoretical price: FY17 PER 13.3x = ¥780

Worst-case scenario ¥500 Petrochemical supply-demand conditions worsening and 3 growth fields expect slow growth. FY16 (E) FY17(E) FY18 (E) Operating profits: ¥79.0 bn ¥81.0 bn ¥88.0 bn EPS: ¥42.3 ¥45.6 ¥51.0 Theoretical price: FY17 PER 11x = ¥500

Source: Credit Suisse estimates

Mitsui Chemicals (4183)6 16 December 2016

Figure 4: Mitsui Chemicals (4183) – Forecasts summary Sales Operating profit Recurring profit Net profit EPS ¥bn YoY (%) ¥bn YoY (%) ¥bn YoY (%) ¥bn YoY (%) ¥ YoY (%) Consolidated 16/3 A 1,343.9 -13.3 70.9 68.7 63.2 42.3 23.0 33.0 23.0 33.1 17/3 CS E (new) 1,178.0 -12.3 92.0 29.7 84.0 32.9 52.5 128.6 52.5 128.6 (prev) 1,215.0 -9.6 86.0 21.2 77.0 21.9 48.5 111.2 48.5 111.2 CoE 1,174.0 -12.6 88.0 24.1 80.0 26.6 50.0 117.7 50.0 117.7 IBES E 1,181.7 -12.1 90.0 26.9 - - 50.9 121.6 50.9 121.6 18/3 CS E (new) 1,215.0 3.1 98.0 6.5 92.5 10.1 58.5 11.4 58.5 11.4 (prev) 1,240.0 2.1 90.0 4.7 84.0 9.1 54.5 12.4 54.5 12.4 IBES E 1,217.4 3.0 91.1 1.1 - - 50.3 -1.1 50.9 0.1 19/3 CS E (new) 1,260.0 3.7 105.0 7.1 100.0 8.1 64.0 9.4 64.0 9.4 (prev) 1,270.0 2.4 100.0 11.1 95.0 13.1 63.0 15.6 63.0 15.6 IBES E 1,248.9 2.6 95.8 5.2 - - 52.8 4.9 52.6 3.3

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

Figure 5: Mitsui Chemicals (4183) – Consolidated income statement

(¥bn) Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17E Mar-18E Mar-19E Sales Mobility - - - - 318.2 296.0 306.0 320.0 Healthcare - - - - 161.1 142.0 150.0 156.0 Food & Packaging - - - - 195.2 183.0 190.0 200.0 Basic materials - - - - 630.8 518.0 530.0 545.0 Other - - - - 38.6 39.0 39.0 39.0 Total 1,454.0 1,406.2 1,566.0 1,550.1 1,343.9 1,178.0 1,215.0 1,260.0

Operating profit Mobility - - - - 44.9 41.5 45.0 48.5 Healthcare - - - - 11.6 15.0 17.0 19.0 Food & Packaging - - - - 20.3 20.0 22.0 23.5 Basic materials - - - - 1.0 23.5 22.0 21.0 Other - - - - -6.9 -8.0 -8.0 -7.0 Total 21.6 4.3 24.9 42.0 70.9 92.0 98.0 105.0

OP Margins (%) Mobility - - - - 14.1 14.0 14.7 15.2 Healthcare - - - - 7.2 10.6 11.3 12.2 Food & Packaging - - - - 10.4 10.9 11.6 11.8 Basic materials - - - - 0.2 4.5 4.2 3.9 Other - - - - -17.9 -20.5 -20.5 -17.9 Total 1.5 0.3 1.6 2.7 5.3 7.8 8.1 8.3

P/L Statement Sales 1,454.0 1,406.2 1,566.0 1,550.1 1,343.9 1,178.0 1,215.0 1,260.0 CoGS 1,261.2 1,233.3 1,353.5 1,308.5 1,069.5 908.0 934.0 965.0 Gross profit 192.8 172.9 212.5 241.5 274.4 270.0 281.0 295.0 SG&A 171.3 168.6 187.6 199.5 203.5 178.0 183.0 190.0 Operating profit 21.6 4.3 24.9 42.0 70.9 92.0 98.0 105.0 Net interest -3.7 -3.1 -3.3 -2.2 -2.6 -3.0 -2.6 -2.5 Equity method investment P/L 5.5 1.6 0.8 -0.1 -2.2 -0.1 0.5 1.0 Net other non-op. -0.5 6.4 0.1 4.7 -3.0 -4.9 -3.4 -3.5 Recurring profit 22.9 9.2 22.5 44.4 63.2 84.0 92.5 100.0 Net extraordinaries -6.5 -10.0 -33.1 -8.6 -21.9 -7.0 -5.0 -5.0 Pretax profit 16.4 -0.8 -10.5 35.8 41.3 77.0 87.5 95.0 Taxes 8.8 6.8 11.4 11.5 11.8 17.0 21.0 22.5 Minorities 8.6 0.5 3.2 7.1 6.5 7.5 8.0 8.5 Net profit -1.0 -8.1 -25.1 17.3 23.0 52.5 58.5 64.0

YoY Growth (%) Sales 4.5 -3.3 11.4 -1.0 -13.3 -12.3 3.1 3.7 Operating profits -46.8 -80.1 480.4 68.8 68.7 29.7 6.5 7.1 Recurring profits -41.1 -59.8 144.6 97.2 42.3 32.9 10.1 8.1 Net profits - - - - 33.0 128.6 11.4 9.4

Margin (%) Gross profit/Sales 13.3 12.3 13.6 15.6 20.4 22.9 23.1 23.4 SG&A/Sales 11.8 12.0 12.0 12.9 15.1 15.1 15.1 15.1 Operating profit/Sales 1.5 0.3 1.6 2.7 5.3 7.8 8.1 8.3 Recurring profits/Sales 1.6 0.7 1.4 2.9 4.7 7.1 7.6 7.9 Net profits/sales -0.1 -0.6 -1.6 1.1 1.7 4.5 4.8 5.1

Source: Company data, Credit Suisse estimates

Mitsui Chemicals (4183)7 16 December 2016

Figure 6: Mitsui Chemicals (4183) – Consolidated balance sheet and cash flow statement

(¥bn) Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17E Mar-18E Mar-19E Balance Sheet Current assets 661.3 715.4 777.0 731.7 628.2 562.7 602.4 651.3 Cash & marketable securities 54.3 46.5 72.0 52.0 79.6 69.8 71.9 74.6 Receivables 274.5 298.4 296.5 299.1 245.3 215.1 221.8 230.0 Inventories 248.4 284.6 301.2 291.3 240.7 211.0 217.6 225.7 Other 84.1 85.8 107.4 89.4 62.6 66.9 91.0 121.0 Fixed assets 595.0 622.6 655.1 680.1 630.7 647.6 664.1 677.7 Tangible fixed assets 430.6 446.6 425.8 433.6 413.4 425.0 436.0 444.0 Intangibles 11.6 14.6 72.2 72.8 40.2 40.2 40.2 40.2 Investments 152.8 161.3 157.1 173.7 177.2 182.5 188.0 193.6 Total assets 1,256.3 1,338.0 1,432.2 1,411.8 1,258.9 1,210.3 1,266.5 1,329.0 Payables 194.0 215.7 219.8 164.2 118.3 103.7 107.0 110.9 Interest-bearing debt 464.8 506.7 580.8 547.4 471.8 427.2 427.2 427.2 Bonds & CBs (incl. Short term) 123.0 107.0 112.0 100.0 79.9 59.7 35.6 20.4 Long-term and current debt 298.0 330.6 412.6 411.2 366.1 341.6 365.7 380.9 Other 181.7 186.8 221.9 228.9 225.6 191.6 197.1 203.6 Total liabilities 840.5 909.1 1,022.5 940.5 815.7 722.5 731.2 741.8 Equity 367.4 376.8 352.8 406.2 382.0 425.9 472.7 524.1 Minorities 48.3 52.1 56.8 65.1 61.3 61.9 62.5 63.1 Net asset 415.8 428.9 409.6 471.3 443.2 487.7 535.2 587.2 Total liabilities/Equity(Net asset) 1,256.3 1,338.0 1,432.2 1,411.8 1,258.9 1,210.3 1,266.5 1,329.0

Cash flow Net profits -1.0 -8.1 -25.1 17.3 23.0 52.5 58.5 64.0 Depreciation 62.7 43.8 48.1 48.2 48.6 46.0 49.0 52.0 Increase/ decrease of working capital 21.3 38.5 10.4 48.4 -58.5 -45.4 10.1 12.3 Other -39.7 -55.7 10.1 -55.5 132.8 -18.3 5.0 5.0 Operating cash flow 43.3 18.5 43.5 58.3 145.9 125.6 102.4 108.7 Capex -44.8 -56.6 -113.2 -47.5 -43.4 -54.0 -60.0 -60.0 Other 2.3 -1.5 23.4 12.5 7.0 -12.0 0.0 0.0 Investment cash flow -42.5 -58.1 -89.8 -35.0 -36.4 -66.0 -60.0 -60.0 Dividend to be paid -6.0 -6.0 -6.0 -3.0 -5.0 -8.0 -11.0 -12.0 Other -20.7 33.3 72.9 -43.6 -74.0 -38.0 -30.0 -30.0 Financial cash flow -26.7 27.3 66.9 -46.6 -79.0 -46.0 -41.0 -42.0 Free cash flow 0.8 -39.6 -46.3 23.3 109.5 59.6 42.4 48.7

Valuations EPS (¥) -1.0 -8.1 -25.1 17.2 23.0 52.5 58.5 64.0 BPS (¥) 366.8 376.2 352.4 405.9 381.8 425.6 472.5 523.8 CFPS (¥) 61.6 35.6 22.9 65.4 71.5 98.5 107.4 115.9 Dividend per share (¥) 6.0 6.0 3.0 5.0 8.0 11.0 12.0 13.0 Dividend payout (%) -596.9 -73.8 -12.0 29.0 34.9 21.0 20.5 20.3

PER (x) High (x) - -31.0 -12.1 21.1 23.6 10.6 9.5 8.7 Low (x) - -17.8 -7.6 13.9 15.6 6.1 5.5 5.0 PBR (x) High (x) 0.8 0.7 0.9 0.9 1.4 1.3 1.2 1.1 Low (x) 0.6 0.4 0.5 0.6 0.9 0.8 0.7 0.6 PCFR (x) High (x) 5.0 7.1 13.2 5.6 7.6 5.7 5.2 4.8 Low (x) 3.7 4.1 8.3 3.7 5.0 3.3 3.0 2.8 EV/EBITDA (x) 8.0 13.7 10.4 8.8 7.1 5.8 5.4 5.0 Market cap 267.0 198.8 246.8 302.3 450.7 439.2 439.2 439.2 Net debt 410.5 460.1 508.8 495.4 392.2 357.5 355.2 352.6 EBITDA 84.3 48.1 73.0 90.2 119.5 138.0 147.0 157.0 Dividend yield 2.3 3.0 1.2 1.7 1.8 2.5 2.7 3.0

ROE (%) -0.3 -2.2 -6.9 4.5 5.8 13.0 13.0 12.8 Sales/net profits (%) -0.1 -0.6 -1.6 1.1 1.7 4.5 4.8 5.1 Total assets turnover (x) 1.2 1.1 1.1 1.1 1.1 1.0 1.0 0.9 Financial leverage 3.4 3.6 4.1 3.5 3.3 2.8 2.7 2.5 ROCE（%） 1.4 -0.3 -4.2 5.6 6.5 12.7 12.6 12.5 Profit before interests after tax 6.1 -1.4 -17.8 24.6 29.6 59.0 64.6 70.0 Capital in use 423.4 422.3 419.3 440.5 457.3 465.5 511.5 561.2

Shareholders' equity/total assets (%) 29.2 28.2 24.6 28.8 30.3 35.2 37.3 39.4 D/E ratio (x) 1.3 1.3 1.6 1.3 1.2 1.0 0.9 0.8 Net D/E ratio (x) 1.1 1.2 1.4 1.2 1.0 0.8 0.8 0.7 OP/interest costs (x) 3.1 0.6 3.4 5.7 10.7 14.2 16.1 17.5

Note: High and Low estimates are based on 2016 YTD high and low share price

Source: Company data, Credit Suisse estimates

Mitsui Chemicals (4183)8 16 December 2016

Companies Mentioned (Price as of 15-Dec-2016) Asahi Kasei (3407.T, ¥1,056) Denka (4061.T, ¥527) Dow Chemical Company (DOW.N, $58.35) Formosa Petrochemical (6505.TW, NT$109.5) Hitachi Chemical (4217.T, ¥2,894) JSR (4185.T, ¥1,820) LyondellBasell Industries (LYB.N, $88.83) Mitsubishi Chemical (4188.T, ¥781) Mitsubishi Gas Chemical (4182.T, ¥1,972) Mitsui Chemicals (4183.T, ¥543, OUTPERFORM, TP ¥780) Nippon Soda (4041.T, ¥535) Sumitomo Chemical (4005.T, ¥577) Teijin (3401.T, ¥2,356) Toray Industries (3402.T, ¥955)

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 Mitsui Chemicals (4183.T)

4183.T Closing Price Target Price Target Price Closing Price 4183.T Date (¥) (¥) Rating 700 21-Jan-14 254 240 U 16-Apr-14 249 220 600 10-Oct-14 302 260 500 15-Jan-15 343 290 400 23-Jun-15 486 380 03-Sep-15 394 360 300 22-Dec-15 521 510 N 200 29-Mar-16 382 380 01- Jan- 2014 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 04-Jul-16 386 400 26-Sep-16 467 660 O U N D ERPERFO RM N EU T RA L * Asterisk signifies initiation or assumption of coverage. 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: Mitsui Chemicals (4183)9 16 December 2016

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Mitsui Chemicals (4183.T) Method: We base our ¥780 target price for Mitsui Chemicals using an implied FY3/18 P/E of 13.3x derived from an SOTP valuation (segment P/E basis) applied to forecast EPS of ¥58.5. Our valuation for Mitsui Chemicals uses our FY3/18 estimates and P/Es of 12.7x for Mobility, 13.9x for Health Care, 10.9x for Food & Packaging, 10.9 for Basic Materials. We expect petrochemical supply–demand to track firm, and our target price reflects expectations that the valuation will also track flat without operating rates to rise above 90%. 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 target price of ¥780 and OUTPERFORM rating for Mitsui Chemicals include erosion in the supply-demand balance for phenols and urethane raw materials, delays with the start of new healthcare projects, and further yen strengthening.

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 Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (4183.T) within the next 3 months. 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=275461&v=-3bjlorvxsebyw41voxjxev7ed . 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. 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

Mitsui Chemicals (4183) 10 16 December 2016

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.

Mitsui Chemicals (4183) 11 16 December 2016

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