16 January 2015 Asia Pacific/Japan Equity Research

Materials & Electronic Components sector

Connections Series

Cross-sector comparison of three ceramics makers: more differences than meet the eye

Figure 1: Ratings, valuations for the three ceramics-related companies Company Analyst Rating Target Current ⊿% MV (¥bn) 5333 NGK Insulators Yamaguchi OUTPERFORM ¥2,980 ¥2,248 33% 734.1 5334 NGK Spark Plug Kanemoto OUTPERFORM ¥4,300 ¥3,540 21% 770.4 4062 Ibiden Kanemoto UNDERPERFORM ¥1,500 ¥1,719 -13% 237.4 Note: Share prices as of 15 January. Source: Company data, Credit Suisse estimates

■ Cross-sector comparison of three ceramics makers: We undertake a cross- The Credit Suisse Connections Series sector comparison and analysis of NGK Insulators, NGK Spark Plug, and Ibiden. leverages our exceptional breadth of The three ceramics makers compete in many areas but are often covered by macro and micro research to deliver different analysts, making it difficult to compare and assess the relative incisive cross-sector and cross-border competitive advantages of each. With this in mind, we break down each thematic insights for our clients. company’s business portfolio and make business-by-business comparisons with

competitors. All three companies have fast-growing businesses in automotives, Research Analysts and it is our hope that this report will both broaden investors’ understanding of Jun Yamaguchi the three ceramics makers and prove to have a long shelf life independent of 81 3 4550 9789 [email protected] short-term earnings trends. Akinori Kanemoto ■ Key points: The automotive industry is an important customer for all three 81 3 4550 7363 companies. NGK Insulators and Ibiden produce ceramic catalyst substrates used [email protected] in exhaust gas purification systems, while NGK Spark Plug and NGK Insulators JaeMin Joo produce exhaust gas sensors. Ceramic chip packages is another key area and +81 3 4550 9815 [email protected] one in which NGK Spark Plug and NGK Insulators will likely increasingly compete in the future. We see NGK Insulators maintaining its current superiority in ceramic substrates and NGK Spark Plug keeping the upper hand in exhaust sensors going forward. Also included in the report is a supplemental section providing background history on the Morimura Group, to which the two NGK companies belong. ■ Stock Calls: In addition to FY3/15 earnings overshoot, NGK Insulators (5333, OUTPERFORM, TP ¥2,980) should benefit from GPFs in the medium term. We have raised our rating for NGK Spark Plug (5334) to OUTPERFORM and our target price to ¥4,300, as we expect the company will benefit from sustained growth in spark plugs and sensors as well as the weaker yen, leading to strong FY3/16 earnings growth. We maintain our UNDERPERFORM rating and ¥1,500 TP on Ibiden (4062), as it benefits the least from exhaust gas regulations; we expect substrate margins to remain weak. ■ Please see also our 23 October 2014 Connections Series report Automotive technology insights: Refocusing on emission technologies for a cross-sector look

at key technologies for meeting tighter emission standards.

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

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

16 January 2015 Table of contents

Aim of report 3 Overview: Our view of the three ceramics makers 3 NGK Insulators (5333, OUTPERFORM, TP ¥2,980) 3 NGK Spark Plug (5334, OUTPERFORM, TP ¥4,300) 3 Ibiden (4062, UNDERPERFORM, TP ¥1,500) 4 Share price and valuation trends 5 Share price since 2000 5 Valuation (P/E, P/B) 7 Company comparison 8 Segment size and consolidated OP, OPM comparison 8 Comparison of sales exposure by industry and region 9 Problem businesses and countermeasures taken 10 Forex sensitivity 10 Financial metrics 11 Shareholder return policy comparison 1: Dividends 11 Shareholder return policy comparison 2: Buybacks 12 Comparison/analysis of competing businesses 13 Automotive the main battleground 13 (1) Exhaust gas purification ceramics (DPF/GPF and honeycomb substrates) 14 Ibiden leads in SiC-DPF, NGK Insulators strong in other areas 14 GPF: NGK Insulators likely leading in this medium-term growth market 16 Honeycomb substrates and DPF for large commercial vehicles: Ibiden looking to expand share with SiC 17 Honeycomb substrates for passenger vehicle catalytic converters: dominated by NGK Insulators and Corning 17 Outlook for NGK Insulators 17 Outlook for Ibiden 18 (2) Exhaust gas sensors 19 Competitive situation 19 Market outlook 19 Oxygen/air-fuel ratio sensors: Expanding precise control with universal air/fuel ratio sensors 20 Additional prospects for oxygen sensors for EGR intake measurement 21 Spotlight on potential for GPF temperature sensors 21 NOx sensors 21 NGK Spark Plug: stands to gain most from expansion in exhaust gas sensor market 22 (3) Ceramic package 23 Ceramic package market dominated by three Japanese makers 23 Trends by application 23 SMD packages 24 CMOS, CCD ceramic packages 24 LED packages 25 Telecom infrastructure-related 25 Kyocera 25 NGK Insulators 25 NGK Spark Plug 26 Supplementary material: Morimura Group history 28 Originally pottery and antiques exporter called Morimura Gumi 28 Shift from “one company in one industry” principle to direct competition 28 (Supplementary) Financial metrics, share price 30 Aim of report

Materials & Electronic Components sector 2 16 January 2015

Aim of report Coverage of the three ceramics makers is often divided, with NGK Insulators covered by materials (glass & ceramics) analysts and NGK Spark Plug and Ibiden by electronic components analysts. Furthermore, for reasons related to their historical roots and the TSE’s classification system, these companies are not covered by auto or automotive components analysts, despite the fact that they are vitally important suppliers to the auto industry. Accordingly, we believe a cross-sector comparison of the three companies would be useful. We think the presence of the ceramics makers within the automotive segment will only continue to grow as emissions standards become more stringent, so we take a close look at the competitive situation among them. It is our hope that this report will both broaden investors’ understanding of the three ceramics makers and prove to have a long shelf life independent of short-term earnings trends.

Figure 2: Three ceramics companies' ratings & valuations

CS Target Current Market P/E (x) P/B (x) EV/EBITDA (x) ROE (%) Company Analyst Rating Price Price (Diff.) Cap (¥mn) FY1 E FY2 E FY1 E FY2 E FY1 E FY2 E FY1 E FY2 E

5333 NGK Insulators Yamaguchi OUTPERFORM ¥2,980 ¥2,248 33% 734,062 16.2 x 14.1 x 1.95 x 1.75 x 9.0 x 7.8 x 12.7% 13.1% 5334 NGK Spark Plug Kanemoto OUTPERFORM ¥4,300 ¥3,540 21% 770,390 18.7 x 13.8 x 2.25 x 1.94 x 9.2 x 6.9 x 12.8% 15.1% 4062 Ibiden Kanemoto UNDERPERFORM ¥1,500 ¥1,719 -13% 237,370 17.5 x 20.1 x 0.72 x 0.71 x 4.5 x 4.1 x 4.2% 3.6% Average 17.5 x 16.0 x 1.64 x 1.46 x 7.5 x 6.3 x 9.9% 10.6% Note: Share prices as of 15 January Source: Company data, Thomson Reuters, Credit Suisse estimates

Overview: Our view of the three ceramics makers NGK Insulators (5333, OUTPERFORM, TP ¥2,980) With high share and strong competitiveness in honeycomb filters for exhaust gas purification systems and diesel particulate filters (DPFs), NGK Insulators should continue to benefit from tightening exhaust emission standards. An area of particular interest over the medium term is the expansion of gasoline particulate filters (GPFs). Given that lateral development based on existing DPF expertise is possible, the company appears well positioned to establish attractive economies of scale (in materials procurement and upstream processes) and a high level of cost competitiveness. Our estimates assume the launch of mass production in 2016, earnings contributions beginning in FY3/18, and sales topping the current level of silicon carbide DPF (SiC-DPF) sales by FY3/19. We see GPFs as a key medium-term earnings driver. NGK Spark Plug (5334, OUTPERFORM, TP ¥4,300) Holding nearly 40% share in both plugs and exhaust sensors, NGK Spark Plug is well positioned to benefit from stricter emission standards. In plugs, gasoline direct injection technology, in addition to boosting fuel economy, promises to drive uptake for precious metal spark plugs, which should lead to an improvement in product mix. In exhaust sensors, we expect demand to grow for universal exhaust gas oxygen (UEGO) sensors capable of detecting oxygen levels linearly, and we also expect increasing use of oxygen sensors on the intake side of exhaust gas recirculation (EGR) valves as well as NOx sensors for diesel vehicles from around 2018. More stringent regulations raising the number of exhaust gas filters required per vehicle should also provide a tailwind for temperature sensors. The high forex sensitivity of this business is also worth noting.

Materials & Electronic Components sector 3 16 January 2015

Ibiden (4062, UNDERPERFORM, TP ¥1,500) Products related to meeting emission regulations include SiC-DPFs and non-expansion mats used in support applications for a variety of exhaust gas filters. We expect demand for passenger vehicle-use SiC-DPFs to see growth in line with that for the European passenger car market. Ibiden appears positioned to benefit much less than NGK Insulators and NGK Spark Plug from tighter emissions standards. FY3/15 earnings were undermined by a dip in yields following launch of mass production of new thin-walled products designed to boost porosity to meet Euro 6 emission standards, but we expect earnings to turn around and normalize in FY3/16 and subsequent years. Ibiden also plans to launch new SiC-DPF products for large vehicles, but we expect its share of this segment to remain in the 10–20% range.

Figure 3: NGK Insulators (5333) earnings summary NGK Insulators Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated Mar-14 A 308,671 22.1 44,252 113.8 45,819 108.0 27,045 136.8 82.8 136.8 Mar-15 CS E 356,800 15.6 60,400 36.5 62,400 36.2 45,200 67.1 138.4 67.1 CoE 350,000 13.4 56,000 26.5 58,000 26.6 39,000 44.2 119.4 44.2 IBES E 358,280 16.1 59,660 34.8 61,560 34.4 43,690 61.5 133.8 61.5 Mar-16 CS E 378,500 6.1 69,600 15.2 71,600 14.7 52,000 15.0 159.2 15.0 IBES E 383,500 7.0 67,780 13.6 69,750 13.3 49,100 12.4 150.6 12.6 Mar-17 CS E 398,400 5.3 73,300 5.3 75,300 5.2 55,100 6.0 168.7 6.0 IBES E 409,763 6.8 74,222 9.5 77,088 10.5 54,950 11.9 168.3 11.7 Source: Company data, IBES, Credit Suisse estimates

Figure 4: NGK Spark Plug (5334) earnings summary NGK Spark Plug Sales Operating profits Recurring Profits Net profits EPS BPS Capex Dep R&D 5334 ¥ mn YoY ¥ mn YoY Margin ¥ mn YoY ¥ mn YoY ¥ ¥ ¥ mn ¥ mn ¥ mn

2013/3 Actual 302,798 6.3% 23,754 -3.0% 7.8% 27,674 16.6% 20,909 -18.1% 96.1 1,223.4 24,012 12,798 17,100 2014/3 Actual 329,758 8.9% 51,661 117.5% 15.7% 54,960 98.6% 32,704 56.4% 150.3 1,381.4 41,034 11,567 19,438 2015/3 CSE 355,762 7.9% 65,176 26.2% 18.3% 71,699 30.5% 41,209 26.0% 189.3 1,570.7 53,400 14,300 20,437 CoE 341,500 3.6% 64,000 23.9% 18.7% 68,500 24.6% 39,000 19.3% 179.2 - 53,400 14,300 20,400 IBES 349,015 5.8% 66,296 28.3% 19.0% 68,991 25.5% 42,283 29.3% 194.3 - - - - 2016/3 CSE 400,610 12.6% 84,520 29.7% 21.1% 87,020 21.4% 55,673 35.1% 255.8 1,826.5 41,500 18,400 20,800 IBES 372,282 6.7% 76,384 15.2% 20.5% 78,079 13.2% 50,147 18.6% 230.4 - - - - 2017/3 CSE 419,492 4.7% 92,781 9.8% 22.1% 95,381 9.6% 62,051 11.5% 285.1 2,111.7 35,000 20,000 21,200 Source: Company data, IBES, Credit Suisse estimates

Figure 5: Ibiden (4062) earnings summary Ibiden Sales Operating profits Recurring Profits Net profits EPS BPS Capex Dep R&D 4062 ¥ mn YoY ¥ mn YoY Margin ¥ mn YoY ¥ mn YoY ¥ ¥ ¥ mn ¥ mn ¥ mn

2013/3 Actual 285,946 -5.0% 5,419 -65.1% 1.9% 10,890 -33.0% 2,233 -79.0% 16.2 2,050.0 43,262 42,697 15,125 2014/3 Actual 310,268 8.5% 23,442 332.6% 7.6% 28,401 160.8% 17,480 682.8% 126.6 2,308.5 37,731 35,702 15,031 2015/3 CSE 324,767 4.7% 20,739 -11.5% 6.4% 23,267 -18.1% 13,542 -22.5% 98.1 2,376.5 75,000 39,945 15,658 CoE 315,000 1.5% 18,000 -23.2% 5.7% 20,000 -29.6% 11,000 -37.1% 76.9 - 65,000 39,000 16,000 IBES 317,611 2.4% 19,466 -17.0% 6.1% 21,621 -23.9% 12,735 -27.1% 89.0 - - - - 2016/3 CSE 336,738 3.7% 20,350 -1.9% 6.0% 21,190 -8.9% 11,833 -12.6% 85.7 2,432.2 41,500 45,800 16,000 IBES 330,859 4.2% 23,409 20.3% 7.1% 23,907 10.6% 15,387 20.8% 107.5 - - - - 2017/3 CSE 343,318 2.0% 22,550 10.8% 6.6% 23,660 11.7% 13,955 17.9% 101.1 2,503.3 41,500 44,900 16,000 Source: Company data, IBES, Credit Suisse estimates

Materials & Electronic Components sector 4 16 January 2015

Share price and valuation trends Share price since 2000 Looking at the three companies’ share price movements since 2000, there have been a number of periods during which two of the three stocks moved in concert. Ibiden and NGK Insulators performed similarly in 2005–07, when they both benefited from rapid growth in the DPF business, and again in 2010–12, when each saw their earnings decline (albeit for different reasons). NGK Insulators and NGK Spark Plug have also moved in tandem, most notably since 2013 as both companies have benefited from rapid growth in their automotive products businesses and support from a weaker yen. Something all three makers have in common is that the performance of their automotive business has a significant impact on companywide earnings and, by extension, share price. Figure 6 shows the indexed share price performance of the three companies since 2000, periods during which two of the stocks showed similar movement, as well as factors behind the correlation.

Figure 6: Absolute share price performance of the three companies (indexed, Jan. 2000=100) (Jan'00=100) Indexed performance since 2000 (Jan'00=100) 600 TOPIX NGK I NGK S IBIDEN 550 Ibiden, NGKI ('05-'07):DPF NGKI ('10-12):NAS battery NGKI, NGKS ('13-): business enters growth period amid 500 claims, fire drag dow n earnings Earnings rebound sharply tightening of European emission Ibiden ('10-12):DPF profits on automotive business standards slow grow th, yen gains (NGKS 450 posts record profits)

400

Ibiden ('12-): Yen gains fail 350 to materialize, substrate earnings sink Ibiden ('04-'06):FC 300 package profits jump

250

200

150

100

50 NGKS ('07-'08):Sw ings to massive losses as package substrate earnings stumble

0

'00/09 '01/01 '03/01 '04/09 '05/05 '06/09 '07/01 '08/09 '09/05 '10/09 '11/01 '11/05 '12/09 '13/05 '14/09 '00/01 '00/05 '01/05 '01/09 '02/01 '02/05 '02/09 '03/05 '03/09 '04/01 '04/05 '05/01 '05/09 '06/01 '06/05 '07/05 '07/09 '08/01 '08/05 '09/01 '09/09 '10/01 '10/05 '11/09 '12/01 '12/05 '13/01 '13/09 '14/01 '14/05

NGKI, Ibiden: Decline together NGKS, NGKI: Climb NGKI, Ibiden: Climb together as promising businesses as DPF earnings rise together on automotive disappoint (NAS batteries at turnaround, yen gains NGKI, DPF at Ibiden)

Source: Thomson Reuters, Credit Suisse

Materials & Electronic Components sector 5 16 January 2015

Figure 7 shows correlation of share price movements for each of the three possible pairings among the ceramics companies since 2001 (coefficient of determination 26-week trailing average on weekly closing prices). The NGK Insulators/Ibiden pair showed the closest correlation, with the coefficient of determination topping the 0.5 level for 54% of the period since 2001. The Ibiden/NGK Spark Plug pair have correlated above 0.5 for 51% of the time, and the NGK Insulators/NGK Spark Plug pair for 45%. Although the NGK Insulators/NGK Spark Plug pair have correlated particularly closely since 2013, this followed a long period during which the companies’ earnings cycles were not in sync.

Figure 7: Coefficient of determination (R2) among three pairings of ceramics makers (R2) NGK I & NGK S share price R2 (trailing 26wk; periods of R2>0.5) (R2) NGK I & Ibiden share price R2 (trailing 26wk; periods of R2>0.5 1.00 1.00 NGK I - NGK S R2>0.5: 45% of the time NGK I - Ibiden R2>0.5: 54% of the time 0.95 0.95

0.90 0.90

0.85 0.85

0.80 0.80

0.75 0.75

0.70 0.70

0.65 0.65

0.60 0.60

0.55 0.55

0.50 0.50

'01/07 '02/07 '03/07 '07/07 '09/01 '10/01 '11/01 '12/01 '01/01 '01/07 '02/01 '02/07 '03/01 '04/01 '06/07 '07/07 '01/01 '02/01 '03/01 '04/01 '04/07 '05/01 '05/07 '06/01 '06/07 '07/01 '08/01 '08/07 '09/07 '10/07 '11/07 '12/07 '13/01 '13/07 '14/01 '14/07 '03/07 '04/07 '05/01 '05/07 '06/01 '07/01 '08/01 '08/07 '09/01 '09/07 '10/01 '10/07 '11/01 '11/07 '12/01 '12/07 '13/01 '13/07 '14/01 '14/07 (R2) Ibiden & NGK S share price R2 (trailing 26wk; periods of R2>0.5) 1.00 Ibiden - NGK S R2>0.5: 51% of the time 0.95

0.90

0.85

0.80

0.75

0.70

0.65

0.60

0.55

0.50

'01/01 '01/07 '02/01 '11/07 '12/01 '14/07 '03/01 '03/07 '04/01 '04/07 '05/01 '05/07 '06/01 '06/07 '07/01 '07/07 '08/01 '08/07 '09/01 '09/07 '10/01 '10/07 '11/01 '12/07 '13/01 '13/07 '14/01 '02/07 Source: Thomson Reuters, Credit Suisse

Materials & Electronic Components sector 6 16 January 2015

Valuation (P/E, P/B) Figures 8 and 9 show changes since 2001 in the consensus 12-month forward P/B and P/E for each of the three companies. Ibiden maintained the highest consensus P/B through 2007, coinciding with an expansion in its DPF earnings, but NGK Insulators has consistently run highest since 2009 (though NGK Spark Plug recently overtook it). Ibiden’s DPF earnings jumped dramatically between FY3/04 and FY3/08, driving a five-fold expansion in OP over just three years—but while this lifted P/B to very high levels, it had only a relatively modest impact on P/E. On the measure of P/E, NGK Insulators has run highest. Even then, following the run-up in its share price since 2013, the highest level P/E has reached is a little over 20x, a multiple that is still below where it was before the 2008 recession hit. The lowest P/E multiples for all three companies have been just under 10x.

Figure 8: Consensus 12-month forward P/B Figure 9: Consensus 12-month forward P/E Consensus 12-month forward P/B Consensus 12-month forward P/E 4.5 40 NGK I NGK S NGK I NGK S 4.0 35 IBIDEN IBIDEN 3.5 30 3.0 25 2.5 20 2.0 15 1.5 10 1.0

0.5 5

0.0 0

'04/09 '04/01 '04/05 '05/01 '05/05 '05/09 '06/01 '06/05 '06/09 '07/01 '07/05 '07/09 '08/01 '08/05 '08/09 '09/01 '09/05 '09/09 '10/01 '10/05 '10/09 '11/01 '11/05 '11/09 '12/01 '12/05 '12/09 '13/01 '13/05 '13/09 '14/01 '14/05 '14/09

'06/09 '12/05 '13/01 '04/05 '04/09 '05/01 '05/05 '05/09 '06/01 '06/05 '07/01 '07/05 '07/09 '08/01 '08/05 '08/09 '09/01 '09/05 '09/09 '10/01 '10/05 '10/09 '11/01 '11/05 '11/09 '12/01 '12/09 '13/05 '13/09 '14/01 '14/05 '14/09 '04/01 Source: Thomson Reuters Source: Thomson Reuters

Figure 10: Consensus 12-month forward P/B and P/E averages and +/− 1 standard deviation ranges since 2004 12M fwd P/B P/E consensus Avg. (a) Std dev. (b) +1 Std dev. - 1 Std dev. (a) / (b) Avg. (a) Std dev. (b) +1 Std dev. - 1 Std dev. (a) / (b) NGK I 1.68x 0.61x 2.30x 1.07x 36% 20.3x 6.5x 26.8x 13.8x 32% NGK S 1.27x 0.40x 1.67x 0.86x 32% 15.6x 4.7x 20.4x 10.9x 30% IBIDEN 1.76x 1.09x 2.85x 0.67x 62% 18.8x 4.9x 23.7x 13.9x 26% Source: Thomson Reuters

Materials & Electronic Components sector 7 16 January 2015

Company comparison Segment size and consolidated OP, OPM comparison Here we compare the business portfolios of the three companies. While consolidated sales are roughly similar at around ¥350bn, there is considerable variation in portfolio composition. At NGK Insulators, ceramics (filters for exhaust gas purification systems in automobiles) account for a high 62% of sales, while at NGK Spark Plug, 85% of revenue is generated by automotive components (mainly plugs and various sensors). Since the OPM in each company’s core business runs in the mid-20s%, companywide OPM is also quite high, at 16.9% and 18.3%, respectively. In the case of Ibiden, 50% of sales are from flip- chip packages and other electronic components. Because OPM in the segment is a low 3.3%, companywide OPM is the lowest of the three, at just 6.4%.

Figure 11: Business segment comparison Company [Ticker] NGK Insulators [5333] NGK Spark Plug [5334] Ibiden [4062] Consolidated sales (¥bn) 356.8 355.8 324.8 Consolidated OP (¥bn) 60.4 65.2 20.7 OPM% 16.9% 18.3% 6.4% 5.2 13.3 Electronics 49.4 Automotive 21.0 Ceramics 1% 4% Substrate 14% components 6% 64.5 26.2 Ceramics 18% 8% Segment sales breakdown Technical Housing 72.0 Power (¥bn) 220.3 ceramics 161.5 Materials 20% 50% 62% 301.2 102.8 Construction 85% 32% Others / elim. Electronics Others / elim.

70 26.2% 30% 80 24.0% 30% 12 17.6% 20% 10 60 25% 60 20% 10.2% 15% 50 8 20% 3.3% 10.5 8.3% 40 10% 6 10% 40 72.2 0.7% 15% 4 5.3 0.5% Segment OP (¥bn) / 30 57.7 7.8% 5% 10% 20 0% 2 0.1 1.1 3.7 OPM (%) 20 -14.3% 0.0 0 0% 10 5.0 5% 0 -10% -3.2% 0% (7.1) 0 (20) -20% (2.3) (10) -5% Automotive Technical Others / Ceramics Power Electronics components ceramics elim. Source: Company data, Credit Suisse estimates Note: Figures are our FY3/15 estimates

Looking at sales and OP peaks and bottoms since FY3/00, Ibiden’s performance on both measures shows the greatest volatility, while NGK Insulators’ shows the least. NGK Spark Plug’s technical ceramics segment is highly volatile, with OP in the business plunging by over ¥40bn from peak to trough, precipitating the only consolidated operating loss recorded among the three companies (in FY3/09).

Figure 12: FY3/00–14 sales and OP peaks and bottoms Peak Bottom Peak-Bottom Peak/Bottom (¥mn) (Value) (Year) (Value) (Year) (⊿Value) (%⊿) Sales 364,888 (08/3) 235,489 (10/3) 129,399 55% NGK I OP 69,377 (08/3) 15,335 (02/3) 54,042 352% Peak Bottom Peak-Bottom Peak/Bottom (¥mn) (Value) (Year) (Value) (Year) (⊿Value) (%⊿) Sales 345,584 (08/3) 195,594 (00/3) 149,990 77% NGK S OP 52,403 (07/3) (5,222) (09/3) 57,625 n.a. Peak Bottom Peak-Bottom Peak/Bottom (¥mn) (Value) (Year) (Value) (Year) (⊿Value) (%⊿) Sales 413,522 (08/3) 192,610 (00/3) 220,912 115% IBIDEN OP 68,960 (07/3) 5,419 (13/3) 63,541 1173% Source: Credit Suisse, Credit Suisse

Materials & Electronic Components sector 8 16 January 2015

Comparison of sales exposure by industry and region Figure 13 is a breakdown of each company’s consolidated sales by client industry and region. NGK Spark Plug and NGK Insulators have high exposure to automotive, at 88% and 56%, respectively. Ibiden, on the other hand, generates 50% of sales from semiconductors/electronics in general, but with smartphones/tablets and PCs each accounting for about half of that, automotive still ends up being the single industry to which it has the greatest exposure, at 28%. Other key segments for NGK Insulators include electric power (insulators, NaS batteries) at 20% and semiconductor/electronics at 13%. NGK Spark Plug has 8% exposure to semiconductors/electronics, which encompasses its ceramic package business, making this its second most important segment behind automotive. By region, all three companies have well-balanced portfolios, with exposure distributed fairly evenly across Japan, the US, Europe, and Asia ex-Japan. Top regions by company are Japan for NGK Insulators, North America for NGK Spark Plug, and Asia ex-Japan for Ibiden.

Figure 13: Sales breakdowns by client industry and region Company [Ticker] NGK Insulators [5333] NGK Spark Plug [5334] Ibiden [4062] Consolidated sales (¥bn) 356.8 355.8 324.8 0% 2% 2% Automotive 0% Automotive Automotive 11% 8% 19% Infra (power etc) Infra (power etc) 28% Infra (power etc) 13% 3% Semi / Semi / Semi / electronics total electronics total electronics total 56% 20% Other industrial Other industrial Other industrial 0% 88% 50% Other Other Other Sales breakdown by client industry Breakdown of Semi / Electronics Breakdown of Semi / Electronics Breakdown of Semi / Electronics 0% 0% 0% 0% PC PC PC 12%

Smartphone / 29% Smartphone / Smartphone / 39% Tablet Tablet Tablet 52% 48% 61% Semi / SPE 41% Semi / SPE Semi / SPE

Other 18% Other Other Electronics Electronics Electronics

7% Japan Japan 8% Japan 12% 18% 26% 16% 32% Europe Europe Europe Sales breakdown by 19% N. America N. America N. America region 25% 43% 22% Asia Asia 19% Asia 23% 26% Other Other Other 4% Note: Client industry breakdown based on FY3/15CSE, regional breakdown based on FY3/14A Source: Credit Suisse, Credit Suisse estimates

Materials & Electronic Components sector 9 16 January 2015

Problem businesses and countermeasures taken NGK Insulators: Insulators and NaS batteries have been problem areas. Restructuring China operations has helped improve its insulator business, but the demand outlook remains less than optimistic. In NaS batteries, the company implemented a number of safety measures in its battery designs and impaired facilities following the September 2011 fire accident. Although the company is currently producing to fill large orders from Italy and UAE, it continues to struggle to expand orders as volume remains too low to allow for efficient capacity utilization. That said, with the company making steady progress in controlling fixed costs in both its insulator and NaS battery businesses, we think the risk of a further significant expansion in losses in its electric power business is low. NGK Spark Plug: The ceramic packages and FC packages remain problem businesses. In ceramic packages, sales are still insufficient in our view relative to fixed costs. We believe the company needs to write off production facilities and transfer personnel to the automotive products business, as well as move away from IT-related business and develop new earnings drivers in non-IT areas. Ibiden: We believe the challenge is in substrates, not ceramics. We think that to improve the profitability of flip chip packages, the company needs to take responsibility as a market leader for normalizing prices for packages used in CPUs following their extraordinary decline. With an industrywide glut developing in flip chip CSPs and PCBs amid slowing growth in high-end smartphones, management’s biggest challenge will be stabilizing and boosting earnings in its substrate business.

Figure 14: Problem businesses and countermeasures, outlook Problem business Measures taken Partial impairment and closure (one site) of Chinese facilities, prompting shift to three- NGK Insulators Insulator plant production system. China demand outlook toned down, but domestic replacement demand still expected.

Improved battery designs and impaired facilities following Sep. 2011 fire, booking ¥60bn NAS battery in extraordinary loss and replacing products already delivered. Currently filling large orders from Italy and UAE, but has yet to announce any major new orders.

Asset impairment and personnel transfer (to automotive) needed as sales insufficient. NGK Spark Plug Ceramic PKG / FC-PKG Development of non-IT related earnings drivers necessary. As the market leader, must lead the normalization of prices for FC packages used in Ibiden Substrates CPUs following their extraordinary decline. Source: Company data, Credit Suisse Forex sensitivity Looking at the impact of a ¥1 swing in the dollar-yen and euro-yen exchange rates, exposure on an absolute profit impact basis is highest at NGK Spark Plug, followed by NGK Insulators, then Ibiden. On a percentage basis, exposure is by far the smallest at NGK Insulators (Ibiden’s profits are smaller than NGK Insulators' on an absolute basis). Ibiden’s exposure is highest in substrates (FC-CSPs) and ceramics (high translation gains as overseas production ratio is high). NGK Insulators’ exposure is highest in its ceramics and electronics businesses.

Figure 15: Forex sensitivity comparison OP⊿ from +¥1 swing % impact to OP 16/3 CSE OP Ticker Company vs USD vs EUR vs USD vs EUR (¥mn) (¥mn) (¥mn) (¥mn) (¥mn) 5333 NGK Insulators 400 230 69,600 0.6% 0.3% 5334 NGK Spark Plug 1,200 400 84,520 1.4% 0.5% 4062 Ibiden 300 100 20,350 1.5% 0.5% Source: Company data, Credit Suisse estimates

Materials & Electronic Components sector 10 16 January 2015

Financial metrics All three companies have a healthy balance sheet. NGK Spark Plug and Ibiden are both net cash positive. NGK Insulators was also net cash through FY3/11, but debt incurred in dealing with the NaS battery fire raised its interest-bearing debt load. That said, we expect the company to return to a net cash position in FY3/16.

Figure 16: Financial metrics comparison (15/3E) NGK Insulators NGK Spark Plug Ibiden PL EBITDA margin 23.2% 22.3% 18.7% Cash & equivalents (¥bn) 50.9 90.0 41.7 Gross debt (¥bn) 60.5 47.0 78.3 Net debt (¥bn) 9.6 -43.0 36.6 D/E (%) 17.0% 14.6% 24.2% BS Net D/E (%) 2.7% -13.4% 11.3% Equity ratio (%) 58.8% 69.6% 72.8% ROE (%) 12.7% 12.8% 4.2% ROA (%) 7.2% 8.7% 3.0% ROIC (%) 11.5% 15.1% 4.3% Gross debt/FCF ratio (x) 3.02x -3.67x -3.64x CF Operating CF/share (¥) ¥176.3 ¥185.1 ¥385.4 Source: Company data, Credit Suisse estimates Shareholder return policy comparison 1: Dividends Figure 17 shows the three companies’ payout ratios, dividend yields, and dividend policies. At less than 2% across the board, dividend yield is not particularly high at any of the companies, but on a relative basis Ibiden does boast a higher dividend yield and payout ratio than the other two. NGK Spark Plug and Ibiden have quantitative dividend payout ratio targets. NGK Spark Plug targets over 20% currently, while Ibiden has set a long-term goal of 30%. NGK Insulators does not disclose its payout target. All three companies have solid finances, so there is scope to enhance shareholder returns, but we do not expect a dramatic jump in payout ratios anytime soon, as all three also tend to place a priority on strategic investment and R&D.

Figure 17: Payout ratio, dividend yield, dividend policy comparison (15/3E) Payout ratio Yield Dividend policy

Dividend decided based on earnings, future business plans NGK Insulators 20.2% 1.2% etc.

Stable dividend policy considering overall cash needs for R&D, NGK Spark Plug 20.1% 1.1% capex etc. Aim for payout of over 20%.

Stable dividend policy considering various parent / Ibiden 30.6% 1.7% consolidated metrics. Mid/long-term payout ratio target of 30%. Source: Company data, Credit Suisse estimates

Materials & Electronic Components sector 11 16 January 2015

Shareholder return policy comparison 2: Buybacks Figure 18 lists share buyback announcements made by the three companies since 2000. NGK Insulators and NGK Spark Plug were fairly active in the early 2000s, but have not repurchased any shares since 2008 and 2007, respectively. Ibiden has carried out only one buyback since 2008 (in 2012). Note that while Ibiden has fully executed each buyback it has announced, NGK Insulators and NGK Spark Plug on occasion have failed to use the full budget originally specified.

Figure 18: Share buyback announcements since 2000 NGK Insulators [5333] NGK Spark Plug [5334] Ibiden [4062] Share # buyback Share # buyback Share # buyback Annc. date Annc. date Annc. date price* shares price* shares price* shares 10/31/08 ¥930 5.0mn 10/31/07 ¥1,698 2.5mn 8/2/12 ¥1,182 5.0mn 7/29/08 ¥1,595 5.0mn 6/30/06 ¥1,907 1.5mn 5/21/08 ¥4,161 2.0mn 2/13/08 ¥2,257 0.2mn 6/28/02 ¥753 10.0mn 2/4/08 ¥6,032 1.5mn 12/24/04 ¥830 6.5mn 7/31/01 ¥831 10.0mn 9/1/06 ¥5,313 1.5mn 11/29/04 ¥758 5.0mn 6/26/03 ¥1,170 4.0mn 6/30/03 ¥579 10.0mn 6/26/02 ¥1,581 2.0mn 6/28/02 ¥798 10.0mn 6/27/01 ¥1,430 0.2mn 7/10/01 ¥848 10.0mn 5/18/00 ¥1,594 0.2mn 1/23/01 ¥1,247 4.0mn 12/1/00 ¥1,212 7.0mn * Share price one business day before buyback announcement ** Some buyback programs incomplete Source: Bloomberg, Credit Suisse

Materials & Electronic Components sector 12 16 January 2015

Comparison/analysis of competing businesses Automotive the main battleground As might be expected given their high sales weighting at all three companies, automotive products are the main area of competition among the ceramics makers. NGK Insulators and Ibiden compete in diesel particulate filters (DPFs), while NGK Spark Plug and NGK Insulators compete in exhaust gas sensors. In ceramic packages, NGK Insulators announced in September 2014 it was acquiring Nippon Steel & Sumikin Electronics Devices, which it renamed NGK Electronics Devices (NGK-ED) on 5 January of this year when the deal was consummated with transfer of all shares from parent company Nippon Steel & Sumitomo Metal (5401). We expect NGK-ED to become a competitor of NGK Spark Plug going forward. That said, with NGK-ED's focus on base stations and NGK Spark Plug in crystal devices, the core businesses of the two companies in the ceramic packages segment differ.

Figure 19: Main competing businesses Client industry Automotive Various industries Product category DPF Emissions sensors Ceramic package Competing company Ibiden NGK I NGK S NGK I NGK S NGK I Current: SiC DPF PKGs for SMD, CMOS/CCD, LED, Logic IC, Current: SiC DPF Sensors for O2, Specific product Future: GPF, Large SiC NOx sensor only MMIC/PA/Optical, SPE, Auto, MEMS etc. Future: GPF DPF temp., NOx DPF Overall, Kyocera is the top player % of total sales 19% (SiC DPF) 11% (SiF DPF) 36% (total) 6% 7% 8% (*) Overall top share; Low margin due to Strong share in all Core NOx sensor Strengths / Top market share in SiC esp. strong in O2 share loss in crystal Strength in PGK for exhaust-related filter patent effective weaknesses etc. DPF sensor and temp. devices; restructuring mobile base stations substrates through 2016 sensor necessary Passenger car SiC DPF Ceramic Package market share Other NGK NGK S (all types) S > Corning Ibiden Market share (AlTi) (SiC) Denso, Bosch etc. NGK I > Kyocera NGK I NGK I (NOx only) (SiC)

Market size (CY13) ¥130bn-140bn ¥250bn (total) ¥215bn (total) Market size (CY20E) ¥140bn-150bn? ¥340bn-350bn? (total) ¥240bn-250bn? (total) PKGs for mobile base stations, auto headlamps, Additional future GPF (NGK I, Ibiden), large-size DPF (Ibiden) Add'l details in Figure 27 auto ECU/PCU; PKG for China high-end opportunities smartphone camera (*) - NGK I announced acquisition of Nippon Steel & Sumikin Electronics Devices in Sep 2014; sales as % of current NGK I consolidated sales Source: Company data, Credit Suisse estimates

Materials & Electronic Components sector 13 16 January 2015

(1) Exhaust gas purification ceramics (DPF/GPF and honeycomb substrates) Ibiden leads in SiC-DPF, NGK Insulators strong in other areas Ibiden and NGK Insulators compete in the area of exhaust gas purification filters. Currently, they directly compete in diesel particulate filters (DPFs) for diesel passenger cars. Ibiden has top share, followed by NGK Insulators, with the two companies controlling an estimated 70% of the market. Ibiden has taken steps to further boost production capacity in this area, completing an expansion of its Hungarian factory in September 2013. Both companies notably have also announced their intention to enter the market for gasoline particulate filters (GPFs), a promising medium-term growth area. In silicon carbide DPFs (SiC-DPFs) for passenger vehicles, Ibiden holds top share, but in exhaust gas purification ceramics in general, it is NGK Insulators that has the broader product line- up and greater sales, and we think that, at this point at least, it has the upper hand in terms of cost competitiveness. Figure 20 shows how honeycomb ceramics for exhaust gas control are subdivided into filters for gasoline and diesel vehicles, and passenger and large vehicles (commercial vehicles). Exhaust gas control mainly consists of: (1) NOx, HC, and CO control and (2) PM control. So-called honeycomb ceramics coated with catalysts that render toxic substances non- toxic (catalytic converters) are used to deal with the former, while filters (DPF and GPF) are used to directly remove the latter. While the size of the honeycomb varies according to the size of vehicle, regardless of fuel (gasoline or diesel) the material used is basically cordierite (Cd). Conventionally, PM filters have only been used in diesel-fueled vehicles. PM filters for passenger vehicles are made from silicon carbide (SiC) and aluminum titanium alloy (ALTi), while those for large and commercial vehicles are made from Cd. GPF, made from Cd, will also increasingly be used in gasoline-fueled vehicles in the future. While there is a possibility that honeycomb ceramic filters currently used in gasoline-fueled vehicles and GPF might not be fitted separately but as integrated systems, we think the roadmap for this has yet to be confirmed.

Figure 20: Overview of main players by automotive ceramic substrate product area Fuel type Gasoline Diesel Vehicle type (size) Passenger car Passenger car Large-size / commercial vehicle Usage (exhaust gas / PM) Exhaust purification Exhaust purification PM removal PM removal PM removal (Usage detail) TWC (DOC / SCR) (DOC / SCR) Product GPF Honeycomb (gasoline & diesel) DPF Large honeycomb Large DPF Corning (Cd) Corning (Cd) Corning (Cd) Ibiden (SiC) Corning (Cd) Corning (Cd) Main players NGK I (Cd) NGK I (Cd) NGK I (Cd) NGK I (SiC) NGK I (Cd) NGK I (Cd) (usage material) (Ibiden: SiC) Corning(AlTi) (Hitachi Metals: Cd) (Sumitomo Chem: AlTi) (Ibiden: SiC) Source: Company data, Credit Suisse

Materials & Electronic Components sector 14 16 January 2015

Figure 21 divides the vehicle market broadly into four categories according to fuel type (vertical axis) and vehicle size (horizontal axis), each requiring different types of ceramic filters, as listed (note that the bottom-right category of gasoline-powered commercial vehicles is nearly nonexistent). Among these, Ibiden currently commands high share only in the upper-left category of diesel-powered passenger vehicles (SiC-DPFs), while NGK Insulators holds share in three different areas: the bottom-left category of gasoline- powered small vehicles (honeycomb substrates and GPFs), the upper-left category of diesel-powered passenger vehicles (honeycomb and SiC-DPFs), and the upper-right category of diesel-powered commercial vehicles (honeycomb and Cd-DPFs). Note that it also has a strong presence in all major product areas in terms of market share (Figure 22), and given the scale of its business in this area, we believe it has the upper hand in cost competitiveness and profitability as well.

Figure 21: Exhaust gas purification-use ceramics Figure 22: Estimated market share breakdown by product applications area Passenger vehicle Large-size Honeycomb / honeycomb (Cd) DPF (Cd) Large DPF Small DPF (NGK I [Cd], (Ibiden [SiC], Ibiden NGK I Corning Corning NGK I Diesel NGK I [SiC]) [SiC]?)

Honeycomb (Cd) Small DPF GPF for exhaust purification GPF w/ TWC, DOC, SCR used Other (NGK I [Cd], in all types (NGK I) NGK I Ibiden Corning > Ibiden

Gasoline (AlTi) Corning [SiC]?) (SiC) No significant gasoline >> commercial vehicle market Ibiden? NGK I (SiC) Passenger (small) Commercial (large) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 23: DPF/GPF basic structure honeycomb structure Exhaust gas inflow Filter w alls to deposit (filter) PM Purified exhaust gases

Source: NGK Insulators, Credit Suisse

Materials & Electronic Components sector 15 16 January 2015

GPF: NGK Insulators likely leading in this medium-term growth market At present, the company that has decided to make specific investments in mass production is NGK Insulators. The firm is setting up GPF mass production facilities as part of investment to expand its plant in Poland announced in April 2014. We expect mass production to start sometime during 2016. As the company plans to use Cd, it should be able to share materials procurement and front-end processes with large Cd-DPF and large honeycomb ceramics, which it is already mass producing on a large scale. Accordingly, we think it will benefit from substantial mass production effects. We expect the takeoff to begin in the European market. The US (where the weighting of GDI engines is higher) and Japan also look promising. We are also focusing on China as it has the potential to become the largest market during the 2020s. Corning is also in the advanced stages of GPF development. It is currently engaged in joint development with major automobile OEMs. We think Ibiden is also engaged in development, but it has no track record of large-scale Cd filter mass production, and we think there are still major disparities between Ibiden and the other two companies in terms of technology and costs. While our forecasts currently do not reflect earnings contributions from GPF, we think that given the above, NGK Insulators and Corning will likely gain substantial GPF market shares in the medium term. We intend to focus on whether Ibiden can take share from these two companies. However, at this juncture we see no major advantages at the company on the technology or cost fronts. NGK Insulators and Corning currently have a near monopoly of the large DPF market using Cd. Ibiden aims to win 20–30% of the DPF market in the longer term via the launch of new products using SiC, and we intend to focus on whether it can win orders.

Figure 24: Conventional TWC system for gasoline cars to gradually integrate GPF capabilities in the future

Conventional system TWC

"Add-on" system (A) TWC TWC + GPF (uncoated) GPF

"Integrated" system (Ex.1) GPF (B) TWC TWC + GPF (coated w/ TWC) w/ TWC GPF's "filter" properties may be integrated with the conventional TWC in the future "Integrated" system (Ex.2) GPF (C) TWC + GPF (coated w/ TWC) w/ TWC

Note: Configurations (A) to (C) are prevailing examples. Actual configurations may differ. Source: Corning, Credit Suisse

Materials & Electronic Components sector 16 16 January 2015

Honeycomb substrates and DPF for large commercial vehicles: Ibiden looking to expand share with SiC Nearly all large commercial vehicles are diesel-powered and therefore need to be equipped with DPFs. The market for these large DPFs is currently dominated by the top two companies: NGK Insulators and Corning (in that order by share, according to our estimates). However, Ibiden has announced plans to begin producing large DPFs at its Hungarian plant, where it completed expansion works in September 2013. The company also announced in November 2013 that it will begin construction of a new plant in Mexico that will become its third overseas DPF production base (total capex around ¥13bn, commencing operations in June 2015). The company aims to leverage SiC technology developed in its passenger-vehicle DPF business to support a full-scale entry into the large DPF market, of which it hopes to take a 20–30% share over the medium term. The silicon carbide Ibiden uses is a more expensive material than the cadmium NGK Insulators and Corning use in their products, so we need to be aware of the risk that price competition in order to win market share could intensify. However, we expect Ibiden to capture no more than around 10–20% of the market. Honeycomb substrates for passenger vehicle catalytic converters: dominated by NGK Insulators and Corning Cordierite honeycomb substrates are used for three-way catalytic converters (TWCs) used in gasoline-powered passenger vehicles and diesel oxidation catalytic converters (DOCs) used in diesel passenger vehicles. Corning is the leader in this field, followed by NGK Insulators. With these two companies controlling most of the global market for these products, we see little chance of Ibiden becoming a major player in the space anytime soon. Outlook for NGK Insulators Honeycomb substrates and DPFs for large/ commercial vehicles will likely be the main growth drivers in the short term. We believe the company is also undertaking a major overhaul of its manufacturing processes for small honeycomb substrates in a bid to extend growth in this area by further cutting costs so as to preserve margins in the face of price deterioration We expect the market for GPFs to take off in 2016 ahead of implementation of Euro 6c emission standards (scheduled for September 2017). We believe NGK Insulators is currently in the lead in terms of gearing up for mass production and that GPFs will likely become a key earnings driver for the company over the medium term. Cadmium, which is used in large honeycomb substrates and large DPFs, is also used in GPFs. This should make it easier for the company to achieve economies of scale in materials procurement and front-end processes.

Figure 25: GPF earnings impact scenario NGK Insulators (5333) FY16E FY17E FY18E FY19E FY20E FY16E GPF market (@USD; $mn) 113 271 531 662 829 Consolidated sales 398,400 GPF market (@¥109/$; ¥mn) 12,300 29,600 57,900 72,100 90,300 Ceramics sales 259,700 GPF market share (assumption) 80% 70% 60% 55% 55% Consolidated OP 73,300 GPF sales 9,800 20,700 34,700 39,700 49,700 Ceramics OP 67,400 YoY% - 111% 68% 14% 25% Consolidated OPM% 18.4% GPF sales ratio (vs 17/3E Ceramics) 4% 8% 13% 15% 19% Ceramics OPM% 26.0% GPF sales ratio (vs 17/3E Total sales) 2% 5% 9% 10% 12% GPF OPM% 0% 7% 17% 20% 24% GPF OP 0 1,400 6,000 8,000 12,000 YoY% - - 329% 33% 50% % of OP (vs 17/3E Ceramics) 0% 2% 9% 12% 18% % of OP (vs 17/3E Total OP) 0% 2% 8% 11% 16% Source: Company data, Credit Suisse estimates

Materials & Electronic Components sector 17 16 January 2015

Outlook for Ibiden While there is potential for expanded usage of SiC-DPFs in India and other markets in the future, in the near term demand growth is likely to be in line with growth in the diesel passenger car market in Europe. Aware of this, Ibiden is trying to boost its SiC-DPF margins (which appear to be lower than NGK Insulators’ despite higher market share) by capturing share in DPFs used in large commercial vehicles, demand for which is expected to grow. It has already begun investing in production facilities in Hungary and Mexico, and we will monitor with interest whether it is able to expand share as planned. In DPFs for passenger vehicles, Ibiden is developing thin-walled products with increased porosity to conform to Euro 6 emission standards, and although margins took a hit in FY3/15 when yields dropped following launch of mass production, we expect earnings to recover to normal levels in FY3/16. Ibiden also appears to be pursuing development of GPFs, but we have yet to see anything to suggest it will be able to secure a meaningful technological or cost advantage over NGK Insulators or Corning. That said, we will continue to monitor the situation. In non-expansion mats, we expect volume to continue to expand going forward as demand steadily shifts away from mats that expand when the filter is exposed to high combustion temperatures.

Figure 26: Ibiden (4062): Earnings scenarios for DPF, sealants Ibiden ¥mn FY13 FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY16E DPF/Catalytic Substrate 70,200 72,500 75,700 78,000 80,000 83,000 88,000 93,000 Consolidated sales 343,318 DPF for PV 56,400 61,000 60,700 60,500 60,500 60,500 60,500 60,500 Ceramics 109,800 DPF for heavy Duty 0 0 3,000 5,000 7,000 10,000 15,000 20,000 Consolidated OP 22,550 POFA (DPF and Catalytic substrate) 13,800 11,500 12,000 12,500 12,500 12,500 12,500 12,500 Ceramics OP 12,200 Non-Expansion Mats 19,100 20,000 20,400 21,000 22,050 23,153 24,310 25,526 Consolidated OPM 6.6% Automotive related sales 89,300 92,500 96,100 99,000 102,050 106,153 112,310 118,526 Ceramics OPM 11.1%

Automotive related OP 9,200 9,900 10,300 11,100 11,736 12,738 14,039 15,408 OPM 10.3% 10.7% 10.7% 11.2% 11.5% 12.0% 12.5% 13.0%

As a % of total Ceramic FY13 FY14E FY15E FY16E Sales 90% 90% 90% 90% OP 109% 94% 92% 91%

As a % of Total FY13 FY14E FY15E FY16E Sales 29% 28% 29% 29% OP 39% 42% 44% 47% Source: Company data, Credit Suisse estimates

Materials & Electronic Components sector 18 16 January 2015

(2) Exhaust gas sensors Competitive situation Major suppliers of exhaust gas sensors include NGK Spark Plug, Denso (6902), and Bosch. NGK Spark Plug holds 40% market share for both oxygen sensors and temperature sensors. NGK Insulators, meanwhile, supplies NOx sensors and holds top share in heavy-duty vehicle segment. In the area of zirconia-based oxygen sensors, NGK Spark Plug and NGK Insulators established a joint venture called Ceramic Sensor Co. in 1989, which produced elements and other products, but dissolved the venture in 2007, making the Ceramic Sensor a wholly-owned subsidiary of NGK Spark Plug.

Figure 27: Market share and scale for exhaust gas sensors (NGK Spark Plug, NGK Insulator) Automotive emissions sensors detail Sensor type Oxygen (OZ, UEGO) sensor DPF Temperature Sensor NOx Sensor Sensing elements Zirconia Thermister (YCrO3) Zirconia units / car 2 units 2 units 2 units Location Front / back of Honeycomb Front / back of DPF Front / back of SCR catalyst/NSR ASP OZ $9-10/UEGO $21-22 $10-11 Now $40-50 ->CY20E $20

NGK S NGK S NGK Insulator (CV/PV) Bosch Sensata > Market Share NGK Spark Plug (PV) Denso Denso > Others Others Bosch???

Market size (CY13) ¥200bn (OZ 85%/UEGO 15%) ¥30bn ¥20bn Market size (CY20E) ¥250bn (OZ 75%/UEGO 25% ¥35bn ¥55-60bn? NGKS: Intake of EGR Front / back of GPF/Back of SCR catalyst CY20 GPF 16.9mn x 2units per car, Other Future CY20 EGR market 40mn units D/E segment snd Trucks will likely have urea Urea based SCR 15mn opporutnity based SCR catalyst and NSR ASP$14-15? ASP $10-11 Potential ¥60bn (in case of 100% attachment rate) ¥50bn Source: Company data, Credit Suisse estimates

Market outlook We forecast potential growth in the market for exhaust gas sensors (oxygen sensors, exhaust gas temperature sensors, NOx sensors) from about ¥250bn in 2013 to ¥350–450bn in 2020. The market for oxygen sensors reached ¥200bn in 2013, and we think product mix improvement resulting from the expanding use of universal air-fuel ratio sensors as well as rising auto production volumes will support market growth to around ¥250bn in 2020. Furthermore, if the adoption of intake oxygen sensors for EGR systems progresses, we think it could boost that total by up to ¥60bn. Temperature sensors are likely to see growth supported by rising production of diesel vehicles, as temperature gauges for DPF applications expand from ¥30bn in 2013 to about ¥35bn in 2020. We also think temperature sensors may well find uses in GPFs, which we expect will start to take off from around 2017–18, and that they may also be used in diagnostics for urea-based selective catalytic reduction (SCR) systems; these applications on top of DPF uses could help push the market up to around ¥50bn in 2020. We expect the use of NOx sensors to increase in tandem with various technologies to reduce NOx emissions in diesel cars as regulations become tighter under Euro 6 legislation. The anticipated adoption of these sensors in promising urea-based SCR systems led to expectations of substantially increased demand, but at this point, although quite a high proportion of commercial vehicles using this system are installed with NOx sensors, they have been adopted for passenger cars only in the D and E segments and in

Materials & Electronic Components sector 19 16 January 2015 certain smaller cars like Peugeot’s Blue Tech line. Still, the development and application of other NOx reduction technologies that do not use urea as a reductant continue, and given that sensors are indispensable to all types of reduction technologies we expect the market to expand from ¥15–20bn in 2013 to around ¥55–60bn in 2020. Below, we look at the backdrop to expanding demand for various types of exhaust gas sensors.

Figure 28: Exhaust gas sensor market set to expand to ¥350bn in 2020; potential growth to ¥450bn if prospects for new applications are factored in ¥ bn 500.0 450.0 Tempreture Sensor for GPF/SCR/NSR 400.0 catalyst 350.0 Oxygen (OZ/UEGO) Sensor for EGR 300.0 NOx Sensor for urea based SCR/NSR 250.0 200.0 Tempreture Sensor for DPF 150.0 100.0 Oxygen (OZ/UEGO) Sensor for Honeycomb 50.0 0.0 2013 2020E (a) 2020E (b) Source: IHS, Company data, Credit Suisse estimates

Oxygen/air-fuel ratio sensors: Expanding precise control with universal air/fuel ratio sensors Zirconia oxygen sensors are installed behind engine exhaust valves and put out signals of 0V to 1V (with 1V at the rich end of the spectrum and 0V at the lean end) to indicate the ideal air-fuel ratio based on oxygen levels in exhaust gases. Fuel injection is adjusted according to the signal output, enabling the engine to keep an optimal mixture and to maintain cleaner exhaust gases. Sensors may also be installed directly behind the honeycomb structure of a TWC to support OBD functions such as the display of catalyst efficiency (although oxygen sensors for OBD functions may be replaced in urea-based SCR systems with NOx sensors that use zirconia elements). As regulations regarding exhaust gases and fuel efficiency become tighter in Japan, the US, and Europe, high-value-added UEGO (Universal Exhausted Gas Oxygen) sensors are increasingly being used to achieve precise control of optimum air-fuel mixtures. Conventional zirconia sensors are limited in their indications to “rich burn” or “lean burn” relative to the ideal ratio, but UEGO sensors can detect the amount of deviation from the ideal and allow more precise control. Also, UEGO sensors can enable adjustment of the ratio to non-ideal levels, allowing for lean-burn combustion in gasoline engines and fine- tuning of diesel engines, for example. We expect the market for oxygen/air-fuel ratio sensors to expand from ¥200bn in 2013 to about ¥250bn in 2020. There are already two oxygen sensors in most cars (either two oxygen sensors or a combination of one UEGO sensor and one oxygen sensor), and the market is set to grow in line with the rise in auto production volumes. Meanwhile, tighter fuel efficiency and emissions regulations, particularly in developed markets, point to further penetration of high-priced UEGO sensors in these markets. Installation rates for UEGO sensors under exhaust valves was around 30% in 2013, and we think this will rise to around 50% in 2020.

Materials & Electronic Components sector 20 16 January 2015

Additional prospects for oxygen sensors for EGR intake measurement Current EGR systems use intake temperature sensors and air flow meters, but not oxygen sensors. Adding oxygen sensors to monitor oxygen levels in the air intake could optimize conditions for EGR. On 15 October 2014, NGK Spark Plug announced plans to commercialize the world’s first EGR intake oxygen sensor. We understand the new sensors use the same zirconia elements as exhaust gas oxygen sensors, but that they are about 35% lighter. The same production and inspection facilities can be used, and once mass production begins we anticipated substantial leverage effects in terms of earnings. NGK Spark Plug plans to start mass production in CY2017. We expect the number of vehicles produced with EGR valves to increase, primarily in developed markets, from around 21mn units in 2013 and 23mn in 2014 to around 41mn in 2020. In terms of valuing exhaust gas sensors, assuming 100% penetration we would estimate the potential 2020 market for exhaust gas oxygen sensors at around ¥60mn.

Figure 29: Oxygen sensor facilities

Source: NGK Spark Plug

Spotlight on potential for GPF temperature sensors Thermistor elements (YCrO3) are used in temperature sensors, which can measure temperatures ranging from −40°C to 900°C. They are mainly installed in the area of DPFs. Initially in the Japanese market, sensors with stabilized zirconia were used to measure temperatures of catalytic converters and to correct abnormally high temperatures when misfires led to unburned gas mixtures during catalysis; however, this demand is shrinking. Today, applications have expanded to various types of catalytic converter exhaust gas purification system controls and turbochargers, but we think the main use is in DPFs. A sensor is located at each end of a DPF to monitor combustion temperatures and help maintain optimal exhaust gas temperatures to burn off collected PM (soot). The market for temperature sensors is thus primarily linked to production volumes of diesel vehicles, but we also highlight new applications in GPFs. We think they may also have potential applications in diagnostics for SCR catalysts in urea-based SCR systems. NOx sensors A significant aspect of the Euro 6 regulations for diesel cars is a squeeze on controlling emissions of NOx, by such means as EGR, urea-based SCR, lean NOx catalyst (LNC) systems, and NOx storage reduction catalyst (NSR) technologies. With urea-based SCR and NSR systems, NOx sensors are used to monitor post-catalyst NOx emissions. Like oxygen sensors, NOx sensors utilize zirconium dioxide (zirconia). As such, they can concurrently act as a zirconia oxygen sensor following three-way catalytic conversion.

Materials & Electronic Components sector 21 16 January 2015

NGK Insulators is the leading developer of NOx sensors for commercial vehicles, while NGK Spark Plug primarily offers NOx sensors for passenger vehicles. Bosch is another leading supplier. NGK Insulators currently has sufficient capacity to produce 7mn NOx sensors each month and plans to ramp up capacity progressively to more than 10mn units by October 2015. NGK Spark Plug and Bosch should be able to produce NOx sensors using existing production lines for sensors that measure the exhaust gas concentration of oxygen. As a means of reducing NOx emissions from diesel vehicles, Peugeot plans to employ urea-based SCR in all models featuring its Blue HDi diesel engine. Mazda's (7261) CX-7 diesel variant also features an SCR system. In compact cars in the A, B, and C segments, we think the main means of NOx reduction will be lean NOx trap (LNT) systems, which are small in scale but nonetheless reduce NOx emissions over time, and EGR. In the D and E segments and in larger commercial vehicles, urea-based SCR and NSR systems are likely to hold sway. NGK Spark Plug: stands to gain most from expansion in exhaust gas sensor market NGK Spark Plug is Japan's leading manufacturer of exhaust gas sensors, with an estimated 35–40% share of the global markets for oxygen and air-fuel ratio sensors, temperature sensors, and NOx sensors. The company’s sensor business (which includes exhaust gas sensors) generated FY3/14 sales of ¥112.8bn, but by FY3/21 we see sales reaching ¥150bn. In fact, we see scope for FY3/21 sales to top ¥190bn in the event of increased sales of temperature sensors for use in GPF, SCR, and NSR systems, also for oxygen sensors used in EGR systems. Based on the timeframe for regulatory tightening, we think these new applications could contribute to earnings as early as 2017–18. Our best-case scenario assumes a 4% annual boost to sales, rising to 7–8% per annum from FY3/18 once these new applications start contributing.

Figure 30: Outlook for NGK Spark Plugs’ exhaust gas sensors ¥ bn 200.0

180.0 Others 160.0 Tempreture Sensor for GPF/SCR/NSR catalyst 140.0 Oxygen (OZ/UEGO) Sensor for EGR 120.0 NOx Sensor for urea based SCR/NSR Tempreture Sensor for DPF 100.0 Oxygen (OZ/UEGO) Sensor for Honeycomb 80.0 60.0 40.0 20.0 0.0 2014/3 2021/3 base case 2021/3 best case Source: IHS, Company data, Credit Suisse estimates Note: Sales breakdown: Credit Suisse estimates

Materials & Electronic Components sector 22 16 January 2015

(3) Ceramic package Ceramic package market dominated by three Japanese makers Although some Chinese manufacturers have started producing packages for crystal devices and some Taiwanese manufacturers have emerged in the area of simple substrates with no cavity structure for use in LED lighting applications, the ceramic package market effectively is an oligopoly comprising the three Japanese makers Kyocera (6971), NGK Spark Plug, and NGK Insulators (note that NGK Insulators announced on 3 September 2014 that it was acquiring Nippon Steel & Sumikin Electronics Devices, which it made a wholly-owned subsidiary on 5 January 2015, and that figures below for NGK Insulators incorporate the past performance of this new subsidiary). The ceramic package market (combined sales of the three companies) was about ¥190bn in FY3/14.

Figure 31: Ceramic package market size Figure 32: Ceramic package market share ¥ mn 225,000 100% 200,000 90% 175,000 80% 150,000 70% 60% 125,000 50% 100,000 40% 75,000 30% 50,000 20% 25,000 10% 0 0% FY3/05 FY3/06 FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/05 FY3/06 FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14

Kyocera NGKS NGKI Kyocera NGKS NGKI

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

Trends by application Major ceramic package applications include SMDs (used mainly in crystal and SAW devices) at 30%, CMOS/CCD image sensors at 18%, MMIC/PA/Optical devices (used mainly in wireless and fixed-line base stations) at 25%, LEDs (mainly high-end, high- intensity LED lighting and automotive lighting) at 6%, and logic ICs at 6% (all figures are estimates). In broad terms, IT hardware applications such as for PCs and smartphones (SMDs, CMOS/CCD sensors) account for about half of total demand, while the remaining half is comprised of applications related to lighting, automotive LEDs, telecom infrastructure, and semiconductor production equipment. Overall, IT hardware-related demand is sluggish while non-IT hardware demand is steadily expanding. Below is an overview of key trends in each of the major application areas.

Materials & Electronic Components sector 23 16 January 2015

Figure 33: Breakdown of ceramic package demand by Figure 34: Breakdown of sales by major product area application 75,000 SMD packge 15% CMOS/CCD 30% 50,000 LED

25% Logic IC 25,000

MMIC/PA/Optical 18% 6% 6% Others 0 (SPE/Auto/MEMS/etc.) SMD CMOS/CCD LED Logic LSI MMIC/PA/ Optical FY08 FY09 FY10 FY11 FY12 FY13

Source: Credit Suisse estimates Source: Credit Suisse SMD packages Surface-mount device (SMD) packages is the only market in which Kyocera, NGK Spark SMD package growth Plug, and NGK Insulators all compete directly. We estimate their respective market shares remains sluggish at about 70%, 10%, and 14%. Despite being the leading ceramic package application alongside telecom infrastructure- related, the market for SMD packages has seen sluggish growth in recent years. Demand has been undermined by increased price pressure from crystal device makers, the top users of SMD packages, amid intensified competition, as well as reduced usage volume as smartphones move away from TCXOs, lower per-unit attach rates for crystal devices, higher demand for FEMs in SAW devices, and greater use of wafer-level packaging. Since most major users are fellow Japanese companies, the business also does not benefit from yen gains. In SMD packages for crystal devices, technological expertise related to high-strength materials is becoming increasingly important amid the ongoing shift to 2016 and 1612 sizes. However, NGK Spark Plug and NGK Insulators have not invested much to date in the development of materials technology, and we suspect they may be struggling in their product development efforts as a result. Key points to watch going forward include growth in the markets for MEMS sensors and microphones, as well as steps NGK Insulators takes to enhance its materials technology after completing its acquisition of Nippon Steel & Sumikin Electronics Devices. CMOS, CCD ceramic packages We expect Kyocera to maintain its over 90% share of this market. While adoption by major Slowing in CDSC-related North American smartphone makers has provided the market a boost, this has been offset demand at an end, with by the sharp decline of the compact digital camera market, resulting in slower overall Chinese smartphones set to growth than anticipated. As fallout from the decline in digital cameras levels off, the key be next driver going forward will be the rate of adoption by smartphone makers other than the major North American makers. In smartphone applications, there is a steady shift to slimmer products, most notably in the high-end handsets of Chinese makers, but the key issue in producing slimmer camera modules is how to preserve the focal length between the CMOS image sensor (CIS) light receiving element and the lens. Ceramic packages are harder than organic packages, allowing for use of a slimmer substrate beneath the CIS, but new packages with cavity structures are producing further slimming gains, with the latest technological trend of penetration cavity flip chip connection allowing the thickness of the substrate just below the CIS to be brought to virtually zero. In

Materials & Electronic Components sector 24 16 January 2015 addition, the surface smoothness of the package surface becomes a problem as CIS resolutions increase, and ceramic packages are superior to organic packages in this respect as well. Our channel checks indicate that Chinese smartphone makers are also beginning to consider switching to ceramic packages, though the price differential with organic packages (we estimate they cost 3–4 times as much) may well become a sticking point. LED packages Chinese and Taiwanese manufacturers produce the aluminum substrates and simple Growth expected going ceramic substrates typically used in general lighting applications, while Japanese makers forward, driven by expanded focus on products used in high-intensity lighting and automotive headlights. Automotive use of LED headlights in headlight-related inquiries have been particularly strong since last year. Expectations of a cars sharp turnaround in LED-related demand, which has been sluggish in recent years, have also been growing recently. Meanwhile, some LED-related customers are making inquiries that extend to chip assembly, suggesting that back-end processes could become a key factor as well. Kyocera is the dominant leader in this area. Telecom infrastructure-related This is a stable market with arguably the strongest growth prospects. In addition to steady Wireless base station- demand for fixed-line base stations, expanded Chinese investment in LTE stations has related demand continues to driven strong growth in demand for power amplifiers (PAs) for wireless base stations and expand optical-related packages used in backbone connections since 1H 2014. In the base station segment, barriers to entry are very high, ranging from development of high-frequency components and alloys to specialized technology for connecting ceramic substrates and alloys. With LTE investment expected to remain strong through 2016 or 2017, driven largely by emerging markets, there is every reason to expect demand for ceramic packages to also continue to run at a high level. That said, the situation bears close monitoring as we also have reports that some PA makers are considering using organic materials in their 1GH LDMOS as a means to cut costs. Kyocera As the impact of the decline in digital cameras eases, expectations are rising for a return to earnings growth; as the largest manufacturer, the company is also expected to aggressively pursue new business development: Kyocera is among the top players in nearly all markets apart from substrates for PAs used in wireless base stations, and still maintains a high 75% share of the overall market. In contrast to NGK Insulators and NGK Spark Plug, it handles all manner of ceramic materials and packages. It is particularly strong in CMOS image sensors (CIS), automotive LEDs, and fixed-line communications, areas in which it holds overwhelming share. Top line growth has slowed in recent years as the market for compact digital cameras has shrunk and liquid crystal counts in smartphones fallen, while new investments in its Vietnam production facilities pushed up fixed costs to further undermine earnings. With these negatives finally cycling through, earnings have shown gradual improvement in FY3/15, driven by non-IT demand. That said, the fact is growth in new applications for ceramic packages remains limited, leaving the impression that, with the exception of certain areas, ceramic packages as a whole are more of a stable market than a growth market. We believe offering total solutions extending to packages will be needed to stimulate growth in new applications, and given that Kyocera has both the technological and financial means to achieve this, we expect it to see it take proactive measures in this regard going forward. NGK Insulators Top share in PA packages for wireless base stations: NGK Insulators announced on 3 September 2014 that it was acquiring Nippon Steel & Sumikin Electronics Devices. The company name was changed to NGK Electronics Devices (NGK-ED) on 5 January 2015. NGK-ED posted sales of ¥24.5bn in FY3/14 and maintains a market share of just over

Materials & Electronic Components sector 25 16 January 2015

10%. It generates an estimated 45–50% of its sales from wireless base station power amplifier (PA) packages for US and European semiconductor makers. NGK-ED has high market share in this area. The company also produces SMD packages for crystal devices, but is losing share as a result of production pressures caused by expanded output of PA packages and development delays in high-strength materials used in small devices. Its other products include ceramic substrates for automotive power semiconductors. With regard to the balance sheet, the company resolved a capital deficit last year and has seen improvement in earnings in FY3/15 driven by growth in PA-related sales. As the subsidiary of a steelmaker, we suspect the company may not have been able to carry out adequate levels of R&D and capital investments. This should change, however, now that it is part of NGK Insulators and we expect to see aggressive technological development and capacity expansion efforts going forward. Along with Kyocera, we expect to see NGK-ED work to expand the market as a whole. Although US and European semiconductor makers use ceramic packages for LDMOS used in wireless base stations, it seems likely that organic packages will remain in demand as a means to cut costs in 1GH and similar applications, so there is a need to quickly establish a new driver. NGK Spark Plug As the only ceramic package maker in the red, and with the outlook for CMOS growth limited, the company is in dire need of restructuring: NGK Spark Plug once held about a 20% share of this market, but has recently seen it slip to around 10%. Shrinkage of its dielectric business, which it announced last July will be transferred to Maruwa, was certainly a contributing factor, but loss of share in its core crystal devices market was the primary cause. A writedown of facilities at the end of last fiscal year notwithstanding, the company is still expected to remain in the red in FY3/15, making it the only ceramic package maker of the three to post a loss. Its problems stem from insufficient investment in materials and process technologies, which caused delays in developing small products in its mainline crystal devices business. This led to a loss of share, but has also left the company without a unique growth driver of its own along the lines of NGK Insulators’ wireless base station PAs. With sales too low relative to fixed costs, we see no other option than to scrap and consolidate production facilities and, as it did in FC packages, transfer personnel to its automotive products business. Finally, looking at the market as a whole, the growth prospects of ceramic packages for IT products are hardly good, so it is essential that the company also develop new, non-IT businesses that can serve as stable earnings drivers over the medium term.

Materials & Electronic Components sector 26 16 January 2015

Figure 35: Comparison of ceramic package makers’ businesses Ceramic Package detail Company Kyocera NGK I NGK S Sales (¥bn) (FY3/15 CSE) ¥155-160bn ¥30-31bn ¥26bn OPM (%) (FY3/15 CSE) 15%+ NA -10% to -15%

SMD packge SMD packge SMD packge

CMOS/CCD CMOS/CCD CMOS/CCD

LED LED LED Sales by application Logic IC Logic IC Logic IC

MMIC/PA/Optical MMIC/PA/Optical MMIC/PA/Optical

Others Others Others (SPE/Auto/MEMS/etc) (SPE/Auto/MEMS/etc) (SPE/Auto/MEMS/etc)

Factory Kokubu/Sendai/Shanghai/Vietnam Yamaguchi/Malaysia NTK Ceramic (Kani, Iijima, Nakatsugawa)

CMOS market share increase. Others include Notes Top Share excluding PA for mobile base station. Top share in PA for mobile base station. SPE related, medical related.

Source: Company data, Credit Suisse estimates

Figure 36: Ceramic package market share (estimate)

Source: Company data, Credit Suisse estimates

Materials & Electronic Components sector 27 16 January 2015

Supplementary material: Morimura Group history NGK Insulators and NGK Spark Plug are known as companies belonging to the Nagoya- based Morimura Group. The two companies have close historical ties, as NGK Spark Plug got its start as a spin-off of NGK Insulators’ spark plug division. Originally pottery and antiques exporter called Morimura Gumi The Morimura Group’s roots are a ceramics and antiques export company called Morimura Gumi, now known as Morimura Brothers. It initially engaged primarily in export trade, but later began to focus on in-house production and sales of ceramics, and in 1904 established the Nippon Toki Gomei Gaisha company, which became Noritake. Nippon Toki Gomei Gaisha in turn spun off its sanitary wares division to establish Toyo Toki, now called Toto. The company subsequently reorganized to become simply Nippon Toki, and leveraged technical expertise gained in the production of western tableware to develop ceramics technology, eventually leading to the establishment of an independent insulator business called NGK Insulators in 1919. NGK Insulators spun off its spark plug business in 1936 to form NGK Spark Plug (it was given this for its English name because NGK was the name of the spark plug brand sold by parent company NGK Insulators, or Nippon Gaishi Kabushikigaisha in Japanese). Currently listed companies in the Morimura Group include Noritake, NGK Insulators, NGK Spark Plug, Toto (5332) and Lixil (5938; formerly Inax, which used to be a group member, but is now independent). Shift from “one company in one industry” principle to direct competition The Morimura Group has historically followed a “one company in one industry” approach, in which businesses within the group that are competitive in specific areas are spun off to become independent manufacturers specializing in that area. A distinguishing characteristic of the Morimura Group relative to other former zaibatsu conglomerates is that capital ties among group members are relatively modest (Figure 38), with emphasis placed instead on independence of action. However, as business areas have become increasingly intertwined in recent years, circumstances are forcing group companies to begin directly competing with each other (such as in the case of NGK Insulators and NGK Spark Plug in the area of NOx sensors).

Figure 37: Morimura Group history x Morimura Gumi March 1876

Morimura Bank Nippon Toki Gomei Kaisha NGK Insulator's spark plug June 1897 Jan 1904 business spun off to become NGK Spark Plug

Morimura Gumi Co., Toyo Toki Co., Nippon Toki, NGK Insulators, Okura Toen Ltd. Ltd. Ltd. Ltd. May 1919 April 1918 May 1917 July 1917 May 1919 Merged with NGK Spark Plug Co., Ltd. Mitsubishi Bank Reorganized Name Changed Name Changed Name Changed Oct 1936 1929 April 1950 July 1946 May 2007 April 1981

Okura Art China, Morimura Bros., TOTO Noritake Co., NGK Insulators, NGK Spark Plug Inc. Inc. Ltd. Limited Ltd. Co., Ltd. x x Source: Noritake, Credit Suisse

Materials & Electronic Components sector 28 16 January 2015

Figure 38: Morimura Group cross-shareholdings: Capital ties comparatively modest Holder NGK SPARK PLUG NGK INSULATORS TOTO NORITAKE Co., Ltd. Ltd. Ltd. Co., Limited

NGK SPARK PLUG 0.56% 1.54% 0.65% Co., Ltd.

NGK INSULATORS 0.30% 0.78% 0.50% Ltd.

TOTO 1.44% 1.29% 1.14% Ltd.

NORITAKE 1.33% 1.32% 3.29% Co., Limited

Source: Bloomberg, Credit Suisse

Materials & Electronic Components sector 29 16 January 2015

(Supplementary) Financial metrics, share price

Figure 39: Financial metrics comparison of the three companies (JPY bn) (JPY bn) x NGK Insulators 3/13 3/14 3/15E 3/16E 3/17E NGK Spark Plug 3/13 3/14 3/15E 3/16E 3/17E 5333 PL data 5334 PL data Sales 252.8 308.7 356.8 378.5 398.4 Sales 302.8 329.8 355.8 400.6 419.5 Operating profit 20.7 44.3 60.4 69.6 73.3 Operating profit 23.8 51.7 65.2 84.5 92.8 Pretax profit 17.7 37.9 63.4 71.6 75.3 Pretax profit 27.7 49.5 65.4 86.0 94.4 Net profit 11.4 27.0 45.2 52.0 55.1 Net profit 20.9 32.7 41.2 55.7 62.1 EBITDA 40.8 64.1 82.9 94.1 97.8 EBITDA 36.6 63.2 79.5 102.9 112.8 Tax rate (%) 33.6% 27.5% 27.9% 26.7% 26.2% Tax rate (%) 23.5% 33.3% 36.5% 35.0% 34.0% OP margin (%) 8.2% 14.3% 16.9% 18.4% 18.4% OP margin (%) 7.8% 15.7% 18.3% 21.1% 22.1% EBITDA margin (%) 16.1% 20.8% 23.2% 24.9% 24.5% EBITDA margin (%) 12.1% 19.2% 22.3% 25.7% 26.9% NP margin (%) 4.5% 8.8% 12.7% 13.7% 13.8% NP margin (%) 6.9% 9.9% 11.6% 13.9% 14.8% BS data BS data Total assets 563.0 614.2 642.0 658.9 699.5 Total assets 366.5 458.1 490.9 549.3 597.5 Cash & equivalents 39.5 49.2 50.9 58.1 62.1 Cash & equivalents 70.6 112.5 90.0 102.9 126.1 Shareholders equity 293.4 334.3 377.3 419.5 464.2 Shareholders equity 266.3 300.6 341.8 397.5 459.6 Gross debt 74.2 66.6 60.5 55.9 39.5 Gross debt 26.4 56.6 47.0 47.0 32.0 Net debt 34.7 17.4 9.6 (2.3) (22.6) Net debt (44.2) (55.9) (43.0) (55.9) (94.1) CF data CF data Operating CF 3.7 32.6 57.6 63.6 71.8 Operating CF 26.7 47.6 40.3 54.0 72.9 Investing CF (0.6) (21.2) (37.5) (39.0) (38.0) Investing CF (34.0) (44.0) (53.1) (41.2) (34.7) Financing CF 12.4 2.0 (18.3) (17.4) (29.8) Financing CF 1.5 31.8 (9.6) 0.0 (15.0) FCF 3.1 11.5 20.0 24.6 33.8 FCF (7.4) 3.6 (12.8) 12.8 38.2 Per share data Per share data EPS (¥) ¥35.0 ¥82.8 ¥138.4 ¥159.2 ¥168.7 EPS (¥) ¥96.1 ¥150.3 ¥189.3 ¥255.8 ¥285.1 BPS (¥) ¥899 ¥1,024 ¥1,156 ¥1,285 ¥1,421 BPS (¥) ¥1,223 ¥1,381 ¥1,571 ¥1,827 ¥2,112 Op. CFPS (¥) ¥11.3 ¥100.0 ¥176.3 ¥194.8 ¥219.9 Op. CFPS (¥) ¥122.6 ¥218.8 ¥185.1 ¥248.3 ¥334.9 DPS (¥) ¥20.0 ¥22.0 ¥28.0 ¥30.0 ¥32.0 DPS (¥) ¥22.0 ¥28.0 ¥38.0 ¥60.0 ¥70.0 Dividend yield (%) 2.1% 1.4% 1.2% 1.3% 1.4% Dividend yield (%) 2.1% 1.3% 1.1% 1.7% 2.0% Div. payout ratio (%) 57.2% 26.6% 20.2% 18.8% 19.0% Div. payout ratio (%) 22.9% 18.6% 20.1% 23.5% 24.6% No. of shares (mn) 326.5 326.5 326.5 326.5 326.5 No. of shares (mn) 217.7 217.6 217.6 217.6 217.6 Financial ratios / Valuation Financial ratios / Valuation D/E ratio 27.1% 21.2% 17.0% 14.0% 8.9% D/E ratio 10.6% 20.0% 14.6% 12.7% 7.5% Net D/E ratio 12.7% 5.6% 2.7% -0.6% -5.1% Net D/E ratio -17.7% -19.7% -13.4% -15.1% -22.0% Net debt/EBITDA 0.85 0.27 0.12 (0.02) (0.23) Net debt/EBITDA (1.21) (0.88) (0.54) (0.54) (0.83) Interest converage ratio 3.53 7.83 10.06 11.46 11.20 Interest converage ratio 7.04 11.56 11.74 13.90 14.60 Total asset turnover 0.45 0.50 0.56 0.57 0.57 Total asset turnover 0.83 0.72 0.72 0.73 0.70 ROE (%) 4.2% 8.6% 12.7% 13.1% 12.5% ROE (%) 8.4% 11.5% 12.8% 15.1% 14.5% ROA (%) 2.1% 4.6% 7.2% 8.0% 8.1% ROA (%) 5.9% 7.9% 8.7% 10.7% 10.8% ROIC (%) 4.4% 9.2% 11.5% 12.4% 12.3% ROIC (%) 8.7% 14.6% 15.1% 17.0% 17.2% P/E 26.67 18.96 16.24 14.12 13.32 P/E 10.86 13.97 18.70 13.84 12.42 P/B 1.04 1.53 1.95 1.75 1.58 P/B 0.85 1.52 2.25 1.94 1.68 EV/Sales 1.45 2.33 2.08 1.93 1.79 EV/Sales 0.89 1.36 2.04 1.78 1.61 EV/EBITDA 8.96 11.22 8.97 7.78 7.27 EV/EBITDA 7.34 7.10 9.15 6.94 6.00 (JPY bn) (JPY bn) x IBIDEN 3/13 3/14 3/15E 3/16E 3/17E NGK Insulators 3/13 3/14 3/15E 3/16E 3/17E 4062 PL data 5333 PL data Sales 285.9 310.3 324.8 336.7 343.3 Sales 252.8 308.7 356.8 378.5 398.4 Operating profit 5.4 23.4 20.7 20.4 22.6 Operating profit 20.7 44.3 60.4 69.6 73.3 Pretax profit 7.4 25.5 19.5 17.2 19.7 Pretax profit 17.7 37.9 63.4 71.6 75.3 Net profit 2.2 17.5 13.5 11.8 14.0 Net profit 11.4 27.0 45.2 52.0 55.1 EBITDA 48.1 59.1 60.7 66.2 67.5 EBITDA 40.8 64.1 82.9 94.1 97.8 Tax rate (%) 68.1% 30.8% 29.6% 30.0% 28.0% Tax rate (%) 33.6% 27.5% 27.9% 26.7% 26.2% OP margin (%) 1.9% 7.6% 6.4% 6.0% 6.6% OP margin (%) 8.2% 14.3% 16.9% 18.4% 18.4% EBITDA margin (%) 16.8% 19.1% 18.7% 19.6% 19.6% EBITDA margin (%) 16.1% 20.8% 23.2% 24.9% 24.5% NP margin (%) 0.8% 5.6% 4.2% 3.5% 4.1% NP margin (%) 4.5% 8.8% 12.7% 13.7% 13.8% BS data BS data Total assets 430.0 462.1 451.0 461.1 477.6 Total assets 563.0 614.2 642.0 658.9 699.5 Cash & equivalents 63.0 77.2 41.7 51.9 64.0 Cash & equivalents 39.5 49.2 50.9 58.1 62.1 Shareholders equity 283.1 318.8 328.2 335.9 345.7 Shareholders equity 293.4 334.3 377.3 419.5 464.2 Gross debt 63.9 61.6 78.3 88.5 100.6 Gross debt 74.2 66.6 60.5 55.9 39.5 Net debt 0.9 (15.6) 36.6 36.6 36.6 Net debt 34.7 17.4 9.6 (2.3) (22.6) CF data CF data Operating CF 33.3 47.2 53.2 55.6 57.5 Operating CF 3.7 32.6 57.6 63.6 71.8 Investing CF (53.2) (43.9) (74.8) (41.3) (41.3) Investing CF (0.6) (21.2) (37.5) (39.0) (38.0) Financing CF 9.9 15.9 (29.1) (4.1) (4.1) Financing CF 12.4 2.0 (18.3) (17.4) (29.8) FCF (20.0) 3.3 (21.5) 14.4 16.2 FCF 3.1 11.5 20.0 24.6 33.8 Per share data Per share data EPS (¥) ¥16.2 ¥126.6 ¥98.1 ¥85.7 ¥101.1 EPS (¥) ¥35.0 ¥82.8 ¥138.4 ¥159.2 ¥168.7 BPS (¥) ¥2,050 ¥2,308 ¥2,377 ¥2,432 ¥2,503 BPS (¥) ¥898.5 ¥1,023.7 ¥1,155.5 ¥1,284.7 ¥1,421.5 Op. CFPS (¥) ¥241.0 ¥342.1 ¥385.4 ¥402.9 ¥416.1 Op. CFPS (¥) ¥11.3 ¥100.0 ¥176.3 ¥194.8 ¥219.9 DPS (¥) ¥30.0 ¥30.0 ¥30.0 ¥30.0 ¥30.0 DPS (¥) ¥20.0 ¥22.0 ¥28.0 ¥30.0 ¥32.0 Dividend yield (%) 2.2% 1.8% 1.7% 1.7% 1.7% Dividend yield (%) 2.1% 1.4% 1.2% 1.3% 1.4% Div. payout ratio (%) 185.5% 23.7% 30.6% 35.0% 29.7% Div. payout ratio (%) 57.2% 26.6% 20.2% 18.8% 19.0% No. of shares (mn) 138.1 138.1 138.1 138.1 138.1 No. of shares (mn) 326.5 326.5 326.5 326.5 326.5 Financial ratios / Valuation Financial ratios / Valuation D/E ratio 23.1% 20.5% 24.2% 26.7% 29.5% D/E ratio 27.1% 21.2% 17.0% 14.0% 8.9% Net D/E ratio 0.3% -5.2% 11.3% 11.0% 10.7% Net D/E ratio 12.7% 5.6% 2.7% -0.6% -5.1% Net debt/EBITDA 0.02 (0.26) 0.60 0.55 0.54 Net debt/EBITDA 0.85 0.27 0.12 (0.02) (0.23) Interest converage ratio 0.58 5.05 4.09 4.02 4.61 Interest converage ratio 3.53 7.83 10.06 11.46 11.20 Total asset turnover 0.66 0.67 0.72 0.73 0.72 Total asset turnover 0.45 0.50 0.56 0.57 0.57 ROE (%) 0.8% 5.8% 4.2% 3.6% 4.1% ROE (%) 4.2% 8.6% 12.7% 13.1% 12.5% ROA (%) 0.5% 3.9% 3.0% 2.6% 3.0% ROA (%) 2.1% 4.6% 7.2% 8.0% 8.1% ROIC (%) 0.6% 5.5% 4.3% 3.8% 4.3% ROIC (%) 4.4% 9.2% 11.5% 12.4% 12.3% P/E 82.83 13.49 17.53 20.06 17.01 P/E 26.67 18.96 16.24 14.12 13.32 P/B 0.65 0.74 0.72 0.71 0.69 P/B 1.04 1.53 1.95 1.75 1.58 EV/Sales 0.71 0.85 0.84 0.81 0.80 EV/Sales 1.45 2.33 2.08 1.93 1.79 EV/EBITDA 4.23 4.49 4.51 4.14 4.06 EV/EBITDA 8.96 11.22 8.97 7.78 7.27 Source: Company data, Credit Suisse estimates

Materials & Electronic Components sector 30 16 January 2015

Figure 40: Absolute share price (indexed, Jan. 2000=100) Figure 41: Relative share price (indexed, Jan. 2000=100) (Jan'00=100) Indexed performance since 2000 (Jan'00=100) (Jan'00=100) Indexed RELATIVE performance since 2000 (Jan'00=100) 800 TOPIX NGK I NGK S IBIDEN NGK I NGK S 700 IBIDEN 700 600 600 500 500 400 400

300 300

200 200

100 100

0 0

'08/07 '09/07 '10/07 '11/07 '00/01 '00/07 '01/01 '01/07 '02/01 '02/07 '03/01 '03/07 '04/01 '04/07 '05/01 '05/07 '06/01 '06/07 '07/01 '07/07 '08/01 '09/01 '10/01 '11/01 '12/01 '12/07 '13/01 '13/07 '14/01 '14/07 '15/01

'09/07 '00/07 '01/01 '01/07 '02/01 '02/07 '03/01 '03/07 '04/01 '04/07 '05/01 '05/07 '06/01 '06/07 '07/01 '07/07 '08/01 '08/07 '09/01 '10/01 '10/07 '11/01 '11/07 '12/01 '12/07 '13/01 '13/07 '14/01 '14/07 '15/01 '00/01 Source: Thomson Reuters Source: Thomson Reuters

Figure 42: Absolute share (indexed, Jan. 2009=100) Figure 43: Relative share price (indexed, Jan. 2009=100) (Jan'09=100) Indexed performance since 2009 (Jan'09=100) (Jan'09=100) Indexed RELATIVE performance since 2009 (Jan'09=100) 600 350 TOPIX NGK I NGK S IBIDEN NGK I NGK S IBIDEN 300 500

250 400

200 300 150

200 100

100 50

0 0

'09/01 '09/04 '09/07 '09/10 '10/01 '10/04 '10/07 '10/10 '11/01 '11/04 '11/07 '11/10 '12/01 '12/04 '12/07 '12/10 '13/01 '13/04 '13/07 '13/10 '14/01 '14/04 '14/07 '14/10 '15/01

'11/10 '12/07 '13/04 '09/04 '09/07 '09/10 '10/01 '10/04 '10/07 '10/10 '11/01 '11/04 '11/07 '12/01 '12/04 '12/10 '13/01 '13/07 '13/10 '14/01 '14/04 '14/07 '14/10 '15/01 '09/01 Source: Thomson Reuters Source: Thomson Reuters

Figure 44: Absolute share price (indexed, Jan. 2013=100) Figure 45: Relative share price (indexed, Jan. 2013=100) (Jan'13=100) Indexed performance since 2013 (Jan'13=100) (Jan'13=100) Indexed RELATIVE performance since 2013 (Jan'13=100) 350 220 TOPIX NGK I NGK S IBIDEN NGK I NGK S IBIDEN 200 300 180 250 160

200 140

120 150 100 100 80

50 60

'14/12 '13/01 '13/02 '13/03 '13/04 '13/05 '13/06 '13/07 '13/08 '13/09 '13/10 '13/11 '13/12 '14/01 '14/02 '14/03 '14/04 '14/05 '14/06 '14/07 '14/08 '14/09 '14/10 '14/11 '15/01

'13/02 '13/12 '13/03 '13/04 '13/05 '13/06 '13/07 '13/08 '13/09 '13/10 '13/11 '14/01 '14/02 '14/03 '14/04 '14/05 '14/06 '14/07 '14/08 '14/09 '14/10 '13/01 Source: Thomson Reuters Source: Thomson Reuters

Materials & Electronic Components sector 31 16 January 2015

Companies Mentioned (Price as of 15-Jan-2015) Corning (GLW.N, $23.02) Denso (6902.T, ¥5,353) Hitachi Metals (5486.T, ¥1,889) IBIDEN (4062.T, ¥1,719, UNDERPERFORM, TP ¥1,500) Kyocera (6971.T, ¥5,321, NEUTRAL, TP ¥5,050) LIXIL Group (5938.T, ¥2,386) Maruwa (5344.T, ¥3,210) Mazda Motor (7261.T, ¥2,507) Morimura Bros. (Unlisted) NGK Electronics Devices (Unlisted) NGK Insulators (5333.T, ¥2,248, OUTPERFORM, TP ¥2,980) NGK Spark Plug (5334.T, ¥3,540, OUTPERFORM, TP ¥4,300) Nihon Touki Co., Ltd. (Unlisted) Nippon Steel & Sumitomo Metal (5401.T, ¥284) Noritake (5331.T, ¥278) Okura Art China (Unlisted) PSA Peugeot Citroen (PEUP.PA, €11.06) Robert Bosch GmbH (Unlisted) Sumitomo Chemical (4005.T, ¥464) TOTO (5332.T, ¥1,290)

Disclosure Appendix Important Global Disclosures Jun Yamaguchi and Akinori Kanemoto, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for IBIDEN (4062.T)

4062.T Closing Price Target Price Date (¥) (¥) Rating 30-Jan-12 1,541 1,550 N 11-Apr-12 1,887 2,000 19-Jul-12 1,346 1,200 13-Sep-12 1,178 990 15-Oct-12 1,024 950 20-Feb-13 1,376 1,600 19-Apr-13 1,505 1,700 19-Jul-13 1,574 1,600 03-Sep-13 1,470 1,500 07-Oct-13 1,508 1,550 NEUTRAL UNDERPERFORM 10-Apr-14 1,977 1,850 30-Sep-14 2,136 1,500 U * Asterisk signifies initiation or assumption of coverage.

Materials & Electronic Components sector 32 16 January 2015

3-Year Price and Rating History for Kyocera (6971.T)

6971.T Closing Price Target Price Date (¥) (¥) Rating 25-Jan-12 3,315 3,800 O 30-Jan-12 3,180 3,550 11-Apr-12 3,600 4,250 27-Jul-12 3,070 4,050 22-Oct-12 3,555 3,800 21-Feb-13 4,070 4,200 N 17-Apr-13 4,610 4,500 12-Jul-13 5,480 5,750 28-Aug-13 4,930 5,500 08-Oct-13 4,770 5,300 OUTPERFORM NEUTRAL 27-Jan-14 4,874 5,500 29-Jan-14 4,890 5,100 25-Aug-14 4,915 5,050 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for NGK Insulators (5333.T)

5333.T Closing Price Target Price Date (¥) (¥) Rating 01-Mar-12 1,088 1,300 O 29-May-12 850 1,000 23-Aug-12 986 1,000 N 19-Nov-12 861 750 28-Feb-13 1,000 860 31-May-13 1,300 1,150 19-Aug-13 1,379 1,300 25-Nov-13 1,809 1,530 13-Feb-14 2,018 2,370 O 04-Jun-14 2,164 2,440 OUTPERFORM NEUTRAL 11-Aug-14 2,551 2,820 19-Nov-14 2,681 2,980 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for NGK Spark Plug (5334.T)

5334.T Closing Price Target Price Date (¥) (¥) Rating 27-Jan-12 960 930 N 11-Apr-12 1,121 1,100 18-Jul-12 949 800 U 24-Aug-12 893 770 15-Oct-12 849 735 22-Apr-13 1,602 1,370 19-Jul-13 2,043 1,850 07-Oct-13 2,086 1,920 10-Apr-14 2,277 2,350 N 25-Aug-14 3,160 3,200 NEUTRAL UNDERPERFORM 23-Oct-14 2,917 3,350 * Asterisk signifies initiation or assumption of coverage. 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.

Materials & Electronic Components sector 33 16 January 2015

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 ra tings 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 Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

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

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

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

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 46% (54% banking clients) Neutral/Hold* 38% (50% banking clients) Underperform/Sell* 14% (42% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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

Price Target: (12 months) for IBIDEN (4062.T) Method: We derive our TP using our FY3/15 forecasts and a zero-growth ROC model (EV/IC = ROC/WACC; we assume a risk-free rate of 0.55%, a risk premium of 6.25%, beta of 1.4, and ROC of 4.1%). We apply a 10% discount to factor in the risk of deteriorating conditions and earnings in the flip-chip package business. Risk: Factors that could cause the shares to exceed our TP include further yen depreciation against the dollar, market share recovery in PCB business, or higher prices for flip-chip packages.

Price Target: (12 months) for NGK Insulators (5333.T) Method: Our ¥2,980 TP for NGK Insulators is based on FY3/15-3/16E average EPS of ¥149 and an assumed fair-value P/E of 20x (average of 12- month forward consensus P/E).

Materials & Electronic Components sector 34 16 January 2015

Risk: Risks that may impede achievement of our ¥2,980 TP for NGK Insulators include: Decreased demand for automotive ceramics products, loosening / delay in implementation of emissions standards in China and elsewhere, delays in new product development in the electronics business, delays in insulator business restructuring, and yen appreciation.

Price Target: (12 months) for NGK Spark Plug (5334.T) Method: In calculating our ¥4,300 target price for NGK Spark Plug, we use a zero-growth ROC model (EV/IC = ROC/WACC) and our FY3/16 estimates. We assume 1.1 beta, 5.9% Rp , 0.50% RfR and 14.7% ROC. Risk: Downside risks to our ¥4,300 target price for NGK Spark Plug include protracted inventory adjustments, yen appreciation, larger-than- expected extraordinary losses accompanying antitrust issues in Europe and Japan, and weaker-than-expected auto production.

Price Target: (12 months) for Kyocera (6971.T)

Method: Our ¥5,050 target price for Kyocera is based on our zero-growth ROC model and FY3/15 forecasts, with key assumptions as follows: EV/IC = ROC/WACC, risk premium 6.25%, risk-free rate 0.55%, ROC 5.1%, and beta 1.2. Risk: Risks to our ¥5,050 target price for Kyocera include: Upside - announcement of a dividend increase or share buyback, Downside - a steeper-than-forecast decline in domestic prices and decreased demand for PV batteries, and deteriorating profitability in the telecommunications equipment business.

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 (4062.T, 6971.T) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (6971.T). 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 have not visited the material operations of the subject company (4062.T, 5333.T, 5334.T, 6971.T) within the past 12 months 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 http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Jun Yamaguchi ; Akinori Kanemoto ; JaeMin Joo

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Materials & Electronic Components sector 35 16 January 2015

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Connection Series_Ceramics Materials & Electronic Components sector comps_011615_E.doc36