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24 January 2014 Asia Pacific/ Equity Research Major Chemicals (Chemicals/Textiles (Japan)) / MARKET WEIGHT

Chemical sector Research Analysts SECTOR REVIEW

Masami Sawato 81 3 4550 9729 [email protected] Keyword: Innovation Maiko Saito Investment strategy 81 3 4550 9936 [email protected] ■ In 2014, we believe "green innovations" and "life innovations" are key to the longer term growth of chemical makers. ■ Green innovation: In the environment/energy field, solar cells and rechargeable lithium-ion batteries (LiB) should attract greater attention, while lightweight carbon fiber composite materials (CFRP) and their contribution to improving the fuel efficiency of automobiles and aircraft become increasingly important to efforts to reduce energy consumption and CO2 emissions. We believe companies to watch include (3402), (3401), Mitsubishi Chemical Holdings (4188), (4023), Chemical (4217), and (4208). ■ Life innovation: For their prospective innovations that could promote greater use of generics and help lower the cost of pharmaceuticals, we are focusing on (4272), a major domestic maker of generic anti- cancer drugs and biosimilars, and Denki Kagaku Kogyo (4061), which we expect to expand its diagnostic reagent business. In addition, we look for (3407) to expand its pharmaceuticals business and, over the medium term, its home dialysis business. We think JSR (4185) is interesting for the medium-term growth potential of its drug discovery support business. Finally, Sanyo Chemical Industries (4471) and Nippon Shokubai (4114), two producers of super absorbent polymers (SAP) used in absorbent materials, should benefit from the global growth in demand that we expect for disposable diapers. Focus stocks ■ Mitsubishi Gas Chemical (4182, OUTPERFORM, TP ¥1,050): Likely to see profits rise in FY3/15 on higher prices of methanol and expanded market share for its bismaleimide-triazine (BT) materials. Our top pick for 2014. ■ Kureha (4023, OUTPERFORM, TP ¥660): Should benefit from expanding demand for its polyglycolic acid (PGA) as a material for molded products used in shale gas extraction. ■ Sanyo Chemical Industries (4471, OUTPERFORM, TP ¥1,010): A pioneer in SAP. Sales growth should outstrip overall market growth owing to a new grade of SAP for disposable diapers. ■ Toray (3402, OUTPERFORM, TP ¥850): As well as carbon fibers, expansion of North American business and strengthening of the life innovation businesses are likely to enhance medium-term prospects. ■ Asahi Kasei (3407, OUTPERFORM, TP ¥920): Continues to post record profits; over medium term, could use its extensive network of homeowners to build its home dialysis business.

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

24 January 2014 2013 sector review Share price performance during 2013 Our chemical sector coverage universe had a tough year in 2013, underperforming TOPIX was the year’s best by 14% for the entire period and 8% for the second half. Just seven of 22 stocks performer, followed by outperformed for the year, with the other 15 underperforming. The top performer was Tokuyama Tosoh on a strong bounce-back in profits as fallout from the Nanyo plant fire tapered off and the company streamlined its urethane operation. Next was Tokuyama, which was coming off the sector’s worst performance in 2012. Tokuyama’s gains were driven by a restructuring plan that included a full writedown of domestic polysilicon facilities and looks set to boost free cash flow and reduce financial risk. The best performer for 2H alone was Kureha. We attribute this to investors’ expectations Kureha was the top for a medium-term contribution from polyglycolic acid (PGA) resins after President Yutaka performer in 2H Kobayashi said at last November’s 1H results briefing that they are being increasingly used in shale gas extraction.

Figure 1: CY2013: Chemical sector stock performance Figure 2: 1H FY2013: Chemical sector stock performance relative to TOPIX relative to TOPIX Tosoh Kureha Tokuyama Tosoh Kureha Nippon Soda Asahi Kasei Asahi Kasei Nippon Kayaku Tokuyama Sumitomo Chemical Nippon Kayaku Mitsubishi Gas Chemical Ube Industries Denki Kagaku Kogyo Denki Kagaku Kogyo Sanyo Chemical Sanyo Chemical Toray Industries Toray Industries Nippon Shokubai Nippon Shokubai Zeon Chemicals Hitachi Chemical Teijin JSR Hitachi Chemical Shin-Etsu Chemical Mitsubishi Gas Chemical Mitsubishi Chemical Holdings Mitsubishi Chemical Holdings JSR Kuraray Shin-Etsu Chemical Ube Industries Kuraray SUMCO Zeon Teijin SUMCO -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% Source: Thomson Reuters Source: Thomson Reuters

Chemical sector 2 24 January 2014

2013 events In 2013, February saw Sumitomo Chemical, Mitsui Chemicals, and Maruzen While stepping up announce plans for the restructuring of operations at their ethylene center realignment of commodity in . This was followed in August by an announcement from Mitsubishi Chemicals and petrochemical operations, Asahi Kasei Chemicals that they would work toward unification on a single naphtha sector companies also inked cracker in Mizushima. Even as realignment of Japan’s petrochemical industry gathered a number of M&A deals pace, Toray Industries, Mitsui Chemicals, Kuraray and others acquired new businesses overseas overseas. In short, 2013 was a year for business portfolio reshuffling.

Figure 3: Ten major announcements in 2013 1 Sumitomo Chemical, Mitsui Chemicals, and Maruzen Petrochemical to restructure their Chiba ethylene center Mitsubishi Chemicals and Asahi Kasei Chemicals to unify naphtha crackers at their Mizushima plants on 2 Mitsubishi's facility, by spring 2016 3 Toray to make full-fledged foray into large tow carbon fiber, with acquisition of US-based Zoltek 4 Mitsui Chemicals purchases dental materials business of German conglomerate Heraeus, for €450mn 5 Toray Industries acquires 56.2% stake in Korea's Woongjin Chemical, for ¥40bn 6 Kuraray to buy DuPont’s vinyl acetate-related businesses, for $540mn 7 Mitsubishi Chemical Holdings completes purchases of pharma-grade capsule maker Qualicaps 8 Mitsui Chemicals transfers all shares in its PTA joint venture in Indonesia, to BP 9 Teijin to reduce polycarbonate resin production capacity in to 160,000t, from mid-October

10 Zeon completes takeover bid for Tohpe on 21 March, at cost of ¥3.4bn Source: The Heavy & Chemical Industries News Agency, Credit Suisse

Chemical sector 3 24 January 2014 2014 investment strategy Keyword: Innovation We expect chemicals to play an increasingly important role in the industrial sector in 2014. Innovations in The Japanese government’s new economic growth strategy centers in part on “green environment/energy and innovation” policies targeting energy and the environment and “life innovation” policies healthcare/medical targeting healthcare, and chemical technology is becoming increasingly crucial for both. technology are key to We see innovation in these areas as the key to chemical makers’ longer-term growth. longer-term growth Green innovation The creation of environmentally friendly products and technologies supports both Expectations high for environmental protection and economic growth, but it also requires innovation. Japan and advances in other countries are positioning energy and the environment as a growth area and therefore environmental/energy promoting the development of related technologies and the creation of related markets. technology Companies have also embraced this as a growth field and are currently concentrating management resources there. Industry made progress in developing new products and technologies in 2013 in such segments as renewable energy, energy-saving, resource cycles, biomass, and water treatment. The chemical sector is part of this effort, and we expect it to make further advances in environmental/energy technology in 2014. A key aspect of green innovation is energy generation and storage. Development of new Progress in developing new products and technologies here—including solar cells and rechargeable lithium-ion solar cells and LiBs batteries (LiB)—is gathering momentum, with some companies offering solutions that combine these two battery types. Companies have also begun full-scale development of hydrogen technologies needed to make effective use of solar and other renewable energy.

Another key aspect of green innovation is energy savings and reductions in CO2 emissions. CFRP poised for full-scale The focus here is on lightweight materials that contribute to better fuel efficiency in take-up automobiles and aircraft. In particular, advances in manufacturing technology for carbon- fiber-reinforced polymer (CFRP) have set the stage for full-scale take-up, in our view. The market for bioplastics has expanded sharply over the past few years, reflecting their ability to not only reduce CO2 emissions but also conserve scarce resources. A report from the Japan Association evaluating chemical product Solar cells and CFRP could lifecycles in Japan and overseas estimates that the use of solar power (polysilicon solar reduce CO2 emissions cells) could reduce CO2 emissions in Japan by around 9mn tons. Using CFRP in aircraft and automobiles worldwide could eliminate another 2.5mn tons in emissions. Carbon-fiber-reinforced polymers Use of carbon-fiber-reinforced polymers (CFRP) in aircraft and automobiles is entering a Usage in autos now full-scale expansion phase. In aircraft, Boeing ratcheted up production of the 787 to 10 beginning planes per month in November, and airframe and CFRP manufacturers are now accelerating their own manufacturing operations to keep pace. The auto industry is also beginning to see extensive use of CFRP at the mass production level, with BMW launching its i3, which uses carbon fiber for its basic structure. In response, Japanese manufacturers are scrambling to develop new production methods to raise manufacturing efficiency, and expectations are running high for 2014 to see expansion in CFRP usage aimed at reducing vehicle weight.

Reducing weight, boosting fuel economy, and cutting CO2 emissions are the main drivers Reduces weight and boosts behind expanded use of CFRP in aircraft and autos. Although manufacturing carbon fiber fuel economy in itself uses a lot of energy due to the high-temperature baking that is required, CFRP is an eco-friendly material nevertheless because, as shown in the Japan Carbon Fiber Manufacturers Association’s (JCMA) life cycle assessment (LSA) model, its use in products significantly reduces CO2 emissions.

Chemical sector 4 24 January 2014

We see cost as the main reason CFRP is not used more extensively despite the significant Cost was barrier previously, advantage it affords in reducing weight. In aviation, where considerable fuel savings can but… be gained through making planes lighter, usage has steadily expanded as related technology has advanced. But in autos, replacing steel with CFRP in large panels has long been difficult to justify from a cost perspective. However, technological advances in related industries, led by carbon fiber manufacturers Potential for extensive use and automakers, are significantly expanding the range of applications in which CFRP can in autos too be used in the auto industry. Matrix resins are also seeing expanded usage, as technological advances in both conventional thermosetting products and thermoplastic applications have raised production efficiency, allowing their use in not only high-end race cars and sports cars that require only small amounts of the material, but now also in electric vehicles in the ¥4–5mn price range like the i3 that make extensive use of the material. The precursor for polyacrylonitrilen (PAN), the type of carbon fiber material used in the i3, is produced by Mitsubishi Rayon at its Otake plant. Lamborghini announced in November that it will partner with Institute of Technology in CFRP R&D, following in the footsteps of Daimler, which has teamed up with Toray, and General Motors, which has a tie-up with Teijin.

We expect demand for carbon fiber used in automobiles to jump from 2,000t in 2012 to 20,000t by 2020 (Figure 4).

Figure 4: Automotive carbon fiber demand could surge tenfold to 20,000t by 2020

Carbon fiber volume Carbon fiber volume 2,000t 20,000t

1% of 5.0m n Supercar Thermo-setting 5,000 units ×100kg/unit 4.2m n Very luxury cars 5.0m n 50,000 units×100kg/unit resin =500t units Luxury cars units =5,000t

Thermoplastic resin

M ore than D-class: 40% of general cars=38m n units

Mainstream cars of 1% use CFRP 95mn units 0.38m n units×40kg/units =15,000t

Global car production in 2012： 85mn units Global car production forecast in 2020： 100mn units

Source: Company data, JAMA, Credit Suisse estimates Solar cells Renewable energy usage is expanding. With feed-in tariffs providing a tailwind, Organic photovoltaic cell construction of photovoltaic (PV) cell power plants is proceeding at a rapid pace. We demand growth looking expect the substantial solar demand to continue to expand through FY3/15 (the premium increasingly likely period for Japan’s tariff system), promising steady growth in module shipments at PV cell makers. With competition in crystalline-silicon solar cells remaining fierce, the potential for demand to take off in more technologically difficult organic PV cells looks to be increasing. Organic thin-film solar cells are produced by coating a thin substrate of metal or Mitsubishi Chemical aiming with organic semiconductor material. Coating transparent resin film in this way makes it for mass production possible to create a lightweight and foldable solar cell that is less than 1mm thick. This would allow the vertical surfaces of high-rise buildings, which make up the bulk of the structure’s surface area, to be used for solar power generation. If applied to all windows

Chemical sector 5 24 January 2014 but those facing north, experimental studies by Mitsubishi Chemical estimate that a 25-story building could produce enough energy to power about 200 typical households. Mitsubishi Chemical aims to begin mass producing these organic thin-film solar cells in FY3/16 and is already in the demo testing phase. Lithium-ion batteries (LiBs) In addition to consumer applications, we expect demand for LiBs to grow in automotive Japanese makers’ share of applications, driven by growth in electric and hybrid vehicles. South Korean and other LIBs used in US autos is Asian manufacturers have been following the Japanese in both batteries and materials, growing but by leveraging their strong technology in these areas, the Japanese have been able to continue to expand market share. In the US market for automotive LIBs, the dominance of Japanese manufacturers has risen to the point where they now have a nearly 80% share of total sales. Sanyo’s share is about twice that of South Korea's LG Chem. recently concluded an agreement with major US electric car maker Tesla Motors to supply 2bn LIBs. Meanwhile, Automotive Energy Supply Corp. (AESC), a joint venture between NEC and , has plans to significantly boost the volume of LIBs it supplies to Nissan. Japanese chemical manufacturers who supply materials to Japanese LIB makers can be Also expect expanded expected to benefit from growth in demand. Companies like Asahi Kasei and Mitsubishi demand for LIB material Chemical are the main producers of the four key materials used in LIBs—anode material, makers cathode material, separators (insulators), and electrolytic solution. Mitsubishi Chemical manufactures all four of these materials and boasts strong technical and production capacity, while Asahi Kasei and Ube Industries aim to capture growing automotive-use demand in the area of separators. Hitachi Chemical, Mitsubishi Chemical, and Kureha are major players in negative anode material. Life innovation The ongoing trend in the chemical industry of investing in life sciences was set in motion Internationally competitive by Asahi Kasei’s acquisition of major US medical equipment maker Zole Medical in 2012, companies include and gained momentum in 2013 with Mitsubishi Chemical’s acquisition of US Mitsubishi Chemical pharmaceutical capsule maker Qualicaps and Mitsui Chemicals’ purchase of the dental Holdings, Kuraray, JSR, materials business of German conglomerate Heraeus. Against a background of growing Mitsubishi Gas Chemical, competition in general-purpose and the electronics business, more such and Sumitomo Chemical M&A activity could be seen this year as companies move quickly to establish high-margin life science businesses and incorporate such operations into their portfolios. That said, the true key to survival will likely be how quickly companies can capture growth in emerging markets in such areas as cosmetics/daily necessities and food/agricultural materials. Pharmaceuticals In the domestic pharmaceutical market, the proportion of new list drug items and generics In addition to healthcare is rising, as government drug reimbursement prices on long-listed products decline and cost control efforts, the market contracts amid efforts to rein in healthcare costs. At the same time, new drug advanced medical use is approval processes are becoming increasingly challenging worldwide, while expanded use also accelerating of global clinical trials is also driving up costs. This is driving a trend in the pharmaceutical industry to focus on the establishment of efficient management structures. We also expect this to accelerate the industry’s commitment to regenerative and other advanced medicines. Government drug reimbursement price revisions scheduled for this April include special JSR to expand drug reductions on items for which little progress has been made in generic replacement after a development support certain period of time and continued retrial aimed at new drug creation and elimination of business off-label drugs. With patents set to expire on a number of big drugs and approval hurdles for new drug makers getting higher, companies will have no choice but to focus more on development over the next few years. At the same time, given the need to improve management efficiency, we also expect increased outsourcing of the drug development process. JSR plans to expand its drug development support business by leveraging synthetic polymer technologies developed in its semiconductor photoresist business.

Chemical sector 6 24 January 2014

In addition, the FY3/15 drug reimbursement price revisions aim to lower overall generic Expectations for biosimilar drug prices by about 60%. In April of last year, the MHLW’s Roadmap for Promotion of the demand growth Use of Generic Drugs set a goal of raising the proportion of generics that can be used as replacement drugs to over 60% by end-FY3/18, pointing to significant growth in the generics market. We expect demand growth to be particularly high for so-called biosimilar drugs—generics for next-generation biopharmaceuticals with high drug reimbursement prices. We believe biosimilars will begin making significant contributions to sales at Nippon Kayaku, the frontrunner in biosimilars, in FY3/16.

Figure 5: Global drug market by category Figure 6: Global biosimilar market

30 ($100mn)

25 Grow 8x from 2010 to 2015

20

15

10

5

0 2010 2015

Source: IMS, Nikkei, Credit Suisse Source: IMS, Nikkei, Credit Suisse Home dialysis The market potential of home medical treatment is also significant, in our view. We are Focus on Asahi Kasei’s focusing on home dialysis. Asahi Kasei has established commercial production of devices home dialysis business such as artificial kidneys, leukoreduction filters, and Planova virus-removal filters. It holds a 60% share of the Japanese market for polysulfone-membrane hollow fiber artificial kidneys (dialyzers). Asahi Kasei is able to supply nearly all the infrastructure needed for dialysis together with the homes it builds. It has established a comprehensive network of alliances, including taking a stake in US dialysis equipment maker NxStage Medical, and makes water treatment membranes used in the manufacturing of ultrapure water. A demonstration house set up by its Research & Development Laboratories shows dialysis patients can live comfortably undertaking dialysis at home. Outpatient dialysis treatment is highly inconvenient for patients, being required on average three times per week for three– five hours per visit and limited to the opening hours of the hospital. Home dialysis improves patients’ quality of life as it eliminates the need to go to a hospital and can be undertaken whenever the patient chooses. Japan has more than 300,000 dialysis patients, of which only 300 are using home dialysis. We expect the number of home dialysis patients to rise as infrastructure develops. Asahi Kasei should see growing demand for renovations to accommodate home dialysis as it has a network of over 1mn past customers through its Hebel Haus and apartment development businesses. Daily necessities and toiletries Life innovation should also contribute in the daily necessities and toiletries field. We are Disposable diaper business focusing on disposable diapers. In the daily necessities field, the Japanese market for likely to grow over medium diapers for babies is mature. However, demand for disposable diapers for adults is rapidly to long term rising as Japan’s elderly population grows. In general, we believe baby diapers tend to penetrate markets when per-capita GDP reaches $3,000, while for adult diapers, the tipping point is $10,000. We see potential for significant growth worldwide, including in South America and Africa as well as non-Japan Asian countries likely to experience population and economic growth. Japanese companies should benefit from this growth in demand.

Chemical sector 7 24 January 2014

Japanese chemical makers stand to benefit from their technological knowhow as diaper Japanese makers have top materials need to be absorbent and elastic. Each diaper maker is able to make distinctive class SAP technology and products having jointly developed SAP with chemical makers. Only Japanese and major manufacturing knowhow overseas manufacturers have this technological expertise. These SAP are the reason global disposable diaper makers do not use materials from Chinese and other manufacturers. Three Japanese companies hold 44% of the global market. Sanyo Chemical Industries is the only company in the world employing both the major Focusing on Sanyo processes for SAP. The use of both techniques enables the company to produce SAP with Chemical Industries and high absorption capacity and SAP with high absorption speed. We believe this Nippon Shokubai technological prowess puts SCI in a good position to reap the benefits of a global increase in demand for disposable diapers over the medium-term. Expanding production capacity and launching a new grade of SAP with superior urine diffusion and even higher absorption capacity should enable SCI to achieve sales growth that outstrips overall market growth. Nippon Shokubai is the largest SAP maker globally. We think the company is likely to see profit improve significantly from FY3/14 after fully restoring operations at its Himeji plant in early 2014. An accident occurred at the plant in September 2012. We expect demand for SAP for disposable diapers to grow from 1,988,000t in 2013 to SAP supply–demand to 2,871,000t in 2020. We expect supply to rise from 2,569,000t to 3,725,000t during the remain firm through 2020 same period, assuming 5% annual growth from 2015 based on planned capacity expansion. The supply–demand balance should remain firm, with the ratio of demand to supply at 77% in both 2013 and 2020.

Figure 7: Supply and demand of SAP for diapers Figure 8: SAP production capacity (incl. expansion)

(thousand tons) Supply 4,000 Adult diaper Baby diaper 3,500

3,000

2,500

2,000

1,500

1,000

500

0 2013 2014 2015 2016 2017 2018 2019 2020 Source: Company data, Credit Suisse estimates Source: Chemical goods handbook 2013, The Heavy & Chemical Industries News Agency Quarterly investment strategy for 2014 (1) Life innovation (Jan–Mar) In Jan–Mar, our intended focal point is companies involved in life innovation businesses Focus on companies ahead of medical system reforms and NHI reimbursement price revisions in April 2014. involved in biosimilars, The use of generics is likely to be promoted in an effort to reduce medical spending. We diagnostic reagents, home are focusing on Nippon Kayaku, a major domestic maker of generic anti-cancer drugs dialysis, drug discovery and biosimilars, and Denki Kagaku Kogyo, which we expect to expand its diagnostic support, and disposable reagent business. Asahi Kasei is likely to expand its pharmaceuticals business and, over diapers the medium term, its home dialysis business. JSR is likely to expand its drug discovery support business. Finally, Sanyo Chemical Industries and Nippon Shokubai, as producers of SAP, should benefit from the projected global growth in demand for disposable diapers over the medium term.

Chemical sector 8 24 January 2014

(2) Green innovation (Apr–Jun) For Apr–Jun, we plan to focus on companies involved in green innovation. Companies to Focus on Toray, Teijin for watch include carbon fiber makers Toray and Teijin as aircraft and the shift to lighter carbon fiber, Kureha, Ube vehicles should boost demand. We are focusing on Kureha, Ube Industries, and Hitachi Industries, Hitachi Chemical Chemical in LiBs, and Mitsubishi Chemical Holdings in organic solar cells. Outside the for LiBs, Mitsubishi green innovation field, Nippon Soda could revise up its full-year guidance. If it does, we Chemical Holdings for recommend short-term trading at that time. organic solar cells (3) Silicon wafers (Jul–Sep) For Jul–Sep, we intend to focus on Shin-Etsu Chemical and SUMCO in silicon wafers. Focus on Shin-Etsu Semiconductor process migration should start to boost demand for epitaxial wafers around Chemical, Sumco as October. We expect rising epitaxial prices driven by tightening supply to be priced tightening supply drives up into shares in Jul–Sep. epitaxial wafer prices (4) Shale gas revolution (Oct–Dec) In Oct–Dec, the streamlining of Japanese ethylene plants is likely to accelerate ahead of Recommend companies an expected increase in ethylene production at shale gas bases a year later (2016). We able to benefit from cheap expect companies likely to benefit from shale gas to gain increased attention amid materials, supplying mining concerns Japanese exports will become less competitive. We are focusing on Shin-Etsu materials, unhurt by shale Chemical, which is likely to expand its US PVC business and become more cost gas competitive through access to cheap materials, and Kureha, which should benefit from expanding demand for its PGA as a material for molded products used in shale gas extraction. Zeon and JSR, as integrated manufacturers of synthetic rubber made from butadiene obtained only from naphtha, are not directly affected by increased shale gas production and should maintain relatively strong earnings within the Japanese petrochemicals sector over the medium term.

Figure 9: Investment strategy for 2014

Source: Credit Suisse

Chemical sector 9 24 January 2014

Stocks to watch in 2014 Mitsubishi Gas Chemical (4182, OUTPERFORM, TP ¥1,050) MGC’s methanol business, which generates more than half of NP, is highly competitive on Higher methanol prices and a global basis. Rising prices should boost equity-method income. We also see a high expanding market share for probability of profit growth in FY3/15 on reduced red ink at the polycarbonate BT materials should boost subsidiary thanks to structural reforms, a higher market share for BT materials used in profits in FY3/15 semiconductor package substrates for smartphones, and expanding demand for cover glass substitutes from smartphone makers. MGC is our top pick for 2014. Kureha (4023, OUTPERFORM, TP ¥660) Prospects for an increase in demand for Kureha’s polyglycolic acid (PGA) for use in shale In addition to expanding gas extraction have strengthened. We expect confirmation of such demand will boost demand for its PGA as a profits and lead the market to assign higher stock valuation. Management’s indication that material for molded products its rolling medium-term plan would cut an additional ¥7bn from costs raises the likelihood used in shale gas extraction, that Kureha will beat its FY3/16 OP target of ¥15bn. In addition to PGA, LiB materials and LiB and agrochemicals have agrochemicals have strong medium-term growth prospects that we think are not yet strong growth prospects factored into the share price. Sanyo Chemical Industries (4471, OUTPERFORM, TP ¥1,010) Sanyo Chemical Industries is the only company in the world employing both the major Look for new products to processes for manufacturing SAP. The use of both techniques enables the company to accelerate growth at this produce SAP with high absorption capacity and SAP with high absorption speed. This SAP pioneer technological prowess puts SCI in a good position to reap the benefits of a global increase in demand for disposable diapers over the medium-term. Expanding production capacity and launching a new grade of SAP with superior urine diffusion and even higher absorption capacity should enable SCI to achieve sales growth that outstrips overall market growth. Toray Industries (3402, OUTPERFORM, TP ¥850) The new medium-term management plan to be implemented from this April evidently calls Watch for expansion in for expansion of Toray’s North American business and strengthening of its life innovation North America and business. We expect it to add carbon fiber production capacity in the US to meet growing strengthening of life demand fueled by Boeing’s increased production of the 787 and the expected start of innovation business production of the next-generation 777. Toray’s strong medium-term growth prospects make the company our top pick among synthetic fiber makers. Asahi Kasei (3407, OUTPERFORM, TP ¥920) We look for record profits in FY3/14 as strong housing demand propels home sales, new Keep eye on home dialysis drugs are driving up sales and profits at the pharmaceuticals business, and the electronics business segment is seeing increased demand for its materials. In addition to these positive business results, yen weakness has a positive impact on Asahi Kasei’s profits. In FY3/15, we expect OP to rise further, supported by a move into the black at the critical care business and continued growth in housing sales, based on the current high level of orders. Over the medium term, we think Asahi Kasei will be able to leverage its housing business to develop its home dialysis business.

Chemical sector 10 24 January 2014

Figure 10: Credit Suisse coverage: Earnings outlook (¥bn) Code Price Rating Con. Sales Con. OP Con. RP Con. NP (¥bn) No. 1/23 13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15E Integrated chemicals Asahi Kasei 3407 814 OUTPERFORM 1,906.0 1,960.0 2,005.0 145.0 155.0 167.0 143.0 155.0 168.0 86.0 96.0 104.0 Sumitomo Chemical 4005 452 NEUTRAL 2,215.0 2,265.0 2,315.0 102.0 110.0 130.0 100.0 121.0 144.0 30.0 68.0 81.0 Mitsubishi Chemical HD 4188 474 NEUTRAL 3,440.0 3,435.0 3,480.0 120.0 138.0 165.0 112.0 128.0 156.0 38.5 43.0 56.0 Tosoh 4042 472 UNDERPERFORM 733.0 748.0 763.0 38.5 40.5 42.0 39.5 39.5 41.0 22.5 22.5 23.5 Mitsui Chemicals 4183 252 UNDERPERFORM 1,543.0 1,536.0 1,570.0 23.0 34.5 42.0 19.0 31.0 39.0 1.0 11.0 16.0 Ube Industries 4208 226 NEUTRAL 665.0 679.0 693.0 26.0 34.0 40.0 20.5 29.5 35.5 10.7 15.5 19.3 Middle-sized chemicals Mitsubishi Gas Chemical 4182 770 OUTPERFORM 532.0 557.0 585.0 20.0 28.0 34.0 39.0 53.0 59.0 28.6 43.0 46.6 Tokuyama 4043 443 OUTPERFORM 283.0 290.0 310.0 18.5 19.5 18.5 14.5 15.1 15.5 10.4 10.3 10.5 Denki Kagaku Kogyo 4061 409 NEUTRAL 386.2 404.5 433.3 23.4 26.6 30.0 21.8 25.0 28.4 13.5 15.6 17.8 Nippon Shokubai 4114 1,200 NEUTRAL 300.0 343.0 364.0 14.0 25.0 30.0 17.0 28.0 33.0 14.0 18.0 21.3 Sanyo Chemical 4471 798 OUTPERFORM 164.0 176.0 200.0 9.0 10.5 13.0 10.0 11.5 14.0 6.0 7.2 9.0 Kureha 4023 525 OUTPERFORM 143.5 154.0 167.5 10.8 14.0 17.0 10.8 13.5 16.5 6.6 7.6 9.5 Electronics materials Shin-Etsu Chemical 4063 5,805 OUTPERFORM 1,130.0 1,180.0 1,230.0 185.0 205.0 225.0 195.0 212.0 232.5 126.0 137.0 150.5 SUMCO 3436 899 NEUTRAL 180.0 195.0 206.0 15.0 20.0 26.5 5.0 16.0 22.5 0.5 12.0 16.5 JSR 4185 2,006 OUTPERFORM 400.0 425.0 445.0 37.5 44.0 48.0 40.5 47.5 52.0 26.8 32.0 35.0 Zeon 4205 1,044 OUTPERFORM 297.0 318.0 335.0 35.0 40.0 44.0 37.0 40.0 44.0 22.6 24.5 27.0 Hitachi Chemical 4217 1,614 OUTPERFORM 493.0 520.0 538.0 32.0 38.0 43.0 33.5 39.0 44.0 24.8 25.0 28.3 Textiles Teijin 3401 251 NEUTRAL 794.2 821.0 855.3 19.9 27.0 34.1 16.8 24.0 31.1 6.9 10.0 15.1 Toray 3402 700 OUTPERFORM 1,837.5 1,923.0 2,017.0 110.0 128.5 143.2 111.6 130.1 144.8 65.1 76.1 85.8 Kuraray 3405 1,226 NEUTRAL 405.8 436.0 470.7 51.3 54.7 59.9 49.4 52.8 58.0 30.4 34.0 37.5 Agrochemicals Nippon Soda 4041 618 OUTPERFORM 136.0 140.0 143.0 6.4 7.0 8.0 9.4 10.7 12.4 7.0 8.0 9.3

Nippon Kayaku Nippon Kayaku 4272 1,408 NEUTRAL 163.3 173.5 188.1 21.2 22.8 28.8 21.2 22.8 28.8 12.5 13.6 17.5

Source: Company data, Credit Suisse estimates

Figure 11: Credit Suisse coverage: Valuations (¥, x, ¥bn, %) Code Price Post-Lehman Rating Target EPS PER PCFR PBR EV/EBITDA Mkt Cap Performance of Share price Dividend No. 1/23 low price 13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 13E 13E 1 year 6mons 3mons 1mon yield Integrated chemicals Asahi Kasei 3407 814 300 OUTPERFORM 920 61.5 68.7 74.4 13.2 11.8 10.9 6.5 6.1 5.8 1.3 1.2 6.6 1,137.6 9.9% 16.1% 4.8% 0.9% 1.7% Sumitomo Chemical 4005 452 266 NEUTRAL 420 18.4 41.6 49.6 24.6 10.9 9.1 5.2 4.0 3.6 1.4 1.3 7.3 738.9 26.0% 26.3% 19.5% 9.5% 2.0% Mitsubishi Chemical HD 4188 474 299 NEUTRAL 530 26.1 29.2 38.0 18.1 16.2 12.5 4.1 4.2 3.9 0.8 0.8 6.3 698.3 -17.5% -9.8% -2.9% -1.1% 2.5% Tosoh 4042 472 138 UNDERPERFORM 320 37.6 37.6 39.2 12.6 12.6 12.0 5.2 5.2 5.1 1.4 1.3 7.6 282.4 63.5% 19.0% 12.1% 0.4% 1.3% Mitsui Chemicals 4183 252 202 UNDERPERFORM 240 1.0 11.0 16.0 252.4 22.9 15.8 5.6 4.4 3.9 0.7 0.7 10.7 252.5 -10.5% 2.1% -5.0% 2.2% 2.4% Ube Industries 4208 226 153 NEUTRAL 200 10.6 15.4 19.2 21.2 14.7 11.8 5.2 4.8 4.5 1.0 1.0 7.1 239.2 -14.7% 8.6% 1.5% 3.7% 2.2% Integrated chemicals Average 25.9 33.9 39.4 57.0 14.9 12.0 5.3 4.8 4.5 1.1 1.0 7.6 9.4% 10.4% 5.0% 2.6% Middle-sized chemicals Mitsubishi Gas Chemical 4182 770 283 OUTPERFORM 1,050 63.3 95.2 103.2 12.2 8.1 7.5 6.7 4.9 4.6 1.1 1.0 11.1 347.8 -8.6% -4.9% -9.0% -5.4% 1.6% Tokuyama 4043 443 321 OUTPERFORM 450 29.9 29.6 30.2 14.8 15.0 14.7 4.9 4.2 3.5 0.7 0.7 8.2 154.1 78.1% 16.4% 7.0% 14.5% 1.4% Denki Kagaku Kogyo 4061 409 150 NEUTRAL 380 28.4 32.8 37.5 14.4 12.5 10.9 5.2 4.9 4.6 1.0 1.0 6.0 190.6 -6.2% 1.2% -4.0% -2.7% 2.4% Nippon Shokubai 4114 1,200 444 NEUTRAL 1,300 69.0 88.7 104.9 17.4 13.5 11.4 14.3 14.3 14.3 1.1 1.0 8.4 243.6 -5.2% 4.4% -5.8% 4.9% 1.3% Sanyo Chemical 4471 798 403 OUTPERFORM 1,010 54.4 65.3 81.6 14.7 12.2 9.8 9.3 9.3 8.8 0.9 0.9 5.0 88.0 9.4% 17.8% 6.8% 17.2% 1.9% Kureha 4023 525 289 OUTPERFORM 660 38.4 44.3 55.3 13.7 11.9 9.5 5.7 5.2 4.7 0.8 0.8 7.4 90.1 11.8% 44.9% 35.5% 6.1% 1.9% Middle-sized chemicals Average 47.2 59.3 68.8 14.5 12.2 10.6 7.7 7.1 6.8 0.9 0.9 7.7 13.2% 13.3% 5.1% 5.8% Electronics materials Shin-Etsu Chemical 4063 5,805 3,400 OUTPERFORM 7,400 296.4 322.3 354.1 19.6 18.0 16.4 12.0 11.4 10.7 1.5 1.4 7.6 2,468.3 -24.0% -20.4% -2.9% -6.1% 1.7% SUMCO 3436 899 821 NEUTRAL 750 1.9 46.6 64.0 463.4 19.3 14.0 10.8 7.5 6.5 1.5 1.5 10.5 231.7 -30.1% -12.8% -8.3% -3.5% 0.0% JSR 4185 2,006 801 OUTPERFORM 2,040 112.9 134.8 147.4 17.8 14.9 13.6 10.2 9.0 8.5 1.5 1.5 6.8 476.4 -19.0% -7.1% 2.3% 0.4% 1.9% Zeon 4205 1,044 215 OUTPERFORM 1,400 97.6 105.8 116.5 10.7 9.9 9.0 6.0 5.3 4.9 1.4 1.2 5.5 241.8 -2.6% -13.2% -14.0% 10.7% 1.2% Hitachi Chemical 4217 1,614 805 OUTPERFORM 1,930 119.0 120.0 135.9 13.6 13.4 11.9 6.7 6.4 5.8 1.0 1.0 6.0 336.1 -13.6% -13.7% -2.2% -5.5% 2.2% Electronics materials Average 125.6 145.9 163.6 105.0 15.1 13.0 9.1 7.9 7.3 1.4 1.3 7.3 -17.9% -13.5% -5.0% -0.8% Chemical sector Average 66.2 79.7 90.6 56.1 14.0 11.8 7.3 6.5 6.1 1.1 1.1 7.5 1.6% 3.4% 1.7% 2.5% Textiles Teijin 3401 251 168 NEUTRAL 230 7.1 10.1 15.3 nm 24.8 16.4 4.7 3.8 3.5 0.8 0.8 7.0 247.0 -14.0% 5.1% 4.2% 8.8% 1.6% Toray 3402 700 352 OUTPERFORM 850 40.0 46.7 52.7 17.5 15.0 13.3 8.0 6.5 6.1 1.5 1.4 8.7 1,140.2 -2.6% -1.3% 6.9% -2.3% 1.4% Kuraray 3405 1,226 610 NEUTRAL 1,200 86.9 97.2 107.1 14.1 12.6 11.4 6.4 5.7 5.0 1.0 1.0 4.7 429.5 -22.2% -18.5% -0.9% -3.1% 2.9% Textiles Average 44.6 51.3 58.4 22.4 17.5 13.7 6.4 5.3 4.9 1.1 1.0 6.8 -12.9% -4.9% 3.4% 1.1% Agrochemicals Nippon Soda 4041 618 225 OUTPERFORM 660 46.0 52.6 61.1 13.4 11.7 10.1 7.1 6.5 5.9 0.9 0.9 9.7 94.0 7.5% -2.9% -4.6% -9.3% 1.0%

Nippon Kayaku Nippon Kayaku 4272 1,408 351 NEUTRAL 1,300 69.1 74.9 96.5 20.4 18.8 14.6 10.6 9.2 8.2 1.6 1.5 7.4 255.2 -1.9% -3.3% -3.2% -8.5% 1.4%

Source: Company data, Credit Suisse estimates

Chemical sector 11 24 January 2014

Figure 12: Credit Suisse coverage: Earnings estimates

Share price Target FY2013 OP estimates FY2014 OP estimates FY2015 OP estimates EPS CSE PER CSE Rating (¥bn) 23-Jan-14 Price CSE Co.E IBESE CSE IBESE CSE IBESE FY12 FY13 FY14 FY12 FY13 FY14 Major Chemicals 3407 Asahi Kasei 814 OUTPERFORM 920 145.0 145.0 146.1 155.0 154.1 167.0 166.1 61.5 68.7 74.4 13.2 11.8 10.9 4005 Sumitomo Chemical 452 NEUTRAL 420 102.0 105.0 102.8 110.0 109.8 130.0 129.2 18.4 41.6 49.6 - 10.9 9.1 4188 Mitsubishi Chemical 474 NEUTRAL 530 120.0 133.0 124.9 138.0 145.2 165.0 167.0 26.1 29.2 38.0 18.1 16.2 12.5 4042 Tosoh 472 UNDERPERFORM 320 38.5 40.0 40.2 40.5 43.6 42.0 46.8 37.6 37.6 39.2 12.6 12.6 12.0 4183 Mitsui Chemical 252 UNDERPERFORM 240 23.0 25.0 24.6 34.5 35.3 42.0 44.3 1.0 11.0 16.0 - 22.9 15.8 4208 Ube Industries 226 NEUTRAL 200 26.0 26.0 26.4 34.0 35.0 40.0 41.5 10.6 15.4 19.2 21.2 14.7 11.8 Integrated chemicals total 454.5 474.0 465 512.0 522.9 586.0 594.9 25.9 33.9 39.4 16.3 14.9 12.0 Middle-sized Chemicals 4182 Mitsubishi Gas Chem. 770 OUTPERFORM 1,050 20.0 16.0 18.0 28.0 23.8 34.0 28.4 63.3 95.2 103.2 - 8.1 7.5 4043 Tokuyama 443 OUTPERFORM 450 18.5 14.0 15.3 19.5 14.9 18.5 19.0 29.9 29.6 30.2 - 15.0 14.7 4061 Denki Kagaku kogyo 409 NEUTRAL 380 23.4 25.0 23.8 26.6 26.5 30.0 29.7 28.4 32.8 37.5 14.4 12.5 10.9 4114 Nippon Shokubai 1,200 NEUTRAL 1,300 14.0 14.0 13.6 25.0 24.5 30.0 29.2 69.0 88.7 104.9 17.4 13.5 11.4 4471 Sanyo Chemical 798 OUTPERFORM 1,010 9.0 7.4 8.5 10.5 9.2 13.0 10.6 54.4 65.3 81.6 14.7 12.2 9.8 4023 Kureha 525 OUTPERFORM 660 10.8 9.5 9.8 14.0 11.8 17.0 14.3 38.4 44.3 55.3 13.7 11.9 9.5 Middle-sized Chemicals total 95.7 85.9 88.9 123.6 110.8 142.5 131.3 47.2 59.3 68.8 15.0 12.2 10.6 Electronic Materials 4063 Shin-Etsu Chemical 5,805 OUTPERFORM 7,400 185.0 170.0 179.7 205.0 198.3 225.0 216.7 296.4 322.3 354.1 19.6 18.0 16.4 3436 SUMCO 899 NEUTRAL 750 15.0 17.0 29.3 20.0 38.3 26.5 51.0 1.9 46.6 64.0 463.4 19.3 14.0 4185 JSR 2,006 OUTPERFORM 2,040 37.5 37.0 37.2 44.0 43.1 48.0 47.9 112.9 134.8 147.4 17.8 14.9 13.6 4205 Zeon 1,044 OUTPERFORM 1,400 35.0 28.0 31.7 40.0 34.0 44.0 37.1 97.6 105.8 116.5 10.7 9.9 9.0 4217 Hitachi Chemical 1,614 OUTPERFORM 1,930 32.0 31.0 31.0 38.0 36.4 43.0 41.9 119.0 120.0 135.9 13.6 13.4 11.9 Electronic Materials total 304.5 283.0 308.9 347.0 350.1 386.5 394.6 125.6 145.9 163.6 105.0 15.1 13.0 Total 854.7 842.9 862.9 982.6 983.7 1,115.0 1,120.7 66.2 79.7 90.6 45.4 14.1 11.9 Textiles 3401 Teijin 251 NEUTRAL 230 19.9 20.0 19.4 27.0 26.7 34.1 32.9 7.1 10.1 15.3 - 24.8 16.4 3402 Toray 700 OUTPERFORM 850 110.0 120.0 112.5 128.5 128.7 143.2 142.7 40.0 46.7 52.7 17.5 15.0 13.3 3405 Kuraray 1,226 NEUTRAL 1,200 51.3 55.0 53.7 54.7 58.4 59.9 63.1 86.9 97.2 107.1 14.1 12.6 11.4 Total 181.2 195.0 185.5 210.2 213.8 237.2 238.6 44.6 51.3 58.4 15.8 17.5 13.7 Agro Chemical 4041 Nippon Soda 618 OUTPERFORM 660 6.4 6.1 6.4 7.0 6.9 8.0 7.4 46.0 52.6 61.1 13.4 11.7 10.1

Nippon Kayaku 4272 Nippon Kayaku 1,408 NEUTRAL 1,300 21.2 19.5 21.2 22.8 22.8 28.8 27.5 69.1 74.9 96.5 20.4 18.8 14.6

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

Chemical sector 12 24 January 2014

Companies Mentioned (Price as of 23-Jan-2014) AES CHEMUNEX (AESCH.PA, €0.55) Asahi Kasei (3407.T, ¥814, OUTPERFORM, TP ¥920) BMW (BMWG.F, €84.665) Boeing (BA.N, $141.31) Daimler (DAIGn.F, €65.139) Denki Kagaku Kogyo (4061.T, ¥409) General Motors Corp. (GM.N, $38.42) Hitachi Chemical (4217.T, ¥1,614) JSR (4185.T, ¥2,006) Kuraray (3405.T, ¥1,226) Kureha (4023.T, ¥525, OUTPERFORM, TP ¥660) Lamborghini (Unlisted) Maruzen Petrochemical (Unlisted) Mitsubishi Gas Chemical (4182.T, ¥770, OUTPERFORM, TP ¥1,050) Mitsubishi Rayon (Unlisted) Mitsui Chemicals (4183.T, ¥252) NEC (6701.T, ¥286) Nippon Shokubai (4114.T, ¥1,200) Nippon Soda (4041.T, ¥618) Nissan Motor (7201.T, ¥934) SUMCO (3436.T, ¥899) Sanyo Chemical (4471.T, ¥798, OUTPERFORM, TP ¥1,010) Sanyo Electric (6764.T^C11, ¥116) Shin-Etsu Chemical (4063.T, ¥5,805) Sumitomo Chemical (4005.T, ¥452) Teijin (3401.T, ¥251) Tesla Motors (TSLA.OQ, $181.5) Tokuyama (4043.T, ¥443) Toray Industries (3402.T, ¥700, OUTPERFORM, TP ¥850) Tosoh (4042.T, ¥472) Ube Industries (4208.T, ¥226) Zeon (4205.T, ¥1,044)

Disclosure Appendix Important Global Disclosures Masami Sawato and Maiko Saito, 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 Asahi Kasei (3407.T)

3407.T Closing Price Target Price Date (¥) (¥) Rating 01-Feb-11 566 550 N 28-Nov-11 445 480 05-Mar-12 510 520 07-Jun-12 424 480 09-Aug-12 418 440 12-Nov-12 439 460 31-Jan-13 528 670 O 23-May-13 691 830 30-Aug-13 724 850 31-Oct-13 745 920 NEUTRAL OUTPERFORM * Asterisk signifies initiation or assumption of coverage.

Chemical sector 13 24 January 2014

3-Year Price and Rating History for Kureha (4023.T)

4023.T Closing Price Target Price Date (¥) (¥) Rating 28-Jan-11 486 580 O 31-May-11 363 540 10-Nov-11 347 510 07-Feb-12 406 530 17-May-12 353 490 23-Oct-12 288 460 15-May-13 355 480 04-Sep-13 343 400 12-Dec-13 448 660 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM

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

4182.T Closing Price Target Price Date (¥) (¥) Rating 02-Feb-11 594 650 O 05-Mar-11 659 770 03-Jun-11 595 750 29-Nov-11 454 630 18-Jan-12 426 600 31-May-12 456 590 03-Sep-12 437 510 19-Oct-12 407 480 02-Nov-12 411 470 22-Jan-13 569 740 08-Mar-13 685 800 15-May-13 805 920 30-Aug-13 793 970 12-Dec-13 847 1,050 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Sanyo Chemical (4471.T)

4471.T Closing Price Target Price Date (¥) (¥) Rating 20-Jan-14 735 1,010 O * * Asterisk signifies initiation or assumption of coverage.

Chemical sector 14 24 January 2014

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

3402.T Closing Price Target Price Date (¥) (¥) Rating 03-Feb-11 573 700 O 06-Jul-11 604 760 04-Aug-11 597 780 07-Feb-12 586 770 01-Jun-12 516 710 24-Oct-12 449 610 29-May-13 713 790 17-Jan-14 699 850 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European 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 rep resenting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and 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* 43% (54% banking clients) Neutral/Hold* 41% (48% banking clients) Underperform/Sell* 14% (43% 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.

Chemical sector 15 24 January 2014

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Price Target: (12 months) for Mitsubishi Gas Chemical (4182.T)

Method: We base our of ¥1,050 target price for Mitsubishi Gas Chemical on a fair-value P/E of 11x (the average 12-month forward P/E since 2008) applied to FY3/15E EPS of ¥95.2. Risk: Risks that may impede achievement of our ¥1,050 target price for Mitsubishi Gas Chemical include softening methanol prices due to unexpected easing of the supply/demand balance and a strong yen. We estimate every ¥1 strengthening of the yen versus the dollar depresses OP by ¥600mn per annum.

Price Target: (12 months) for Kureha (4023.T) Method: We base our ¥660 target price for Kureha on our FY3/15 EPS estimate of ¥44.3 and a fair-value P/E of 15x, derived by multiplying Kureha's 1.29x 9-year average P/E relative to our mid-sized chemicals coverage by the average P/E of 11.6x for these peers. Risk: Risks to our ¥660 target price for Kureha include a slowdown in carbon fiber shipments due to slowing solar cell capex, lower PPS resin shipments caused by an unexpectedly sharp drop in car production, and delays in expansion of demand for PGA gas barrier resin in the oil and shale gas drilling industries.

Price Target: (12 months) for Sanyo Chemical (4471.T) Method: Our ¥1,010 target price for Sanyo Chemical is based on our FY3/16 EPS forecast of ¥81.6 and the average P/E of 12.4x among global SAP manufacturers. Risk: Risks to our ¥1,010 target price for Sanyo Chemical include deterioration in the supply–demand balance for SAP or reversal of the yen’s weakening trend

Price Target: (12 months) for Toray Industries (3402.T) Method: Our ¥850 target price for Toray Industries uses FY3/15E BPS of ¥510.7 and a P/B of 1.6x. Our multiple is based on the 10-year correlation between ROE and P/B. Risk: Risks that may impede achievement of our ¥850 target price for Toray Industries are: (1) deterioration in carbon fiber demand, (2)delay in an increase in aircraft applications demand of carbon fiber, (3)longer-than-expected adjustment of display materials demand and price decrease, (4) raw material cost increase, (5) yen appreciation - we assume ¥88/$, with every ¥1 rise eroding full-year OP by ¥500mn and (6) stiffer competition in textile business.

Price Target: (12 months) for Asahi Kasei (3407.T)

Method: We base our ¥920 target price for Asahi Kasei on FY3/15E EPS of ¥68.7 and a P/E of 13.4x, the average 12-month forward P/E since 2004. Risk: Risks to our ¥920 target price for Asahi Kasei are a fall in housing orders, narrower acrylonitrile (AN) margins, a slowdown in housing orders, a reduction in sales of electronic products due to a downturn in the semiconductor market and yen appreciation.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (3402.T, 3407.T, 4208.T, 4043.T, 4205.T, 3405.T, 3401.T, 4005.T, 4114.T, 4185.T, 4217.T) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (4023.T, 4043.T). Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

Chemical sector 16 24 January 2014

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (4182.T, 4023.T, 4471.T, 3402.T, 3407.T, 4208.T, 4043.T, 4042.T, 4041.T, 4183.T, 4205.T, 3436.T, 4061.T, 3405.T, 3401.T, 4005.T, 4063.T, 4114.T, 4185.T, 4217.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. The following disclosed European company/ies have estimates that comply with IFRS: (3407.T). As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. 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 ...... Masami Sawato ; Maiko Saito

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

Chemical sector 17 24 January 2014

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