16 December 2016 Asia Pacific/Japan Equity Research Major Chemicals (Chemicals/Textiles (Japan))
Mitsubishi Chemical (4188) Rating OUTPERFORM Price (15 Dec 16, ¥) 781 INCREASE TARGET PRICE Target price (12-mth, ¥) (from 820) 1,030 Chg to TP (%) 31.9 Upside potential in new growth strategies, Market cap (¥ bn) 1,150.10 (US$ 9.80) Enterprise value (¥ bn) 2,320.79 integration effects Number of shares (mn) 1,473.17 Free float (%) 75.0 ■ Action: We revise our forecasts, raise our target price from ¥820 to ¥1,030 52-week price range 785–445 (potential return 31.9%), and maintain our OUTPERFORM rating. *Stock ratings are relative to the coverage universe in each ■ Investment overview: A “new Mitsubishi Chemical” will come into being on 1 analyst's or each team's respective sector. April 2017, with the integration of three chemical operating companies. At the ¹Target price is for 12 months. business briefing on 8 December, Mitsubishi Chemical Holdings (MCHC) said it Research Analysts expects integration to provide a boost of ¥50bn, above the previous guidance for Masami Sawato ¥20bn. The company is now prioritizing achieving the medium-term plan core OP 81 3 4550 9729 target of ¥380bn in FY20 (see our 8 December 2016 report, Business briefing: [email protected] integration of three chemical companies to provide ¥50bn boost). We see OP growing to ¥290bn by FY3/19, on integration effects and execution of the new Mitsubishi Chemical’s growth strategies. We performed a scenario analysis, where our bull case yields a theoretical share price of ¥1,360, premised on tight supply–demand in the petrochemicals market and buoyant demand for functional products. On this basis, there appears ample share price upside. ■ Mitsubishi Chemical parent undervalued: If we take the market cap of MCHC and subtract from this the combined market value of the two listed subsidiaries (based on percentage ownership), we arrive at a value of ¥259.5bn for the parent company, or ¥177.2 per share. On this basis, we consider the parent’s operations undervalued. ■ Catalysts/risks: Potential catalysts include the possibility of an upward revision to FY3/17 guidance when 3Q results come out, an announcement on anticipated cost synergies following the April 2017 birth of the new Mitsubishi Chemical, and evidence of the environmental and clean energy operations getting established. Downside risks include: (1) deterioration in profit margins for products such as MMA, (2) a stronger yen, and (3) escalating competition and diminished demand in display materials. ■ Valuation: Using an SOTP valuation based on individual segment P/Es, we derive a target price of ¥1,030 that references a P/E of 13.3x (previously 12x) and FY3/18E EPS of ¥77.1 (previously ¥68.3). Share price performance Financial and valuation metrics Pr ice (LH S) Reb ased Rel (RH S) Year 3/16A 3/17E 3/18E 3/19E Sales (¥ bn) 3,823.1 3,280.0 3,380.0 3,460.0 9 0 0 1 3 0 Operating profit (¥ bn) 280.0 250.0 270.0 290.0 Recurring profit (¥ bn) 270.6 235.0 255.0 275.0 6 5 0 1 0 5 Net income (¥ bn) 46.4 141.0 113.0 126.0 EPS (¥) 31.7 96.3 77.1 86.0 IBES Consensus EPS (¥) n.a. 80.4 76.3 81.8 4 0 0 8 0 EPS growth (%) (23.4) - (19.9) 11.5 Jan - 1 5 Ju l- 1 5 Jan - 1 6 Ju l- 1 6 P/E (x) 18.5 8.1 10.1 9.1 The price relative chart measures performance against the Dividend yield (%) 2.6 2.0 2.0 2.0 TOPIX which closed at 1,542.72 on 15-Dec-2016 EV/EBITDA (x) 4.2 5.1 4.8 4.5 On 15-Dec-2016 the spot exchange rate was P/B (x) 0.9 1.1 1.1 1.0 ¥117.41/US$1 ROE(%) 4.9 14.5 10.8 11.1 Performance 1M 3M 12M Net debt/equity (%) 123.4 115.5 105.0 93.3
Absolute (%) 13.7 31.8 0.6 Source: Company data, Thomson Reuters, Credit Suisse estimates Relative (%) 3.7 14.2 0.5
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 16 December 2016
Mitsubishi Chemical (4188) Price (15 Dec 2016): ¥781 (upside: 31.93%); Rating: OUTPERFORM; Target Price: (from ¥820) ¥1,030; Analyst: Masami Sawato Income statement (¥ bn) 3/16A 3/17E 3/18E 3/19E Key ratios 3/16A 3/17E 3/18E 3/19E Sales 3,823.1 3,280.0 3,380.0 3,460.0 Growth (%) EBITDA 480.8 451.1 476.1 496.1 Sales 4.6 - 3.0 2.4 Operating profit 280.0 250.0 270.0 290.0 Operating profit 69.0 - 8.0 7.4 Recurring profit 270.6 235.0 255.0 275.0 EPS (23.4) - (19.9) 11.5 Extraordinary gain & loss (72.4) 0.0 0.0 0.0 Margins (%) Profit before tax 198.2 235.0 255.0 275.0 Gross margin 27.3 27.6 28.0 28.4 Net income 46.4 141.0 113.0 126.0 EBITDA margin 12.6 13.8 14.1 14.3 Cash flow (¥ bn) 3/16A 3/17E 3/18E 3/19E OP margin 7.3 7.6 8.0 8.4 Operating cash flow 388.7 425.8 260.9 279.3 DuPont analysis Depreciation & Amortization 200.8 201.1 206.1 206.1 ROE (%) 4.9 14.5 10.8 11.1 Financing cash flow (157.0) (22.0) (23.4) (22.4) Net profit margin (%) 1.2 4.3 3.3 3.6 Issuance (retirement) of stock - - - - Sales/Assets 0.9 0.8 0.8 0.8 Dividends paid (19.0) (22.0) (23.4) (23.4) Assets/Equity 4.4 4.0 3.9 3.6 Investing cash flow (202.8) (244.0) (210.0) (209.0) Credit ratios (%) Capex (176.5) (244.0) (210.0) (210.0) Equity ratio 23.0 24.7 26.0 27.8 Free cash flow 185.9 181.8 50.9 70.3 Net D/E ratio 1.2 1.2 1.1 0.9 Net change in cash 28.9 159.9 27.5 47.9 Per share data (¥) Number of shares (mn) 1,464.8 1,464.9 1,464.9 1,464.9 Balance sheet (¥ bn) 3/16A 3/17E 3/18E 3/19E EPS 31.7 96.3 77.1 86.0 Cash & cash equivalents 314.8 270.1 278.3 284.9 BPS 636.8 691.9 739.4 808.7 Current receivable 704.0 604.0 622.4 637.1 DPS 15.0 16.0 16.0 16.0 Inventories 547.8 470.0 484.3 495.8 Dividend payout ratio (%) 47.3 16.6 20.7 18.6 Other current assets 250.9 466.4 495.6 542.8 Current assets 1,817.5 1,810.5 1,880.6 1,960.6 Valuation (x) 3/16A 3/17E 3/18E 3/19E Property, plant & equipment 1,390.7 1,454.7 1,479.7 1,504.7 P/E 18.5 8.1 10.1 9.1 Investments 434.3 434.3 434.3 434.3 P/B 0.9 1.1 1.1 1.0 Intangibles 419.0 398.1 378.2 359.3 EV/EBITDA 4.2 5.1 4.8 4.5 Other non-current assets 434.3 434.3 434.3 434.3 Dividend yield (%) 2.6 2.0 2.0 2.0 Total assets 4,061.6 4,097.6 4,172.8 4,258.9 FCF yield (%) 24.7 15.9 4.5 6.1 Payables 408.3 350.3 361.0 369.5 Short term debt 603.2 598.2 593.2 588.2 Other current liabilities 334.8 397.8 392.1 388.5 Current liabilities 1,346.2 1,346.2 1,346.2 1,346.2 Long term debt 862.6 842.6 822.6 802.6 Other non-current liabilities 298.2 235.2 240.9 244.4 Total liabilities 2,507.0 2,424.0 2,409.7 2,393.3 Shareholders' equity 932.8 1,013.6 1,083.1 1,184.7 Minority interests 621.8 660.0 680.0 681.0 Source: Company data, Thomson Reuters, Credit Suisse estimates
Mitsubishi Chemical (4188)2 16 December 2016
Changes to our forecasts We raise our FY3/17 OP estimate from ¥230bn to ¥250bn, largely because of higher-than- expected profits in the health care and polymers segments. In the health care segment, curbs on R&D and SG&A spending have buoyed profit, while in polymers we anticipate stronger MMA monomer profits. We also raise our FY3/18 OP estimate from ¥250bn to ¥270bn, and lift our FY3/19 forecast from ¥265bn to ¥290bn, again because of upward revisions to our forecasts for the health care and polymers segments. Mitsubishi Chemical’s new growth strategies Integration now seen boosting profit by ¥50bn On 1 April 2017, the group’s three chemical operating companies (Mitsubishi Chemical, Mitsubishi Plastics, and Mitsubishi Rayon) are scheduled to integrate, creating a “new Mitsubishi Chemical.” The integration is now expected to provide a boost of ¥50bn, above the initial guidance for ¥20bn, and should make a substantial contribution to growth in group profits. Looking to expand operations in five markets Merging the three chemical companies will reduce the number of business units from 56 to 26, which MCHC believes will accelerate growth by enabling the group to fully leverage market information and its technological capabilities. Through the merger of the three companies, MCHC is aiming for a ¥15.0bn/year productivity boost in FY20. The company's growth strategy is to focus on five markets: (1) autos/aircraft (mobility), (2) packaging/labels/films, (3) IT/electronics/displays, (4) environment/energy, and (5) medical/bio). In doing so, its plan is to accelerate growth centered on the most effective growth drivers while making related business divisions work together in harmony. The company expects sales in the above five markets in FY20 of ¥420.0bn (vs. ¥300.0bn in FY3/16), ¥230.0bn (¥180.0bn), ¥300.0bn (¥220.0bn), ¥240.0bn (¥135.0bn, including lithium-ion battery sales of ¥70.0bn, vs. ¥25.0bn in FY3/16), and ¥150.0bn (¥80.0bn). In basic materials it plans to maintain its 40% or so share of the methyl methacrylate (MMA) market (the lion's share of the global market) and complete its Middle East project as planned. It also plans to increase the group's overseas business ratio from 44% at present to 50% in FY20, and will accelerate overseas business development to achieve this, establishing bases (regional headquarters) to support business and earnings growth in each region in four locations around the world. Holding company’s overall operations undervalued Figure 1 follows the market cap of Mitsubishi Chemical Holdings and the market cap of its stakes in its two listed subsidiaries (Taiyo Nippon Sanso and Mitsubishi Tanabe Pharma). Based on 14 December share prices, the company’s stake in Taiyo Nippon Sanso and Mitsubishi Tanabe Pharma was worth ¥919.9bn. Deducting this from Mitsubishi Chemical Holdings’ market cap of ¥1,179.4bn puts the value of the remaining operations at ¥259.5bn, or ¥177.2 share. Based on this, we do not believe Mitsubishi Chemical Holdings’ current share price fairly reflects the value of its operations if the two listed subsidiaries are excluded.
Mitsubishi Chemical (4188)3 16 December 2016
Figure 1: Market value for Mitsubishi Chemical and listed subsidiaries (ownership ratio)
(¥bn)
1,400 Taiyo Nippon Sanso Mitsubishi Tanabe Pharma Mitsubishi Chemical HD 1,200
1,000
800
600
400
200
0 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 8 8 8 8 8 8 9 9 9 9 9 9 0 0 0 0 0 0 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4 5 5 5 5 5 5 6 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Source: Thomson Reuters Datastream, Credit Suisse Scenario analysis We have prepared a number of estimates to gauge the earnings impacts of supply– demand shifts for petrochemicals and demand trends for performance products, the company’s core driver. Using these, we weigh several scenarios for the share price based on shifts for earnings. We begin with our main scenario, which we use as the basis for our target price for Mitsubishi Chemical Holdings. We believe oil prices will remain at low levels and that supply–demand for petrochemicals will remain firm, supporting an operating rate of 90% for the company’s petrochemical plants. This scenario also anticipates solid demand for performance products. Based on these assumptions, we forecast FY3/18 OP of ¥270bn (+8% YoY), and we expect EPS to trend from ¥96.3 in FY3/17 to ¥77.1 in FY3/18 and ¥86 in FY3/19. Using these inputs, our sum-of-the-parts model (based on P/Es for individual business units) leads to a target P/E of 13.3x. Our ¥1,030 target price uses this and FY3/18E EPS of ¥77.1. Our bullish scenario assumes a tight supply–demand balance for petrochemicals and an operating rate of 100% for the company’s petrochemical plants, as well as upbeat demand for performance products. These assumptions lead us to FY3/18 OP of ¥300bn and EPS of ¥113.2 in FY3/17, ¥90.6 in FY3/18, and ¥99.5bn in FY3/19. Using a target P/E of 15x in this scenario and our FY3/18 EPS figure gives us a theoretical value of ¥1,360. Our bearish scenario prices in a slack supply–demand balance for petrochemicals and an operating rate of 80% for petrochemical facilities, and weak demand for performance products. Under these assumptions we would expect EPS of ¥71.9 in FY3/17, ¥57.8 in FY3/18, and ¥66.7 in FY3/19. An FY3/18E P/E of 10x gives us a theoretical value of ¥580 in our bearish scenario.
Mitsubishi Chemical (4188)4 16 December 2016
Figure 2: Scenario analysis 1 (¥) 1,600
(Best-case scenario) 1,400 ¥1,360
1,200 (Base scenario) 1,000 ¥1,030
800
600 ¥580 (Worst-case scenario)
400
200
0 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Source: Thomson Reuters Datastream, Credit Suisse estimates
Figure 3: Scenario analysis 2 Best-case scenario ¥1,360 Tighter petrochemical supply-demand trend and strong growth for functional materials FY16E FY17E FY18E Operating profits: ¥280.0 bn ¥300.0 bn ¥320.0 bn EPS: ¥113.2 ¥90.6 ¥99.5 Theoretical price: FY17 PER15x = ¥1,360
Base scenario ¥1,030 Petrochemical supply-demand to track firm and firm growth for functional materials FY16E FY17E FY18E Operating profits: ¥250.0 bn ¥270.0 bn ¥290.0 bn EPS: ¥96.3 ¥77.1 ¥86.0 Theoretical price: FY17 PER 13.3x = ¥1,030
Worst-case scenario ¥580 Petrochemical supply-demand conditions worsening and declining demand for functional materials FY16E FY17E FY18E Operating profits: ¥207.0 bn ¥227.0 bn ¥247.0 bn EPS: ¥71.9 ¥57.8 ¥66.7 Theoretical price: FY17 PER10x = ¥580
Source: Credit Suisse estimates
Mitsubishi Chemical (4188)5 16 December 2016
Valuation We derive our ¥1,030 target price using FY3/18E EPS of ¥77.1 and a target P/E of 13.31x based on an SOTP model. We use P/E of 15.3x for electronics applications (previously 9.8x), 13.6x for designed materials (9.8x), 24.6x for healthcare (25x), 12.3x for chemicals (8.4x), and 11.6x for polymers (8.2x).
Figure 4: Valuations (SOTP basis)
Applied P/E Segment EPS Electronics applications 15.3 x 0.0 ----- 4185 JSR 17.5 x 4217 Hitachi Chemical 13.1 x
Designed materials 13.6 x 0.3 ----- 4217 Hitachi Chemical 15.0 x 4061 Denka 11.2 x 4204 Sekisui Chemical 14.5 x
Healthcare 24.6 x 26.3 ----- 4502 Takeda Pharmaceutical 37.6 x 4508 Mitsubishi Tanabe Pharma 19.4 x 4568 Daiichi Sankyo 23.2 x 4506 Sumitomo Dainippon Pharma 22.7 x 4507 Shionogi 19.9 x
Chemicals 12.3 x 13.7 ----- 3407 Asahi Kasei 15.5 x 4004 Showa Denko 11.2 x 4005 Sumitomo Chemical 10.3 x 4042 Tosoh 11.0 x 4088 Air Water 15.6 x 4183 Mitsui Chemicals 10.0 x 4208 Ube Industries 12.4 x
Polymers 11.6 x 18.1 ----- 4118 Kaneka 13.6 x 4183 Mitsui Chemicals 10.0 x 4005 Sumitomo Chemical 10.3 x 4208 Ube Industries 12.4 x T/P 1,030 Implied P/E 13.3 x
Source: I/B/E/S, Credit Suisse estimates
Mitsubishi Chemical (4188)6 16 December 2016
Figure 5: Mitsubishi Chemical (4188) – Forecasts summary Sales Operating profit Recurring profit Net profit EPS ¥bn YoY (%) ¥bn YoY (%) ¥bn YoY (%) ¥bn YoY (%) ¥ YoY (%) 16/3 A 3,823.1 4.6 280.0 69.0 270.6 66.0 46.4 -23.7 31.7 -23.4 17/3 CS E (new) 3,280.0 - 250.0 - 235.0 - 141.0 - 96.3 - (prev) 3,610.0 - 230.0 - 217.0 - 90.0 - 61.4 - CoE 3,280.0 - 229.0 - 214.0 - 125.0 - 85.3 - IBES E 3,378.3 - 247.6 - - - 122.2 - 80.4 - 18/3 CS E (new) 3,380.0 3.0 270.0 8.0 255.0 8.5 113.0 -19.9 77.1 -19.9 (prev) 3,730.0 3.3 250.0 8.7 237.0 9.2 100.0 11.1 68.3 11.1 IBES E 3,446.8 2.0 266.9 7.8 - - 111.9 -8.4 76.3 -5.2 19/3 CS E (new) 3,460.0 2.4 290.0 7.4 275.0 7.8 126.0 11.5 86.0 11.5 (prev) 3,800.0 1.9 265.0 6.0 252.0 6.3 110.0 10.0 75.1 10.0 IBES E 3,519.0 2.1 283.3 6.2 - - 119.3 6.6 81.8 7.3
Source: Company data, I/B/E/S, Credit Suisse estimates
Mitsubishi Chemical (4188)7 16 December 2016
Figure 6: Mitsubishi Chemical (4188) – Consolidated income statement
(¥bn) Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17E Mar-18E Mar-19E By segment Sales Electronics applications 133.8 118.2 133.7 118.8 115.6 100.0 109.0 115.0 Designed materials 699.9 689.7 790.9 811.4 852.6 810.0 840.0 860.0 Health care 502.5 514.4 531.3 531.9 554.1 535.0 542.0 548.0 Chemicals 1,007.5 903.6 955.1 1,139.4 1,321.1 965.0 994.0 1,017.0 Polymers 658.6 675.7 858.4 834.6 773.7 680.0 700.0 720.0 Other 205.9 187.0 229.5 220.2 206.0 190.0 195.0 200.0 Total 3,208.2 3,088.6 3,498.8 3,656.3 3,823.1 3,280.0 3,380.0 3,460.0 Operating profits Electronics applications -5.3 -5.1 -5.5 -2.7 -1.0 -2.0 0.0 1.0 Designed materials 23.1 22.5 46.5 56.1 75.7 62.5 68.5 76.0 Health care 76.4 74.9 68.3 77.0 103.4 89.0 92.0 92.0 Chemicals 14.9 -0.2 0.7 9.2 57.3 45.0 48.0 53.5 Polymers 23.8 0.1 2.3 26.8 43.3 58.0 63.5 69.0 Other 6.1 6.5 5.7 6.5 7.3 6.5 7.0 7.5 Corporate -8.3 -8.5 -7.5 -7.1 -6.0 -9.0 -9.0 -9.0 Total 130.6 90.2 110.5 165.7 280.0 250.0 270.0 290.0 OP Margins (%) Electronics applications -4.0 -4.3 -4.1 -2.3 -0.9 -2.0 0.0 0.9 Designed materials 3.3 3.3 5.9 6.9 8.9 7.7 8.2 8.8 Health care 15.2 14.6 12.8 14.5 18.7 16.6 17.0 16.8 Chemicals 1.5 0.0 0.1 0.8 4.3 4.7 4.8 5.3 Polymers 3.6 0.0 0.3 3.2 5.6 8.5 9.1 9.6 Other 3.0 3.5 2.5 2.9 3.5 3.4 3.6 3.8 Total 4.1 2.9 3.2 4.5 7.3 7.6 8.0 8.4
P/L Statement Sales 3,208.2 3,088.6 3,498.8 3,656.3 3,823.1 3,280.0 3,380.0 3,460.0 CoGS 2,508.0 2,440.2 2,791.4 2,826.2 2,779.6 2,375.0 2,435.0 2,477.0 Gross profit 700.2 648.4 707.4 830.1 1,043.5 905.0 945.0 983.0 SG&A 569.6 558.2 596.9 664.4 763.5 655.0 675.0 693.0 Operating profit 130.6 90.2 110.5 165.7 280.0 250.0 270.0 290.0 Net interest -6.6 -4.1 -6.5 -5.4 -6.9 -15.0 -15.0 -15.0 Equity method investment P/L 14.9 3.2 -0.4 3.8 10.1 0.0 0.0 0.0 Net other non-op. -5.3 -2.4 -0.5 -1.0 -12.7 0.0 0.0 0.0 Recurring profit 133.6 87.1 103.1 163.1 270.6 235.0 255.0 275.0 Net extraordinaries -6.1 -4.2 13.5 2.6 -72.4 0.0 0.0 0.0 Pretax profit 127.5 82.9 116.6 165.6 198.2 235.0 255.0 275.0 Taxes 53.1 40.1 56.3 69.2 92.6 40.0 87.0 94.0 Minorities 38.9 24.2 28.0 35.6 59.2 54.0 55.0 55.0 Net profit 35.5 18.6 32.2 60.9 46.4 141.0 113.0 126.0
YoY Growth (%) Sales 1.3 -3.7 13.3 4.5 4.6 - 3.0 2.4 Operating profits -42.3 -30.9 22.4 50.0 69.0 - 8.0 7.4 Recurring profits -40.3 -34.8 18.4 58.2 66.0 - 8.5 7.8 Net profits -57.5 -47.6 73.4 88.7 -23.7 - -19.9 11.5 Margin (%) Gross profit/Sales 21.8 21.0 20.2 22.7 27.3 27.6 28.0 28.4 SG&A/Sales 17.8 18.1 17.1 18.2 20.0 20.0 20.0 20.0 Operating profit/Sales 4.1 2.9 3.2 4.5 7.3 7.6 8.0 8.4 Recurring profits/Sales 4.2 2.8 2.9 4.5 7.1 7.2 7.5 7.9 Net profits/sales 1.1 0.6 0.9 1.7 1.2 4.3 3.3 3.6
Source: Company data, Credit Suisse estimates
Mitsubishi Chemical (4188)8 16 December 2016
Figure 7: Mitsubishi Chemical (4188) – Consolidated balance sheet and cash flow statement
(¥bn) Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17E Mar-18E Mar-19E Balance Sheet Current assets 1,377.7 1,456.7 1,563.4 1,857.2 1,817.5 1,810.5 1,880.6 1,960.6 Cash & marketable securities 161.1 201.0 250.2 364.0 314.8 270.1 278.3 284.9 Receivables 593.4 588.2 615.7 759.9 704.0 604.0 622.4 637.1 Inventories 516.1 547.0 591.1 595.5 547.8 470.0 484.3 495.8 Other 107.1 120.5 106.3 137.9 250.9 466.4 495.6 542.8 Fixed assets 1,796.2 1,851.1 1,916.0 2,465.8 2,244.1 2,287.1 2,292.2 2,298.3 Tangible fixed assets 1,032.7 1,061.6 1,118.1 1,498.1 1,390.7 1,454.7 1,479.7 1,504.7 Intangibles 208.2 245.2 296.5 425.3 419.0 398.1 378.2 359.3 Investments 555.3 544.3 501.4 542.3 434.3 434.3 434.3 434.3 Total assets 3,174.0 3,307.8 3,479.4 4,323.0 4,061.6 4,097.6 4,172.8 4,258.9 Payables 411.3 417.0 413.4 459.3 408.3 350.3 361.0 369.5 Interest-bearing debt 1,164.5 1,188.8 1,258.2 1,603.6 1,465.8 1,440.8 1,415.8 1,390.8 Bonds & CBs (incl. Short term) 255.0 270.0 280.1 325.1 365.0 365.0 365.0 365.0 Long-term and current debt 869.1 768.8 825.5 1,073.9 932.3 907.3 882.3 857.3 Other 453.2 498.7 492.9 671.5 633.0 633.0 633.0 633.0 Total liabilities 2,029.0 2,104.4 2,164.5 2,734.4 2,507.0 2,424.0 2,409.7 2,393.3 Equity 770.7 815.5 900.8 981.5 932.8 1,013.6 1,083.1 1,184.7 Minorities 373.6 387.2 413.6 607.1 621.8 660.0 680.0 681.0 Total net asset 1,145.0 1,203.3 1,314.9 1,588.6 1,554.5 1,673.6 1,763.1 1,865.7 Total liabilities/Equity 3,174.0 3,307.8 3,479.4 4,323.0 4,061.6 4,097.6 4,172.8 4,258.9
Cash flow Net profits 35.5 18.6 32.2 60.9 46.4 141.0 113.0 126.0 Depreciation 145.7 129.5 131.6 151.3 180.4 180.0 185.0 185.0 Increase/ decrease of working capital -5.7 20.0 75.2 102.6 -52.5 -119.8 22.1 17.7 Other 42.4 38.4 -62.0 15.1 214.3 -15.0 -15.0 -14.0 Operating cash flow 218.0 206.5 177.0 329.8 388.7 425.8 260.9 279.3 Capex -116.1 -132.2 -133.3 -165.1 -176.5 -244.0 -210.0 -210.0 Other 52.7 -37.6 -26.5 -112.1 -26.3 0.0 0.0 1.0 Investment cash flow -63.4 -169.8 -159.8 -277.2 -202.8 -244.0 -210.0 -209.0 Dividend to be paid -14.7 -14.7 -17.7 -17.6 -19.0 -22.0 -23.4 -23.4 Other -149.4 -11.5 9.4 15.5 -137.9 0.0 0.0 1.0 Financial cash flow -164.1 -26.3 -8.3 -2.1 -157.0 -22.0 -23.4 -22.4 Free cash flow 154.6 36.7 17.2 52.6 185.9 181.8 50.9 70.3
Valuations EPS (¥) 24.1 12.6 21.9 41.4 31.7 96.3 77.1 86.0 BPS (¥) 522.8 553.5 612.0 670.1 636.8 691.9 739.4 808.7 CFPS (¥) 122.9 100.5 111.3 144.8 154.8 219.1 203.4 212.3 Dividend per share (¥) 10.0 12.0 12.0 13.0 15.0 16.0 16.0 16.0 Dividend payout (%) 41.5 95.1 54.8 31.4 47.3 16.6 20.7 18.6
PER (x) High (x) 25.4 35.3 25.9 15.7 26.5 8.3 10.3 9.3 Low (x) 17.2 25.6 18.7 9.7 17.1 4.5 5.7 5.1 PBR (x) High (x) 1.2 0.8 0.9 1.0 1.3 1.2 1.1 1.0 Low (x) 0.8 0.6 0.7 0.6 0.9 0.6 0.6 0.5 PCFR (x) High (x) 5.0 4.4 5.1 4.5 5.4 3.6 3.9 3.7 Low (x) 3.4 3.2 3.7 2.8 3.5 2.0 2.1 2.1 EV/EBITDA (x) 6.4 7.1 7.1 6.3 4.7 4.8 4.5 4.2 Market cap 756.3 565.7 719.1 771.6 1,012.9 903.1 903.1 903.1 Net debt 1,003.4 987.8 1,007.9 1,239.6 1,151.0 1,170.7 1,137.5 1,105.9 EBITDA 276.3 219.7 242.0 316.9 460.4 430.0 455.0 475.0 Dividend yield 1.9 3.1 2.5 2.5 2.2 2.6 2.6 2.6
ROE (%) 4.6 2.3 3.8 6.5 4.9 14.5 10.8 11.1 Sales/net profits (%) 1.1 0.6 0.9 1.7 1.2 4.3 3.3 3.6 Total assets turnover (x) 1.0 0.9 1.0 0.8 0.9 0.8 0.8 0.8 Financial levelege 4.1 4.1 3.9 4.4 4.4 4.0 3.9 3.6 ROCE（%） 4.5 2.9 3.9 5.4 4.2 10.1 7.9 8.2 Profit before interests after tax 51.3 33.6 48.6 78.5 65.7 163.0 135.0 148.0 Capital in use 1,129.5 1,174.1 1,259.1 1,451.7 1,571.6 1,614.0 1,718.3 1,814.4
Shareholders' equity/total assets (%) 24.3 24.7 25.9 22.7 23.0 24.7 26.0 27.8 D/E ratio (x) 1.5 1.5 1.4 1.6 1.6 1.4 1.3 1.2 Net D/E ratio (x) 1.3 1.2 1.1 1.3 1.2 1.2 1.1 0.9 OP/interest costs (x) 8.3 6.0 6.7 9.4 14.5 11.4 12.3 13.2
Source: Company data, Credit Suisse estimates
Mitsubishi Chemical (4188)9 16 December 2016
Companies Mentioned (Price as of 15-Dec-2016) Mitsubishi Chemical (4188.T, ¥781, OUTPERFORM, TP ¥1,030) Mitsubishi Chemical Corporation (Unlisted) Mitsubishi Plastics (Unlisted) Mitsubishi Rayon (Unlisted) Mitsubishi Tanabe Pharma (4508.T, ¥2,234) Taiyo Nippon Sanso (4091.T, ¥1,360) For other companies mentioned see Figures 4
Disclosure Appendix Analyst Certification I, Masami Sawato, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Mitsubishi Chemical (4188.T)
4188.T Closing Price Target Price Target Price Closing Price 4188.T Date (¥) (¥) Rating 1,150 21-Jan-14 470 530 N 14-Apr-14 406 490 12-May-14 403 520 900 10-Oct-14 511 600 09-Mar-15 700 900 O 650 23-Jun-15 797 1,000 14-Sep-15 654 1,030 400 15-Jun-16 499 820 01- Jan- 2014 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 * Asterisk signifies initiation or assumption of coverage. N EU T RA L O U T PERFO RM
3-Year Price and Rating History for Mitsubishi Tanabe Pharma (4508.T)
4508.T Closing Price Target Price Target Price Closing Price 4508.T Date (¥) (¥) Rating 2,300 11-Mar-14 1,536 1,400 N 20-Nov-14 1,821 1,800 2,100 02-Mar-15 2,058 2,100 1,900 15-Sep-15 2,166 2,200 1,700 03-Dec-15 2,142 2,100 31-May-16 1,863 2,000 1,500 10-Nov-16 2,081 2,100 1,300 * Asterisk signifies initiation or assumption of coverage. 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017
N EU T RA L The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.
Mitsubishi Chemical (4188) 10 16 December 2016
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Mitsubishi Chemical (4188.T) Method: We base our ¥820 target price for Mitsubishi Chemical Holdings using an implied FY3/18 P/E of 12x derived from an SOTP valuation (Electronics applications 9.8x, Designed materials 9.8x, Health care 25x, Chemicals 8.4x, Polymers 8.2x) applied to forecast EPS of ¥68.3. We assign our 12x valuation multiple in the expectation that it will rise from the current level as the profit weighting increases for added- value products with high margins and high market expectations, including environment-friendly and energy-saving products. We also expect valuations for the sector will rise as the three Japanese integrated chemical majors' earnings look to come in above the targets set out in their new medium-term business plans, and that the market will take a more favorable view of the petrochemicals business. We base our OUTPERFORM rating on our expectations for total returns and comparisons with our coverage universe over the next 12 months. Risk: Risks to our ¥820 target price and OUTPERFORM rating for Mitsubishi Chemical Holdings include sliding margins on terephthalic/methyl methacrylate (MMA)/other products, yen strengthening.
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 (4188.T, 4508.T) within the next 3 months.
Mitsubishi Chemical (4188) 11 16 December 2016
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Mitsubishi Chemical (4188) 12 16 December 2016
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Mitsubishi Chemical (4188) 13