NGK Insulators (5333) 12M-Fwd PER Simple Average 20.0 +1 St-Dev., 27.5 -1 St

23 June 2016 Asia Pacific/Japan Equity Research Auto Parts & Equipment (Auto Parts (Japan)) / MARKET WEIGHT

NGK Insulators (5333 / 5333 JP) Rating OUTPERFORM* Price (22 Jun 16, ¥) 2,241 INITIATION

Target price (¥) 3,000¹ Chg to TP (%) 33.9 Market cap. (¥ bn) 720.66 (US$ 6.90) Reemphasizing the strength of auto ceramics; Enterprise value (¥ bn) 740.22 Number of shares (mn) 321.58 initiate at OUTPERFORM Free float (%) 65.0 52-week price range 3,335 - 1,831 ■ Action: We initiate coverage of NGK Insulators with a ¥3,000 target price *Stock ratings are relative to the coverage universe in each (potential return 33.9%) and an OUTPERFORM rating. We focus on the analyst's or each team's respective sector. ¹Target price is for 12 months. company's automotive ceramic substrates in expectation of stricter automotive emissions regulations driving demand growth. Research Analysts Koji Takahashi ■ Investment case: We expect the trend toward tighter emissions regulations 81 3 4550 7884 to support growth in profits centered on automotive ceramic substrates. [email protected] Profits could rise sharply over the medium to long term as an increased Masahiro Akita 81 3 4550 7361 attachment rate for ceramic substrates and increased use of gasoline [email protected] particulate filters (GPFs) in gasoline-powered vehicles offsets automakers’ reduced use of diesel engines. The automotive ceramic substrates market has high entry barriers and few participants, which compared with other auto parts implies much greater growth potential driven by wider marketing and higher attachment rates. We think guidance for a forex-induced decline in FY3/17 profits is already priced in and therefore see valuations poised for renewed expansion. We think now is the time to invest in view of the strong long-term profit prospects and initiate coverage at OUTPERFORM. ■ Risks: (1) A drop in global demand for autos/commercial vehicles, (2) delay in introduction of emissions standards (3) earnings deterioration in electronics, (4) delayed improvement in insulator profits, and (5) a stronger yen. ■ Valuation: We base our TP on FY3/17E EPS of ¥153.7 and a P/E of 19.8x, the high end of the range on 12-month forward consensus since 2013.

Share price performance Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 435.8 421.9 450.6 497.5 4000 120 Operating profit (¥ bn) 80.9 67.0 70.8 82.1 3000 110 Recurring profit (¥ bn) 81.5 68.0 71.8 83.1 2000 100 Net income (¥ bn) 53.3 48.9 52.4 61.6 1000 90 EPS (¥) 163.3 153.7 164.7 193.6 0 80 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 149.1 163.9 183.5 The price relative chart measures performance against the EPS growth (%) 28.4 -5.9 7.2 17.6 TOPIX which closed at 1284.61 on 22/06/16 P/E (x) 12.7 14.6 13.6 11.6 On 22/06/16 the spot exchange rate was ¥104.5/US$1 Dividend yield (%) 1.8 1.8 1.9 2.0 EV/EBITDA(x) 6.2 7.7 7.3 6.4 Performance over 1M 3M 12M P/B (x) 1.7 1.6 1.5 1.3 Absolute (%) -4.4 10.7 -31.7 ROE(%) 13.3 11.5 11.3 12.2

Relative (%) -0.4 15.8 -8.3

Net debt/equity (%) net cash 4.4 4.3 2.8 Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

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

23 June 2016

Key charts

Figure 1: Global auto engine projections by type: Figure 2: New market opening up with GPF for GDI Expecting diesel to decrease, GDI to increase 100% 0.6% (mn) Total gasoline-related ceramic substrate market opportunity (volume) 2.0% 3.3% xEV (total): +7.4%pt 6.7% 120 90% Pure EV GPF (for GDI w/in gasoline) 80% Honeycomb (Gasoline = PFI+GDI) HEV/PHEV 100 70% 55% 31% Gasoline (PFI) 60% Gasoline (PFI): -24%pt 80 Gasoline (GDI) 50% 60 Diesel 40% Gas (GDI): +24%pt 46% 30% 22% 40

20% 20 10% 20% Diesel: -8%pt 12%

0% 0

CY2019 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2020 CY2021 CY2022 CY2023 CY2024 CY2025

Figure 3: Market forecast for ceramic substrates: Expecting growth in GPFs for gas engines, while increasing value and installations for diesel

Source: Company data, Credit Suisse estimates

Figure 4: Average attachment rate of ceramic substrates Figure 5: Offsetting decrease in diesel volume with higher to increase as emission regulations become stricter attachment rate and new sales to gasoline vehicles Total industry: Ceramic substrate vol / Vehicle vol ratio (mn) LV ceramic substrate market opportunity estimate (pieces) (i.e. Attachment rate) 1.40x GPF (for GDI w/in gasoline) 160 1.31x 1.31x 147mn 1.30x Honeycomb (Gasoline = PFI+GDI) 10-yr CAGR: 5% 1.28x 1.30x 140 1.24x Diesel SCR 1.19x 120 Diesel DOC 1.20x DPF (EM) 1.12x EM growth phase 100 88mn DPF (DM) 1.10x 1.06x 80 1.00x 0.98x 60 1.00x 0.94x 0.95x 0.95x 0.92x 0.93x 0.94x DM growth phase 40 0.90x 20

0.80x 0

CY2016 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2017 CY2018 CY2019 CY2020 CY2021 CY2022 CY2023 CY2024 CY2025

CY2020 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 CY2021 CY2022 CY2023 CY2024 CY2025 CY2010 Source: Company data, IHS, Credit Suisse estimates Source: Company data, IHS, Credit Suisse estimates

NGK Insulators (5333 / 5333 JP) 2 23 June 2016 Investment opinion Initiate coverage at OUTPERFORM Operating environment favorable; ceramic substrates set for further profit growth We initiate coverage of NGK Insulators with a ¥3,000 TP and an OUTPERFORM rating. Profits look poised for further growth centered on automotive ceramic substrates. Environmental regulations are heavily influencing trends in automotive technology and, in our view, stricter emissions regulations represent a growth opportunity for NGK in view of its specialization in emission purification components. We expect emissions regulations to be strengthened in parallel with CO2 (fuel efficiency) regulations; as improving fuel economy in internal combustion engines (ICEs) tends to worsen some aspects of their emission performance, we expect automakers to make increased use of ceramic substrates in an effort to avoid any tradeoff between the two. We expect this to drive strong growth in demand. We therefore think the environment surrounding automotive ceramic substrates looks highly favorable, and we expect NGK to benefit as follows. Cultivating new markets with GPFs Profits could benefit as the use of particulate filters expands from diesel-powered vehicles to gasoline-powered. Automakers have been making increased use of gasoline direct injection (GDI) as a means of boosting fuel economy, and we anticipate increased demand for GPFs to counter the resulting increase in particulate matter (PM). The Euro 6c regulations coming in September 2017 include stricter PM rules for gasoline engines, and this could support medium-term expansion in the company's operations. While we expect automakers to reduce their use of diesel engines particularly in compact models—a result of the high cost of emissions processing systems—we look for this to be offset by increased use of GPFs in GDI vehicles. Diesel-related products could hold up even amid falling demand for diesels We think stricter emissions regulations could also support increased installation of ceramic substrates in diesel-powered vehicles and drive performance improvements (added value). Automakers could reduce their use of diesel engines centered on compact models due partly to Volkswagen’s recent emissions scandal but also to the high cost of emission after-treatment systems. However, we expect diesel engines to remain popular for use in commercial vehicles and large passenger cars and think NGK could accordingly see an increase in per-vehicle sales of exhaust ceramics. We also see scope for higher attachment rates in emerging markets as they catch up with emissions standards in developed markets. In addition, we look for the company to show particular strength in supplying GPFs for GDI engines in compact models shifting from diesel. In view of the above, we think NGK's current share valuations offer a prime investment opportunity. Medium-term business image NGK Insulators' main business segments are ceramics, electronics, and power, with ceramics—which includes automotive ceramic substrates—accounting for a full 58% of consolidated sales and 87% of OP. The company as a waypoint for their sales expansion through FY3/21, targets a 30% weighting in FY3/18 for new products including the ceramics segments’ GPFs as well as DPFs (diesel particulate filters) tailored to the new emissions standards. We forecast the sales in FY3/21 to hit above ¥550bn level. We think an operating environment conducive to these is steadily taking shape.

NGK Insulators (5333 / 5333 JP) 3 23 June 2016

Figure 6: Segment breakdown (FY3/16) Figure 7: Ceramics generates more than half of revenue (FY3/16) Revenue Segment Products Contribution Honeycomb/Catalyst Carriers 18.6% Honeycomb, Cd-DPF/Large Catalyst Carrier 16.4% 18.6% Ceramics Sic-DPF 10.1% Electronics, NOx Sensor 7.4% 23.3% Cd-DPF/Large Industrial Process 5.0% Ceramics, 57.6% Conv., 16.4% Electronic Components 7.8% SPE 8.4% Sic-DPF, 10.1% Electronics Power, 19.2% Metals (Beryllium Copper) 4.6% NOx Sensors, 7.4% Soshin Electric 2.5% Ind. Process, Domestic Insulators 7.8% 5.0% Power Overseas Insulators 5.3% NAS Batteries 6.0% Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 8: Ceramics contributes nearly 90% of OP (FY3/16) Figure 9: Targeting high sales growth with new products 600 bn JPY 50% Power, 3.2% Electronics, 45% 500 9.5% 40% 35% 400 30% 25% 30% 300 20% 25% 15% 20% 200 15% Ceramics, 87.3% 10% 100 5% 0 0% FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/21E Power segment (LHS) Electronics segment (LHS) Ceramics segment (LHS) New Product Contribution (RHS)

Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimate

NGK Insulators (5333 / 5333 JP) 4 23 June 2016 Ceramic substrates' growth potential Industry analysis Increasingly stringent auto emissions standards and measurement methods The regulatory environment with respect to automotive emissions is changing dramatically as environmental consciousness grows. Emissions regulations can be broadly divided into two categories: (1) those aimed at reducing nitrogen oxides (NOx) and PM as exemplified by Europe's Euro standards, the US's tier standards, and Japan's post new long-term standards and (2) CO2/fuel efficiency regulations, exemplified by national fuel efficiency standards. Emissions regulations are aimed at reducing NOx, hydrocarbons (HC), carbon oxides (CO), and PM found in automotive emissions as byproducts of internal combustion. In Europe, the Euro 6c standard, aimed at tightening regulation of GDI engines' PM emissions, is scheduled to take effect in September 2017 as a follow-up to Euro 6a, which took effect in September 2014. Europe has been the leader in setting standards for CO2 emissions and fuel efficiency. Other countries are following its lead, continually tightening their CO2 emissions and fuel efficiency standards. However, the tradeoff between fuel efficiency and emissions is an inherent property of ICEs, but automakers are under pressure to develop powertrains that meet both fuel efficiency and emissions standards without sacrificing one for the sake of the other. As it is thought that compliance with ever more stringent standards cannot be met by improvement in ICEs alone, we expect to see increasing importance placed on after-treatment technologies to purify/filter emissions.

Figure 10: EU/US/Japan introduction of regulations 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 … 2025

EU EURO5 EURO6a/b EURO6c EURO7(?)

PM Mass 5.0mg/km 4.5mg/km 4.5mg/km Diesel PM Count - 6 x 10^11 /km 6 x 10^11 /km Under Study PM Mass 5.0mg/km 4.5mg/km 4.5mg/km Gas (DI) PM Count - 6 x 10^12 /km 6 x 10^11 /km LEV3 - US LEV2 LEV3 -Step2 LEV3 -Step3 Step1

Diesel PM Mass Step Decrease All Vehicles 10.0mg/mile 6.0mg/mile 1mg/mile ： Gas (DI) PM Mass Target 3.0mg/mile 3.0mg/mile

Japan Post New Long Term Next Post New Long Term

Diesel PM Mass 5.0mg/km Under Study Gas (DI) PM Mass 5.0mg/km Source: Company data, Marklines, Credit Suisse

NGK Insulators (5333 / 5333 JP) 5 23 June 2016

Figure 11: CO2 target in major auto markets Figure 12: Combustion in ICEs creates tradeoff between

CO2 and emitted gas CO2 g/km Fuel 3-way 170 Air / Fuel Ratio Temp. CO HC NOx Econ Catalyst 160 150 148 More Air 136 Lean Burn Low Low High Good Inefficient 130 130 116 114 110

Stoich Operating 95 93 Stoichiometry Low Low Mid Normal 90 Env 89 78 74 70 68

50 Rich Burn More Fuel High High Low Worse Inefficient

China U.S. Japan EU Source: Nikkei Automotive, Credit Suisse Source: ICCT, Credit Suisse In addition to the ongoing tightening of emissions and fuel-efficiency standards, regulators are also looking into more stringent approaches to measuring fuel efficiency and emissions. Regulatory authorities globally are working on formulating testing conditions that are a closer approximation of actual driving conditions in order to rectify discrepancies between test-cycle measurements and emissions and fuel efficiency under actual driving conditions, a problem highlighted by the recent VW scandal. Most notably, the UN Economic Commission for Europe (UNECE) is promoting adoption of a Worldwide Harmonized Light Duty Test Cycle (WLTC) based on highly effective standards that better replicate actual driving conditions. Europe has decided to adopt WLTC in September 2017, Japan in 2018. Other countries looking at adopting WLTC include the US, China, Germany, and Korea. Regulatory authorities are also considering adoption of real driving emission (RDE) testing to supplement WLTC bench testing. Unlike WLTC, in which fuel efficiency and emissions are measured over predetermined cycles by a test bench, RDE tests measure fuel efficiency and emissions performance of test vehicles by having them actually driven on the road. Some tests have already showed large differences in emissions between conventional test cycles and on-road driving. Adoption of WLTC and RDE testing that aims to replicate actual driving conditions will therefore likely drive additional growth in demand for automotive emission control technologies. For details on emission regulations and test cycles and analysis of related products, please refer to our connection series report issued on 15 April 2016, Automotive technology insights: "Really Demanded Equipment" for RDE.

Figure 13: NOx emission comparison between bench test Figure 14: PM emission comparison between bench test and actual driving and actual driving 500 NOx emissions mg/km 8.00E+11 PN emissions #/km 7.00E+11 400 6.00E+11

5.00E+11 300 4.00E+11

3.00E+11 200 2.00E+11

100 1.00E+11

0.00E+00 NEDC WLTP NEDC WLTP PEMS PEMS EURO6 0 Limit NEDC WLTC RDE Euro 6 NEDC WLTC RDE Euro 6 PEMS Limit PEMS Limit GAS Test Vehicle DIESEL DIESEL DIESEL Test Test VehicleTest Vehicle GAS Test Vehicle DIESEL Test Vehicle Vehicle 1 2 3 Source: AECC, Credit Suisse Source: AECC, Credit Suisse

NGK Insulators (5333 / 5333 JP) 6 23 June 2016

Figure 15: Regulation and test cycle introduction timeline in major auto markets Regulation/ Region 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Test Standards Emission New Long Term Standards Post New Long Term Standards Next Term Standards Regulation Japan Test Mode 10/15Mode + 11 Cycles JC08 WLTC

Emission EURO4 EURO5 EURO6b EURO6c/d-Temp Regulation EU Test Mode NEDC (Urban + EUDC) NEDC (Revised Urban + EUDC) WLTC + RDE

Emission EPA Tier2 Tier3 U.S. Regulation (EPA) Test Mode FTP-75

Emission LEV II LEV III U.S. Regulation (CARB) Test Mode FTP-75

Emission China II China III China IV China V China Regulation (National) Test Mode NEDC

Emission China II China III China IV Beijing V Beijing VI China Regulation (Beijing) Test Mode NEDC FTP-75

Source: ICCT, Nikkei Automotive, Credit Suisse After-treatment technologies to comply with stricter standards Technologies aimed at improving vehicles' environmental performance are set to increase in importance in the wake of tightening of emissions standards and adoption of WLTC/RDE. Automakers will likely place more priority on increasing fuel efficiency with technologies that reduce vehicle weight or improve ICEs' efficiency. Given the aforementioned tradeoff between ICE fuel efficiency and emissions performance, improving fuel efficiency in ICEs will require after-treatment technologies to separately treat the constituent substances of these emissions. The main regulated substances in automotive emissions are CO, HC, NOx, and PM. The first three are compounds generated by combustion of organic matter (fuel in the case of vehicle emissions). Whether fueled by gasoline or diesel, ICEs emit CO, HC, and NOx, which are all efficiently purified from automotive emissions by three-way catalytic converters installed in nearly all of today's gasoline-fueled vehicles. These catalytic converters use ceramic honeycombs to hold powdered catalysts. The honeycomb shape increases catalytic conversion efficiency by substantially increasing specific surface area. While three-way catalytic converters are known to simultaneously remove CO, HC, and NOx from emissions, their performance drastically decreases as an engine's air/fuel ratio varies from the stoichiometric mixture of 14:1. Catalytic converters' effectiveness is thus diminished in diesel engines with oxygen-rich emissions and lean-burn gasoline engines. Diesel engines and some lean-burn gasoline engines are therefore equipped with oxidation catalytic converters (also known as two-way catalytic converters), which purify HC and CO from emissions while NOx is reduced by a separate method. Oxidation catalytic converters likewise incorporate ceramic honeycombs. Methods of separately reducing NOx from emissions include lean NOx traps (LNT) and urea selective catalytic reduction (SCR), the latter of which selectively reduces emissions of NOx, as its name implies. As a NOx-absorptive catalyst, the LNT first absorbs NOx by oxidizing it in a lean-burning environment and then using HC and CO as reactants to

NGK Insulators (5333 / 5333 JP) 7 23 June 2016 regenerate in a reductive (fuel-rich) atmosphere. Urea SCR in contrast uses ammonia to selectively reduce NOx. Although it purifies NOx from emissions more efficiently than LNT, urea SCR is costlier, bulkier, and structurally more complex, partly because it requires a separate system including a urea tank. Urea SCR's adoption in small diesel vehicles entails challenges that have yet to be resolved, but as emissions standards become stricter urea SCR will likely be increasingly used in large diesel vehicles as an efficient NOx reduction system. PM consists of impurities such as soot and embers generated by fuel combustion in ICEs. Like CO, HC, and NOx, PM emissions are also regulated. PM is removed from emissions by ceramic filters installed in vehicles' exhaust lines. Demand for such filters, virtually the only product that directly removes PM from automotive emissions, is projected to continue growing. Many diesel engines are already equipped with such ceramic filters because of the high PM content in their emissions, but the filters will likely see future use in vehicles with GDI engines. GDI engines are more fuel-efficient than conventional port fuel-injection (PFI) engines but generate more PM as a byproduct of combustion. Accordingly, we expect demand for gasoline particulate filters (GPF) that collect PM to grow as GDI engines rise in prevalence to improve fuel efficiency.

Figure 16: Major after-treatment products for auto emissions

Applicable Emission Aftertreatment Components PRO CON CO HC NOx PM

3-Way Catalyst ○ ○ ○ - High purification performance - Effective only under stoich.

DOC (Diesel - High purification performance ○ ○ - Almost no effect against NOx and PM Oxidation Catalyst) - Less complex

DPF ○ - Efficient filtration method against PM - Requires regeneration (for Diesel)

GPF ○ - Efficient filtration method against PM - Requires regeneration (For Gas)

- Treats NOx separately from DOC - Lower efficiency than SCR LNT ○ - Smaller sized than SCR - Requires fuel spike to purify - Lower cost than SCR

- Treats NOx separately from DOC - Requires separate Urea system SCR ○ - Highly purification performance - Complex system and size - No direct fuel efficiency impact - Higher cost than LNT

Source: Mitsubishi Motor, Toyota Motor, from NGK Insulator company website, Credit Suisse Market outlook by engine type Since 2000, global auto production has generally continued to grow about 5% annually. Meanwhile, global auto production's breakdown by engine type has changed substantially in the wake of the trend toward electric vehicles since the Toyota Prius's advent in 1997, and growth in GDI engines and diesel passenger vehicles in pursuit of better fuel efficiency. In the future, we anticipate distinct divergences in production growth rates by engine type, especially for diesel vehicles, in response to increasingly stringent regulations and the recent VW scandal. Specifically:

■ PFI vehicles: We expect production to decrease both in absolute terms and as a share of total production as PFI engines are supplanted by GDI engines and/or EVs.

■ GDI vehicles: We expect production to increase in both absolute terms and as a share of total production as GDI engines supplant PFI engines by virtue of their fuel- efficiency and cost advantages. Production of GDI vehicles will likely increase as a

NGK Insulators (5333 / 5333 JP) 8 23 June 2016

replacement for small diesel passenger vehicles not compatible with emissions after- treatment.

■ Diesel vehicles: Production will likely decrease, mainly in the compact passenger vehicle segment, driven largely by challenges in emissions after-treatment. Diesel engines will likely continue their wide use in commercial vehicles with high-torque requirements. They will likely continue to see use in large passenger vehicles also by virtue of their superior fuel efficiency.

■ Electric-powertrain vehicles: Electric powertrains include a variety of technologies, including hybrids (mild, full, and plug-in varieties) as well as purely electric vehicles. We expect such vehicles' production to increase, mainly in the passenger vehicle segment, in both absolute terms and as a share of production. From a power efficiency standpoint, we see little prospect of growth in electric-powertrain usage in large commercial vehicles.

Figure 17: Performance difference between diesel/gas Figure 18: Future outlook of each engine type Gasoline Powertrain Gasoline Port Fuel Diesel Type Direct Injection Fuel / Power source Gasoline Diesel Electric Injection

CO2 High Med Low Port Fuel Gasoline Direct- Engine system Diesel xEV Injection (PFI) Injection (GDI) Emission NOx Low Low High Performance

Most common More cost / fuel- Includes HEV, Description Fuel-efficient PM Low High High gasoline engine efficient gasoline PHEV, EV

Characteristic High Rev High Torque

Mid/Full sized PV Market growth Applicable Vehicles Small/Mid/Full sized PV Commercial Vehicles Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates

Figure 19: Global auto forecast by engine type Figure 20: Global sales volume per engine type (mn) 100% 0.6% 2.0% 3.3% Pure EV 30% xEV (total): +7.4%pt 6.7% 120 110 111 112 90% HEV/PHEV 108 109 Pure EV 104 106 25% 99 102 Gasoline (PFI) 96 80% 100 92 HEV/PHEV Gasoline (GDI) 20% 87 70% 55% 31% Diesel 81 83 74 77 15% Gasoline (PFI) 80 Total YoY% Gasoline (PFI): -24%pt 70 67 60% 64 67 61 59 10% Gasoline (GDI) 56 57 58 50% 60 54 5% Diesel 40% Gas (GDI): +24%pt 0% 46% 40 30% 22% -5% 20% 20 -10% 10% 20% Diesel: -8%pt 12%

0 -15% 0%

CY2011 CY2000 CY2001 CY2002 CY2003 CY2004 CY2005 CY2006 CY2007 CY2008 CY2009 CY2010 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 CY2020 CY2021 CY2022 CY2023 CY2024 CY2025

CY2001 CY2010 CY2019 CY2002 CY2003 CY2004 CY2005 CY2006 CY2007 CY2008 CY2009 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2020 CY2021 CY2022 CY2023 CY2024 CY2025 CY2000 Source: Company data, IHS, Credit Suisse estimates Source: Company data, IHS, Credit Suisse estimates Demand outlook for automotive ceramic substrates In light of the emissions and fuel efficiency regulations and prospective growth in vehicle production by engine type, as discussed above, we expect demand for key ceramic emissions control products to increase. As noted in the discussion on regulations, ceramic products will likely increase in importance as an after-treatment technology to reduce regulated gases, whose emissions are inversely related to fuel efficiency as noted above. Accordingly, instead of being proportionate to growth in the overall auto market, we expect unit growth in ceramic substrates to be driven by these products' increasing prevalence in new vehicles in both developed and emerging markets. Even in the case of products in markets with limited unit growth potential (e.g., diesel vehicles), the performance, average

NGK Insulators (5333 / 5333 JP) 9 23 June 2016 size, and added value (e.g., addition of SCR) of ceramic substrates will likely continue to increase in order for vehicles to comply with stricter regulations. Although we anticipate diminished demand for diesel vehicles, particularly compact diesel vehicles, NGK will likely benefit from expansion of new products such as GPFs in conjunction with migration to GDI engines, and acceleration of SCR adoption in larger vehicles.

Figure 21: Analysis of future growth for each segment of ceramic substrates

Source: Company data, Credit Suisse estimates While production of the various forms of electrified vehicles (xEV) will likely continue to grow rapidly, near-term growth at a scale sufficient to threaten ceramic emission control technologies is not a realistic scenario in our opinion. Hybrid vehicles, which are equipped with both an ICE and electric powertrain, will continue to require catalytic converters. Even if emission-free electric vehicles' share of auto production increases substantially, the impact of such growth would likely be offset by a greater share of vehicles equipped with ceramic emission control devices. For example, the table below presents estimates of the impact of hypothetical growth in xEV vehicles' market share to 20% and 30% as of 2025. Even under these hypothetical scenarios, we would not expect demand for ceramic emissions control products to decrease in absolute unit terms.

Figure 22: EV to take time to reach 30% market share due to issues including capacity bottlenecks 20% xEV market share in 2025 equates to… 30% xEV market share in 2025 equates to… 21 mn electrified vehicles 32 mn electrified vehicles 9 times the total xEV sales volume in 2015 13 times the total xEV sales volume in 2015 21 times Tesla's '20 target EV sales volume (1mn) 32 times Tesla's '20 target EV sales volume (1mn) 360 GWh in LiB demand 540 GWh in LiB demand 7 times the total global LiB production in 2015 10 times the total global LiB production in 2015

1.1 times global Lithium Carbonate capacity 1.5 times global Lithium Carbonate capacity Source: Company data, Credit Suisse estimates

NGK Insulators (5333 / 5333 JP) 10 23 June 2016

Figure 23: Demand volume matrix for ceramic substrates Total Ceramic Year in which xEV reaches Y-axis market share substrate market size (mn units) CY20 CY21 CY22 CY23 CY24 CY25

15% 109 116 123 128 132 135

20% 100 107 112 117 121 124

25% 91 97 102 107 110 113

30% 82 87 92 96 99 101 market sharemarket xEVcombined 35% 73 78 82 86 88 90

40% 65 70 74 77 79 82 2015-2016 average market size: 91mn units BLUE shaded cells = total substrate market volume greater than 2015-2016 market size RED border cells = combination of xEV share & year shown in previous charts x Source: Company data, Credit Suisse estimates GPF demand growth, new market emergence Stronger PM regulations and GDI engine growth mean rising GPF demand With fuel efficiency standards tightening year by year, the gasoline car market continues to shift toward more efficient GDI engines. GDI engine volume has increased 17x over the past 10 years, and we expect growth rates to remain high. GDI engines, however, also have a drawback—higher PM emissions. Improving fuel economy while also keeping pace with tightening emission regulations therefore means including additional mechanisms for physically removing PM from the emission stream. The Euro 6c regulation going into effect in September 2017 tightens PM standards on GDI engines. In meeting these requirements, we expect automakers to take on increased adoption of GPFs, similar to the PM collection filters currently used with diesel engines (DPFs). No current mass production vehicle includes a GPF, but we expect these to enter the market in the run-up to Euro 6c.

Figure 24: GDI effective in improving CO2 emissions Figure 25: GDI volume on an uptrend GDI fuel economy improvement over PFI (concept) (mn) (PFI fuel economy = 100) 30 70% 100 GDI volume YoY% GDI % share of mkt 100 60% ~85 25

34% CAGR (2010-2016) 50% 80 20 ~15% fuel economy improvement from switch 40% 60 from PFI to GDI 15 30% 10 40 20%

5 10% 20 0 0%

Conventional PFI Turbocharged GDI

CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2010 Source: Company data, Credit Suisse Source: Company data, IHS, Credit Suisse estimates

NGK Insulators (5333 / 5333 JP) 11 23 June 2016

Figure 26: PM emission study using US GDI vehicle Figure 27: NIES study of PM emissions using domestic samples GDI vehicles Unit: PM emission numbers（Particulate Numbers/km) Unit: mg/mile Black Carbon (PM) Mass Emission 7E+12 8 EURO Gas PM 7 6E+12 Regulation Limit 2014- 6 5E+12 5

4 4E+12 US LEV3 2017 3 Target 3mg/mile 3E+12 2

1 2E+12 0 EURO Gas PM 1E+12 US06 Test Cycle Federal Test Federal Test Regulation Limit 2017- (48mph) Procedure Phase 3 Procedure Phase2 (26mph) (16mph) 0 Japan Domestic PFI Gas Japan Domestic DI Gas EU DI Gas Vehicle Gas DI sample1 Gas DI sample2 Vehicle Vehicle

Source: Green Car Congress, MECA, Credit Suisse estimates Source: Company data, NIES, Credit Suisse estimates The GPF market is new, but the product design and materials are close to those of existing cordierite honeycomb DPFs. As a result, manufacturing costs may well be kept to relatively reasonable levels even though R&D costs and capex are still required. Since such filters are basically the only physical mechanisms for efficiently removing PM and are also a comparatively economical option, this market could grow rapidly. NGK Insulators and Corning are virtually the only companies making cordierite honeycomb for passenger car part use, and they are also the only two to so far have declared intent to enter the cordierite GPF market. We expect NGK to maintain its high market share and thereby secure high sales growth. We also expect the emergence of the GPF market to more than cover declines in compact diesel vehicles.

Figure 28: Basic structure of GPF/DPF Honeycomb structure Exhaust gas inflowFilter walls to deposit (filter) PM Purified exhaust gases

Source: Company data, Credit Suisse

NGK Insulators (5333 / 5333 JP) 12 23 June 2016

Figure 29: Price comparison for GPF Figure 30: Forecast for ceramic substrates for gas vehicles (volume) (USD) (mn) Total gasoline-related ceramic substrate market opportunity (volume) GPF vs DPF ASP comparison 100 120 GPF (for GDI w/in gasoline) Honeycomb (Gasoline = PFI+GDI) 100 80 GPF: $40-$100 (expected) DPF: avg. around $70

60 60 Roughly comparable price range

40 40

20 20

GPF price DPF price

CY2019 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2020 CY2021 CY2022 CY2023 CY2024 CY2025 CY2010 Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 31: GPF market forecast (volume) Figure 32: GPF market forecast (value) (mn units) GPF substrate market forecast (volume) (bn USD) GPF substrate market forecast (value) 60 2.5 2.2 49.8 2.1 50 47.0 2.0 2.0 43.7 1.8 38.7 40 1.6 32.7 1.5 1.3 30 25.6 1.0 0.8 20 16.6 0.5 9.4 0.5 10 2.9 0.15 0.0 1.1 0.0 0.06 0 0.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Start of GPF adoption assumption: EU (2H16-) + JP (2H17-) + NA (2H17-) + CH (2H20-) + Other (2H22-) Start of GPF adoption assumption: EU (2H16-) + JP (2H17-) + NA (2H17-) + CH (2H20-) + Other (2H22-) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Diesel vehicle ceramics demand Demand for diesel ceramic substrates should hold steady While unit volume declines are most likely inevitable in diesel compact cars, where it is difficult to install complex after-treatment systems, we do not expect the entire diesel vehicle market to go away. SCR systems for NOx purification are costly ($500–1,000 or more), and space limitations are also an issue, which supports the view that diesel is facing rising obstacles in the compact car segment. These challenges are less severe, however, in the luxury class and with larger passenger cars. Moreover, diesel market share is unlikely to be shaken in commercial vehicles, with their higher torque requirements. Even if unit sales of diesel vehicles decline, should most of that decline occur in compact cars, the total average diesel displacement level could nevertheless rise. In that case, DPF unit volume could decline in proportion to vehicle numbers, but DPF capacity (size/volume) would likely rise in proportion to total diesel displacement level. This could lead to positive changes in the product mix. In addition, a rise in adoption rates for SCR systems, which are currently installed on only some passenger cars, could also counter the overall decline in diesel vehicle numbers and end up being a positive factor. Such a rise in SCR system adoption rates could also spur volume growth in ceramic NOx sensor sales. Finally, DPF adoption could rise still further to the extent that emerging markets follow mature market regulators in diesel vehicle emission standards. In this light, we expect the business climate for NGK Insulators to remain favorable. Numerous positive factors include its high share in large diesel vehicles, the NOx sensors

NGK Insulators (5333 / 5333 JP) 13 23 June 2016 in its product lineup, and its being positioned to cover declines in diesel compact cars by moving into the GPF market.

Figure 33: Diesel market segments (2015) Figure 34: Forecast for diesel ceramic substrates (volume) (mn) 40 Others A Segment B Segment 10% 6% 14% 35

E Segment 30 9% 25

Segments at risk 20 of shrinking / disappearing 15

D Segment 5 24% C Segment

37% 0

CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 CY2020 CY2021 CY2022 CY2023 CY2024 CY2025 DPF (DM) DPF (EM) Diesel DOC Diesel SCR Source: IHS, Credit Suisse Source: Company data, Credit Suisse (estimates from 2016) Emission control ceramics market share forecasts The ceramic substrates market includes a limited number of major players with high market shares. Although there are some new entrants, the entry pace is slow. Technical barriers to entry are quite high due to the need to develop products capable of both achieving the high heat and shock resistance characteristics needed for automobile exhaust systems while also pushing the limits of purification efficiency. NGK has been growing its market share within this environment, and we see that as a sign of rising competitiveness. The company also brings long years of experience in DPF technology development to its entry into the GPF market.

Figure 35: Estimated shares of ceramic substrate market Figure 36: NGK increasing its honeycomb share

Passenger vehicle Large-size Honeycomb/DPF honeycomb

Honeycomb share (2010) Honeycomb share (2015)

NGK I Corning Corning NGK I

NGK I NGK I Corning Corning Small DPF NOx Sensor NGK Other Spark Plug

Corning Ibiden

NGK I NGK I

Source: Credit Suisse estimates Source: Credit Suisse estimates Based on the foregoing, we forecast rising demand for key automotive ceramic products. We think the drivers of adoption growth will be GPF and SCR systems in mature markets in the near term and, later, rising adoption rates in emerging markets that follow the stronger emission standards of mature market regulators. Over the next 10 years, we forecast unit demand growth of just under 70% and CAGR of over 5%.

NGK Insulators (5333 / 5333 JP) 14 23 June 2016

Figure 37: Expecting higher penetration rate from 2015 to Figure 38: Average ceramic attachment rate increasing 2025 for automotive ceramic products Substrate attachment rate by product / market (DM/EM) Total industry: Ceramic substrate vol / Vehicle vol ratio (Attachment rate%) (i.e. Attachment rate) 2015 2025E 1.40x 100% 100% 1.30x 1.31x 1.31x 100% 95% 95% 95% 95% 95% 95% 95% 95% 95% 1.28x 1.30x 1.24x

80% 75% 75% 75% 75% 1.19x 1.20x 1.12x EM growth phase 60% 1.10x 1.06x

1.00x 40% 0.98x 1.00x 0.94x 0.95x 0.95x 0.92x 0.93x 0.94x 30% 20% DM growth phase 0.90x 15% 0% 0% 0% 0% 0% 0% DM EM DM EM DM EM DM EM DM EM DM EM 0.80x DPF SCR DOC NOx sensor GPF Honeycomb

Diesel Gasoline

CY2016 CY2011 CY2012 CY2013 CY2014 CY2015 CY2017 CY2018 CY2019 CY2020 CY2021 CY2022 CY2023 CY2024 CY2025 CY2010 Source: Company data, Credit Suisse estimates Source: Company data, IHS, Credit Suisse (estimates from 2016)

Figure 39: Ceramic substrates market: Forecasting CAGR of +5% (mn) LV ceramic substrate market opportunity estimate (pieces) GPF (for GDI w/in gasoline) 160 147mn Honeycomb (Gasoline = PFI+GDI) 10-yr CAGR: 5% 140 Diesel SCR 120 Diesel DOC DPF (EM) 100 88mn DPF (DM) 80

CY2020 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 CY2021 CY2022 CY2023 CY2024 CY2025 CY2010 Source: Company data, IHS, Credit Suisse (estimates from 2016)

NGK Insulators (5333 / 5333 JP) 15 23 June 2016 Earnings forecasts Negatives already reflected, volume to remain firm For FY3/17, we forecast sales of ¥421.9bn (−3.2% YoY), OP of ¥67.0bn (−17.2%), and EPS of ¥153.7 (−5.9%). Although we forecast falling earnings and sales, this is due mainly to forex, and we still see some room for upside to guidance, which currently calls for sales of ¥410bn and OP of ¥60bn. We forecast some impact from rising GPF sales starting in FY3/18 and expect sales of mainstay ceramic substrates to remain firm. A slowdown in diesel vehicle sales, mainly in Europe, would be a concern until GPF sales ramp up, but such a slowdown is not evident in recent sales trends. European diesel vehicle sales continue to be up YoY and we forecast relatively firm sales volume. We expect FY3/17 to be the short-term peak for upfront capex and thus forecast a five- year low for free cash flow. However, we also believe the consensus forecast, the share price, and the valuation each sufficiently factor in guidance for an earnings decline. The company also announced a higher dividend and share buybacks when it announced FY3/16 results. Over the long term, we expect earnings growth in automotive ceramic substrates to raise the company’s total cash flow generation ability; on that basis we again stress that now may well be a good time to buy.

Figure 40: Recent diesel sales solid in major European Figure 41: Total from four major markets in Europe, markets recent diesel sales not slowing down 40.0% 800,000 14.0% 11.7% 11.5% 12.0% 30.0% 600,000 8.5% 10.0% 8.1% 20.0% 7.5% 6.5% 8.0% 5.9% 6.1% 10.0% 400,000 6.0% 3.7% 4.0% 0.0% 2.6% 1.4% 200,000 2.0% -10.0% -1.2% 0.0%

-20.0% 0 -2.0%

France Germany Italy UK Diesel Sales (LHS) Diesel Sales YoY (RHS) Source: KBA, Credit Suisse Source: KBA, Credit Suisse Top class longer-term growth potential within the autoparts sector We anticipate a growth story from FY3/18 onward based mainly on automotive ceramic substrates. Starting in FY3/18, we forecast expanding sales of GPFs for GDI engine vehicles compliant with the Euro 6c regulation. Although ICEs' structure creates a tradeoff between emission and fuel economy, we nevertheless expect both applicable standards to be tightened in parallel, which would promote an extremely favorable business climate for NGK. Technical barriers to entry are high in this market, which has a limited number of competitors, and the gains for NGK from an expanding emission control ceramics market are therefore likely to be quite large. With this in mind, we emphasize the company's high growth potential within our auto sector coverage. We therefore forecast EPS of ¥164.7 (+7.2% YoY) for FY3/18 and ¥193.6 (+17.6%) for FY3/19.

NGK Insulators (5333 / 5333 JP) 16 23 June 2016

Figure 42: NGK segment sales forecast Figure 43: NGK segment OP forecast 600 bn JPY 70% 100 bn JPY 140% 62% 63% 126% 126% 60% 61% 62% 57% 58% 54% 60% 120% 500 52% 80 102% 97% 96% 50% 94% 93% 92% 87% 100% 400 60 40% 80% 300 40 30% 60% 200 20% 20 40%

100 10% 0 20% 11/3 12/3 13/3 14/3 15/3 16/3E 17/3E 18/3E 19/3E 0 0% 11/3 12/3 13/3 14/3 15/3 16/3E 17/3E 18/3E 19/3E -20 0% Power Electronics Ceramics %Sales Ceramics Power Electronics Ceramics %Sales Ceramics Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 44: Earnings forecast summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated Mar-16 A 435,797 15.1 80,898 31.4 81,498 33.5 53,316 28.5 163.3 28.4 Mar-17 CS E 421,900 -3.2 67,000 -17.2 68,000 -16.6 48,900 -8.3 153.7 -5.9 CoE 410,000 -5.9 60,000 -25.8 63,000 -22.7 44,000 -17.5 136.8 -16.2 IBES E 414,100 -5.0 65,967 -18.5 68,550 -15.9 48,250 -9.5 149.1 -8.7 Mar-18 CS E 450,600 6.8 70,800 5.7 71,800 5.6 52,400 7.2 164.7 7.2 IBES E 436,333 5.4 72,600 10.1 75,350 9.9 53,047 9.9 163.9 9.9 Mar-19 CS E 497,500 10.4 82,100 16.0 83,100 15.7 61,600 17.6 193.6 17.6 IBES E 461,417 5.7 81,200 11.8 84,100 11.6 59,398 12.0 183.5 12.0 Source: Company data, Credit Suisse estimates

NGK Insulators (5333 / 5333 JP) 17 23 June 2016 Valuation In deriving our ¥3,000 target price, we apply a target P/E of 19.8x to our ¥153.7 FY3/17 EPS forecast. This P/E is the upper end of the 12-month forward consensus range since earnings began recovering in 2013. The most recent 12-month forward consensus P/E has been at the lower end of this range during FY3/17. We believe the valuation already sufficiently factors in the earnings decline guidance that came with FY3/16 results and the expected short-term peak in capex in FY3/17. We expect earnings growth in the automotive ceramics business to turn strongly positive and therefore conclude that using the upper end of the P/E range is appropriate.

Figure 45: 12-month forward consensus P/E 40

2014/7/1 2005/1/1 2005/7/1 2006/1/1 2006/7/1 2007/1/1 2007/7/1 2008/1/1 2008/7/1 2009/1/1 2009/7/1 2010/1/1 2010/7/1 2011/1/1 2011/7/1 2012/1/1 2012/7/1 2013/1/1 2013/7/1 2014/1/1 2015/1/1 2015/7/1 2016/1/1 NGK Insulators (5333) 12m-fwd PER Simple Average 20.0 +1 St-dev., 27.5 -1 St. Dev., 12.5 Source: Thomson Reuters, Credit Suisse Risks

■ A drop in global demand for autos/commercial vehicles.

■ Slower introduction of emissions regulation and/or lower target levels

■ Earnings deterioration in electronics

■ Delayed improvement in insulator profits.

■ A stronger yen.

NGK Insulators (5333 / 5333 JP) 18 23 June 2016 HOLT analysis NGK Insulators has produced a volatile CFROI® profile that has been negative at times, most recently in 2011. Both margins and asset efficiency have been on an upswing of late, and CFROI neared the 6% level last year. While expectations point to a decline this year on currency headwinds, we expect a recovery beyond that. Specifically, our published forecasts for the next three years combined with a medium- term scenario that contemplates slowing but initially high single digit growth and continued improvement in both margins and asset efficiency suggests that CFROI could exceed 7%. Notably, this would put CFROI ahead of cost of capital on a sustained basis, helping to differentiate the company from Japanese peers, which on balance earn returns below cost of capital (i.e., are value destroyers). It would also put economic profit (cash flow less a capital charge) at an all-time high of ¥25bn. Admittedly, this forecast for year-on-year improvement looks aggressive versus recent results, but we would point to (1) the achievement of similar levels of margin and asset turns in historical years, and (2) our view that NGK is capable of achieving both sales and margin expansion, while utilizing production facilities to produce more value-added ceramic substrates. Key to this scenario playing out is our expectation that capex spend will subside beyond FY3/19, which combined with high levels of profitability should lead to fairly healthy cash generation. With respect to valuation, the achievement of this scenario suggests 19% potential upside on the HOLT discounted cash flow model. Sensitivity to sustained changes in margin and growth assumptions are shown in the top left table (below). Fairly low levels of leverage work both ways in that small changes in operating assumptions do not have outsized impact on warranted equity value. While this valuation scenario suggests upside that is short of that suggested by our target price, which we set based on 12-month consensus P/E and forecasted EPS, we view positively the combination of improved operations given a clear structural growth story and valuation support as suggested by the HOLT scenario.

NGK Insulators (5333 / 5333 JP) 19 23 June 2016

Figure 46: HOLT analysis summary

Source: Company data, HOLT, Credit Suisse estimates

NGK Insulators (5333 / 5333 JP) 20 23 June 2016 Appendix

Figure 47: Profit and loss statement Consolidated P&L statement (¥mn) 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 CSE CSE CSE Net sales 239,363 248,948 252,789 308,671 378,665 435,797 421,900 450,600 497,500 YoY % 1.6% 4.0% 1.5% 22.1% 22.7% 15.1% -3.2% 6.8% 10.4% CoGS 160,804 172,457 178,053 208,052 254,387 289,266 292,000 313,300 342,700 Gross profit 78,559 76,491 74,736 100,619 124,278 146,531 129,900 137,300 154,800 SG&A 46,456 49,987 54,041 56,367 62,701 65,633 62,900 66,500 72,700 % of sales 19% 20% 21% 18% 17% 15% 15% 15% 15% Operating profit 32,102 26,504 20,695 44,252 61,577 80,898 67,000 70,800 82,100 YoY % 36.9% -17.4% -21.9% 113.8% 39.2% 31.4% -17.2% 5.7% 16.0% OPM % 13.4% 10.6% 8.2% 14.3% 16.3% 18.6% 15.9% 15.7% 16.5% Non-operating items (net) 569 2,616 1,334 1,567 -509 600 1,000 1,000 1,000 Recurring profit 32,671 29,120 22,029 45,819 61,068 81,498 68,000 71,800 83,100 YoY % 31.5% -10.9% -24.4% 108.0% 33.3% 33.5% -16.6% 5.6% 15.7% RPM % 13.6% 11.7% 8.7% 14.8% 16.1% 18.7% 16.1% 15.9% 16.7% Extraordinary items (net) -2,244 -61,137 -4,327 -7,914 -4,678 -10,914 0 0 0 Profit before taxes 30,427 -32,017 17,702 37,905 56,390 70,584 68,000 71,800 83,100 Income taxes 5,260 2,517 5,956 10,439 14,000 17,144 18,100 18,400 20,500 Tax rate % 17.3% -7.9% 33.6% 27.5% 24.8% 24.3% 26.6% 25.6% 24.7% Minority interests -739 -817 -324 -421 -886 -124 -1,000 -1,000 -1,000 Net profit 24,428 -35,351 11,422 27,045 41,504 53,316 48,900 52,400 61,600 YoY % 37.2% - - 136.8% 53.5% 28.5% -8.3% 7.2% 17.6% NPM % 10.2% -14.2% 4.5% 8.8% 11.0% 12.2% 11.6% 11.6% 12.4% EPS ¥74.8 (¥108.3) ¥35.0 ¥82.8 ¥127.1 ¥163.3 ¥153.7 ¥164.7 ¥193.6 YoY % 37.2% - - 136.8% 53.5% 28.4% -5.9% 7.2% 17.6% BPS ¥942.6 ¥780.1 ¥898.5 ¥1,023.7 ¥1,203.4 ¥1,248.1 ¥1,395.5 ¥1,518.1 ¥1,667.7 YoY % 1.6% -17.2% 15.2% 13.9% 17.6% 3.7% 11.8% 8.8% 9.9% Dividend per share ¥20 ¥20 ¥20 ¥22 ¥28 ¥38 ¥40 ¥42 ¥44 Payout ratio 26.7% -18.5% 57.2% 26.6% 22.0% 23.3% 26.0% 25.5% 22.7% ROE 8.0% 0.0% 4.2% 8.6% 11.4% 13.3% 11.5% 11.3% 12.2% Source: Company data, Credit Suisse estimates

NGK Insulators (5333 / 5333 JP) 21 23 June 2016

Figure 48: Balance sheet Consolidated balance sheet (¥mn) 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 X CSE CSE CSE X Current assets 241,682 283,112 303,568 352,589 397,160 412,333 397,716 403,716 420,616 X Cash and deposits 49,177 47,595 39,542 49,214 69,958 97,481 94,616 93,116 96,116 X Notes and accounts receivable 50,080 54,848 59,062 72,167 88,979 102,575 97,200 102,800 110,600 X Securities 42,037 68,530 81,735 100,653 98,104 72,503 69,500 66,500 63,500 X Inventories 81,925 79,869 95,944 101,352 111,498 108,945 105,500 110,400 119,500 X Other current assets 18,590 32,381 27,394 29,320 29,841 31,655 31,700 31,700 31,700 X Allowance for doubtful debts -127 -111 -109 -117 -1,220 -826 -800 -800 -800 X Fixed assets 238,110 240,210 259,462 261,630 305,074 299,564 359,943 386,477 398,574 X Property, plant and equipment 137,229 135,444 163,884 176,323 199,259 204,993 245,993 273,993 302,993 X Intangible fixed assets 2,657 3,513 5,390 4,848 4,185 3,019 3,000 3,000 3,000 X Investments and other assets 98,223 101,253 90,188 80,459 101,630 91,552 110,950 109,484 92,581 X Total assets 479,793 523,322 563,030 614,219 702,234 711,897 757,659 790,193 819,190 X X Current liabilities 72,601 112,650 86,346 101,419 107,126 112,463 90,200 89,600 92,300 X Notes and accounts payable 23,330 24,589 25,268 25,728 36,057 36,052 36,800 37,500 41,600 X 15,228 12,735 5,107 25,136 10,665 24,791 12,981 15,425 30,753 X Other current liabilities 34,043 75,326 55,971 50,555 60,404 51,620 40,419 36,675 19,947 X Long-term liabilities 83,246 146,290 173,611 168,346 191,106 181,461 213,000 207,100 185,800 X Bonds 20,000 20,000 20,000 0 0 0 0 0 0 X Long-term debt 34,000 98,701 130,709 142,158 145,537 139,180 170,700 164,800 143,500 X Allowance for retirement benefits 16,162 16,465 16,166 16,678 20,222 21,418 21,400 21,400 21,400 X Other long-term liabilities 13,084 11,124 6,736 9,510 25,347 20,863 20,900 20,900 20,900 X Total liabilities 155,848 258,940 259,957 269,766 298,232 293,924 303,200 296,700 278,100 X Shareholders' equity 341,399 299,209 307,841 328,327 364,585 407,158 443,328 482,362 529,959 X Common stock 69,849 69,849 69,849 69,849 69,849 69,849 69,849 69,849 69,849 X Capital surplus 85,136 85,138 85,135 72,092 72,099 72,092 72,092 72,092 72,092 X Retained earnings 200,829 158,634 167,219 187,733 224,040 266,580 302,750 341,784 389,381 X Treasury stock, at cost -14,415 -14,412 -14,362 -1,347 -1,403 -1,363 -1,363 -1,363 -1,363 X Valuation & Translation Adj. -34,322 -45,250 -15,171 5,173 27,469 -414 -98 -98 -98 X Stock acquisition rights 698 741 739 778 886 875 875 875 875 X Minority interests 16,169 9,682 9,664 10,175 11,062 10,354 10,354 10,354 10,354 X Total net assets 323,945 264,382 303,073 344,453 404,002 417,973 454,459 493,493 541,090 X Total liabilities & net assets 479,793 523,322 563,030 614,219 702,234 711,897 757,659 790,193 819,190 Source: Company data, Credit Suisse estimates

NGK Insulators (5333 / 5333 JP) 22 23 June 2016

Figure 49: Cash flow statement Consolidated cash flow statement (¥mn) 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 X CSE CSE CSE X Net income before tax 30,427 -32,017 17,702 37,905 56,390 70,584 68,000 71,800 83,100 X Depreciation and amortization 19,042 18,924 20,089 19,893 25,532 27,365 28,000 30,000 32,000 X Increase/decrease in receivables 7,591 -9,571 897 -9,517 -6,512 -16,044 5,375 -5,600 -7,800 X Increase/decrease in inventories -18,184 103 -5,400 -1,044 -2,374 -1,633 3,445 -4,900 -9,100 X Increase/decrease in payables 4,287 3,969 -5,949 -2,052 4,359 -95 748 700 4,100 X Others -6,513 32,442 -23,658 -12,538 -4,393 -20,732 -24,968 -17,500 -17,100 X CF from operating activities 36,650 13,850 3,681 32,647 73,002 59,445 80,600 74,500 85,200 X Acquisition of tangible fixed assets (net) -23,932 -27,767 -31,190 -27,995 -27,904 -42,527 -69,000 -58,000 -61,000 X Purchases of investment in securities (net) -17,958 -11,889 13,367 19,533 5,235 -1,122 0 0 0 X Other 24,004 -5,782 17,241 -12,723 -16,826 -4,123 -1,000 -1,000 -1,000 X CF from investing activities -17,886 -45,438 -582 -21,185 -39,495 -47,772 -70,000 -59,000 -62,000 X Net change in ST debt 5,535 726 -30 -431 -1,118 527 -49 0 0 X Net change in LT debt -4,000 62,777 19,077 9,400 3,787 10,135 19,759 -3,456 -5,972 X Redemption of bonds 0 0 0 0 -20,000 0 0 0 0 X Acquisition of treasury stock 0 0 0 0 0 0 -20,000 0 0 X Dividends paid -5,878 -6,530 -6,530 -6,531 -8,163 -10,775 -12,730 -13,048 -13,685 X Other -803 -365 -69 -412 -506 -260 -480 -496 -543 X CF from financing activities -5,146 56,608 12,448 2,026 -26,000 -373 -13,500 -17,000 -20,200 X Effect of FX rate chg on cash & cash equiv. -3,985 -2,904 2,897 3,446 1,329 -3,850 35 0 0 X Net increase in cash & cash equiv. 9,631 22,116 18,444 16,934 8,836 7,450 -2,865 -1,500 3,000 X Cash & cash equiv. at end of term 63,003 85,148 102,845 119,781 128,616 136,065 133,200 131,700 134,700 Source: Company data, Credit Suisse estimates

Figure 50: Segment information Consolidated segment information (¥mn) 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 CSE CSE CSE Consolidated Sales 239,363 248,948 252,789 308,671 378,665 435,797 421,900 450,600 497,500 (YoY%) 1.6% 4.0% 1.5% 22.1% 22.7% 15.1% -3.2% 6.8% 10.4% Power 53,810 56,667 57,730 58,985 72,804 83,505 64,900 68,000 73,200 (YoY%) -38.3% 5.3% 1.9% 2.2% 23.4% 14.7% -22.3% 4.8% 7.6% Ceramics 123,835 134,082 143,971 190,761 227,101 250,861 259,300 277,800 312,700 (YoY%) 22.2% 8.3% 7.4% 32.5% 19.1% 10.5% 3.4% 7.1% 12.6% Electronics 61,717 58,198 51,087 58,924 78,759 101,431 97,700 104,800 111,600 (YoY%) 31.6% -5.7% -12.2% 15.3% 33.7% 28.8% -3.7% 7.3% 6.5% Consolidated OP 32,102 26,504 20,695 44,252 61,577 80,898 67,000 70,800 82,100 (YoY%) 36.9% -17.4% -21.9% 113.8% 39.2% 31.4% -17.2% 5.7% 16.0% (OPM%) 13.4% 10.6% 8.2% 14.3% 16.3% 18.6% 15.9% 15.7% 16.5% Power -8,096 -11,764 -5,729 -3,900 -2,351 2,577 -1,300 -400 0 (YoY%) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. (OPM%) -15.0% -20.8% -9.9% -6.6% -3.2% 3.1% -2.0% -0.6% 0.0% Ceramics 31,085 33,290 25,983 44,998 57,614 70,650 64,400 65,800 75,400 (YoY%) 135.9% 7.1% -21.9% 73.2% 28.0% 22.6% -8.8% 2.2% 14.6% (OPM%) 25.1% 24.8% 18.0% 23.6% 25.4% 28.2% 24.8% 23.7% 24.1% Electronics 9,023 4,935 440 3,104 6,294 7,670 3,900 5,400 6,700 (YoY%) 294.4% -45.3% -91.1% 605.5% 102.8% 21.9% -49.2% 38.5% 24.1% (OPM%) 14.6% 8.5% 0.9% 5.3% 8.0% 7.6% 4.0% 5.2% 6.0% Eliminations etc. 90 43 1 50 20 1 0 0 0 Source: Company data, Credit Suisse estimates

NGK Insulators (5333 / 5333 JP) 23 23 June 2016

Companies Mentioned (Price as of 22-Jun-2016) Corning (Unlisted) Hitachi Metals (5486.T, ¥1,093) IBIDEN (4062.T, ¥1,270) NGK Insulators (5333.T, ¥2,241, OUTPERFORM, TP ¥3,000) Sumitomo Chemical (4005.T, ¥461) Toyota Motor (7203.T, ¥5,607) Volkswagen (Unlisted)

Disclosure Appendix Important Global Disclosures Koji Takahashi and Masahiro Akita 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 NGK Insulators (5333.T)

5333.T Closing Price Target Price Date (¥) (¥) Rating 19-Aug-13 1,379 1,300 N 25-Nov-13 1,809 1,530 13-Feb-14 2,018 2,370 O 04-Jun-14 2,164 2,440 11-Aug-14 2,551 2,820 19-Nov-14 2,681 2,980 24-Feb-15 2,343 2,850 05-Jun-15 3,140 3,690 01-Sep-15 2,571 3,550

01-Oct-15 2,327 2,550 N NEUTRAL 11-Nov-15 2,853 2,680 OUTPERFORM N O T RAT ED 30-May-16 2,394 3,100 O 08-Jun-16 2,398 NR * 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. 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 sto ck’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, 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%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

NGK Insulators (5333 / 5333 JP) 24 23 June 2016

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* 56% (39% banking clients) Neutral/Hold* 34% (18% banking clients) Underperform/Sell* 10% (40% banking clients) Restricted 0% *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.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for NGK Insulators (5333.T) Method: Our ¥3,000 target price for NGK Insulators is based on FY3/17E EPS of ¥153.7 and a P/E of 19.8x, the higher end of the 12-month forward consensus range in the period since 2013, when earnings started to recover. We believe the expected profit decline in FY3/17 is now fully discounted but that on the other hand, the company’s longer-term growth potential on the back of tighter auto emissions regulations has yet to be factored in. We rate the stock as OUTPERFORM based on the comparison between the 12-month expected total return of the stock and the coverage universe. Risk: Risks that may impede achievement of our ¥3,000 target price and OUTPERFORM rating for NGK Insulators include: Decreased global demand for autos and commercial vehicles, loosening / delay in implementation of emissions standards, worse-than-expected deterioration in the Electronics segment, delays in insulator business profitability improvement, wider losses from antitrust-related investigations, 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 Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

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