Japan Equity Strategy Minority Shareholders: Investing Without Representation... History Rhymes

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1 STRATEGY NOTE Equity Strategy Equity Strategy Minority Shareholders: Investing Without Representation... History Rhymes Key Takeaway Panasonic's 100% acquisition of its majority owned subsidiary, PanaHome, is making headlines because of unfair treatment claims by minority shareholders. This does not surprise us. In July 2016 we had identified PanaHome as a company at risk of precisely this issue. In our 7 July 2016 report, "Minority Investors: Investing Without Representation is...," we wrote about the conflicts of interest at Daihatsu in its acquisition by its majority shareholder, Toyota (7203 JP, Hold, TP 6,600). We focused on the lack of independent directors at Daihatsu to represent minority shareholders' interests. We also highlighted the lack of incentive for any of the inside or outside directors to push for a higher acquisition price due to their own minimal share ownership. In that report we presented a list of companies with controlling shareholders where we believed minority shareholders were potentially at risk of similar treatment if the parent company decided to fully acquire the listed subsidiary. Panahome (1924 JP, NC) was one of the companies on that list. EQUITY STRATEGY GLOBAL List of Conflicted Subsidiaries: Our methodology for identifying the at risk companies was very simple, we did a screening of TSE first section companies that had large corporate shareholders and at most two outside directors. In other words, these are all companies whose boards have a majority of directors with clear conflicts of interest. In our report we pointed out that the list included many companies in the automotive sector as well as a number of companies that are subsidiaries or affiliates of the major electronics giants such as Sony, Panasonic, Toshiba, Canon, Fujitsu, etc. We highlighted that both these sectors are likely to see significant reorganizations through the acquisitions of subsidiaries. Panahome Acquisition: Panasonic (6752 JP, Buy, TP 1,280) is acquiring the remaining 46% of Panahome shares that it does not already own through a share exchange, thereby turning Panahome into a wholly-owned subsidiary. At least one minority shareholder has publically complained that the share exchange ratio is unfavorable to minority shareholders. The share exchange ratio is only at a small 20% premium to the share price ratio before the announcement, which itself was at a 52 week low. Everything about the way this acquisition was done is almost exactly the same as the way Toyota went about acquiring Daihatsu. History Rhymes. PanaHome's Board: PanaHome took a number of measures to show that they were avoiding conflicts of interest. These include hiring third parties to provide fairness opinions, setting up a third party committee to evaluate the proposal and certain board members recusing themselves from the vote. While these efforts should be applauded, we believe that the conflicts of interest were so extreme as to not make these measures sufficient. 7 out of 9 board members were insiders who had worked their entire careers within the Panasonic group. The outside directors were both fairly new to the board. The board members only held nominal amounts of Panahome shares, equal to a few months base salary. Nobody had any incentive to go against their employer and push for minority shareholders to get more. Token Takeover Premium: has many tangled webs of listed companies with listed subsidiaries and affiliates. There are many inherent conflicts of interest in these structures. Both the Daihatsu and PanaHome acquistions indicate that implementation of the Corporate Governance Code has not yet had an impact on improving the protection of minority shareholder interests. A low proportion of truly independent board members and a lack of incentive alignment through share ownership remain key problems. Investors should be very cautious when they are minority shareholders in companies that may potentially be taken over. They should expect to be taken out when the stock price is low and to be paid only a token takeover premium. Zuhair Khan, CFA * zuhair.khan@jefferies.com Sean Darby Chief Global Equity Strategist sdarby@jefferies.com Takaki Nakanishi * tnakanishi@jefferies.com Yoshihiro Azuma * yazuma@jefferies.com Atul Goyal, CFA agoyal@jefferies.com Masahiro Nakanomyo * mnakanomyo@jefferies.com Thanh Ha Pham * tpham@jefferies.com Hiroko Sato * hsato@jefferies.com Chang Han Joo, CFA * cjoo@jefferies.com Mitsuko Miyasako * mmiyasako@jefferies.com Sho Fukuhara * sfukuhara@jefferies.com Shinnosuke Takeuchi * stakeuchi@jefferies.com * Jefferies () Limited Jefferies Hong Kong Limited Jefferies Singapore Limited MCI (P) 047/07/2016 ^Prior trading day's closing price unless otherwise noted. Please see analyst certifications, important disclosure information, and information regarding the status of non-us analysts on pages 14 to 18 of this report.

2 PANAHOME ACQUISITION... 2 Minority shareholder complaint... 2 PanaHome s procedures to avoid conflicts of interest... 2 Past relative valuations... 3 The conflict of interest is extreme... 4 PanaHome s board... 5 No incentive to dissent... 6 AUTOMOTIVE INDUSTRY RESTRUCTURING... 6 OTHER COMPANIES OF CONCERN... 7 AUTOMOTIVE SECTOR - DETAILED DATA... 9 A somewhat low 20% premium to the pre-acquisition share price ratio A minority shareholder disagrees on the valuation PanaHome had gotten the opinion of third parties on the valuation PanaHome Acquisition Since its founding in 1963, PanaHome (1924 JP, NC) has been a Panasonic group company and Panasonic (6752 JP, Buy, PT 1,280) has owned a 54% majority stake in PanaHome since On 20 th December 2016, Panasonic and PanaHome announced that Panasonic would acquire the 46% of PanaHome shares which it did not already own, thereby converting PanaHome into a wholly-owned subsidiary. This would be done as a share exchange, at a ratio of 0.8 Panasonic shares for each PanaHome share. Just prior to the announcement, PanaHome s shares were trading at a ratio of 0.66:1 vs. Panasonic shares. Thus the premium being paid was 20%, slightly low for an acquisition, but not scandalously low. Minority shareholder complaint According to a 4 th February 2017 Nikkei Asia Review article, Panasonic s Buyout of PanaHome protested by Hong Kong fund one of the minority shareholders in PanaHome, Oasis Management, said that it would take legal action if the valuation is not revised. On Bloomberg, Oasis is listed as holding a 5.04% stake in PanaHome. PanaHome s procedures to avoid conflicts of interest As per the 20 th December 2016 notice Panasonic Corporation Announces to Have Executed a Share Exchange Agreement to Make PanaHome Corporation its Wholly-owned Subsidiary through Share Exachange, Panasonic and PanaHome implemented a number of measures to avoid conflicts of interest. Panasonic retained Nomura Securities to provide a third-party valuation while PanaHome retained Nikko SMBC for this purpose. PanaHome also established a third-party committee consisting of their outside board member, Mr. Naoto Terakawa, their outside Statutory Audit Board member Mr. Katsuhiko Arita, as well as two outside experts in law and accounting with no material relationship with Toyota. Four of PanaHome s nine directors worked for Panasonic in the recent past. These four board members recused themselves from participating in the negotiations and voting on the transaction. It would thus appear that PanaHome instituted proper measures to ensure the avoidance of conflicts of interest and we believe the companies were sincere in their efforts. Unbridled greed is not culturally acceptable in and we do not believe any of the companies involved were purposefully acting unethically. page 2 of 18

3 Chart 1: Share prices ( ) Panasonic and PanaHome 2,000 1,800 1,600 1,400 1,200 1, Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Panasonic (LHS) Panahome (RHS) Source: Bloomberg Past relative valuations Before reviewing PanaHome s measures to avoid conflicts of interest, we would first like to review whether there might be any merit in the minority shareholders contention that 0.8:1 is not an appropriate exchange ratio. A starting point would be to utilize one of the methodologies used by both the third parties that provided fairness opinions, historic relative market prices. What we do differently, is that we look at a longer time frame of up to the past 5 years, rather than only looking at shorter time frames ranging from the past 5 days to a maximum of the past 6 months. Chart 2: PanaHome vs. Panasonic - relative share prices Range Average Source: Bloomberg, Jefferies estimates As can be seen from the chart above, at 0.66:1 immediately prior to the acquisition announcement, PanaHomes shares were trading at lows for the past year relative to Panasonic shares. Over the past 1 year the average share price ratio was 0.82:1. For the 5 years prior to 2015, the shares had traded at an average relative price of 0.72:1. If we exclude the period, when Panasonic s shares had jumped up sharply before coming back down, the average ratio was 0.83:1 and the range was 0.62:1 to 1.28:1. page 3 of 18

4 Using this simplistic approach, the minority shareholders claim that the 0.8:1 exchange ratio is too low seems to have some merit. It would certainly appear that Panasonic is not paying any premium to take 100% ownership of PanaHome. The true worth of PanaHome shares relative to Panasonic shares cannot be determined by simply looking at past ratios. It would depend on the future prospects of both companies, which are unknown. Different investors would base their valuations on different forecasts of the future. Indeed both Nomura and SMBC Nikko did longer-term forecasts and used DCF methodologies to value the companies. We presume the minority shareholder also did their own long-term forecasts and valuations. There must have been different opinions on these future prospects and how to value them. That said, what we find from their DCF analysis is that the bottom end of the DCF valuation range is similar to the pre-bid ratio of 0.66:1, while the high end of the DCF valuation is nearly double that at 1.27:1. Thus we could find some support from the DCF analysis done by both Panasonic and PanaHome s advisors for justifying a significantly higher valuation than 0.8:1. The question however in our mind is not about which valuation is more appropriate, that is a matter of opinion, rather it is whether minority shareholders rights were given adequate consideration. The conflict of interest is extreme While we do not contend that Panasonic and PanaHome did anything illegal or intentionally wrong, we nonetheless would like to highlight a few governance matters. First and foremost is our belief that none of the parties involved in coming up with the 0.8:1 share exchange ratio had any incentive to look after minority shareholders interest beyond the absolute minimum level of care. What we mean by this, is that as long as nothing too blatantly egregious was being done, nobody had an incentive to speak up. PanaHome has been a majority owned subsidiary of Panasonic for 12 years and a group company since its founding. Any person being hired by PanaHome or any firm being retained by them clearly understands this and knows that when all is said and done, they were in effect working for Panasonic. The only way to credibly believe the contrary, i.e. that all parties truly behaved independently of Panasonic, would be if PanaHome had a board that was clearly dominated by independent outsiders whose interests aligned with those of minority shareholders. Table 1: PanaHome s Board was almost all long-term Panasonic group salarymen at the time of the acquisition announcement Inside Directors Age Tenure Title Original Affiliation Ryuji Matsuhita President Panasonic (Parent Company) Makoto Hatakeyama Executive Vice President PanaHome Mitsuhiko Nakata Executive Vice President PanaHome Nobuhiko Teranishi Executive Vice President Panasonic (Parent Company) Atsushi Hongo Senior Managing Executive Officer Hideyo Hamatani Senior Managing Executive Officer Shinichi Watabe Senior Managing Executive Officer PanaHome Panasonic (Parent Company) Panasonic (Parent Company) Outside Directors Age Tenure Current Affiliation Original Affiliation Kazuo Ichijo Hitotsubashi University Hitotsubashi University Naoto Terakawa Various corporates Sony Source: Company Data page 4 of 18

5 Table 2: PanaHome has an insider dominated board with only the minimum necessary 2 independent directors. Total Score 0 Entrenchment +10 Outside Influence +5 Skills -20 Diversity 0 Shareholder Alignment +5 Entrenchment +10 Total number of Board Members 9 0 Average tenure Average age CEO age 53 0 Chairperson age N/A 0 Oldest Director 59 0 Chairperson previous CEO No 0 CEO Tenure Chairperson Tenure N/A 0 Outside Influence +5 Outside Chairperson No 0 Percent of outside directors 22% -5 Number of independent directors Number of committees None 0 Legal vs. advisory committees N/A 0 Insiders vs. outsiders on committee N/A 0 Committee chairperson N/A 0 Skills Accounting 0-10 Law 0-10 Business, finance, consulting 1 +5 Academia, politics, bureaucracy Diversity 0 Foreign inside directors 0 0 Foreign outside directors 0 0 Women directors Shareholder Alignment +5 Median - Outside directors 0 mn 0 Median - Inside directors 9.5 mn 0 Maximum Shareholding 15.2 mn 0 CEO Shareholding 9.5 mn 0 Compensation Plan Perf Based +5 Source: Jefferies estimates, company data PanaHome s board A quick look at PanaHome s board makes the conflicts of interest very clear. 7 out of 9 board members are insiders who have spent their careers at either PanaHome or Panasonic. PanaHome makes a distinction between people who directly worked for Panasonic within the recent past and other board members. The board members that had directly worked at Panasonic within the past several years were not allowed to vote on the transaction. In our opinion, this distinction is not particularly meaningful. Panasonic was a founding shareholder of PanaHome and has been PanaHome s majority shareholder for the past 12 years. As a subsidiary of Panasonic, PanaHome is firmly a Panasonic group company. It is hard to imagine that PanaHome employees, who have spent almost their entire careers as Panasonic group employees, would go against their parent company s plans unless they had very strong incentives to do so. page 5 of 18

6 Elec - Diversified Fin - Bank TMT - Internet HC - Equipment Fin - Invt. Services Fin - Insurance Auto - Tires Elec - Misc TMT - Games Elec - Consumer Healthcare Financials Electronics TMT Consumer Topix 500 Materials Real Estate Machinery Automotive Utilities Chemicals Transportation TMT - Biz Products Auto - Parts Trans - Rail Trans - Warehouse PanaHome s board had only two outside directors. While both appear to be independent and not have clear conflicts of interest, they are both recent appointees only having been on the board for 6 months and 18 months at the time of the bid. It is hard to see the relatively new outside directors taking a stand on minority shareholder rights unless they had strong personal incentives to do so. No incentive to dissent The median share ownership of PanaHome s inside board members is 9.5mn. The maximum share ownership is 15.2mn. Thus the board members own shares that equate to a few months base salary. A few extra months of employment at Panasonic group companies is worth more than most board members total share ownership. The upside from bargaining for a higher share exchange ratio is thus small. This low share ownership level is after year careers at PanaHome or other Panasonic group companies. What personal incentive would any of these board members have to try to maximize the share exchange ratio, at the risk of upsetting their parent company? Neither of the independent directors owns any shares. Thus they have no personal incentive to try to secure a higher share exchange ratio. Thus none of the directors, neither the inside directors, nor the independent director, have any meaningful alignment of interest with minority shareholders. This lack of incentive to rock the boat is especially true because at ese companies, the last few years of employment are the most lucrative. The bonus paid to senior employees upon retirement is a large lump sum payment that is lightly taxed. This is then usually followed by a cushy stint as a senior manager at a smaller group company and then often an advisor position after that. Hard work and loyalty over a 40 year career is rewarded with a well-paid semi-retirement that can last many years. Why would anyone put this at risk? Chart 3: Average Board Structure Score by Sector: The Auto-parts Sub-sector is One of the Worst (20) Source: Jefferies estimates, company data Automotive Industry restructuring The automotive industry is likely to go through significant restructuring over the next several years. We believe that Toyota making Daihatsu a wholly-owned subsidiary is just the first move, and other Toyota group companies are likely to be reorganised in the future through mergers and acquisitions. Similarly it is quite possible that Honda (7267 JP, Buy, 3,600) and Nissan affiliates are also reorganized, including Mitsubishi Motors. While we do not predict blatant asset grabs, these are valuable companies with world leading page 6 of 18

7 capabilities. Even small differences in valuations potentially represent billions of dollars transferring from one set of shareholders to another. Who will represent minority shareholders interests when these reorganisations happen? Chart 3, shows the overall board structure scores from our 30 th September 2016 report Board Structure Reform: Meaningful Progress. It can be seen that the automotive sector has among the worst board structure scores of any sector. The auto-parts sub-sector scores particularly badly. The details of the sector s board structure scores are presented at the end of the report in Tables 4 to 8. Other companies of concern In Table 3 we again present the list of companies from our 7 th July 2016 report, Minority Shareholders: Investing Without Representation Is which included PanaHome, which we have highlighted. These are companies that have controlling or large corporate shareholders and had at most two outside directors. We excluded companies where the large shareholder is the founding family. We excluded companies with at least 3 outside directors. The list includes some companies such as NTT (9437 JP, NC) and Tobacco (2914 JP, NC) that still have the government as their main shareholder. Why these companies do not have better board structures is surprising given that the government is a key driver of corporate governance reform. The list also has many companies from the automotive sector. Other companies that show up in the list are subsidiaries of electronics giants Sony (6758 JP, Buy, TP 5,150), Panasonic (6752 JP, Buy, TP 1,280), Toshiba (6502 JP, NC), Fujitsu (6702 JP, NC), Canon (7751 JP, Hold, TP 3,000) and Ricoh (7752 JP, Hold, TP 940). Subsidiaries of the trading company, Itochu (8001 JP, Buy, TP 1,850) and the retailer Aeon (8267, JP, NC) also feature in this list. Investors much check to see if board members have any meaningful share ownership to align their interests with those of minority shareholders When corporate reorganises over the coming years to improve operational efficiencies or balance sheets, it is questionable as to whether minority shareholder interests will be adequately represented. Investors in companies on this list should be very cautious as they risk the same fate as minority investors in Daihatsu and PanaHome. In particular they should look at whether the board members of these companies have any meaningful share ownership. If not, investors should assume that the board members interests are aligned with the parent company and not the minority sharesholders. Table 3: Companies with controlling or large shareholders and at most 2 outside directors Code Company name Market Cap ( bn) Major share holder % Held Directors Outside Directors 9437 NTT DOCOMO INC 11,414 NTT NIPPON TELEGRAPH & TELEPHONE 10,574 MINISTRY OF FINANCE % Outside Directors 2914 JAPAN TOBACCO INC 8,568 MINISTRY OF FINANCE NISSAN MOTOR CO LTD 4,059 RENAULT SA NTT DATA CORP 1,370 NIPPON TELEGRAPH & T M3 INC 1,181 SONY CORP MITSUBISHI TANABE PHARMA 1,045 MITSUBISHI CHEMICAL KYOWA HAKKO KIRIN CO LTD 1,004 KIRIN HOLDINGS CO LT NIPPON PAINT HOLDINGS CO LTD 761 NIPSEA INTERNATIONAL SUMITOMO DAINIPPON PHARMA 751 SUMITOMO CHEMICAL CO NEXON CO LTD 639 NXC CORP FAMILYMART CO LTD 632 ITOCHU CORP DAIHATSU MOTOR CO LTD 562 TOYOTA GROUP HINO MOTORS LTD 539 TOYOTA GROUP SONY FINANCIAL HOLDINGS INC 474 SONY CORP AEON FINANCIAL SERVICE CO LT 463 AEON SCSK CORP 414 SUMITOMO CORP page 7 of 18

8 Table 3: Companies with controlling or large shareholders and at most 2 outside directors Code Company name Market Cap ( bn) Major share holder % Held Directors Outside Directors 3141 WELCIA HOLDINGS CO LTD 355 AEON CO LTD NTT URBAN DEVELOPMENT CORP 349 NIPPON TELEGRAPH & T % Outside Directors 8905 AEON MALL CO LTD 317 AEON CANON MARKETING JAPAN INC 292 CANON INC ITOCHU TECHNO-SOLUTIONS CORP 272 ITOCHU CORP FUJITSU GENERAL LTD 258 FUJITSU LTD TOYODA GOSEI CO LTD 226 TOYOTA GROUP GMO PAYMENT GATEWAY INC 222 GMO INTERNET INC NIPPO CORP 208 JX HOLDINGS INC CALSONIC KANSEI CORP 205 NISSAN MOTOR CO LTD KANDENKO CO LTD 176 TEPCO POWER GRID INC HITACHI KOKUSAI ELECTRIC INC 172 HITACHI LTD NISSIN ELECTRIC CO LTD 164 SUMITOMO ELECTRIC IN NS SOLUTIONS CORP 163 NIPPON STEEL & SUMIT TOSHIBA PLANT SYSTEMS & SERV 160 TOSHIBA CORP AEON DELIGHT CO LTD 156 AEON NISSAN SHATAI CO LTD 149 NISSAN MOTOR CO LTD PALTAC CORPORATION 143 MEDIPAL HOLDINGS COR PANAHOME CORP 138 PANASONIC CORP CHUDENKO CORP 133 CHUGOKU ELECTRIC POW TOKAI RIKA CO LTD 131 TOYOTA GROUP TOPPAN FORMS CO LTD 121 TOPPAN PRINTING CO L JAPAN PETROLEUM EXPLORATION 116 MINISTER OF ECON TRA SUMITOMO REAL ESTATE SALES 115 SUMITOMO REALTY & DEV ITOCHU ENEX CO LTD 111 ITOCHU CORP TOKEN CORP 108 TOMEI SHOJI KK KEIHIN CORP 107 HONDA MOTOR CO LTD NIPPON STEEL & SUMIKIN BUSSA 104 NIPPON STEEL & SUMIT TOSHIBA TEC CORP 101 TOSHIBA CORP DAIBIRU CORP 100 MITSUI OSK LINES LTD AOKI HOLDINGS INC 93 ANNIVERSAIRE HOLDING NEC NETWORKS & SYSTEM INTEGR 93 NEC CORP TOWA PHARMACEUTICAL CO LTD 88 YOSHIDA JIMUSHO KK SUMITOMO RIKO COMPANY LTD 84 SUMITOMO ELECTRIC IN NISSIN KOGYO CO LTD 83 HONDA MOTOR CO LTD PRIMA MEAT PACKERS LTD 81 ITOCHU CORP RICOH LEASING CO LTD 79 RICOH CO LTD CONEXIO CORP 76 ITOCHU CORP RELIA INC 75 MITSUI & CO LTD OSAKA STEEL CO LTD 73 NIPPON STEEL & SUMIT TORII PHARMACEUTICAL CO LTD 70 JAPAN TOBACCO INC SHINKO ELECTRIC INDUSTRIES 65 FUJITSU LTD BELLSYSTEM24 HOLDINGS INC 64 ITOCHU CORP JSP CORP 63 MITSUBISHI GAS CHEMI CANON ELECTRONICS INC 58 CANON INC INFO SERVICES INTL DENTSU 56 DENTSU INC YURTEC CORP 55 TOHOKU ELECTRIC POWE PAL CO LTD 54 SCOTCH TAYLOR'S SHOP KUMIAI CHEMICAL INDUSTRY CO 52 ZENNOH NIPPON SYNTHETIC CHEMICAL 49 MITSUBISHI CHEMICAL SHIN-ETSU POLYMER CO LTD 49 SHIN-ETSU CHEMICAL C MINISTOP CO LTD 48 AEON SUN FRONTIER FUDOUSAN CO LTD 44 HOUON CO LTD ELEMATEC CORP 43 TOYOTA GROUP YUSEN LOGISTICS CO LTD 42 NIPPON YUSEN KK SHOWA CORP 42 HONDA MOTOR CO LTD SUMITOMO DENSETSU CO LTD 40 SUMITOMO ELECTRIC IN Source: Jefferies estimates, company data page 8 of 18

9 Automotive Sector - Detailed Data Table 4: Autos (1) Ticker Name Market Cap ( Bn) Subsector Total Score Shareholder Alignment Entrenched Board Outside Influence Skills Diversity 7203 Toyota Motor 20,075 Auto - OEM Nissan Motor 4,514 Auto - OEM Yamaha Motor 701 Auto - OEM Mazda Motor 946 Auto - OEM Fuji Heavy 3,018 Auto - OEM Mitsubishi Motors 472 Auto - OEM Honda Motor 5,384 Auto - OEM Suzuki Motor 1,692 Auto - OEM Unipres 88 Auto - Parts Stanley Electric 483 Auto - Parts NGK Spark Plug 413 Auto - Parts Keihin 120 Auto - Parts Toyota Industries 1,590 Auto - Parts Toyota Boshoku 421 Auto - Parts Nissan Shatai 149 Auto - Parts Exedy 127 Auto - Parts Nissin Kogyo 102 Auto - Parts Nifco 299 Auto - Parts Tokai Rika 187 Auto - Parts Takata 30 Auto - Parts NHK Spring 239 Auto - Parts GS Yuasa 174 Auto - Parts TS Tech 179 Auto - Parts JTEKT 507 Auto - Parts Toyoda Gosei 317 Auto - Parts Denso 3,261 Auto - Parts Aisin Seiki 1,385 Auto - Parts NOK 382 Auto - Parts Koito Mfg 796 Auto - Parts Sumitomo Electric 1,156 Auto - Parts Bridgestone 3,003 Auto - Tires Toyo Tire & Rubber 179 Auto - Tires Sumitomo Rubber 406 Auto - Tires Yokohama Rubber 274 Auto - Tires Hino Motors 625 Auto - Trucks Isuzu Motors 1,037 Auto - Trucks Source: Jefferies estimates, Bloomberg page 9 of 18

10 Table 5: Autos (2) Shareholder Alignment Entrenched Board Ticker Name Total Score Median Outside Median Inside Max Shrhldg CEO Shrhldg Comp. Plan Board Size Avg. Age CEO Age Chair Age Oldest Director Chair prev CEO Avg. Tenure CEO Tenure Chair Tenure 7203 Toyota Motor Nissan Motor Yamaha Motor Mazda Motor Fuji Heavy Mitsubishi Motors Honda Motor Suzuki Motor Unipres Stanley Electric NGK Spark Plug Keihin Toyota Industries Toyota Boshoku Nissan Shatai Exedy Nissin Kogyo Nifco Tokai Rika Takata NHK Spring GS Yuasa TS Tech JTEKT Toyoda Gosei Denso Aisin Seiki NOK Koito Mfg Sumitomo Electric Bridgestone Toyo Tire & Rubber Sumitomo Rubber Yokohama Rubber Hino Motors Isuzu Motors Source: Jefferies estimates page 10 of 18

11 Table 6: Autos (3) Outside Influence Skills Diversity Ticker Name Total Score Outside Chair % Outsiders # Indep # of Comm'te Legal vs. Advisory Majority Outsiders Comm'te Chair Acct Law Business / Finance Academia / Govt. Women Foreign Inside Foreign Outside 7203 Toyota Motor Nissan Motor Yamaha Motor Mazda Motor Fuji Heavy Mitsubishi Motors Honda Motor Suzuki Motor Unipres Stanley Electric NGK Spark Plug Keihin Toyota Industries Toyota Boshoku Nissan Shatai Exedy Nissin Kogyo Nifco Tokai Rika Takata NHK Spring GS Yuasa TS Tech JTEKT Toyoda Gosei Denso Aisin Seiki NOK Koito Mfg Sumitomo Electric Bridgestone Toyo Tire & Rubber Sumitomo Rubber Yokohama Rubber Hino Motors Isuzu Motors Source: Jefferies estimates page 11 of 18

12 Table 7: Autos (4) Shareholding ( mn) Entrenched Board (Age, Tenure in Years) Ticker Name Total Score Median Outside Median Inside Max Shrhldg CEO Shrhldg Comp. Plan Board Size Avg. Age CEO Age Chair Age Oldest Director Chair prev CEO Avg. Tenure CEO Tenure Chair Tenure 7203 Toyota Motor ,439 28,439 SO No Nissan Motor ,073 3,073 PB No Yamaha Motor PB Mazda Motor PB Yes Fuji Heavy PB Mitsubishi Motors PB No Honda Motor PB Suzuki Motor , PB Yes Unipres Stanley Electric ,177 1,177 PB,SO NGK Spark Plug PB No Keihin PB Toyota Industries , Yes Toyota Boshoku , SO Yes Nissan Shatai PB Exedy PBSC Nissin Kogyo PB Nifco PBSC Tokai Rika SO Takata No NHK Spring GS Yuasa Yes TS Tech JTEKT Yes Toyoda Gosei Yes Denso Yes Aisin Seiki , SO Yes NOK PB No Koito Mfg SO Yes Sumitomo Electric Bridgestone SO Yes Toyo Tire & Rubber PB Sumitomo Rubber PB Yokohama Rubber PB Yes Hino Motors SO No Isuzu Motors Yes Source: Jefferies estimates, Bloomberg, company data page 12 of 18

13 Table 8: Autos (5) Outside Influence Skills Diversity Ticker Name Total Score Outside Chair % Outsiders # Indep Comm'tes Legal vs. Advisory Majority Outsiders Comm'te Chair Acct Law Business / Finance Academia / Govt. Women Foreign Inside Foreign Outside 7203 Toyota Motor 50 27% 3 N C Advisory -, -, - -, -, Nissan Motor 35 11% 1 -, -, - -, -, Yamaha Motor 25 27% 2 N C Advisory -, Y, Y -, -, Mazda Motor 15 20% 2 N C Advisory -, -, - -, Y, Y Fuji Heavy 10 25% 2 N C Advisory -, -, - -, -, Mitsubishi Motors 10 40% 2 -, -, - -, -, Honda Motor 0 15% 2 -, -, - -, -, Suzuki Motor % 2 N C Advisory -, -, - -, -, Unipres 65 38% 2 A Legal Y, -, - -, -, Stanley Electric 40 22% 2 -, -, - -, -, NGK Spark Plug 30 30% 3 -, -, - -, -, Keihin 20 18% 2 -, -, - -, -, Toyota Industries 15 27% 2 N C Advisory -, -, - -, -, Toyota Boshoku 15 25% 3 -, -, - -, -, Nissan Shatai 15 33% 2 -, -, - -, -, Exedy 10 27% 2 -, -, - -, -, Nissin Kogyo 0 13% 1 -, -, - -, -, Nifco -5 33% 2 -, -, - -, -, Tokai Rika -5 9% 1 -, -, - -, -, Takata -5 17% 1 -, -, - -, -, NHK Spring % 2 -, -, - -, -, GS Yuasa -10 8% 1 -, -, - -, -, TS Tech % 2 -, -, - -, -, JTEKT % 2 N C Advisory -, -, - -, -, Toyoda Gosei % 2 -, -, - -, -, Denso % 2 N C Advisory -, -, - -, -, Aisin Seiki % 3 -, -, - -, -, NOK % 2 -, -, - -, -, Koito Mfg -50 7% 1 -, -, - -, -, Sumitomo Electric % 2 N C Advisory -, -, - -, Y, Y Bridgestone % 7 A N C Legal Y, Y, Y Y, Y, Y Toyo Tire & Rubber 55 38% 3 -, -, - -, -, Sumitomo Rubber 50 27% 3 N C Advisory -, Y, Y -, Y, Y Yokohama Rubber % 2 N C Advisory -, -, - -, -, Hino Motors -5 18% 2 N C Advisory -, -, - -, -, Isuzu Motors % 2 -, -, - -, -, Source: Jefferies estimates, company data page 13 of 18

14 Analyst Certification: I, Zuhair Khan, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Sean Darby, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Takaki Nakanishi, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Yoshihiro Azuma, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Atul Goyal, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Masahiro Nakanomyo, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Thanh Ha Pham, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Hiroko Sato, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Chang Han Joo, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Mitsuko Miyasako, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Sho Fukuhara, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Shinnosuke Takeuchi, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Registration of non-us analysts: Zuhair Khan, CFA is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Sean Darby is employed by Jefferies Hong Kong Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Takaki Nakanishi is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Yoshihiro Azuma is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Atul Goyal, CFA is employed by Jefferies Singapore Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Masahiro Nakanomyo is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Thanh Ha Pham is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Hiroko Sato is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. page 14 of 18

15 Registration of non-us analysts: Chang Han Joo, CFA is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Mitsuko Miyasako is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Sho Fukuhara is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Shinnosuke Takeuchi is employed by Jefferies () Limited, a non-us affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Investment Recommendation Record (Article 3(1)e and Article 7 of MAR) Recommendation Published, 22:00 ET. February 12, 2017 Recommendation Distributed, 01:00 ET. February 13, 2017 Company Specific Disclosures For Important Disclosure information on companies recommended in this report, please visit our website at Disclosures.action or call Explanation of Jefferies Ratings Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months. Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value. page 15 of 18